Investment experts are urging Australian shareholders to use the looming end to franking credit refunds to address longstanding biases towards Australian equities and diversify into more exotic fare.
In a packed auditorium at the SMSF Association's annual conference at Melbourne's Exhibition Centre, a panel of portfolio managers and analysts said self-managed superannuation funds should consider global equities and debt, nominating Japanese and the US equities markets as offering comparable risk-adjusted returns.
Schroders head of fixed income and multi-assets, Simon Doyle, said investors should be cautious of structured products that promise to "fill the void" left by fully franked Australian shares and instead explore the risks and opportunities of going offshore.
Shadow treasurer Chris Bowen says the top 1 per cent of SMSFs claim $83,000 in excess franking credits each year or more than the average full-time salary. Dominic Lorrimer
"There is probably only a couple of things you can do — you've got to either make your portfolio a little more complex, and people will happily sell this to your clients, or you can broaden your opportunity set and look at other areas," he said.
"If I had to pick one equity market to buy today on a three-year return it would probably be Japan."
Labor has said should it win the coming federal election, cash refunds for excess franking credits to zero taxpayers, such as retirees, would be abolished. However pensioners receiving benefits as of March 28, 2018, would be not be affected.
The opposition has singled out SMSFs as taking a disproportionate amount of the benefit from franking credit refunds, saying 90 per cent of cash refunds go to SMSFs despite accounting for fewer than 10 per cent of all superannuation fund members.
The federal government has attacked the policy, with Treasurer Josh Frydenberg describing it as a $55 billion retiree tax. Modelling by the government shows the changes would cost the average SMSF $12,000 a year.
The portfolios of the typical Australian self-managed super fund are massively overweight in Australian equities and cash, but in recent years this has begun to shift to include property, following a change of rules concerning the assets held by SMSFs, and a slow drift to international equities.
Magellan's head of research, Vihari Ross, said the starting point for the firm was to look for the best-managed businesses in the world before beginning to assess whether there was value in the price.
"The global technology giants are not listed here, the global multinationals are not listed here. The calibre of businesses that are available to global investors are leaps and bounds different," she said.
Magellan has been among the best-performing equity managers in Australia over the past year and is known for taking and holding large positions in giants such as Alphabet, Apple, Microsoft, KraftHeinz and Yum Brands.
Ms Ross also rejected the idea the United States was expensive in comparison to other markets.
"The reality is that it is a company-by-company decision and, in our research, the evidence is in fact that individual companies like-for-like in the US versus companies in Europe and companies in Australia are not more expensive."
Dimensional Fund Advisors head of Asia Pacific, Bhanu Singh, said although there was no magic number for investors to pursue when allocating investments to global markets, it was important to remember that the Australian market was about 2 per cent of the total market.
"If you have a 60 per cent home bias to Australia, which is probably at the lower end, you have more money in four banks and BHP than the entire US equity market," Mr Singh said.
Blackrock's head of Asia Pacific portfolio analysis and solutions, James Kingston, said investors could replicate the 4.5 per cent yield available in Australian equities elsewhere but would need to apply a filter to identify the relevant opportunities.
"If you look at the broad market, the overall yield might be less, but if you are using strategies that are targeting yield, you can find that income," he said.
Mr Kingston, however, cautioned against blindly chasing yield and going too far up the risk curve, saying quality should be an investor's No.1 priority.
By James Frost
21 February 2019