Get higher income with the right hybrids

Hybrids have become very popular with SMSFs but they are not simple investments. Our research helps you find the right hybrids for your portfolio.

  • Research table of key data with filter tool
  • Viewpoint summary reports
  • A Hybrids Model Portfolio of best ideas

Hybrids research

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.

CLICK HERE to view our Hybrids research table and filter sample

CLICK HERE for a sample Listed Income Viewpoint report.

Highly informed, investment recommendations

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.

Comprehensive due diligence and risk assessment

The six risk categories identified and assessed (in order of importance) are:

https://www.thesmsfinvestor.com.au/wp-content/uploads/2019/12/hybrid-1-1.png Financial

Financial strength is examined according to the sector in which the company operates. Primarily designed to ensure the analysis represents a true reflection product issuer’s financial strength, includes key indicators such as balance sheet strength, wholesale credit rating, capital adequacy ratios, interest cover, asset quality, liquidity, net tangible assets, gearing and earnings quality.

https://www.thesmsfinvestor.com.au/wp-content/uploads/2019/12/hybrid-2-1.png Structure

The risks inherent in any listed income security can vary significantly based on the security structure. To assess structure risk, Lonsec examines subordination / capital classification, distribution payment tests, distribution restriction conditions and conversion conditions.

https://www.thesmsfinvestor.com.au/wp-content/uploads/2019/12/hybrid-3.png Maturity

The risks associated with the maturity structure are examined in detail and a relevant risk rating assigned. To determine market pricing, including the ‘how’ and ‘when’ the invested capital is returned to the investor, Lonsec forms a view, having considered conversion terms, financial capacity of product issuer, ascribed equity credit and the size of the issue.

https://www.thesmsfinvestor.com.au/wp-content/uploads/2019/12/hybrid-4.png Liquidity

Liquidity risk is the risk that an investment may not be easily converted into cash with little or no discount to the last traded market value, and at minimum delay. A liquidity premium should be required by investors to compensate for lack of liquidity. Low liquidity can also result in higher than desired volatility. Key attributes analysed to rate liquidity include issue size and average weekly turnover.

https://www.thesmsfinvestor.com.au/wp-content/uploads/2019/12/hybrid-5.png Financial

Structural and operational risks associated with the industry in which the company operates can impact the financial position and prospective performance. Industry analysis involves consideration of the following factors: current and forecast industry conditions, domestic and global economic outlook, regulatory risks, the company’s positioning and pricing power, the power of suppliers and buyers, as well as the life cycle stage of the industry.

https://www.thesmsfinvestor.com.au/wp-content/uploads/2019/12/hybrid-6.png Volatility

Volatility measures how much the market value of an issue fluctuates with respect to its face value over the life of the issue. Our assessment takes into consideration metrics including financial strength of the product issuer, economic, equity and credit market conditions, investor sentiment, the likelihood of distribution deferral or a conversion trigger, capital ranking / structure, liquidity, conversion terms, maturity risk and the volatility of listed peers.

Low

A low risk assessment indicates that a majority of the risks are rated as low which indicates strong credit quality.

Moderate

A moderate risk assessment indicates that a majority of the risks are rated as moderate which indicates good credit quality.

High

A high risk assessment indicates that a majority of the risks are rated as high which indicates low credit quality.

Speculative

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.

Clear risk indicators and scoring

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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