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Franking credit reform to take sting out of SMSFs’ ‘home bias’: investment adviser

While a degree of home bias makes sense, SMSFs need to be more globally diversified and imputation credit reform could be the catalyst, an investment adviser has said.

Speaking at a roundtable in Sydney this week, the head of market strategy and communications at Vanguard Investments, Robin Bowerman, said SMSFs’ lack of diversification remains a problem, despite allocation to international equities trending upwards.

“Allocation to international equities is trending up ... but there's a big chunk of money still sitting in Aussie equities and that's partly driven by tax reasons,” Mr Bowerman said.

Imputation credits are a powerful reason why SMSFs use Australian equities so that's an interesting question in itself in terms of some of the proposed changes to the imputation credit system.”

He continued, “That in its self could mean more people could look overseas to invest for higher growth rates because the imputation credits are not as valuable.”

However, Mr Bowerman conceded that it is still too early to tell if this trend will eventuate, especially given Labor – who proposed reform to cash refunds on excess dividend imputation credits – hasn’t even been voted in yet.

Nevertheless, he predicts greater offshore diversification will continue.

“Australia is only 3 per cent of the global share market, so while on some level of home company bias makes sense, if you're looking at it on a market cap basis then Australian investors need to be a bit more diversified globally,” Mr Bowerman said.

With this in mind, he argued against the criticism of ETF and passive investing as investing in “one big amorphous mass”, and the belief that all investors are simply investing in the market cap structure.

“In reality some people are using smart beta type approaches, some people are using traditional market-cap weighted,” Mr Bowerman said.

“There's a whole spectrum of people making active decisions and the ETFs are simply the tool that they're using to implement the portfolio.”

Franking credit reform to take sting out of SMSFs’ ‘home bias’: investment adviser
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