Overview
Hybrid securities are complex financial instruments that combine features of both bonds and shares, meaning they exhibit characteristics of both debt and equity. These securities can provide regular income, similar to bonds, but their value can fluctuate significantly, much like shares.
Hybrid securities may also include features that affect their future value, making them a unique and sometimes higher-risk investment. This category includes:
Subordinated debt
Perpetual notes
Convertible preference shares
Capital notes
Typically, hybrid securities pay a fixed or floating rate of return until a specified date. They are generally expected to offer a higher return than traditional debt securities, such as bonds. However, in times of financial crisis, hybrids tend to behave more like equities, experiencing greater volatility and potential value declines.
Benefits of Hybrid Securities for Investors
Higher rate of return
Liquidity benefits
Income at a Higher Price Volatility than Fixed Income, but Lower Price Volatility than Equity
Diversification benefits
Asset Allocation of Hybrid Securities
A wide variety of hybrid securities are available for purchase on the ASX, trading in the same manner as other listed securities. These instruments offer different features that impact their classification and allocation within an investment portfolio.
Some hybrid securities provide franked income, similar to ordinary shares.
Others have the ability to convert into shares, either as an option or automatically under certain conditions.
Certain hybrids will convert into shares on specific dates or when predefined trigger events occur.
Due to their dual nature, hybrid securities can play a unique role in portfolio diversification, offering both income generation and potential equity exposure. Understanding their specific terms and conditions is crucial when considering their allocation in an investment strategy.
Asset Allocation within Morningstar Adviserlogic
In line with Morningstar’s global methodology, hybrid securities are listed and linked to their primary stock.
To maintain data consistency, they are classified and stored as 100% Australian Shares within the Morningstar AdviserLogic database.
We acknowledge that this classification may not perfectly reflect the nature of hybrids, as they contain both debt and equity characteristics. However, due to their equity-like behaviour during market stress, they continue to be categorised under Australian Equity.
If you have Product Disclosure Statements (PDS) or fund reports from other sources that suggest an alternative classification, we encourage you to share them with us. Our team is happy to review and investigate further.