There are a variety of reasons investors may choose to invest in hybrid securities, including the potential to:
- receive a steady and defined income stream for a pre-determined period;
- improve the return on your capital – the income from hybrid securities is typically higher than interest paid on simple bonds reflecting their higher risk;
- diversify the risk of your overall portfolio; and
- profit from anticipated movements in interest rates or equity prices.
Using hybrid securities to diversify your portfolio
Diversifying your investment portfolio with a variety of ASX listed products can help reduce risk and protect returns over the longer term. Diversifying involves:
- spreading your investments across different asset types such as shares (both Australian and international), REITs (listed commercial property), bonds, hybrid securities, currencies and commodities;
- spreading your investments within each asset type so, for example, you hold a range of shares across different sectors, a spread of bonds and hybrid securities of different types with different issuers and maturity dates; and
- spreading your investments across assets that have low correlation with each other, recognising that the value of investments in different asset classes can vary through different cycles.
Hybrid securities are a good way to introduce diversification into an investment portfolio because their regular income stream generally provides more stable returns.
Risk and return – the trade off
It is important to understand the degree of risk associated with different types of investments and how that affects their expected return. Generally speaking there is a trade-off between risk and return. Assets with a higher level of risk will generally have a higher potential rate of return attached and vice versa. That is why most hybrid securities pay higher returns than regular bonds – there is usually a higher level of risk attached to a hybrid security than to a regular bond.
A protfolio with a balance of shares, hybrid securities and bonds may have a lower risk profile and more stable returns than a portfolio of shares only. This may suit investors with a desire for greater certainty of income rather than potential capital growth.
Learn more about hybrid securities by downloading the new ASX booklet 'Understanding hybrid securities'