Hybrids (also known as Listed Income Securities) are a type of security listed on the ASX that have become very popular with SMSF investors over the past decade. They are securities that have historically been bought for the relatively high level of income that they generate, compared to other fixed income type investments.
However, hybrids are not simple investments, nor are they risk free. As such, it is important for SMSF investors to understand what they are getting into when they decide to invest in hybrids.
Lonsec are experienced hands with researching hybrids. We provide a research table of key data with a filter tool, plus Viewpoint reports. These reports are a two-page summary research report which includes an overview of the security, key details, approved / not approved rating, risk rating, and commentary around the various risk categories of financial risk, structural risk, maturity risk, liquidity risk, industry risk, and volatility risk.
Each listed income investment under coverage is assigned either an ‘Approved’ or ‘Not Approved’ rating.
The ‘Approved’ rating indicates that Lonsec believes the security is of ‘Investment Grade’ quality, meaning we believe the security will pay all distributions in the term to call and holders will receive face value on maturity, such that the income potential outweighs the potential risks.
The ‘Not Approved’ rating indicates that Lonsec believes the security is not of ‘Investment Grade’ quality, meaning we believe the potential risks outweigh the long term income potential of the security. These recommendations are made with reference to the Lonsec risk assessment, which is discussed below, and with consideration to the relative attractiveness of the expected return.
The six risk categories identified and assessed (in order of importance) are:
A low risk assessment indicates that a majority of the risks are rated as low which indicates strong credit quality.
A moderate risk assessment indicates that a majority of the risks are rated as moderate which indicates good credit quality.
A high risk assessment indicates that a majority of the risks are rated as high which indicates low credit quality.
A speculative risk assessment indicates that a majority of the risks are rated very high which indicates the issue is below investment grade and has speculative qualities.
Following an assessment of the risks and metrics described above, a risk ranking score is assigned to each of the six risk categories. The risk rating categories range from Low to Speculative, and are described here.
Lonsec also advises on the Lonsec investor risk profiles that each security is suited to.
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