Income Report / Income Note: 3 short dated hybrids that look good (BENPE, AMPPA, CBAPE)

By Market Matters 15 July 20

Income Note: 3 short dated hybrids that look good (BENPE, AMPPA, CBAPE)

Market Matters Income Report 15th July 2020

The ASX has opened higher this morning following a positive night overseas with the index ticking around the 6000 handle. As we’ve written recently, the structure of the market is neutral however there’s a lot happening under the hood. Resources have been strong, and we expect that theme to continue, today we see Rio Tinto (RIO) up another 3% as Iron Ore trades at ~$118, while Oz Minerals (OZL) trades up to its highest level since 2011. The second-tier resource stocks are starting to chime in with Alumina (AWC) adding 4.5% today to break through $1.70.  We remain bullish resources in an absolute sense, however from a specific income perspective the large caps (BHP & RIO) remain well positioned to pay yields above 4% plus franking.   

The ASX 200 is currently trading up +82pts/1.41% to 6024.

ASX 200 Chart

The Income Portfolio saw slight negative performance over the last week, down -0.59% though this was around half the move of the ASX accumulation index which was down -1.2%. No dividends were paid during the week, weakness was seen in  Super Retail Group (SUL) while Rio Tinto (RIO) was the best performer, up 5.15%. the portfolio remains up for FY21 to the tune of 1.09% with the benchmark (RBA + 4%) sitting at 0.15%. Since inception the portfolio has added +9.17% vs. the benchmark of +15.75%. 

3 short dated hybrids that look good

A full hybrid rate sheet is available - here – thanks to our Income Strategies team at Shaw.

Hybrids had a weak period during the March sell-off, however they have bounced back strongly since. The Solactive Hybrid Index tracks the listed hybrids on the ASX and highlights the trend that played out during that period – a pullback of around 10% however clearly, they’ve bounced back strongly since. Margins over banks bills blew out to an astonishing ~9%, however they’re now back closer to 3.8%, which remains attractive. Our general rule of thumb is a margin over bank bills below 3% is expensive and over 4% is cheap.

Solactive Hybrid Index Chart

There are multiple ways to utilize hybrids in an income focussed portfolio. For the MM Income Portfolio, we hold 4 positions of varying maturity dates and names, however in today’s note we’ll focus on short dated securities.  

Short dated hybrids: Generally speaking, the shorter the duration of a hybrid, the safer it is. That concept is easy to understand with less time available for the current status quo / market conditions to change. That lower risk is reflected in a lower return, however there’s still an uplift that can be achieved for the active investors in this space.

Shorter dated hybrids.

Source: Shaw and Partners

BENPE: Yield to first call date of 5.60% (annualised) with first call date on the 30th November. The risk is that BEN don’t call these securities at that time and the notes stay on issue until the next call date, which is 30th November 2020. In that case, the yield to maturity looks less attractive at 3.59%pa, however, that’s a low probability outcome in our view and the downside is manageable.

MM likes the BENPE as a short dated hybrid


AMPPA: The short dated of the two AMP securities on issue and while we think AMP itself has some challenges in terms of earnings, the recent sale of their life business has had a positive impact on their capital levels, which is a positive for hybrids. The AMPPA has first call date on the 22nd December 2021 offering 4.39% pa. If for whatever reason they don’t call these then, the security is offering 4.99% pa for until 22nd Dec 2023. The higher probability is that AMP redeem or roll these securities next year.

MM likes the AMPPA as a shorter dated hybrid


CBAPE: A more conservative holding than both the BENPE and AMPPA, the CBAPE offers a yield to first call of 3.31% pa with first call date on the 15th October 2021.  

MM likes the CBAPE as a shorter dated hybrid


The below table looks at hybrids offering the highest yield to maturity (YTM). This combines income with any capital growth from current price to the face value of the security and is shown as an annualised number. Securities that are interesting include the AMPPB which we currently hold in the MM Income Portfolio, along with the longer dated CBAPI, offering an annualised yield to maturity of 4.3%.

Source: Shaw and Partners

There are plenty of upcoming payments from mid-August to the start of September as detailed below, with CBA distributions clustered around the start of September. We have a preference for CBA hybrids given it’s the most well capitalised bank in Australia, however NAB’s equity raise is a positive for their hybrids given it creates more of an equity buffer.

Upcoming Coupon/Dividend payments

Source: Shaw and Partners

Conclusion (s)

Shorter dated hybrids if actively traded, can offer a decent yield uplift across a portfolio

We like the BENPE, CBAPI then the AMPPA in that order.

Have a great day!

James, Harry & the Market Matters Team


Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.


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