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Home / Markets / Debt Markets
Mar 10 2012 at 12:04 AM
Updated Mar 19 2012 at 8:13 AM
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REPRINTS & PERMISSIONS
Fixed-interest products come with own risks
by Alison Kahler
Brokers have earned a cheeky $60 million, or thereabouts, by selling hybrid securities
and subordinated notes to investors over the past few months.
The 1 per cent commission that’s usually paid for selling such issues adds up to that
amount after a slew of issues worth a total $6 billion.
The bonanza has compensated the industry for lean times in which it’s been almost
impossible to earn a decent buck by selling shares to a public still scarred by the
financial crisis. Investors have stockpiled cash since the nadir of the crisis in 2008 and
are itching to spend it – giving issuers and brokers a captive, though often uninformed
market, from which they can raise capital.
The imminent launch of bond exchange-traded funds (ETFs) will create a competing
product for hybrids and if the government has its way, there may also soon be a retail
corporate bond market.
The pitch for all these products – and, again, there will be plenty of brokers selling
them – will be that people need more fixed income in their portfolios as insurance
against sharemarket volatility.
This is probably true, but smart people won’t simply swallow that pitch but instead
analyse each offer spruiked to them to determine how it works and if it’s actually
suited to their circumstances.
This will involve some hard graft as investors get their heads around concepts
including the yield curve, capital structures, step-ups and all sorts of other factors that
make up proper credit analysis.
It’s an arcane area that can make the head spin wildly but there is no point buying any
of these new fixed-interest products without a proper understanding of their
mechanics.
Hybrid securities and notes are not the same as a corporate bond, let alone as safe as
cash.
“Investors do need to be aware that these securities are not a substitute for fixed
income," UBS head of investment strategy George Boubouras told the bank’s private
clients in a recent note. “They offer an attractive yield versus conventional bonds due
to the additional risk."
The bond ETFs expected to be launched within weeks could be a combination of any
of the above asset classes plus others like government and semi-government bonds to
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complicate matters more.
The underlying structure of an ETF will add an additional layer of complexity to
investment decision-making. Investors need to how the ETF invests, the fees it
charges and if there additional risks in the fund’s own mechanics.
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Already, there are concerns that people who bought into the recent note issues
consider them to be relatively safe, as well as homogenous.
1 hr ago
“We’re at pains to emphasise the risk. We try to make people understand these are
Liberal party cash comes with
Chinese strings attached
unsecured," says Ravi Reddy, an analyst at research house Morningstar. “People have
lost money in the past."
Sulieman Ravell, from advisory company Wealth Focus, has a similar view.
“People have to realise that issues can be very, very different," Ravell says. “Even one
ANZ issue, for example, is different to the next ANZ issue. I can see people are going to
get their fingers burnt down the road."
The Australian Financial Review
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