The changes to franking credits have escalated as prime cause of concern but its implications may not be as pronounced as is feared according to a new research paper.
Investment management group, Vanguard have released a research paper on franking credits which states that current polls suggest the franking credit discussion is something to elevate beyond just the academic.
“There is no guarantee that Labor will win government, though current polls indicate a likely victory which elevates the franking credit discussion to something more than just an academic exercise,” it said.
The Vanguard paper conclusion found that the changes would have minimal impact and for those impacted, it provides a catalyst to review portfolio strategies.
“The proposed changes to franking credit rules, if legislated, will have a minimal influence on Australian share market volatility,” said Vanguard.
Vanguard’s research found that its impact would not be equal and that SMSFs and those not paying tax would see the biggest losses.
“The loss of value will be most pronounced for those individuals not paying tax, and who are ineligible to receive the Age Pension,” said Vanguard.
Critics of Labor's plan often say that removing franking credit refunds would see investors cease to invest in Australian stocks as there would no longer be a benefit to home bias.
Vanguard's research acknowleged the influence of home biase but said it was impossible to quantify what proportion of home bias could be attributed to franking credits.
“An important caveat underpinning this conclusion is that the study assumes that franking credits are not priced in to the Australian equity market.
“While we are not making an estimate of the extent to which franking credits are priced either wholly or partially into the value of Australian equities, the implications of a change to the franking credit rules would be lessened under a scenario where the value of franking credits are either wholly or partially priced in,” it said.
Vanguard also said there was a question around what can be done to “make up” a potential loss of yield from the change, but said it offered an opportunity to reproach strategy.
“The question of what can be done to “make up” the loss of yield from a change to the franking credit rules raises a broader question about the investment strategy being pursued and the goal that the strategy has been designed to support,” it said.
Vanguard urged investor caution as there was a low likelihood of a serious market correction as a direct result of the changes. If changes are legislated then revisiting goals was the first step.
“For self-funded retirees paying zero tax, the implications for portfolio positioning will depend on the starting point.
“For income-oriented portfolios with concentrated exposures to Australian equities, the opportunity exists to revisit the goals of the investor and improve the mix of diversification,” it said.
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