Investors happy with hybrid offerings: van Eyk

A sector review conducted by van Eyk has found fund managers offering a minimum strategic allocation of 50 per cent in combined domestic and global hybrid securities have met investor demand for stable income products with tax benefits.

Hybrids, also known as convertibles, are a blend of equity and debt, providing an alternative for income investors seeking tax effective returns of cash plus 2 to 2.5 per cent, investment grade credit risk and high franking levels. Having recently reached $35 billion, the domestic market for the asset class has grown faster than expected.

Among other findings, the review highlighted the importance of managers having flexibility along with disciplined credit analysis capabilities as funds under management grow and alpha opportunities changed.

The van Eyk Australian hybrid debt sector review found the asset class met investor expectations, generating returns averaging 8 per cent over the last three years and less volatility than bonds.

“Given [that] the downside is potentially larger than the upside, strong risk management skills are essential, particularly in an environment where supply is driven by merger and acquisition related issuance,” said Nigel Douglas, senior investment analyst at van Eyk.

Seven managers were considered, with three awarded A ratings, two BB and two B ratings. The process assesses each manager’s people, processes and business management.

No AA ratings were awarded during this review due to the current environment of strong competition.

Douglas said one theme emerging from the review was the “diverse range of investment styles used by the managers”.

“The investment styles adapted vary widely from the conservative ‘buy and hold’ low turnover style to secondary market focused high turnover trading strategies.

“In addition, several managers also undertake active tactical asset allocation across an array of high yielding asset classes … providing investors with a ‘fund of fund’ like structure,” he said.