Question 1: Given the wipeouts of tier 1 capital bonds seen overseas, are hybrids at Aussie banks at risk as well?
Answer: I think the position taken in the bailout of Credit Suisse, where effectively shareholders got some return but hybrid bond holders got no return, surprised many people in the market.
Chris Joye from Coolabah Capital Investments (and others) have argued that Australian bank hybrids are very different from European bank hybrids. Australian bank hybrids issued by the major banks are investment grade (rated BBB-), whereas European bank hybrids are “junk” (rated B). Moreover, European bank hybrids don’t automatically convert into bank shares in a ‘non-viability’ situation (as do Australian bank hybrids), so there was no alternative for the authorities but to wipe them out.
That’s why there wasn’t a major price movement with Australian bank hybrids. Bottom line – Australian bank hybrids are not at risk.
Question 2: Is the proposed merger between BOQ and Bendigo & Adelaide Bank a reality or just talk?
Answer: Talk. It has been “talked about” since Adam was a boy. In some quarters, it was a three way tie up (BOQ, Bendigo & Adelaide and Suncorp Bank) to form a bank that could take on the majors, but with Suncorp Bank going to ANZ, it is now just the two.
Many in the market think it is logical, but I am not sure that the regulator wants to see less competition. Maybe it will happen…one day.
Question 3: Is now a suitable time to invest in an ETF (exchange traded fund) focused on bonds and if so, are there any you would recommend or believe are worth considering?
Answer: Ideally, you want to get in the bond market when increases in short-term interest rates have stopped and inflation is on the way down. My sense is that we are not too far away from this point, although I wouldn’t be surprised if there aren’t a few landmines yet to explode on the inflation front.
So, I think this is a reasonable time to be lengthening and buying long-term bonds. I think time is on your side here so you can be patient – buy when the price dips/yields spike higher.
If it is Australian bonds, then the major ETFs are fine (VAF from Vanguard of IAF from iShares). Both are passively managed and just track the index. You could also look at an active manager. There is an active ETF from Betashares (BNDS), but performance, although improving, is a touch underwhelming.
Question 4: I hold 75% of my portfolio in 3 monthly income stocks: Plato Income Maximiser (PL8), Betashares Dividend Harvester (HVST) and Einvest Income Generator (EIGA). These seem to give a diversified holding over 30 to 40 stocks. As a77 year old self funded person, I need regular income more than capital growth. I hold a few more speculative ETF’s such as Betashares Geared Aus Equity Fund (GEAR) as well as a small holding in Switzer Dividend Growth Fund (SWTZ). Have ETFs ever failed? Do you think this is sufficient diversification?
Answer: In Australia at least, we haven’t had a failure with an ETF. An ETF is just like any other managed fund in that it has a Responsible Entity (RE), with the RE being regulated by ASIC. Investors should be confident that the industry is well regulated.
Are you sufficiently diversified? Yes and no. With three ETFs, each investing in 30 to 40 stocks, you will get a fairly broad coverage of the market. There will be a strong bias to higher yielding stocks, which means you will be overweight sectors like financials, real estate, consumer staples and utilities – and underweight sectors such as health care and information technology. Typically, you would also be underweight materials, but with BHP and Fortescue paying such big dividends, you may actually be overweight this sector.
One way to balance this would be to buy some “growth” shares directly.
