AUSIEX noted that advisers and clients are seeking different ways to obtain income amid volatility in the markets, with some turning to alternative specialist income-generating investments.
Along with other hybrid securities like convertibles and preference shares, capital notes have seen a significant recent uptick in trading.
“AUSIEX data shows hybrids recorded the highest traded value in December 2022 since at least 2018, more than double that of the value in the previous December,” said Brett Grant, head of product and trading at AUSIEX.
Financial advisers, he noted, accounted for half of the demand, with much of the remainder being institutional investors.
“Trade volume among financial advisers increased 15.7 per cent over the 2022 calendar year, compared with 2021,” Mr Grant said.
“Across generations, for advised accounts, Gen X showed a significant lift in interest, with the proportion of trades increasing from 31 per cent to 37.7 per cent.”
According to AUSIEX, the heightened interest in capital notes can be attributed to investors’ inclination towards debt securities that possess equity-like characteristics and offer franked dividends.
“The fact they are issued by some of the bigger banks is also appealing to some investors who are looking for a diversification alternative to dividends,” noted Mr Grant.
AUSIEX added that because capital notes are a type of unsecured debt a company takes to cover short-term liabilities, they typically pay investors a higher interest rate, as they carry more risk than term deposits.
Part of the risk is that hybrids generally rank behind other creditors if the company fails. While the debt is junior to secured notes, they are monitored by the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulatory Authority (APRA).
Mr Grant added that while having the backing of well-established institutions, these investments were once considered too complex for most clients.
“But as the market and investing has become more challenging, there has been increasing interest from a range of investors,” he said.
The firm noted that capital notes are also a hedge against inflation, as the yield increases when interest rates rise.
question is what type of asset class to treat them as – defensive or growth – and how much of the portfolio weight should be allocated.