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Active Retirees : Active Retirees Oct-Nov 2012
Active RetireesTM | 41 Subordinated Notes (NABHB) with a running yield of 6.4 per cent and compulsory interest payments. Why the shift? The shift to more equity-like characteristics is being driven by regulatory requirements for banks. Some 75 per cent of the $25 billion hybrid market is bank-issued. Regulators increasingly want banks’ regulatory capital to look like equity so bank losses are cushioned. But that means hybrid investors have fewer rights to allow them to get their money back if a company gets into trouble. “Investors are being asked to take on more equity-type risk,” says Reddy, citing Westpac Convertible Preference Shares (WBCPC), which offer a yield of 3.2 to 3.5 per cent above the 180-day BBSW. The terms of this hybrid contain a trigger event, so that if WBC’s Core Tier Capital One ratio falls below a prescribed level, which is 5.125 per cent, WBCPC convert into ordinary Westpac shares. The shift to equity-likeness has implications for diversification: if a hybrid behaves more like equity, then hybrid investors are not diversifying their portfolio into more defensive assets and may be better off in term deposits and corporate and government bonds. This particularly relates to retirees holding bank shares. If they also own bank hybrids, they’re receiving little or no diversification. Devil in the detail Retirees need to be aware that, when it comes to hybrids, the devil is in the detail. Focus on risk as much as reward. As to what portion of a portfolio should be dedicated to hybrids, each portfolio should be customised to reflect the investor’s preferences and risk profiles. Banner says retirees’ portfolios usually lean towards defensive assets, but for a portfolio with half defensive assets and half growth assets, about 20 per cent of the defensive portion might be hybrids, with the other 30 per cent in term deposits or other fixed interest investments. •• The shift to equity- like characteristics is driven by regulatory requirements for banks.
Active Retirees Aug-Sept 2012
Active Retirees Dec-Jan 2013