Nature abhors a vacuum is a saying that even applies to the share market.
The progressive winding down of Australia’s $14.5 billion bank hybrid market is producing a serious investment vacuum, and there is no shortage of new investment products trying to meet the demand for enhanced income products that feature franking credits.
The entire hybrid market was initially moved into wind-down mode in December 2024 when the Australian Prudential Regulation Authority (APRA) decided to gradually end the entire market over seven years.
APRA’s reasoning was that investors were not aware of the risks to repayment of this “hybrid” form of investment – effectively a combination of share and credit – after Credit Suisse hybrid holders got nothing when the bank was swallowed up by UBS for $4.5 billion.
One of the more interesting new offers is the about to list on the share market and is a bit of a twist on the traditional listed investment company,
Monthly Income with Franking
Solaris Australian Equity Income Plus (ASX: SET) is a listed investment company but unlike many others it is designed to deliver monthly fully franked dividends for income-seeking investors.
The shares for the LIC are expected to start trading on the ASX on April 17, targeting a raise of $300 million with a minimum subscription of $175m.
Solaris said the LIC caters to the growing number of Australians who are transitioning into retirement with an increasing demand for reliable, tax-effective income.
Additionally, it also provides a reinvestment opportunity for investors who relied on hybrids as a core income source after the phase-out of bank hybrids by APRA.
Retained Earnings Can Smooth Out Dividends
"As a LIC, we can retain profits and build reserves, enabling smooth, regular dividend payments across market cycles," Solaris chief investment officer and co-founder Michael Bell said.
"Solutions that can deliver consistent, regular franked income without sacrificing long-term capital growth have a critical role to play in enabling fulfilling lives for Australians, long into retirement."
The first dividend is expected to be delivered in August 2026.
The new LIC will employ the same investment strategy as the Solaris Australian Equity Income Fund, which has delivered income of 8.36% per annum including franking credits, alongside a net total return of 10.89% per annum.
Dividend-Forecasting Approach
"A key feature of the Solaris income strategy is its forward-looking approach to dividend forecasting. Since the change to tax legislation and effective ban on off-market buybacks in October 2022, special dividends have become the dominant way companies return surplus capital," Bell said.
"Our team covers more than 220 companies and conducts over 500 management meetings per year, maintaining proprietary forecasts of income, franking and capital growth to position the portfolio ahead of special dividend announcements."
Bell said the $9.5 billion investment manager's philosophy is to grow the farm and not sell it.
"We invest in both high-yielding value companies and capital growth opportunities. This dual focus is critical for Australian income investors, particularly retirees who rely on their income-generating investments to pay the bills and support their lifestyles for decades into retirement," Bell added.
