Asset managers that offer investments with excess franking credit refunds will need to rethink their offerings and prepare for likely client departures should Labor’s proposed franking ban transpire.
Plato Investment Management managing director Don Hamson said the firm employs an active strategy to capture more income and will consider other options for its investors to accommodate the loss in excess franking credits should the proposal become a reality.
“The difficulty is that if this new world comes in, then you’ve got two types of tax-exempt investors – the ones that can use full franking, such as charities, endowments and pensioners investing in their own name, versus pension-phase SMSFs and super funds that are going to miss out,” Hamson told a recent media briefing in Sydney.
“So we need to think about whether we create a product for those people; we may decide to do a new product for Australian equities, that is, a high-income fund with no franking.
“That’s a major question if this [ban] comes in.”
He said he expects some clients would move out of Plato’s Australian Share Income Fund as an outcome of an excess franking ban.
“It’s still an if, but we were told there’d be more demand for a high-income global strategy,” he said.
“Our numbers suggest that move will be about 20 per cent out of Australian equities into global. That’s pretty significant. And that’s the difference of franking.”
Plato senior portfolio manager Daniel Pennell said he also believes more investors would look offshore for income than they currently do today.
“Franking is the icing on the cake for clients, so there are other things we could do [to make up the difference] if it did come in, but we don’t think it’s going to come in the way it’s been [proposed] right now,” Pennell noted.
“A lot of institutional clients have moved globally in the last 10 to 15 years and in the SMSF statistics last year there was 1 per cent of direct equity in global, which is tiny.”
He added global stocks have offered better returns in the past five years.
“I think we’re seeing the natural tendency of people looking offshore and as the home bias breaks down, people become comfortable with names and start to understand global stocks, which is still an impediment,” he said.
“We’ve experienced more and more investors and advisers looking at us because they realise global is a massive asset class and they’re not allocated there, although we haven’t seen this for income extensively, but we think you should.”
Earlier this month, the fund manager announced it had launched an online petition to help protect the dividend imputation system and ensure positive financial outcomes for retirees in light of the opposition’s policy proposal to scrap excess franking credit refunds.
The petition, found at www.plato.com.au/petition, had attracted over 500 electronic registrations at the time.