The sharemarket's unfettered popularity among yield-seeking investors has made it expensive, but attractive yield can also be found in quality corporate bonds and select hybrids without diving into dangerously risky territory, fund managers say.
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Investors are clinging so desperately to the yield ship that is the Australian sharemarket that many are worried it is destined to capsize, particularly as the forecast earnings-per-share growth on the S&P/ASX 200 does not appear to reflect the elevated valuations of the market.
While government bond yields sit at once-in-a-lifetime lows, investors should look to corporate credit to beef up their yield in their fixed income portfolio, Vanguard Australia head of fixed income Stephen Howard said.
"Corporate credit does have some risk factors [compared to government bonds] in the ability of the corporate to pay its issues on the security but the corporate market here is high quality," he said.
The yield difference between a corporate credit and government bond is about 1.2 per cent, he added.
The only problem is the relative lack of paper being issued. That's easily managed by a firm of Vanguard's size, but a challenge for a smaller investor.
Issuance is at a cyclical low in Australia at the moment, and Vanguard's fixed income investments, which include its Corporate Fixed Interest Index exchange-traded fund launched this week, also include Australian issued paper from foreign companies such as Apple, Goldman Sachs and Norway's Kommunalbanken. It also holds local credit in the big four banks and GE Capital, among about 260 Australian issued-bonds.
Yield-seeking investors should also consider hybrid securities in the volatile pricing period the market is experiencing, Clime Asset Management chief investment officer John Abernethy said.
"Often the opportunity in the lower risk segments of the market is ignored, and this is what appears to be happening with [certain] income securities," he said.
While complex hybrid securities – which blend features of debt and equity securities – come with added risk in that a company, when faced with a financial calamity, can convert the hybrids to shares.
But Mr Abernethy has identified three hybrids for income-seeking investors to consider: National Bank Income Securities, Macquarie Income Securities and Multiplex Sites.
"[These] hybrids should be assessed for possible inclusion on the shopping lists of income-oriented investors who understand investment risk and are prepared to buy against poor sentiment," he said.
The running yields on the three securities have increased as their prices have all fallen below their $100 issue price, and sit well above 90-day term deposit rates, he said.
They pay floating quarterly distributions which are reset every 90 days, the quality of each issuer is good and supported by solid business cash flows and they do not have mandatory conversion clauses that allows them to be converted into ordinary shares.
Both the National Australia Bank and Macquarie hybrids are issued by Australian banks that have "substantial" APRA regulated capital buffers and rank ahead of ordinary equity, he said.
"Both securities are strong hybrids with solid yields relative to the market, and they have never missed a distribution – even during the GFC [global financial crisis]," he said.
Multiplex Site's hybrid too has not skipped a beat and is issued by Brookfield which has more than $100 billion in global assets.
