Advisers turn to capital notes to generate more investment income for clients

8 MARCH 2023

Financial advisers and their clients continue to seek ways to obtain income in today's volatile and uncertain markets, and while there remains strong interest in fixed income and dividend income, some are identifying other specialist income generating investments.

There has been an increase in the trading capital notes on the Australian Securities Exchange (ASX), notes the country’s leading wholesale trading platform AUSIEX.

Capital notes fall into the broad category of hybrid securities, along with convertibles and preference shares. All three have been established, and traded, for several decades.

“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.

Mr Grant said: “Financial advisers accounted for half of the demand, with much of the remainder being institutional investors. Trade volume among financial advisers increased 15.7% over the 2022 calendar year, compared with 2021.”

“Across generations, for advised accounts Gen X showed a significant lift in interest, with the proportion of trades increasing from 31% to 37.7%.”

Capital notes are debt securities that have equity-like features and pay franked dividends, thus their increasing attraction to those investors who like or require income.

“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.

Notes have been issued by a number of organisations in recent times including Commonwealth Bank (ASX: CBA), Macquarie Bank (ASX: MQG), ANZ Bank (ASX: ANZ), Insurance Australia Group (ASX: IAG), Westpac Banking Corporation (ASX: WBC) and National Australia Bank (ASX: NAB).

Capital notes are a type of unsecured debt a company takes to cover short-term liabilities. It is important to note that as the debt is unsecured, capital notes typically pay investors a higher interest rate, as they carry more risk than term deposits. For example, hybrids generally rank behind other creditors if the company fails.

This debt is junior to secured notes, though 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 financial advisers’ clients. “But as the market and investing has become more challenging, there has been increasing interest from a range of investors.”

But with that increased return comes potential increased risks compared to a term deposit, though comparatively less risk than bank shares.

Advisers note that capital notes are also a hedge against inflation as the yield increases and interest rates rise. But of course, seek or provide, professional financial advice with respect to investors’ individual requirements.

About AUSIEX

With over 25 years of experience in the local market and the backing of a multinational trading technology powerhouse, AUSIEX combines deep expertise with trusted and reliable technology to deliver trading solutions for financial institutions, intermediaries, advisers and industry participants. Owned by Nomura Research Institute Ltd (NRI), AUSIEX specialises in equities execution, clearing and settlement services and equities administration for the wholesale market.

As one of Australia's leading providers of trading solutions, AUSIEX has used its scale, expertise and heritage to deliver value for advisers, brokers, many large institutions and tens of thousands of their clients by seamlessly connecting them to markets.

Disclaimer

This information has been prepared by Australian Investment Exchange Limited (AUSIEX) ABN 71 076 515 930 AFSL 241400, a Market Participant of ASX Limited and Cboe Australia Pty Ltd, a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited. Share Trading is a service provided by AUSIEX.

This information contains general advice and has been prepared without taking into account your objectives, financial situation or needs. You should consider its appropriateness, having regard to your objectives, financial situation and needs. Investors should read the relevant disclosure document and seek professional advice before making any decision based on this information. This information has been prepared by Australian Investment Exchange Limited (AUSIEX) ABN 71 076 515 930 AFSL 241400, a wholly owned subsidiary of Nomura Research Institute Limited (NRI). AUSIEX is a Market Participant of ASX Limited and Cboe Australia Pty Ltd, a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited.