A majority of SMSF investors who hold hybrid securities do not appreciate all of the risks associated with the investment, according to BetaShares.
BetaShares chief executive Alex Vynokur told selfmanagedsuper while most SMSFs hold a very small number of hybrids and are attracted to them for the income and franking credits they generate, they remain poorly informed on the risks.
“The terms and conditions of each hybrid are actually different from each other. Each hybrid has its own terms and conditions of issue so, for example, bailing provisions basically will differ on each hybrid,” Vynokur said.
“A lot of them have provisions in their terms which might have compulsory conversion to equity in times of stress, which the Australian Prudential Regulation Authority basically requires.”
BetaShares launched its Active Australian Hybrids Fund (managed fund) last year, which is an actively managed exchange-traded fund and targets volatility of 3 per cent to 4 per cent a year.
The investment manager is able to increase exposure to cash and bonds if market conditions require it.
Vynokur also warned SMSF investors not to treat hybrid instruments as a substitute for term deposits as term deposits carry significantly less risk than hybrids.
He also said since a large portion of SMSFs do not use the services of a financial planner, he and his firm view it as their responsibility and opportunity to educate SMSF trustees and explain the issues to them directly.
“Hybrids are a really good example of an industry which has been so dominated by direct holdings of their underlying securities,” he noted.
“Yet the vast majority of people that hold those underlying securities just don’t have the access to all the information to be able to make an informed decision in relation to those securities.”
