Question 1: Are hybrids a good investment and how safe are they for your self managed super fund as they pay a better interest rate than term deposits?
Answer (By Paul Rickard): Firstly, I don’t think of hybrids as a “share” – I think of them as a floating rate “corporate bond” or an “interest rate security”. As the interest rate is re-set every three months, it is a bit like investing in a “corporate” term deposit that is rolled over every three months.
So, the question of whether they are a “good investment” means (for me) are they good compared to a term deposit, or a corporate bond?
How good are they? Well, they were a lot better some nine to 12 months back when they were priced at more attractive margins. In the search for yield, the spreads have been compressed and they are now less attractive. That said, they are still somewhat attractive compared to a government-guaranteed term deposit.
Safety? I think that with the bank issued hybrids, you can be reasonably comfortable. They are not riskless – so diversify and spread your risk – take exposure across a number of issues.
Question 2: Which bank do you favour for the five to seven year term for both growth and income?
Answer 2 (By Paul Rickard): Five to seven years is a long, long period, however I am going to stick with my “form guide” (see here [1]).
But if the new CEO of the cheapest bank, NAB (Andrew Thorburn), gets that bank into shape, who knows what it might do.
Bottom line – I wouldn’t just invest in one bank (they are too big), and I would certainly review any selection on a periodic basis.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Charlie Aitken and John Pearce: The Westfield split – For and Against [2]
- Staff reporter: Buy, Sell, Hold – what the brokers say [3]
- Jo Heighway: My SMSF – how to focus on yield [4]
- Roger Montgomery: The resource service sector headwinds [5]
- Tony Negline: Be ready for raised caps on 1 July [6]