A retirement portfolio is about half growth assets and half defensive. That is roughly where Australia's large funds put a 65-year-old, and it is what the Vanguard Balanced Index Fund — a reasonable proxy for the shape — targets exactly.
Inside the growth half, one slice does something none of the others can. Australian shares pay franking credits, and for a retiree in pension phase those credits come back as cash.
Why this matters more after retirement than before it
Franking credits are refundable. A superannuation fund in pension phase pays no tax, so every credit it receives is paid out to it in full. The foreign tax withheld inside an international equity fund is not refundable: the offset can reduce an Australian tax bill to zero, but it cannot create a refund, and any excess is simply lost.
So for the investor this article is about, the Australian slice of the growth half earns something the rest of the portfolio cannot. The rest quietly pays tax it will never see again.
Collecting franking on more than you own
Here is the part that is not obvious. A fund that hedges part of its equity exposure still owns the shares underneath the hedge — and those shares still pay dividends, and those dividends still carry credits.
Our own Australian Share Income Fund typically runs 60–80% net long, hedging the rest with options. At 70%, holding 28.6% of a portfolio in it gives 20% look-through Australian equity — exactly what the Balanced fund holds — plus an 8.6% sleeve that behaves like cash. Because that sleeve is cash-like, it is funded from the defensive side rather than the growth side.
The result is a portfolio with identical growth exposure that collects franking on 29% of itself rather than 20%.
What that was worth, over fifteen years
Change nothing else — same international equities, same fixed interest, rebalanced monthly.
Franking roughly doubles, from 0.28 to 0.55 percentage points a year, on identical equity exposure. The income the portfolio pays out rises too — from 4.29% to 4.85% grossed up, which on a $500,000 balance is about $2,800 a year more to actually spend.
The fifteen years were not a neutral test
This is the part that matters more than the result, so we would rather put it plainly than bury it.
International equities returned 13.9% a year over this period against Australian equities' 9.6%. That is an extraordinary gap, driven largely by a handful of very large US companies, and it is a headwind to anything tilted towards Australia. Our comparison survives it because it does not tilt — both portfolios hold the same 20% — but a reader should know which way the wind was blowing.
And bonds did badly, which is the opposite of what most people assume. The Australian 10-year yield rose from 4.22% to 5.12% across the window. Fixed interest returned about half what it now yields; so did cash.
Nobody knows the next fifteen. But the arithmetic is suggestive
We are not forecasting. What we can do is apply the same assumption to both equity markets and see what falls out.
Give Australian and international equities an identical risk premium over their own bond markets. The gap between them is then just the gap between those bond markets — 0.6 percentage points, against the 4.3 points international actually delivered. That conclusion holds whatever premium you choose, because it is the same number added to both. Franking adds 1.4 points to the Australian line for an investor who can use it, which more than covers the 0.6.
Two things follow, and neither depends on us being right about markets. If bonds return closer to their yields, the defensive half does better in both portfolios — and the hedged sleeve, being cash-like, does better alongside them. And if international returns land closer to Australian ones, the cost of holding Australian equities falls while the franking they pay does not.
In other words, the case for the hedged sleeve, and for an Australian tilt more broadly, looks better in a normal world than it did in this one.
What this does not mean
Our fund trailed the index. Over the same fifteen years the Income fund returned 7.96% a year net of fees against the Australian index fund's 9.62%. The portfolio still comes out ahead because of franking and because the hedged sleeve displaced bonds that returned almost nothing — not because of stock selection.
And the Australian index is concentrated, which is a reason to think about how an Australian tilt is held, not only how large it is. Merlon's portfolios are built without reference to index weights; that is a separate argument for another piece.
For the record, and because a five-year figure is the one that should be quoted: the Merlon Australian Share Income Fund returned 10.55% a year over the five years to 30 September 2026, and 8.98% a year excluding franking credits. Past performance is not a reliable indicator of future performance.
The lesson, which is not about us
Most of the attention in a retirement portfolio goes to how much sits in growth assets. The more useful question, once that is settled, is what the growth half is made of — because one part of it pays a credit that comes back as cash, and the rest pays tax that never does.
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