Hybrids vs Equities: How Does Risk vs Return Trade-Off Stack-Up?

Christopher Joye

Coolabah Capital

Two quick charts looking at the risk and return trade-off between ASX equities and ASX major bank hybrids. The first chart considers the current cash (unfranked) and fully franked dividend yield on the ASX200 index versus a range of major bank hybrid yields in both franked and unfranked terms. The bottom line is that you can currently get better cash and franked yields in the hybrid market. This begs the question about relative risk. The second chart looks at the volatility of the equities market compared to the ASX hybrids index. Since 2012, the annualised volatility of the hybrid market (2% pa) has been about 1/6  the volatility of the Aussie sharemarket (12.2%)...What about during the GFC? On our estimates, the ASX hybrids market fell about 27% peak-to-trough versus a 48% loss suffered across the broader sharemarket.

The author is a portfolio manager with Coolabah Capital Investments, which invests in fixed-income securities including those discussed by this column. The information herein shall not in any way constitute financial advice.

Christopher Joye
Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs $7 billion with a team of 33 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

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