Hybrid equities should not replace defensive assets in an investors portfolio due to their susceptibility to volatility, a number of investment managers said yesterday.
"Hybrids have a place in the market and they have a place in a portfolio, but they are not a replacement for a defensive asset," PIMCO head of portfolio management Rob Mead told delegates at yesterday's Morningstar Investment conference in Sydney.
Mead said the pricing of hybrids in the retail market have tended to have much less attractive returns compares to similar types of securities in the institutional market.
"There is no doubt that there are corporates using this as an opportunity to raise some very cheap equities," Mead said.
"Don't think that when equity market volatility reappears that the hybrids aren't going to have very similar correlations to risky assets."
Investors should be mindful of volatility and portfolio positioning when looking to make an allocation to hybrids, he said.
"Don't make the mistake of thinking these are a great replacement for the term deposits that have just matured or to avoid having to buy something in the bond market given that the yield is lower," Mead said.
Macquarie Investment Management head of fixed income and currency Brett Lewthwaite agreed.
"Hybrids aren't a substitute for fixed income because they do, in times of poor equity market returns, perform quite poorly," Lewthwaite said.
It can be a shock for investors if they invest in hybrids thinking they are getting a seven per cent yield that then drops, he said.
"[Investors should] think about the diversity aspects. Take advantage of [hybrids] but certainly do not concentrate your exposure in that area," Lewthwaite said.
