Believers in the efficient market theory would tell you that it’s impossible to find mispricing opportunities in a liquid market, but in the opaque world of Australian hybrids, the mispricings are rife. Christopher Joye, Co-Chief Investment Officer at Coolabah Capital, says these inefficiencies can create incredible opportunities, for those equipped to exploit them.
“The beauty of the hybrid market is that it’s a large market, there are many issuers, and you can get a lot of diversification.”
One of the key drivers for these mispricings is the complexity of properly pricing hybrids. These include:
- Pricing the maturity of perpetual securities,
- Pricing the credit rating, when many securities are sub-investment grade,
- Pricing the risk of a bail-in by APRA,
- Pricing the risk of conversion to equity,
- Pricing the risk that the issuer will stop paying the distribution.
In the video below, Joye expands on these risks, and explains how they go about exploiting these situations.
A better way to invest in Hybrids
Christopher Joye is the Co-Chief Investment Officer of Coolabah Capital Investments who has been appointed the investment manager of the HBRD Fund by BetaShares: (VIEW LINK)