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Cuffelinks Firstlinks Edition 303

  •   26 April 2019

Next Wednesday, it will be 500 days since the Financial Services Royal Commission was established. Even those who wanted it did not expect remediation costs would top $10 billion before any criminal convictions.

Only in Australia - an election fought on franking credits

Now that the public holidays are behind us, we suddenly have only three full weeks before the 18 May election. I live in Tony Abbott's seat of Warringah, and independent Zali Steggall is his biggest threat since he won the seat in 1994. At a major Military Road intersection, the Liberal Party has rented one shop, and Steggall has taken the one next door. Labor will finish a distant third in this Sydney Lower North Shore seat.


Steggall highlights her opposition to 'Bill Shorten's investment tax', which the Coalition calls a 'retirement tax' and is really the franking credits proposal. She is deliberately distancing herself from the "Vote Steggall Get Shorten" headline in the Liberal Party poster. And curiously, no mention on any of the posters of the name of our sitting member, the ex-PM.

In 30 years living at this address, for the first time ever, we were doorknocked about an election this week. Not by a party but by GetUp, which is mobilising a massive grass roots effort to unseat Abbott. He will need all his political skill to survive this one.

Dozens of these personal battles will play out over the country (including for Peter Dutton and Josh Frydenberg) and decide the election result. They will make 18 May a fascinating evening, and if ever you've thought of holding a 'Don's Party', this has to be the night.

I doubt many members of Labor's Shadow Ministry thought the arcane subject of franking credits would become the Number One issue in parts of the electorate. 

And for what? Treasury admits its costing of the policy is "particularly unreliable" due to the high sensitivity to behavioural changes, especially by trustees of large SMSFs:

"A proportion of franking credit refunds held by SMSFs is assumed to be sold, as investors shift to other forms of investment. This behavioural response is assumed to be greater for higher wealth SMSFs. In addition, the behavioural response is assumed to grow over time. Some of the sold credits are assumed to be purchased by an entity that can use the credits to offset tax."

And later, more detail on the likely changes:

"Assets that shift into APRA funds are assumed to continue to draw the benefit of the franking credit since most APRA funds are in a net taxpaying position. Some other SMSFs will rebalance their portfolios away from franked dividend paying shares towards other forms of income to compensate for the fall in after-tax returns on shares in the absence of refundability. These other forms of income could include fixed income, property trusts, managed funds or offshore equities."

To help you sort out your views on the superannuation policies, Mark Ellem has produced a useful 'Compare the Pair', and it's also a good reminder of how to top up super before 30 June.

KPMG has produced a fascinating interactive website which shows how the superannuation industry has changed, and we take a quick look at their future predictions.

Use the Have Your Say section to comment on super policies or the future of the industry.

ASX at 11-year high but value managers still struggle

One reason it is difficult to judge fund managers is that their style may stay out of favour for years, even if it is proven over long periods. Value managers who look for stocks that appear undervalued by the market have struggled for at least five years versus growth managers who focus more on future growth potential. Australia has its own version of the US FAANG with our WAAAX (WiseTech, Afterpay, Altium, Appel and Xero). These are all growth stocks.

The MSCI Australia Growth Index versus Value Index shows growth has beaten value over all periods to five years, but since 1974, value is the big winner by 2.75% per annum. At some point, the market will focus more on fundamentals and less on the dreams of loss-makers. 


Source: MSCI

Four pieces explore this issue and whether it's a good time to invest. Emma Goodsell describes some value opportunities in local consumer stocks, while Richard Ivers finds three other unfashionable shares. There has also been much talk of the US yield curve investing, and Peter Moussa checks it as a sign of the arrival of a downturn. The White Paper from Vanguard puts a probability of a recession at 35% as risks spill over into the economy. It's a tough balance for investors tempted into the market by the S&P500 and NASDAQ at record highs.

Meanwhile, Peter Meany describes five myths about listed infrastructure, an increasingly popular sector due to its long-term earnings strength and lower price volatility.

Finally, Marissa Hall takes a tough look at diversity and inclusion in the workforce, reporting on what really works. It's not just a matter of hiring people with different backgrounds. 

Graham Hand, Managing Editor


For a PDF version of this week’s newsletter articles, click here.



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