Hybrid securities are investments that combine elements of debt and equity. They provide a regular income, diversification benefits, and the potential for capital growth and franking credits, making them an attractive addition to a fixed income fund.
But they are complex in nature, and the debt and equity characteristics between securities can vary widely. While investing directly via an exchange is an option, if investors don’t fully understand the terms and conditions of each security, they can inadvertently take on extra risk or forgo higher returns.
Some things are best left to the experts
To access the benefits of hybrids, investors should consider an actively managed fund. One that gives them exposure to a portfolio of quality hybrids and which is run by a team of investment professionals with the expertise, resources and buying power to take advantage of market mispricing opportunities.
Not only does it provide an opportunity for outperformance, which helps investors add value to their portfolio, it also lets them access a managed portfolio of securities that are typically not available to individual retail investors.
4 reasons why you should choose an actively managed fund
1. Reduced risk
Investing in an actively managed fund that has exposure to a portfolio of hybrid securities delivers diversification benefits in a number of ways. Firstly, it minimises the exposure of risk to any single issuer, which helps spread the credit risk.
Secondly, hybrids are a blend of debt and equity, which means that in a large equity market sell-off, hybrids will outperform the underlying equity.
2. Access to liquidity
The hybrid market can experience low levels of liquidity compared to equities listed on the share market, So, investing directly can often be more costly for retail investors. That’s because the bid-offer spread (the difference between the market price that hybrids are bought and sold for vs the share price for the same security) can vary enormously on any given day.
For an active manager, their buying power means they can access liquidity in the professional market or trade in the over-the-counter (OTC) market, which experiences greater volumes than a retail investor can access on the ASX. They can also trade directly with other financial institutions, which generally offer better terms and a tighter bid-offer spread.
Like any investment, it pays to do your research before you invest. But hybrid securities are complex, and each has its own terms and conditions, some of which can run to hundreds of pages. It doesn’t take an expert to work out that it takes an expert to understand the risk and merits of a hybrid security!
That’s where an actively managed fund can help. They’re run by a team of professional investment managers who have the time and expertise to evaluate the risk/return characteristics associated with individual hybrid securities.
4. Capturing alpha
One of the most important reasons for investing in hybrids through an actively managed fund is to capture market-beating returns (alpha).
The complex nature of hybrid investments means they can often be mispriced. This presents an opportunity for a skilled investment manager to take advantage of the relatively inefficient market and capture alpha.
Taking advantage of active management
Hybrid securities are more complex to understand and value than shares, and that presents a risk to investors who may not have the time or expertise to fully understand the risk-reward characteristics of each security.
By investing through an actively managed fund, investors can not only take advantage of the diversification and risk management benefits, but they may also profit from higher returns.
Invest in more
The Yarra Enhanced Income Fund is a competitively priced, actively managed fund that has delivered higher returns than traditional fixed income investments, but with less volatility than shares.