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Active Retirees : Active Retirees Oct-Nov 2012
Active RetireesTM | 39 Finance A fter the GFC- triggered stock market crash, retirees have increasingly focused on fixed income products with more stable capital and income and portfolio diversification. Term deposits have been particularly popular, but with interest rates falling, retirees are looking for higher yields. Many are turning to another category of fixed income products: hybrid securities. There is debate about the exact definition of hybrids, but generally they have both equity and debt characteristics and are listed on the ASX. Typically they earn higher yields than the likes of term deposits, but are less risky than shares. While yields on term deposits are currently just over five per cent, investors can earn double-digit returns from hybrids. According to research firm Morningstar, the BBSW rate, which is currently 3.5 per cent, plus a three per cent margin, is a fair return for a median-risk hybrid. Hybrids are typically issued at a face value of $100, and a coupon, the current Bank Bill Swap Rate plus a margin, is paid between two and four times a year. When the principal is redeemed it can come as cash or as shares of the issuer, though particular perpetual notes have no redemption date. Assets sit in a capital structure, which effectively means blocks sitting on top of each other. The higher the block, the riskier the asset. Hybrids sit above cash and government bonds, but beneath equity. If a company goes bust, the bondholders will get their money before hybrid investors, and hybrid investors before equity holders. Hybrids and your portfolio Hybrids have a role to play in some retirees’ portfolios. They provide diversification and » There’s always a risk when it comes to monetary investment, but some products claim to offer the best of both worlds. Ben power discusses whether hybrid securities can deliver for your SMSF. Hybrid securities Hybrids sit above cash and government bonds, but beneath equity.
Active Retirees Aug-Sept 2012
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