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Active Retirees : Active Retirees Oct-Nov 2012
Finance 40 | www.probussouthpacific.org good yields, and can be used to time future income needs. But each hybrid is different. “Each has its own specific terms and conditions,” says Ravi Reddy, equities analyst at Morningstar. “You only have to look at the size of some of the prospectuses to realise how complicated they can be.” Regulatory changes also mean hybrids are starting to look increasingly like equity, with investors having fewer rights to get their money back. This means retirees who invest in hybrids to diversify and hold more defensive fixed income assets may not be spreading their risk to the extent they think. Benefits to retirees Hybrids can be included in a portfolio primarily to meet future income needs. “I look to have the maturity profile to match the pension income liability,” Provenance Corporate and Personal Advice’s Paul Banner says, explaining that he includes hybrids along with cash, generic bonds, international bonds, high- quality blue chip shares, and riskier growth assets such as infrastructure and international shares. He’ll time hybrids’ maturities, when investors get their money back, with future income requirements. Banner says the value of the funds at the call date of hybrids is more certain than managed funds, which can be hit by interest rate movements just when the retiree needs to access the funds. Risky business But hybrids can be risky; the investor may not be paid if a company gets into difficulties. In 2008 for example, the collapse of Allco Finance saw investors lose a total of $250 million invested in hybrids issued by the company. The key, Banner says, is to assess the risk of a hybrid issuer, and compare it with the hybrid's yield and alternative assets. “The critical point for me is the risk that I am taking on by holding the hybrid relative to the return I’m getting,” Banner says. “I then compare that to the less risky option: a term deposit.” Extra care is needed because of the trend towards equity-like characteristics. “There are products that in my mind should be categorised as an equity piece where the risk of default and risk of capital loss isashighasitwouldbeforan equity,” says Banner. Banner points to the recently released Healthscope Note, with a fixed-rate yield of 11.25 per cent. That’s a fantastic return, but isn’t a defensive investment. In the event of insolvency, 90 per cent of the group’s assets rank above the notes, so investors in 90 per cent of the company’s other offerings would see some sort of return before hybrid investors. By contrast, a safer choice, according to banner, is NAB An SMSF provides investors with the freedom to put their super behind just about anything, but the conditions can take the fun out of it. You can invest in property ... ... but you or your family members cannot live in it. Your SMSF can buy wine ... ... but you can’t drink it. You can indulge in breathtaking jewels ... ... but not for you to wear. You can finally buy that precious artwork ... ... but you can't display it in your home or business. ! Hybrids are not akin to propagating cash. In fact, as regulators seek to cushion bank losses, bank- issued hybrids are increasingly similar to equity investments. wheRe...? put youR $ The 2008 collapse of Allco Finance saw hybrid investors lose $250 million.
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