Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 403

The fascinating bank hybrid journey of the last year

This time last year we were scrambling to figure out how best to explain the hybrid market’s performance. From 2 March 2020 to the close of business on 23 March 2020 the broader market, as represented by Elstree Hybrid Index declined by a material 15.7%. By the month’s end the index had managed to claw its way back such that it was down, over the month, by a relatively pedestrian 6.2%.  

Wow, that was some 12-month period!

On the 12-month anniversary of the biggest drawdown since the GFC, it's an interesting time to reflect.

Most risk markets, hybrid markets included, bottomed on or around 23 March before rallying strongly on coordinated government and central bank intervention. The rally that ensued produced extraordinary return outcomes – we might even go so far as to say ‘ridiculous’ return outcomes.

Over the year to end 31 March 2021 the hybrid market as represented by the Elstree Hybrid Index returned 13.32%. This compares (now) with an expected hybrid market return of cash +3% (i.e. 3%). Investors certainly should not expect those hyper-inflated return outcomes again any time soon. The chart below shows the returns on individual hybrids (vertical axis) and the standard deviation (horizontal axis). We’ve also shown the Elstree Hybrid and All Ordinaries Accumulation indices.

What does this tell us?

  • Almost everything did well but the non-major bank hybrids did best with many producing around 30% returns.
  • Volatility was relatively subdued given the return outcomes. Pretty much everything went up in a straight line.
  • If you produced the same chart but started it at 28 February 2020, you would get different outcomes with hybrids still producing an acceptable return and risk profile with equities displaying more risk and less return.

What were the fascinating days?

  • The hybrid market’s worst day was a -6.1% decline on 23 March 2020. This was the day that the NAB announced that they were converting their maturing NABPB hybrid into shares via a VWAP (Volume Weighted Average Price) agreement with UBS. This ‘option’ is present in almost every hybrid document and it allows the issuer to raise $1-$2 billion of equity capital without the usual complexities. In this instance investors received their $100 (for the note) and then the NAB ‘on sells’ the note to UBS and NAB then issues ordinary shares to UBS. The market erroneously interpreted the cleansing statement issued by NAB to mean that the maturing NABPB holders would not get $100 and instead would receive NAB shares at an estimated 30% premium to the last traded price. Investors sold everything including equities. NABHA fell 12%, AMPPB fell 11% while the broader equity market declined by just under 6%.
  • The hybrid market’s best day was a mere two days later on 25 March 2020 resulting in a 3.8% return. This was the day investors realised they had sold for the wrong reasons and bought back the stocks they had sold. The market had a net gain of 3.9% for that week.

Probably the biggest lesson is that many investors don’t understand the structures, and in a crisis, everyone panics first and thinks later.

 

Campbell Dawson is an Executive Director of Elstree Investment Management, a boutique fixed income fund manager. The Elstree Enhanced Income Fund delivered 18.7% in the 12 months to end March 2021. This article is general information and does not consider the circumstances of any individual investor.

 

RELATED ARTICLES

What now for SMSFs and hybrids?

Hybrids alongside corporate bonds a good balance

How are high net worths investing and thinking now?

banner

Most viewed in recent weeks

Are term deposits attractive right now?

If you’re like me, you may have put money into term deposits over the past year and it’s time to decide whether to roll them over or look elsewhere. Here are the pros and cons of cash versus other assets right now.

Uncomfortable truths: The real cost of living in retirement

How useful are the retirement savings and spending targets put out by various groups such as ASFA? Not very, and it's reducing the ability of ordinary retirees to fully understand their retirement income options.

Is Australia ready for its population growth over the next decade?

Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise. 

How retiree spending plummets as we age

There's been little debate on how spending changes as people progress through retirement. Yet, it's a critical issue as it can have a significant impact on the level of savings required at the point of retirement.

20 US stocks to buy and hold forever

Recently, I compiled a list of ASX stocks that you could buy and hold forever. Here’s a follow-up list of US stocks that you could own indefinitely, including well-known names like Microsoft, as well as lesser-known gems.

Where Baby Boomer wealth will end up

By 2028, all Baby Boomers will be eligible for retirement and the Baby Boomer bubble will have all but deflated. Where will this generation's money end up, and what are the implications for the wealth management industry?

Latest Updates

Property

Financial pathways to buying a home require planning

In the six months of my battle with brain cancer, one part of financial markets has fascinated me, and it’s probably not what you think. What's led the pages of my reading is real estate, especially residential.

Meg on SMSFs: $3 million super tax coming whether we’re ready or not

A Senate Committee reported back last week with a majority recommendation to pass the $3 million super tax unaltered. It seems that the tax is coming, and this is what those affected should be doing now to prepare for it.

Economy

Household spending falls as higher costs bite

Shoppers are cutting back spending at supermarkets, gyms, and bakeries to cope with soaring insurance and education costs as household spending continues to slump. Renters especially are feeling the pinch.

Shares

Who gets the gold stars this bank reporting season?

The recent bank reporting season saw all the major banks report solid results, large share buybacks, and very low bad debts. Here's a look at the main themes from the results, and the winners and losers.

Shares

Small caps v large caps: Don’t be penny wise but pound foolish

What is the catalyst for smalls caps to start outperforming their larger counterparts? Cheap relative valuation is bullish though it isn't a catalyst, so what else could drive a long-awaited turnaround?

Financial planning

Estate planning made simple, Part II

'Putting your affairs in order' is a term that is commonly used when people are approaching the end of their life. It is not as easy as it sounds, though it should not overwhelming, or consume all of your spare time.

Financial planning

Where Baby Boomer wealth will end up

By 2028, all Baby Boomers will be eligible for retirement and the Baby Boomer bubble will have all but deflated. Where will this generation's money end up, and what are the implications for the wealth management industry?

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.