How can you maximise returns without franking credits?

21 February 2019

Those looking to restructure portfolios to maximise investment returns in the absence of franking credits, should the Australian Labor Party’s (ALP’s) policy proposal become law, should cast an eye offshore, a panel of investment experts has told the SMSF Association National Conference.

Schroders head of fixed income and multi-assets, Simon Doyle, said that there were essentially two paths advisers navigating this path could take.

“You’ve got to either make your portfolio a bit more complex, and there’s lots of complex strategies that people will try and push on you to sell your clients, or you can broaden your opportunity set and look where you haven’t before,” Doyle said.

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“Personally, I’d rather look abroad,” he said, pointing to Japanese equities as a particular preference.

While he acknowledged that currency must then be considered, he said that that involved “probably a simpler discussion with clients than some of those more complex strategies would”.

Magellan Asset Management’s head of research, Vihari Ross, said that investors looking abroad also needed to keep an eye on interest rates: The Fed has put the punchbowl out at the party – now does that mean it’s time to risk on, all of a sudden?” she said.

“From our point of view, there’s still a lot of risk out there … We’re still seeing percolating signs of inflation, like looking at the US and its unemployment.”

Doyle pointed out that refocusing portfolios to have some international assets wasn’t a bad thing however, as portfolios with heavy domestic leanings would likely be coming under pressure soon regardless of the change.

“The one positive of forcing a rethink on construction [as a result of franking credit changes] is making us have a rethink on our domestic bias,” he said,

Ross backed this up: “There’s growth and diversification benefits to [investing] internationally, and yield isn’t as bad as people think, to investors should be looking here anyway,” she said, flagging Magellan’s main global offering as yielding around four per cent.

“My view is that the Aussie market won’t be immune from global and geopolitical risks either,” she said and noted that Magellan was currently allocating defensively here.

It could also force a rethink from some investors who had hit a stage where they needed to restructure their portfolios anyway, director and head of APAC portfolio analysis and solutions at BlackRock, James Kingston, said.

“When you get to retirement … your asset allocation actually should change anyway. You can’t hold [your portfolio] static … markets change, so you need to diversify and consider making changes.”

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"a rethink on our domestic bias' is a good statement and illustrates the poor decision by those investors who have biased their investment portfolio to take advantage of a tax break while disadvantaging their overall investment opportunities and increasing their return risk by investing only in domestic funds and shares.

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