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Investments, Regulation

Imputation credit policy may hit stock returns

Labor’s plan to abolish cash refunds on franking credits could have an impact on the return profile of higher dividend-paying stocks, according to a bond investor.

Daintree Capital director and interest rates and currency portfolio manager Justin Tyler said Labor’s policy is a political risk that needs to be kept in mind as many retirees have planned their retirement around the income they receive from franked dividends.

Tyler said with the ALP also proposing negative gearing changes with a view to achieving a housing market correction, the franked dividend policy will likely exacerbate issues with the return profile of some higher dividend-paying stocks.

“We’re talking about a policy out of the Labor Party that might potentially cause issues for the return profile of these stocks, in conjunction with an interest-rate market that is already causing issues with the return profile of these stocks,” he told a 2019 global economic outlook media luncheon in Sydney last week.

“Many, not all, but many of the higher dividend-paying stocks … are more interest-rate sensitive.

“So you’re talking listed trusts. You’re talking about banks. You can see just how much those higher dividend-paying stocks underperformed.

“Again it’s not something that we’re losing a huge amount of sleep over now, but certainly as investors for me looking at interest rates, for example, [we’re] quite happy to take long positions with interest rates.”

He said he welcomed the franked dividend proposal as a bond investor and hoped to see a tilt towards fixed income in portfolios.

Australia is among the world’s most underweight when it comes to fixed income and every portfolio requires a defensive element, he added.

“We see this as a portfolio construction flaw that affects most people,” he said.

He added if he were an equity investor, he would reallocate assets away from interest-rate-sensitive sectors in equities.

“Our perception as professional investors is many retail investors tend to take a quite a hands-on passive view to their investments and then when something happens, then they react, which is precisely the wrong way of doing things,” he said.

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