Hybrid securities, which have made headlines recently for attracting the regulators’ ire, are currently overpriced and investors can find better value elsewhere, according to Victor Rodriguez, head of fixed income at Aberdeen Asset Management.

“For the value they represent, hybrids are expensive. Furthermore, they don’t provide the diversification benefits of other high quality fixed-interest securities,” Rodriguez said.

Hybrids are a broad group of securities that combine the elements of debt and equity.

Their rapidly growing popularity among self-managed superannuation funds prompted the Australian Securities and Investments Commission to launch an investigation into the mis-selling of these instruments on August 20.

Rodriguez said hybrids were more like equities than senior secured debt and investors needed to understand their place in the capital structure.

“Hybrids are at the bottom of the capital structure just above equity, and the regulator is keen to ensure that retail investors understand exactly what they’re investing in,” he said.

“In terms of providing an insurance policy against falling equity markets, hybrids don’t fit that category and they don’t offer the benefits of franking credits either.”

Aberdeen does not currently hold any hybrids in its diversified fixed-income portfolios.

Rodriguez’s comments followed a briefing on emerging markets hosted by Aberdeen Asset Management’s global chief investment officer, Anne Richards.

He said that Australian fixed interest had been sold down severely by the bears in the last six to 12 months but had now moved to “fair value”.

“We thought the Australian marketplace was getting too pessimistic and there are still challenges for the Australian economy, but we felt the market had overshot,” he said.

“Investors are asking about whether we’re facing a 1994 bond-meltdown scenario, whether fixed interest is still a worthwhile investment given the low yields on offer and whether fixed income still provides an insurance policy against an equity-market downturn.

“Our view is that Australian fixed interest will outperform cash quite comfortably and provide protection if equity markets fall 20 to 25 per cent. Our central bank still has some tools available, albeit only 2 per cent left.”

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