Investors need a crystal ball for risk, not returns
Instead of asking what assets to invest in, they would be better off learning about the seismic shifts that could turn into big risks in the future
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“LEO, what do you think of this CoCo?”
Like clockwork, every few weeks for the last decade, one of our clients would forward an e-mail recommendation from a private bank on the newest subordinated Additional Tier-1 (AT1) issue. CoCos are contingent convertibles, which qualify as AT1 capital. As it is frequently issued, there is little wonder that CoCos – a new hybrid instrument created in the aftermath of the 2008 great financial crisis – have ballooned to over US$250 billion.
My answer was always the same: “Don’t buy it. You’re not getting paid for the risk.” Why would you invest in a security whose sole reason for existence is to provide a source of bank equity in times of crisis at investors’ expense – especially since by their nature banks tend to fail in a financial crisis? And all this risk for a 2 per cent pick-up in yield?
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