The Australian Hybrid Phase-Out: Navigating a New Era for Income Investors

For decades, hybrid securities have served as a cornerstone of income-focused portfolios in Australia, celebrated for their capacity to deliver high-yielding, regular income payments that often exceeded the returns from traditional fixed-income products. The regulatory decision to phase out this popular asset class creates a conundrum for those that have been regular investors: how to now source high-yielding, fixed-term investments that come with high levels of liquidity if needed, in a macroeconomic environment already defined by falling interest rates.

The hybrids experience for local investors was largely a positive one, which came down predominantly to the quality of issuers in the sector.  That is, investors have in most cases avoided any specific capital events during their hybrids journey despite having their exposures at the bottom level of issuers debt structure, only one notch above ordinary equity. This new era of post-hybrid investing, is the opportunity for those investors who are now considering broadening their investments to give greater understanding to the ratings of their new exposures. Mark Sherwood, Investment Strategist of iPartners Group notes “Many hybrid investors gave little thought to the rating of the securities they were holding.  The rolling out of the hybrids sector is now the perfect time for investors to understand the ratings assigned to fixed income investments.”

The end of the hybrids era, however, is not a market contraction but a market transformation.  While the familiar high-yielding product is disappearing, a new landscape of alternatives is emerging. The complexities of this transition underscores the increasing importance of professionally managed solutions as a strategic choice for diversification, risk management and quality market access.

The wholesale bond markets for corporate and asset backed securities is a logical place for hybrid investors to seek new investments with their maturing proceeds.  However, sourcing and selecting the individual bonds becomes a significant challenge to individual investors and understanding the individual bond ratings requires ongoing work.  This challenge didn’t previously exist for those hybrid investors, as they often simply waited for the next primary issuance to be offered.  The iPartners Bond Income Fund does not self-rate any of its wholesale bonds, but instead spends the credit work required to deeply understand the bonds external ratings and the risk-reward of owning it.  The fund also utilises multiple counterparties, ensuring it can source the strongest risk-reward bonds available in the secondary market that meet the fund profile.

For wholesale investors (individuals with a gross annual income of greater than $250,000 for the past two years or net assets in excess of $2.5 million), the iPartners Bond Income Fund has been designed for investors seeking a passive investment exposure to the Australian fixed income sector.  The fund can be utilised as a substitute for an investor attempting to source and manage individual bonds themselves.  With a targeted return profile of the RBA cash rate plus 3 to 4%, paying monthly distributions, the fund returns are comparable to those that hybrids investors have appreciated.  Click here to learn more.