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5 dividend hits, 4 misses in funds study

Glenn Freeman  |  27 Jul 2018Text size  Decrease  Increase  |  
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Dividends remained quite stable, while realised capital gains fluctuated from year to year, according to a Morningstar study that tracked 34 large-cap equity funds over 11 years.

Income-oriented Australian equities funds have generally "lived up to their billing" by delivering above-average franked dividends and unit-holder distributions, according to a report authored by Morningstar Australia's Tim Wong and Anthony Serhan.

Several funds stood out among the product offerings of the 34 asset managers that participated in the Morningstar study, which assessed the income and tax-effectiveness of large-cap Australian equity funds.

Pendal Wholesale Imputation (5730)Nikko AM Australian Share Income (16966)Investors Mutual Equity Income (12285)Merlon Australian Share Income (3683), and Zurich Investments Equity Income (14474) delivered "above average gross distribution yields," according to the study.

These are shown as red crosses in the chart below; the remainder of the sample are the green circles.

However, Wong and Serhan note it wasn't "all one-way traffic, with instances of outsize distributions elsewhere."

Gross tax distributions split between "income" strategies & remainder as a percentage yield

funds income yield capital gains

As the above chart shows, Antares Professional Australian Equities 4522, Platypus Australian Equity 14369 and Nikko AM Australian Share Concentrated 19895 distributed capital gains well above their benchmarks in 2015, 2017 and 2014, respectively.

The report notes that in many instances, this can be attributed to a combination of large fund outflows and the manager having "a substantial store of unrealised capital gains, as happened to Platypus in 2017".

Accounting for capital gains is difficult

Deferring the realisation of capital gains is a common accounting strategy to minimise tax payable. This was "a pertinent factor following the 2008 financial crisis," according to Wong and Serhan.

Several fund managers in the study carried forward capital losses incurred during this period to reduce their tax liabilities in subsequent years.

"Accounting for the impact of realised capital gains is difficult. This can dramatically lift a fund's distribution well above the dividends received," say Wong and Serhan.

"From a tax standpoint, it is beneficial to at least defer realising capital gains for most taxpayers, given the 50 per cent discount applied when securities are held for at least one year."

The report notes this factor doesn't affect each of the funds equally, given some were only launched after 2008 – a discrepancy that adds to the difficulty alluded to above.

4 funds that missed

At the other end of the spectrum are the vehicles that distributed little, if any, income – albeit over a short period within the total timeframe of the study.

"As the chart shows, most funds typically had a gross tax distribution yield of between 4 and 8 per cent, which makes sense given the Australian share market's average dividend yield," say Wong and Serhan.

Bennelong Australian Equities (16998), Platypus Australian Equities - Wholesale (14369) had gross yields of about 1 per cent in 2010 and 2016, respectively.

DNR Capital Australian Equity High Conviction (40948) and Fidelity Australian Opportunities (19483) were below 2 per cent in 2016 and 2017, respectively.

"The presence of Bennelong, Platypus, and Fidelity shouldn't surprise given the common focus on high earnings growth and willingness to depart meaningfully from the crowd," says Wong and Serhan.

"Of course, these strategies don't hold themselves out as 'income' vehicles, and we note that such miniscule distributions are the exception over the entire period sampled."

 

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Glenn Freeman is senior editor, Morningstar Australia.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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