Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 403

The fascinating bank hybrid journey of the last year

This time last year we were scrambling to figure out how best to explain the hybrid market’s performance. From 2 March 2020 to the close of business on 23 March 2020 the broader market, as represented by Elstree Hybrid Index declined by a material 15.7%. By the month’s end the index had managed to claw its way back such that it was down, over the month, by a relatively pedestrian 6.2%.  

Wow, that was some 12-month period!

On the 12-month anniversary of the biggest drawdown since the GFC, it's an interesting time to reflect.

Most risk markets, hybrid markets included, bottomed on or around 23 March before rallying strongly on coordinated government and central bank intervention. The rally that ensued produced extraordinary return outcomes – we might even go so far as to say ‘ridiculous’ return outcomes.

Over the year to end 31 March 2021 the hybrid market as represented by the Elstree Hybrid Index returned 13.32%. This compares (now) with an expected hybrid market return of cash +3% (i.e. 3%). Investors certainly should not expect those hyper-inflated return outcomes again any time soon. The chart below shows the returns on individual hybrids (vertical axis) and the standard deviation (horizontal axis). We’ve also shown the Elstree Hybrid and All Ordinaries Accumulation indices.

What does this tell us?

  • Almost everything did well but the non-major bank hybrids did best with many producing around 30% returns.
  • Volatility was relatively subdued given the return outcomes. Pretty much everything went up in a straight line.
  • If you produced the same chart but started it at 28 February 2020, you would get different outcomes with hybrids still producing an acceptable return and risk profile with equities displaying more risk and less return.

What were the fascinating days?

  • The hybrid market’s worst day was a -6.1% decline on 23 March 2020. This was the day that the NAB announced that they were converting their maturing NABPB hybrid into shares via a VWAP (Volume Weighted Average Price) agreement with UBS. This ‘option’ is present in almost every hybrid document and it allows the issuer to raise $1-$2 billion of equity capital without the usual complexities. In this instance investors received their $100 (for the note) and then the NAB ‘on sells’ the note to UBS and NAB then issues ordinary shares to UBS. The market erroneously interpreted the cleansing statement issued by NAB to mean that the maturing NABPB holders would not get $100 and instead would receive NAB shares at an estimated 30% premium to the last traded price. Investors sold everything including equities. NABHA fell 12%, AMPPB fell 11% while the broader equity market declined by just under 6%.
  • The hybrid market’s best day was a mere two days later on 25 March 2020 resulting in a 3.8% return. This was the day investors realised they had sold for the wrong reasons and bought back the stocks they had sold. The market had a net gain of 3.9% for that week.

Probably the biggest lesson is that many investors don’t understand the structures, and in a crisis, everyone panics first and thinks later.

 

Campbell Dawson is an Executive Director of Elstree Investment Management, a boutique fixed income fund manager. The Elstree Enhanced Income Fund delivered 18.7% in the 12 months to end March 2021. This article is general information and does not consider the circumstances of any individual investor.

 

RELATED ARTICLES

What now for SMSFs and hybrids?

Hybrids alongside corporate bonds a good balance

How are high net worths investing and thinking now?

banner

Most viewed in recent weeks

Australian stocks will crush housing over the next decade, one year on

Last year, I wrote an article suggesting returns from ASX stocks would trample those from housing over the next decade. One year later, this is an update on how that forecast is going and what's changed since.

What to expect from the Australian property market in 2025

The housing market was subdued in 2024, and pessimism abounds as we start the new year. 2025 is likely to be a tale of two halves, with interest rate cuts fuelling a resurgence in buyer demand in the second half of the year.

Howard Marks warns of market froth

The renowned investor has penned his first investor letter for 2025 and it’s a ripper. He runs through what bubbles are, which ones he’s experienced, and whether today’s markets qualify as the third major bubble of this century.

The perfect portfolio for the next decade

This examines the performance of key asset classes and sub-sectors in 2024 and over longer timeframes, and the lessons that can be drawn for constructing an investment portfolio for the next decade.

9 lessons from 2024

Key lessons include expensive stocks can always get more expensive, Bitcoin is our tulip mania, follow the smart money, the young are coming with pitchforks on housing, and the importance of staying invested.

The 20 most popular articles of 2024

Check out the most-read Firstlinks articles from 2024. From '16 ASX stocks to buy and hold forever', to 'The best strategy to build income for life', and 'Where baby boomer wealth will end up', there's something for all.

Latest Updates

Investment strategies

The perfect portfolio for the next decade

This examines the performance of key asset classes and sub-sectors in 2024 and over longer timeframes, and the lessons that can be drawn for constructing an investment portfolio for the next decade.

Shares

The case for and against US stock market exceptionalism

The outlook for equities in 2025 has been dominated by one question: will the US market's supremacy continue? Whichever side of the debate you sit on, you should challenge yourself by considering the alternative.

Taxation

Negative gearing: is it a tax concession?

Negative gearing allows investors to deduct rental property expenses, including interest, from taxable income, but its tax concession status is debatable. The real issue lies in the favorable tax treatment of capital gains. 

Investing

How can you not be bullish the US?

Trump's election has turbocharged US equities, but can that outperformance continue? Expensive valuations, rising bond yields, and a potential narrowing of EPS growth versus the rest of the world, are risks.

Planning

Navigating broken relationships and untangling assets

Untangling assets after a broken relationship can be daunting. But approaching the situation fully informed, in good health and with open communication can make the process more manageable and less costly.

Beware the bond vigilantes in Australia

Unlike their peers in the US and UK, policy makers in Australia haven't faced a bond market rebellion in recent times. This could change if current levels of issuance at the state and territory level continue.

Retirement

What you need to know about retirement village contracts

Retirement village contracts often require significant upfront payments, with residents losing control over their money. While they may offer a '100% share in capital gain', it's important to look at the numbers before committing.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.