Let's be frank

Looking beyond tranked bank hybrids for income opportunities

- Helen Mason

As we head into the second half of 2025, Lincome investors are facing a tough time with interest rates falling and taking with it returns on cash investments. Along with the phasing out of Australian bank hybrid investments, income options for investors appear to be diminishing.

However, high-quality investment grade corporate bonds, such as those issued by Australian companies, are a good option. Also known as public credit, they offer an equally compelling alternative for income-seeking investors, presenting a blend of highly favourable investment characteristics. They can provide reliable income to investors, which will persist, as the market for Australian bank hybrids, which are a combination of debt and equity, is phased out.

For many years, franking credits on Australian securities offered what was thought of as a key advantage. But for fixed interest securities like Australian retail bank hybrids, franking is now old news, especially following the decision by the Australian Prudential Regulation Authority (APRA) to phase out the substantial $43 billion Australian retail bank hybrid market by 2032. While investors might feel a sense of potential loss for the income streams that they may have enjoyed, they don't need franking credits to achieve good income returns.

Achieving attractive returns with lower volatility

While return numbers are important for investors, they don't paint the full picture. A critical metric for investors is to consider the return received per unit of risk taken, which is commonly measured by the 'Sharpe ratio'. Investors should be looking for a fund that has demonstrated a significant outperformance against Australian retail bank hybrids across one, two, and threeyear timeframes. This means that while the fund delivers high investment returns, it does so with considerably less volatility than single Australian retail bank hybrid instruments.