Hybrid Bank Shares - Pros/Cons?

Discussion in 'Other Asset Classes' started by LoanSharkJR, 8th Aug, 2016.

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  1. LoanSharkJR

    LoanSharkJR Well-Known Member

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    Just wanting opinions on what my dad should do, his financial advisor mentioned hybrid bank shares as a "Less risky"investment option for his super (which he wants to keep as safe as possible, not much left).
    We get the feeling The financial advisor is trying to hold onto my dads super for as long as he can as he gets a commission for the admin/annual fees that the fund pays. This is in comparison to a term deposit or high interest savings account.

    I has a quick look on ASIC website, these hybrids are very confusing, I hardly can understand how they can be less risky than share market, they seem more risky to me, but, as I said, I am finding it hard to understand them.

    Any thoughts?
     
  2. ErYan

    ErYan Well-Known Member

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    I believe hybrids are preferred over normal shares. To lose your money the company needs to go belly up. Normal shares can go down whereas the return on the hybrid is fixed and near enough to guaranteed.

    Basically there is a protected downside and a decent upside especially compared to fixed interest. I was told the old type hybrids are the best.

    Not advice and I have yet to use hybrids.
     
  3. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    Commissions were bannned about 5 years ago now.
     
  4. Scott No Mates

    Scott No Mates Well-Known Member

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    Geez. Why do peeps have such an aversion to paying for advice?
     
  5. OscarBravo

    OscarBravo Well-Known Member

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    In my opinion, the best way to think of hybrids is like preferred equity. Being preferred they sit higher on the capital structure than normal equity and are therefore by definition "less risky"; that is to say, in the event that something terrible happens to the company, the equity holders are wiped out before the hybrid holders.

    Hybrid instruments definitely do have downside risk though - if you are looking for an asset class that is "as safe as possible" then hybrids probably aren't it. Unfortunately I think ErYan has it wrong - hybrids have 100% downside but hold to maturity investors will only ever receive a fixed yield.

    Safe to say that a number of financial planners aren't as informed about hybrids as they should be, in my opinion. Obviously you should take this with a grain of salt given I'm not licensed to give financial advice. Traditional safe assets are cash/term deposits.
     
    jimmy and Nodrog like this.
  6. tvadera

    tvadera Well-Known Member

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    Any one eyeing Suncorp Capital Notes 2 raising
    Capital raising: 250-300M
    Trading margin: 3.65
    With current 3M BBSW rate of 1.74%, distribution would like
    Distribution Rate = (Bank Bill Rate + Margin) x (1 – Tax Rate)
    =(1.74 + 3.65) * 0.7 (as franking is included) = 3.77% (grossed up 5.39%)

    Call option in 2024

    Anyone got any experience with capital notes that they would like to share? Positives and negatives?
     
  7. Ross Forrester

    Ross Forrester Well-Known Member Business Member

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    “Less risky”?

    Cash on call with a bank is less risky.
    Then term deposits.
    Then Aaa bonds, then Aab and so on and so forth.
    Then hybrid shares.

    Just ask the advisor what is the risk and explain it in detail.

    Most are taking a percentage so they should be happy to talk to you.
     
  8. Nodrog

    Nodrog Well-Known Member

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    I agree with @OscarBravo’s comments.

    I don’t like Hybrids at all.

    There are two types of assets, risk and risk free (or as close as you can get). Hybrids are certainly not risk free. As for downside protection have a look at what happened to them during the GFC.

    If one wants risk assets then why not just buy the shares rather than hybrids. Over the long term there’s likely to be much better income and capital growth. Then balance that with risk free assets (Gov’t guaranteed cash / term deposits and direct Gov’t bonds) in whatever allocation to provide liquidity, avoid forced sale of shares during bad times and allow one to sleep well at night.

    Personal amateur view only, not licensed to give advice.
     
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  9. willair

    willair Well-Known Member Premium Member

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    Only my simple opinion,but some of these hybrids as some sound simple ,unlike taking a punt on that a share price will fall or go up ,the hybrids work very different and one can read up on what happens ,I think it was early quarter of 2009 ,and the high in investors fears about the depth of the banking crisis..

    I Would not invest in something like this ,too many unseen linked risks..imho..
     
  10. Leo2413

    Leo2413 Well-Known Member Premium Member

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    Most people want to make money from spending nothing. :rolleyes:

    I have always paid for the best advice/help I could get at the time. I will do the same when I am ready to develop in Perth. Sure I can PM someone and get some free info but as far as I'm concerned that's just all superficial stuff. No one really gives away the nitty gritty details plus their contacts and their time for free.
     
  11. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Member

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    Hybrids (Notes) are an income producing market security which pays a rate of return of X% above a market determined rate (often BBSW 90day bills) - A floating rate. All slightly different with t&C and when you can and cant get the capital value. You need to determine you view on holding such a risk - Australian big 4 banks are considered safe but that technically not correct. They could fail. Seems unlikely but...

    Unlike cash / TDs the notes may also be franked. For a SMSF that may gross up the income...So the true rate of return is higher than the paid rate when tax credits are allowed for.

    The income will vary with market rates AND the capital value may vary compared to the $100 value of each note but not like a bank share. Its not equity after all. Its more like a bond. Easily converted on market to cash if a market exists and demands the hybrids. Hybrids are not guaranteed by the Govt in the same ways some value of cash and TDs are.

    Shares are an income producing (hopefully) equity asset based on a market price. Alsdo likely franked for a Big 4 bank as they make good profit

    The advice by the FP should address all of this.
     
  12. SatayKing

    SatayKing Well-Known Member

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    I had a rush of blood to the head and took up a few hundred of WFHPB for the SMSF in 2012 when the company offered them because they paid 7%ff @ $100 per preference share.

    While they have added cash to the kitty, I wouldn't do it again though. No idea yet as to what I will I try to do, or what will actually occur, for the reset date which is in November next year.
     
  13. Nodrog

    Nodrog Well-Known Member

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    I vaguely recall you mentioning that you invested in a hybrid fund as part of your asset alocation in the SMSF way back around 2003 / 2004? Did you hang on to that at all?

    I must admit I’ve never invested in Hybrids or any sort of corporate bond like instrument for reasons given earlier. When the sh*t hits the fan they behave more like equities than genuine defensive assets such as Gov’t bonds / Gov’t guaranteed cash and term deposits.
     
    Last edited: 2nd Nov, 2017
  14. SatayKing

    SatayKing Well-Known Member

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    It was the WBC preference shares. Got out of them as I realised it didn't fit with my style. Then I go and do the WHF thing. Once stupid, always stupid.
     
  15. Nodrog

    Nodrog Well-Known Member

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    LOL. Now now, be kind to yourself:). What’s that they say about harmful negative self talk. Best go for positive self talk. I’m positive I’ll buy hybrids again:D.
     
  16. SatayKing

    SatayKing Well-Known Member

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    Hehe.

    And thank you to NAB (and SOL) in time for Christmas. In advance, I'd also like to thank WBC on Monday and WHF around mid month.