Hybrid securities are not capital guaranteed
THE traditional investments are cash/fixed interest, property and shares, and it's a fundamental principle that you need a portfolio that is diversified across these three asset classes.
However, there is another product which is becoming increasingly popular - the hybrid security - which has the characteristics of both an income investment and an equity investment. They usually pay a set rate of interest and often have the option of conversion to shares.
On the face of it they are a great alternative to leaving your money in the bank where you are now hard pressed to get 4.5% per annum on it, but to remember the adage "the higher the return the higher the risk" - it's a matter of history that not all hybrids have given a satisfactory return.
The purpose of this column is neither to encourage nor discourage investment in hybrids, but to point out that they are not capital guaranteed, and do carry substantial risks that are not generally understood.
Some hybrids allow the company to suspend interest payments and while the interest may compound, investors could be out of pocket while they are waiting for it. At the same time the value of the hybrid may fall, forcing investors to take a capital loss if they want access to their capital.
The ASIC website www.moneysmart.gov.au has a large section on hybrids which outlines the risks in detail. Anybody thinking of investing in hybrids should read this closely and then seek more information from their financial adviser or stockbroker. In the right circumstances, they can be a very worthwhile addition to a portfolio - if you pick the wrong one, you may well suffer many sleepless nights.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org.