Exchange traded fund issuer BetaShares has launched the first Australian fund specialising in hybrid securities. It is targeting investors who like the high yield offered by hybrids but would like some downside protection.
The BetaShares Active Australian Hybrids Fund is an actively managed ETF. BetaShares has appointed Coolabah Capital Institutional Investments as investment manager.
According to its product disclosure statement, the fund is targeting a similar level of distribution income as may be achieved by an investor holding a diversified portfolio of hybrids directly. “Over time the fund expects to deliver net returns after fees and expenses that exceed that RBA cash rate by at least 2.5 per cent a year,” it says.
However, by employing an active management approach, the fund aims to reduce the volatility and downside risk that may otherwise be experienced by direct holders of hybrid securities.
The fund may also hold cash and higher-ranking bonds as a defensive measure when hybrids are judged to be overvalued or to present heightened risk of capital loss.
The hybrid asset class includes subordinated notes, convertible preference shares and capital notes issued by banks, insurance companies and, to a lesser extent, non-financial companies.
Hybrids combine features of debt and equity securities and they involve higher risk than traditional fixed income investments. For example, capital notes and preferences shares are often issued with a perpetual term; while they are usually redeemed there is no guarantee that they will be.
And the securities can also be converted into equity by the issuer or banking and insurance regulator if certain trigger events occur.
Hybrids were in the news last year. Standard & Poor’s downgraded big bank hybrids in May, dropping them below investment grade. And in June Europe’s Single Resolution Board cancelled all the shares and hybrids of Spain’s Banco Popular in response to the bank’s failure.
Former Australian Securities and Investments chair Greg Medcraft questioned whether hybrids were suitable for retail investors.
BetaShares chief executive Alex Vynokur says: “We are of the view that hybrids are an important asset class with benefits for investors. We are also concerned that they have been sold as a substitute for term deposits. We know that a lot of people don’t understand the risks.
“This fund will give investors diversification and also focus on managing volatility.”
The fund will aim to identify mispriced securities within the Australian hybrids market that may produce capital gains. It will target a holding to 20 to 50 hybrids when fully invested and will aim to have a weighting below 15 per cent in any individual security at the time of investment
The management fee and other expenses add up to 55 basis points.
There are about $50 billion of hybrids listed on the ASX and another $10 billion in the unlisted market.
Vynokur says there is plenty of liquidity in the hybrid market to support the fund.