There is confusion within the industry regarding the function of hybrid bonds, with the Australian Corporate Bond Company (ACBC) indicating they are not defensive assets and should not be used as such.
ACBC chief executive Richard Murphy said while hybrids have features of a fixed-income product, they are not defensive in shielding portfolios against market downturns.
“When equity prices fall, hybrids tend to behave more like equities,” Mr Murphy said.
A recent survey by the ACBC revealed that 47 per cent of respondents either classified hybrids as fixed income or did not know how to classify them.
Morningstar head of Australian credit research, John Likos, also emphasised that hybrids should not be classed as defensive products.
“The increasingly issuer-friendly terms contained in hybrids suggest they shouldn’t be included in the defensive fixed-income part of a portfolio,” he said.
Moreover, the ACBC survey found that 47 per cent of respondents considered regular income as a number one priority for clients in 2016. Further, 28 per cent see accumulating wealth for retirement as a foremost priority, with 23 per cent marking capital stability as key.
Mr Murphy said in the context of market volatility, it is no surprise that investors see regular income and capital stability as priorities.
“Senior bonds, unlike hybrids, have been able to consistently deliver income as well as capital stability in difficult markets,” he added.