Speaking to InvestorDaily, Goldman Sachs AM Australia managing director Philip Moffitt said ‘new-style’ hybrids are looking expensive compared to their older cousins.
“The new ones can convert into equity basically at the company’s discretion. It doesn’t look to us as though you’re getting properly compensated for that risk,” said Mr Moffitt.
Many institutional fixed income investors cannot invest in the new ‘convertible’ hybrids due to investment constraints, he said.
“I think the vast majority of [the new-style hybrids] have been bedded down with private client investors,” he added.
Mr Moffitt said his private banker emails him every time there is a new hybrid issue available.
“So I look at what I’m being sent – I guess it’s been through their compliance and it’s factual – all it says is the yield’s going to be six per cent. Great!” he said.
But Goldman Sachs AM head of Australian credit and global fixed income management, Roy Keenan, reckons investors should be “selling new ones to buy the old ones”, said Mr Moffitt.
“What the retail market’s doing is to some extent it’s selling the old issues to buy the new issues – because they’re new issues and they’re being promoted,” he said.
“But the old issues are better than the new issues and therefore yielding more because they’re being sold,” said Mr Moffitt.
It’s a “pretty straightforward” trade for investors like Goldman Sachs AM to purchase the older hybrids on the secondary market, he said.
“We’re sceptical about the quality of some of the new stuff. Not all of it, but some of it. And that’s how credit cycles come to an end,” said Mr Moffitt.
“You get lower and lower issuance with fewer and fewer covenants and support as people get desperate for yield,” he said.
