Point out difference between perp, preference shares and equities

The reality is that investing in high-yield bonds should be done only by investors who have the funds and investing expertise to diversify across sectors and countries.
The reality is that investing in high-yield bonds should be done only by investors who have the funds and investing expertise to diversify across sectors and countries. PHOTO: ST FILE

Recently, the Monetary Authority of Singapore (MAS) said that restricting access to perpetual securities and preference shares may limit the choice available to retail investors and cause unintended effects (MAS has been doing its part but investors must exercise care, April 17).

The example given was that an investor may choose to invest in equities instead, and take on even more risk.

I was surprised to see MAS compare perpetual securities and preference shares with equities.

First, investors usually buy perpetual bonds and preference shares for their yields, and equities for capital gains.

Hence, they are not direct substitutes.

More importantly, the amount allocated to a single share is usually minuscule.

Thus, even if investors lose all their money invested in a single share, it would not make much of a difference to their net worth.

In the case of high-yielding bonds and perpetual securities, the amount allocated is far higher, which means even a single default can completely destroy an average retailer's net worth.

Incidentally, this is what happened to many Hyflux perpetual securities and bond investors.

The reality is that investing in high-yield bonds should be done only by investors who have the funds and investing expertise to diversify across sectors and countries.

It is highly reckless for anyone to take a concentrated exposure to such high-yield instruments.

It is the regulator's job to clearly point this out to retailers rather than ask them to read a complex 700-page document.

Bobby Jayaraman

A version of this article appeared in the print edition of The Straits Times on April 19, 2019, with the headline 'Point out difference between perp, preference shares and equities'. Print Edition | Subscribe