Bank hybrids may not suit all income investors after a possible March 2020 ‘shock’.
In March 2020, bank share prices halved and the underlying equity conversion risk was highlighted when the prices of the bank hybrids also fell about 20% from par.
While no bank did force a conversion to shares for any of the hybrids on offer, investors may have gotten a shock from the velocity of bank hybrids’ price declines alongside equity markets.
When investing in bank hybrids, the investor takes the credit risk of the bank AND the risk of possible conversion to bank equity if the bank’s share price falls significantly (say more than 80%).
Equity markets have rallied since March 2020, but most bank stocks have not recovered to pre-COVID levels – still roughly at about 60% of these levels.
Worried bank hybrids investors have a window at present
Prices of bank hybrids have recovered to about par, so it might be a good time to consider exiting to reduce risk. If bank stocks start to slide again, bank hybrids are closer to conversion compared to March 2020.
An alternative to hybrids is available for wholesale investors
To compensate for the loss of income from the hybrids, investors can consider fixed income alternatives like the Laureola Fund investing in life settlements.
The Laureola Fund targets an annualised return of 8-10%. As the investments are in life settlements (resold insurance policies), there is no equity market correlation. Investors make returns when the life policies mature as expected.
Laureola fund has been operating for seven years with only two negative months.
Background material on Laureola Fund, now available in Australia:
Alex Lee CFA
Director, Investor Relations – Australia and New Zealand
Laureola Advisors
Mobile: +61 434 269 987
Email: alee@laureolaadvisors.com
https://www.laureolaadvisors.com
Tony Bremness, Managing Director & CIO of Laureola Advisors, is based in Europe and can be contacted at Tony.Bremness@laureolaadvisors.com