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Risk v Reward in Hybrids

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Risk v Reward in Hybrids

Hi James,

I sometimes have some doubts about your stock picks, but happily have come to realize that over time you have hit the mark. I am considering the new ANZ Hybrid issue offered by Shaw’s. However, I don't like the trend to increase the duration out to 9 years increasing risk substantially. I took up the recent CBA Hybrid at 7 years but at 9 years it is ridiculous even with a margin of 3.0%. I think the Big 4 are exploiting the demand from desperate Yield hungry SMSF's at the expense of a massive increase in RISK. The standard used to be 5 years for new Hybrid issues. Perhaps it is better to buy the Shares instead on a pullback. I would appreciate your thoughts.

Richard O.

Answer

Hi Richard,

I agree that the pickings are getting a lot skinnier in the Hybrid space, although the ANZ issue was relative attractive paying 3% over bank bills relative to where the market was trading when they launched it. The book build was heavily oversubscribed, however that doesn’t make it a good issue. I remember back when CBA launched the CBAPD, that issue was heavily oversubscribed at 2.8% over and that delivered a very poor outcome for much of it’s listed life.

The time frames you’re quoting must be the alternative maturity date, not the first call/maturity date with is 2 years shorter. The last CBA issue (CBAPJ) has a first call date on 20 Oct 2026 making it 5.4 years to first call, the new ANZ hybrid has first call date of 20th March 2028 which means it’s slightly less than 7 years. Recent trends imply the first call date is likely to be the maturity date used.

I agree with your comments RE demand for yield, it’s there however as investors we need to be very conscious of understanding the risks we’re taking on to achieve the returns, as you say, sellers of products / investments etc will ‘feed the ducks when they’re quaking.  From your question Richard I believe you are across these risks, which is a great thing. 

In terms of buying bank shares the market has already risen significantly e.g. Commonwealth Bank  (CBA) is up +23% in 2021, plus having paid an attractive $1.50 fully franked dividend in February. At this stage of the cycle we probably prefer banks into weakness but some selective hybrids do remain attractive and we have added the new ANZ note to our Income Portfolio which aims to generate a blended return between high yielding equities, bonds and hybrids.

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Commonwealth Bank (CBA)
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