AFIC Managing Director, Mark Freeman, discusses the full financial year performance for 2021/22 which saw a significant increase in profit as company dividends recovered.

AFIC’s 2021/22 financial year profit was $360.6 million, up 53.4% on the previous financial year.

This profit included a dividend of $74.9 million, non-cash but carries franking credits, resulting from the BHP Petroleum/Woodside merger, while last year’s figure included a demerger dividend of $36.5 million resulting from the Endeavour Group demerger from Woolworths.

Excluding both one-offs, the full year profit was $285.7 million, up from $198.6 million in the previous corresponding period and this increase was driven by higher dividends received from investee companies.

Earnings per share, excluding the BHP Petroleum/Woodside merger non-cash dividend, were 23.3 cents per share and a final dividend of 14 cents per share fully franked was maintained, bringing total fully franked dividends applicable for this financial year to the same as last year at 24 cents per share.

FY22 portfolio overview

Our primary focus for the management of the portfolio through the year was to increase exposure to existing holdings. Purchases were funded through the sale of positions due to takeovers, where companies in our assessment face emerging significant structural industry challenges, or an environment where competitive intensity has materially increased.

Purchases included Transurban Group, CSL, Domino’s Pizza Enterprises, Coles Group, Goodman Group, Carsales.com and Auckland International Airport. We also initiated positions in JB Hi Fi, Mirvac Group, and a small holding in WiseTech Global.

During the financial year we exited Qube Holdings, APA Group, Lifestyle Communities, Origin Energy, Endeavour Group and Altium. Takeovers of Milton Corporation and Sydney Airport saw us also exit our holdings in these companies.  

Short-term portfolio performance was impacted by adjustments in the market resulting from geopolitical events and rising interest rates which produced falls in many companies with high valuations. These conditions also produced fluctuations in more cyclical stocks where AFIC, given its long-term focus, is typically underweight.

Portfolio return for the year was negative 6.8 per cent, including franking. The decline in valuation of many high-quality companies from previously high levels was the largest drag on performance.

However, we remain convinced about the prospects for these companies despite recent declines in share price performance. An underweight position in resources, including energy stocks, also had a negative impact on relative portfolio performance.

The return for the S&P/ASX 200 Accumulation Index to 30 June 2022, was -5.1%, including franking.

Companies in AFIC’s portfolio that performed relatively well against the Index during the period were Amcor, Sydney Airport (now taken over), Transuburban Group, Macquarie Group, Computershare and Ramsay Health (currently subject to an expression of interest offer).

The long-term performance of the portfolio which is better aligned with our investment timeframes was 10.5% per annum for the 10 years to 30 June 2022, against the Index return over the same period of 10.9% per annum. These results include the benefit of franking, with AFIC’s performance after costs.

Our management expense ratio remains low at 0.16% with no performance fees.

Outlook for FY23

Strengthened demand produced supply chain challenges in many industries during 2021/22 which contributed to a meaningful increase in reported inflation. Central banks seeking price stability wound down stimulatory policy settings and equity markets now face challenges on multiple fronts – slowing economic growth, inflation, and interest rate hikes.

While the uncertain environment that produced a fall in equity markets during the financial year is unlikely to be materially different in the short term, we believe fluctuations in valuations are not a reason to initiate a knee jerk reaction. We think the market is now more fairly priced and we await the August reporting season with interest.

As tax aware investors who invest for the long-term, we are comfortable with the current portfolio settings and can afford to be patient with our capital until attractive opportunities appear.