Income Report / Income Report: Practical steps taken by one subscriber to address Labor’s attack on franking credits (ANZ, GMA)

By Market Matters 01 May 19

Income Report: Practical steps taken by one subscriber to address Labor’s attack on franking credits (ANZ, GMA)

Market Matters Income Report 1st May 2019

Local stocks have rallied this morning largely driven by the banks after ANZ released 1H19 earnings that were (again) better than the market had feared, this is becoming fairly typical for the banks with the market so negative that an inline result = a beat and the stock rallies.

A few key points on ANZ; 1H cash profit of $3514m which was slightly ahead of expectations. There was no change in the net interest margin and little change in loans from 2H18 to 1H19. The best part of the result was the large growth in business loans with expanding margins. Hopefully, a large increase in problem loans won’t follow in the next few years! Capital was strong and dividend was flat on the period at 80cps.

All up, a fair result and the stock is trading up +2.65% at time of writing.

ANZ Chart

Genworth (GMA) also out with a quarterly update today, and again, no real surprises either side of the ledger – more in the afternoon note today however the stock trading +2% higher today at $2.44.

Genworth (GMA) Chart

The market is trading up +43points / +0.68% at time of writing 

ASX 200 Chart

The past week saw the Income Portfolio down -0.07% weighed mostly by a pullback in Woodside (WPL). In the current financial year, the portfolio is up +4.90% vs the benchmark (RBA + 4%) which is tracking slightly below at +4.56%, while the accumulation index is now up ~5.76 %.  Since inception (5/7/2017) the portfolio is up +11.12%, outperforming its benchmark (RBA Cash plus 4%) at +10%.

Practical steps taken by one subscriber to address Labor’s attack on franking credits

We penned a note yesterday on franking credits looking bigger picture (click here), however in today’s income note we’ll look at some practical steps taken by one subscriber to address the proposed impost. While we, like many subscribers are frustrated with the muted changes – it’s a flawed policy in many ways -  having a plan to deal with the cards that may be dealt is important.

From the emails / discussions we have / get at MM, and we’re talking with a lot of retirees on a daily basis, the frustration stems from three main areas:

1. The tax has already been paid by the business, the owners of that business should get the benefit (makes total sense)
2. The goal posts are being moved which often happens under labor, however it’s more irritating this time around given its for political gain – the budget is back in surplus
3. The impost hits the wrong demographic. Since the $1.6m cap in super was applied, the wealthy are paying tax, so can utilise the credits whereas those that have saved and got to a position to support themselves through retirement savings (doing the Govt a favour) will be hit – the move actually incentivises retirees to try and get some form of government pension.

Rob, a valued MM subscriber emailed me yesterday outlining his approach on his portfolio. It was a great, practical email worth sharing with the broader MM community.

Hi James, Very interesting and pertinent commentary, which I have read several times over. I agree with your overall conclusions on a macro view of the markets, which of course is of interest to all local investors.   I think though that a substantial proportion of your subscriber base is very focused also on the micro view in terms of the impacts on them personally from likely future policy changes.  Not necessarily preoccupied, but nonetheless concerned and taking reasonable precautionary steps.

In my own case more than $40k annually of franking credits are exposed and I have no intention of seeing these fall into shorten’s hands even if this does involve a degree of cutting off the nose to spite the face. Satisfaction can be ascribed a monetary value?

Am I thinking of abandoning the local share market completely? Of course not. Getting out of all shares paying franking credits?  No again, because of contributions tax plus Turnbull tax I have about $15k in superannuation tax liabilities to offset against franking credits.  But what I am progressively doing is rebalancing the portfolio. E.g. a hybrid paying 6% gross may be more attractive than a bond paying 5% but once the franking credit is lost the 6% becomes only 4.2% and the hybrid becomes unattractive compared to the bond.  So logical directional rebalancing sees incremental but not wholesale moves from hybrids to bonds etc.  From income to growth. From companies to trusts. And from local to international. But certainly not from SMSF into industry funds!!  That just sees the villains win.

I am not making all of these changes ahead of time, because as you say it may not happen.  But I think the probability of the ALP wining is high, they are likely to get the changes through the senate with only minor changes (thank of the Rudd and minority Gillard governments when many daft ideas sailed through the senate), and the ALP have announced already that these changes will be retrospective to July 1 this year.

 So that’s where I’m headed, a similar direction I suspect to many others of your subscribers who are similarly affected to a greater or lesser degree by the proposed changes. 

No reply is needed James, just wished to give you my perspective on this.  However, any guidance of a general nature to benefit the group of subscribers impacted by franking credit changes will I’m sure be gratefully appreciated. 

Firstly, your approach makes total sense and it also highlights that active management of a portfolio under the proposed changes will become more important than ever. Let’s think about the areas you’ve raised and how MM will assist:  

1.       Australian Equities: Many Australians are simply buy and hold for income and these investors, assuming they pay no tax (and are not on any form of govt pension) will lose out. To maintain returns from shares, investors in this cohort will be forced to take more interest in the market. Taking less interest, and investing in an industry super fund, as you rightly point out, does not solve the issue. MM  will continue to focus on total return across our portfolios with an active approach. Nothing changes here.  

2.       International Equities: Data shows that Australian’s are significantly underinvested in international markets. The Australian tax system has been set up to incentivize fully franked income and by doing so, it disincentives companies to reinvest for growth. In the US, companies are incentivised to grow, and embracing international investment makes sense. It’s becoming easier to do so, and portfolios should be looking further afield to generate better ‘total returns’. MM has been penning an international report weekly (out today) which is a warm up ahead of our International Portfolio launch in the next month. We have outlined two portfolio’s that are ‘coming soon’ and we can now put a date of launch on these as the 1st June. The two portfolio descriptions are outlined below.

Market Matters International Equities Portfolio

Australia is a small market with just ~3% of the worlds listed equities. Many of the more progressive investment opportunities are listed overseas in places like the U.S, Europe and Asia. The Market Matters International Equities Model Portfolio will target large cap, growth oriented global companies with a near term catalyst for share price gains.

Market Matters Global ETF Portfolio

Thematic investing makes sense, from being long the $US, short Gold, bullish the US market versus Emerging Markets, short the Aussie and long Oil to name a few. The Market Matters  Global ETF Model Portfolio is a long / short macro driven portfolio designed to tap these big picture trends using domestic & international Exchange Traded Funds (ETFs).

Note: As some subscribers may know, Shaw and Partners (where I reside) is a shareholder in Market Matters. Shaw has recently signed a strategic partnership with Swiss based EFG group where EFG has made an investment in Shaw. More importantly, this provides access to the incredible international coverage of EFG with more than 200 analysts globally focussing on markets outside of Australia.

3.       Hybrids to Bonds – Companies to Trusts; Markets are fairly efficient and if demand for hybrids reduces as a result of any change we would expect the structure / composition of hybrids could possibly be amended as a consequence. Regarding Bonds, the likely change could actually help to stimulate the listed bond market in Australia, which is an area we cover in the MM Income Note – although the range of bonds is still a lot better in the over the counter (OTC) market.

The change from Listed Investment Companies (LIC’s) to Listed Investments Trusts (LIT’s) has been obvious over the past year or so, as has the type of offerings that are coming to market.  We have the NB Global Income Trust (NBI) in the MM Income Portfolio which invests in global bonds. We also have MXT which is the MCP Master Income Trust which invests in corporate loans. Both of these investments have performed above their targets since listing, and both securities are now (or shortly) offering the ability to buy new units.  Perpetual also have just listed a new trust which is suitable for income focussed investors - The Perpetual Credit Income Trust  which we covered (here) that will list under ASX code PCI.  There was also the MOT, which was another income focussed trust from Metrics that has listed recently. We covered it, however did not invest in it for a few reasons as outlined in out note (here)

MM will continue to assess and write about new income opportunities – including those that are more relevant post any changes in tax legislation.


After more than a decade working in the markets, there’s one thing I do know, markets & market participants adapt and changes typically bring opportunity. As investors, adaption will be key in this instance and expanding horizons could be an unintended benefit.  

As Rob alluded to, tweaking portfolios makes sense, being active around exposures looking at ‘total return’ as opposed to fixating on income only, and importantly, looking internationally.

Have a great day!

James & the Market Matters Team


Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.


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