Michael Saba is Evans & Partners Head of Income Products and as such spends a lot of time looking at bonds, notes and hybrid securities. He recently noted how some hybrids seem to be more in favour if they have higher running yields relative to other hybrids. In the diagram below which he put together he speculated securities in the yellow box would be more favoured. Then he set out to test his theory.
The next diagram he put together shows the all-up return of a security against its running yield. The all-up return is the sum of the capital gain or loss since 31 October plus any income. His conclusion? In itself, choosing a security with a high running yield does not lead to a higher return. Take CBA PERLS 8 (ASX code: CBAPE) for instance. Its return is towards the lower end of the range. Longer periods of testing gives a similar (in fact, worse) result.