One need only look at the recent performance of hybrid securities to realize that debt securities can have similar characteristics to stocks. As we saw during the GFC, hybrid stocks act like debt in rising markets and stocks in falling markets, which begs the question for many investors: what is the level of risk taken in? the search for yield? The answers can be found in the new IPO of Gryphon Capital Income Trust (ASX: CGI).
For a long time, investors had limited choice in which securities they could buy for income. When it comes to income-producing assets, the typical SMSF portfolio typically holds term deposits in cash, bank stocks, and hybrids, as well as investment property (if they’re lucky). The attractiveness of postage credits made bank and hybrid stocks an overweight position. But the volatility associated with this exposure can put capital at risk during times of market stress or when, as Bill Shorten has proven, regulatory changes threaten cash repayments. The risk of capital loss is best illustrated by the graph below which shows the recent performance of a sample of hybrids listed on the ASX at longer maturity (Additional Tier 1) compared to the performance of the institutional strategy. Gryphon proxy.
Gryphon Capital has been managing institutional mandates in the field of structured credit for several years and currently manages around $ 1.7 billion, mainly in the form of covered bonds such as Residential Mortgage Back Securities (RMBS) and Asset Backed Securities (ABS ). RMBS are backed by real estate assets; ABS by cash flow from rentals and credit cards. The objective of the Gryphon Capital Income Trust (ASX: CGI) is to provide a net return of 5% paid monthly to investors with low capital volatility. The new listing will for the first time give retail investors access to an institutional quality strategy and, key in times of increased market volatility, will offer them an alternative to cash term deposits and equity-type return instruments. .
An equally important question, not only with regard to Gryphon Capital but also for holders of bank stocks and bank hybrids who are heavily indebted for the same risk, is “How will a collapse in house prices affect- there those who are exposed to residential mortgages? “. As part of its risk management strategy, Gryphon Capital is testing its portfolios for this exact event, using the APRA 100 and 200 year event, which equates to a 40% drop in residential housing prices. . In this environment, Gryphon Capital wishes to ensure that the capital of its investors is protected.
What we do know is that markets tend to highlight risks with small signals before those risks manifest, whether they are market related or politically motivated, such as the crackdown proposed by Bill Shorten on postage credits. As it has done in the past, the hybrid market now shows us that these debt-like securities can have risk profiles comparable to those of equities. The role of a strategy like the Gryphon Capital Income Trust (ASX: CGI) is best understood by referring to the bank financing model, where term deposits rank first in the event of default, followed in descending order of secured debt. (like RMBS and ABS), unsecured debt, hybrids and equities. This risk is reflected in the income that an investor would expect to receive for holding the asset.
While retail investors cannot test portfolios for the risk of collapsing house prices, the defensive alternative doesn’t always have to be 2% cash term deposits per annum. Exposure to cash and equities are not the only categories of income-producing assets. We have recently seen the success of strategies such as global equities and long / short become more common in retail portfolios. This should be the case with covered bond strategies like the Gryphon Capital Income Trust (ASX: CGI). Australian investors need fixed income exposure to provide true diversification.