This is all very sensible and pragmatic, in my view.There is still some benefit to franking. It appears to be priced into a fair amount, but not fully. My understanding is this is likely due to the fact that about half of Australian equities are held by non-residents (e.g., that 2% held in lots of index funds around the world) who can not claim the franking credit and as a result, it is roughly priced-in for approximately those who can claim it. The result is that there are some benefits for Australian tax residents, which are paid for by non tax residents. Another example of the brilliant Australian government's actions driving away investment in Australia.As Andrew9999 has pointed out, however, Purchasing Power Parity doesn't seem to hold that well. Australian Dollar moves up and down v say USD and does so for decadal periods. The theoretically correct way to address that is to hold global equity portfolios that are currency-hedged. However those have higher expense ratios - it should not be much, but I haven't seen anyone post on the impact of that.
I think Andrew9999 also pointed out that the prices of Australian stocks seem to adjust for the franking. There's no free win there.
Personally, I don't mind a compromise on all sides of something like 20/20/60 Au/Int-hedged/int-unhedged.
In my opinion:
* The 20% concentration risk gives some reduction in upside currency risk and a little benefit from tax credits.
* The 40/60 currency exposure (both upside and downside) is important, considering how much our currency fluctuates relative to the rest of the world (and over very long periods) due to the commodity cycle.
* Any cost of hedging with only 20% of the equities is not going to cost much.
I think that's an easy and simple solution that is 'good enough' on all accounts while retaining the long list of benefits of indexing along with the effectiveness, simplicity, and ease of management of the 3-fund portfolio (with one extra fund).
If the commodity cycle goes your way, so does the ASX I would expect. Notwithstanding a rising AUD is not great for mining companies that export.
Conversely if commodity prices are lower, the AUD will be lower. But then mining companies benefit from the falling AUD.
In other words, it's not possible to call it. Being the world's second or third largest lithium miner + all the other things Australia exports, seems like a relatively good place to be.
Statistics: Posted by Valuethinker — Tue Jun 11, 2024 2:45 am — Replies 19 — Views 3102