ALF pay a 1% fee when borrowing stock which they then sell....

ALF pay a 1% fee when borrowing stock which they then sell.

Approximately 75% of the borrowed stock is registered to overseas owners which means that dividends on that borrowed stock that needs to be repaid does not include franking credits. Overseas shareholders do not pay tax in Australia & therefore cannot claim franking credits.

In doing your sums let's assume a yield of 4% on both borrowed stock & purchased stock.

This means that on ALF's long portfolio they receive a 4% yield plus 1.2% franking which totals 5.2%.

On borrowed stock they reimburse the 4% yield plus only 25% of the 1.2% franking (0.03%) which totals 4.3%.

When we add the 1% fee the total cost of borrowing is 5.3% against the long portfolio's 5.2%.

So the net cost of borrowing stock to short sell in the order of 0.1%.