Hybrids are taking off

The hybrid market is the next frontier in share investing, according to John Dyall, head of investment research at Rainmaker Group, the publisher of Money magazine.

Hybrids are complex financial instruments that have both equity and debt features, providing attractive franked returns. They operate as exchange traded products (ETPs) in that they can be bought and sold on the stock exchange, and as unlisted unit trusts.

Hybrid products now represent around 15% of the total market.

“These are the products that straddle the old world of unlisted unit trusts that have held sway for decades now,” says Dyall. “The truth is that the managed investments industry in Australia goes through constant change, and the rise of the hybrid is a sign we are going through one of those periods right now.”

Dyall says the ETP versions can be bought and sold during trading hours at known prices.

“They are transacted with brokerage costs and the buy/sell spread may be larger than those charged directly by the manager. The unit trust version may have buy/share spreads that are less than those charged on the exchange and there are no brokerage costs.”

This makes unit trusts advantageous to investors either buying or selling units on a regular plan.

Managers with existing assets under management – in the form of unlisted unit trusts – can provide existing and new investors with easily accessible liquidity at known prices.

“Units purchased on the exchange can be redeemed directly from the manager at the daily net asset value while units previously purchased from the manager can be sold on the exchange,” says Dyall.

“There are benefits to both approaches ... the one downside [of the ETP version] is that it is subject to brokerage costs, and the buy-sell spread may differ to those charged directly by the manager, due to the price-rounding convention on the stock exchange.”

The funds under management of hybrid products in international equities strategies rose from zero in mid 2020 to $15.7 billion at the end of March 2022 and now represent 23% of international equities assets.

The proportion of hybrid products in Australian equities is substantially less at 4% or $1.6 billion.