Many in retirement are travelling comfortably, with three key factors contributing to their happiness – good physical and mental health and enough money to enjoy life.
Perhaps the assumption that markets are still anchored by predictable economic policies needs to be challenged. For the first time since the fall of the Berlin Wall, political volatility – once background noise – is potentially reshaping investment risk at a structural level.
New breed of debt securities emerging to replace $40b in bank hybrids
A new generation of local and international fixed-interest products are being developed to replace the popular hybrid securities offered by large banks that are being phased out because of regulator concerns about risk, according to asset managers.
But the flow of alternative local and international corporate hybrid bonds “remains in its infancy” and needs to “develop and mature, despite encouraging growth fuelled by investor demand”, they claim.
Financial advisers warn investors could face higher risk and increased costs in the wait for a competitive alternative to the hybrids that are paying between seven and nine per cent – much higher than most fixed-income products or shares.
They also claim investors seeking higher returns are “flooding” into private capital and higher-risk debt products, often unaware of the potential volatility and threat of capital loss.
Alex Jamieson (pictured), founder of AJ Financial Planning, says: “Massive inflows into private capital caused by investors seeking higher-yielding products are likely to be the cause of the next sub-prime crisis.”
The sub-prime meltdown was caused by a sharp increase in high-risk mortgages that went into default around 2008, triggering a severe global recession.
Tristan Bowman, partner at wealth manager Cameron Harrison, adds: “Now more than ever, investors should seek out structured investment advice to access fixed-income strategies professionally managed to high quality, income generating, capital stable interest income securities.”
He says wealthy investors with access to wholesale markets can invest directly into a wider range of professionally managed fixed-income strategies comprised of wholesale subordinated debt, asset-backed securities or corporate debt.
“Hybrids, on the other hand, have typically appealed to retail investors who are not able to access the much deeper and diverse wholesale bond market,” he says. “Currently, with the withdrawal of hybrids, the options for retails investors are exchange-traded funds (ETFs) and managed funds.”
About $40 billion is invested in Australian bank hybrid securities by retail investors seeking a blend of debt and equity features with competitive yields, franking credits and the benefit of Australian Prudential Regulation Authority (APRA) oversight.
For example, Commonwealth Bank PERLS X has a running yield – the annual income of an investment divided by its current value – of 7.54 per cent; Westpac Capital Notes 5, 7.44 per cent; AMP Capital Notes 2, 8.14 per cent; and more than 9.5 per cent from Judo Capital Notes.
“They have provided investors with an appropriate level of income with lower volatility than equities,” says Bowman. “Some investors have particularly liked the franking credits that are attached to their hybrids.”
The returns compare with a Commonwealth Bank saver getting 4.5 per cent on a $100,000 deposit from a 10-month term fixed term account, or 4.9 per cent for a five-year term with Rabobank.
APRA recently announced it will phase-out the so-called Tier 1 capital by 2032 because of concerns about its potential complexity, effectiveness during financial crises and that danger that retail investors are underestimating potential risks.
Cameron McCormack, a senior portfolio manager for VanEck Asset Management, which has more than $190 billion under management, says an alternative corporate hybrid range of investments is emerging.
He says the hybrid phase-out will encourage the growth of the Australian subordinated debt – also known as Tier 2 capital – market for investors seeking a similar yield. “It’s a natural fit.”
Smaller banks might also eventually issue subordinated debt to take advantage of the gap in the market. Alternatively, Australian-denominated “kangaroo” bonds issues by foreign companies in the local debt market to raise capital from Australian investors are beginning to grow.
“Foreign entrants boost market liquidity and issuer diversification, as well as signal the maturity of this asset class,” says McCormack.
He adds that corporate hybrids, which are available to wholesale investors, “have taken off in the past 12 months”, largely because of issuances by utility and real estate companies. For example, mall operator Scentre Group’s recent hybrid launch was five times oversubscribed.
Hybrids are attractive to REITs because they provide an alternative to trading assets when property asset values are low.
Macquarie Bank offers a Global Yield Maximiser Active ETF (ASX: MQYM) that has a diversified portfolio of fixed-income securities that is generally expected to be a higher-yielding than traditional fixed-income investment.
The average credit quality is sub-investment grade, which includes allocation to emerging-market debt, junk bonds, structured credit and unrated issues.
