Franked Dividends and Global Growth Funds: WQG, MFF

Summary

• Dividend imputations laws in Australia are effective reforms in avoiding tax cascading of corporate tax paid by companies against income tax on dividends from owned interests in those companies.
• WCM Global Growth outperformed its benchmark by over 12% in FY20. As per latest figures, over half of assets are in the information tech, consumer staples, and health care sectors.
• MFF Capital invests in concentrated portfolio of global and Australian businesses. At the end of June, the firm had balance sheet cash of 44% of assets with large cash denominated in USD.

Franking credits are dear to Australian investors, especially ones with lower income tax slabs. Australian dividend imputations laws, introduced by the Hawke-Keating Government, are among some of the laws across the world where policymakers have repented the cascading effects of taxation.

But reformist thinking was prevalent in succeeding governments that have also contributed to imputation laws, as there have been several amendments, including zero tax liability and full refund.

The Australian Labor Party probably had a misadventure in elections last year after pitching for amendments to the status quo of imputation laws. The plan perhaps didn’t go really well into Australian voters and backlash also intensified.

Speculations are rife over Australia’s entry into recession phase, its first in the last 29 years. It is imperative for policymakers to think beyond the crisis and its long-term implications. Australian tax reforms are due for a long time now, and offloading COVID-19 induced funding could be smooth.

Additional taxability of household income may also worsen the damage caused by COVID-19. Dividends continue to be an income source for many Australians, and attached franking credits add further value due to benefits.

Some listed investment companies also pay dividends with attached credits.

Interesting Read: Tips for reliable dividends on ASX

WCM Global Growth Limited (ASX:WQG)

During mid-July 2020, WCM Global Growth announced that the portfolio delivered a 17.62% return for the year ended June 2020, penning an outperformance by 12.9% relative to its benchmark MSCI All-Country World ex-Australia, which returned 4.75%.

WCM Investment Management, an active global and emerging market manager, is based in California. It noted that markets have recovered from March sell-off, especially driven by the large technology stocks, and indicated flows into risk assets, regions, and other sectors.

In June, WCM was down 0.45% while its benchmark returned -0.56%. Emerging Market (EM) and European equities that lagged the market through recovery, added gains during the month. S&P 500 recorded its strongest quarter since 1998.

A lower USD was tailwind for EM equities, while crisis fund prospects by the European Union added support in European equities. The investment manager also acknowledged re-opening across countries and outperformance by growth stocks.

AUDUSD rates also impacted unhedged global equity portfolios during June. It saw monthly outperformance from Tencent, Shopify, and MercardoLibre in its internet and e-commerce stakes. Dutch payment business Ayden, Indian bank HDFC and Taiwan Semiconductor Manufacturing Company also made positive contributions in June.

WCM continues to focus on expanding economic moats and aligned corporate cultures to harvest shareholder returns. It recognised outperformance by growth stocks over the past decade and long-term expectations from growth businesses.

The firm had over half of the portfolio allocated to information tech, consumer staples, and health care sectors. Financials and industrials had a size of over 10% each while consumer discretionary was a little shy off that mark. Largest holding was Shopify, followed by West Pharmaceuticals, MercardoLibre, Visa Inc., Stryker Corp, Tencent Holding, lululemon athletica, etc.

On 16 July 2020, WQG last traded at AU$1.265, moving upward by 1.2%.

MFF Capital Investments Limited (ASX:MFF)

MFF Capital invests in global and Australian companies, while also hedging its portfolio when required conditions arrive. At the end of June, MFF’s after tax NTA was $2.478.

Cash allocation was ~44%, and the firm sold $19.7 million and bought ~$51.7 million. Chris Mackay, Portfolio Manager, noted that the firm chose to protect capital, and monetary stimulus has driven divergence in equity and risk debt market rallies.

MFF seeks businesses with a strong balance sheet and high cash. Its investment process remains unchanged despite changing economic conditions due to the pandemic and its effects. The firm continues to look at pricing, risks, opportunity costs, and value.

Its long-term expectations from the portfolio companies did not change in June. The investment manager acknowledged geopolitical developments that are beginning to shape, especially China’s Hong Kong laws.

Although the firm doesn’t prefer holding significant amounts of cash for long periods because of the attached opportunity costs, it believes cash remains valuable amid a crisis and market dislocations. In the past, MFF experienced favourable results when it deployed capital at low prices.

The commitment to avoid permanent loss of capital has also led to high cash levels. MFF has been engaged in ‘buying dips’ for short-term opportunities. It was highlighted that equity markets have also priced pre-pandemic stimulus programmes.

The firm noted that growth stocks have outperformed over the past decade, and lower interest rates have altered discount rates that are much lower now. And, these growth stocks also dominate ETFs and index funds as equity market indices are dominated by large growth stocks.

Fund had large USD denominated cash and continues to expect most purchases through USD. The portfolio manager is taking notes of green shoots propelled by policy support, especially in residential real estate markets, albeit broader problems like unemployment and income.

On 16 July 2020, MFF last traded at AU$2.700, moving upward by 0.372%.