Australian investors have historically not been big fans of bonds. That can be explained by the lack of a retail bond market in this country – until relatively recently – and a much stronger philosophical attraction to shares and property on the part of Australians. Asset allocation specialists often bemoan the almost total lack of fixed-income in Australian retail portfolios, versus figures as high as 20% in offshore markets; and in the case of retirement funding, Australia has a back-to-front approach to asset allocation, with shares the dominant holding, compared to fixed-income in many northern hemisphere markets.
In the absence of retail avenues for exposure to the bond markets, Australian investors have looked for their income to the term deposit market, and to share dividends. But as the official Reserve Bank cash rate sank from 7.25% in 2008 to its record low of 1.5% – where it has now been for a year – average five-year term deposit rates have plummeted from 7.5%–8% (which investors were receiving as recently as 2010) to a current average, according to Canstar, of 2.79%. The average one-year term deposit rate is not even 2.5%.
The largesse of the dividend imputation system has also led Australian investors to rely heavily on income from shares, especially in self-managed superannuation funds (SMSFs), where a fund operating in accumulation phase, with a tax rate of 15% on earnings, receives a partial rebate of the franking credits attached to a fully franked dividend, because it does not need all of the franking credits to offset tax on the dividend.