Against a backdrop of a surprisingly strong year for the Australian stock market, given the economic challenges of a global pandemic, AFIC has outperformed its ASX benchmark index over the short and long term with its FY21 financial results. AFIC’s Managing Director, Mark Freeman, outlines the financial performance of the largest and one of the longest standing LIC on the ASX.
Following a very difficult FY20, market factors including low interest rates, record stimulus to counter the pandemic, and higher corporate earnings have produced very positive conditions for equity markets in FY21.
This has resulted in the S&P/ASX200 recording its strongest financial year since inception in 1992.
In this context, AFIC’s portfolio returned 31.9%, including franking, beating the S&P/ASX 200 Accumulation Index by 2.8 per cent, which was up 29.1%, including franking. AFIC’s 3-year, 5-year and 10-year returns are also ahead of the index.
We are a long-term investor with low volatility providing very tax effective returns for shareholders. Our strong short and long term performance reflects the benefit of holding a diversified portfolio with a mix of what we consider to be high-quality companies including businesses benefiting from economies re-opening.
AFIC’s reported full-year profit was $235.1m, down 2.2 per cent from $240.4m in the previous corresponding period. The profit includes a dividend of $36.5m (which was non-cash and carries no franking) resulting from the Endeavour Group demerger from Woolworths. This fall in profit versus the corresponding period last year was due to the decline in underlying income as the economic impact of the Covid-19 pandemic continued to limit dividends for many holdings in our portfolio, especially the banks.
AFIC will pay shareholders a fully franked dividend of 14 cents per share on August 31, which is consistent with last year’s dividend.
Our longevity and management of the portfolio has allowed us to build reserves that can be drawn upon in difficult times. This approach has seen us continue to deliver dividends to our shareholders through market cycles and unpredictable events such as the global financial crisis back in 2008 and now the global pandemic.
Portfolio Overview: Opportunities and Challenges
Several companies in the portfolio contributed strongly to AFIC's relative returns including Reece Group, Mainfreight, ARB, James Hardie and ALS.
All the largest contributors are run by strong management teams and boards, have strong market positions in their core markets, and have strong balance sheets allowing them to fund growth opportunities for their business.
Short-term share price weakness gave us the opportunity to materially add to our holdings in Woolworths and ASX. Both have been long-term holdings in the portfolio and have market leadership positions with strong long-term growth prospects.
AFIC also added new holdings to the portfolio: PEXA, Domino’s Pizza, Temple & Webster, FINEOS and Nanosonics. These companies have strong industry positions in their core markets and potential for growth. For early stage companies such Temple & Webster, Nanosonics and FINEOS, AFIC will invest a small initial holding and look to increase the weighting as confidence levels increase.
AFIC exited positions in South 32 and Alumina given the strong run in commodity prices. Additionally, AFIC exited its holding in Brickworks as the share price ran up strongly supported by government stimulus efforts to the housing market. Funds from these sales funded other activity.
Around 8 per cent of the portfolio is currently invested in technology companies led by holdings in realestate.com.au, Seek, carsales.com.au and Iress. We believe these companies have considerable long-term growth opportunities.
Banks have rallied more than 50 per cent in the last 12 months as the impact from COVID on bad debts proves to be less severe than previously expected. The result is that all banks have excess capital. Following strong performance last year, the valuation of the banks is now more in line with long term averages.
Resource companies have also had a strong year. AFIC has large holdings in both BHP and Rio Tinto with both offering a diversified commodity exposure and tier one assets. With market conditions remaining positive both companies are expected to deliver strong earnings and dividends in the near term.
Focus remains on quality
We continue to feel positive about the portfolio, but our sense is the market may prove to be more volatile in the near-term than what was experienced over the past 12 months. This reflects uncertainty in the ongoing pandemic, the rise in supply chain disruption and costs and whether inflation proves transitory or more of a long-term issue.
In a market that currently looks to be well priced, and at record highs, we feel comfortable that the portfolio is well positioned given it is invested in what we asses to be high quality companies with strong industry positions and good long-term prospects. We will continue to look for opportunities to invest in companies that fall into our assessment of high quality should volatility emerge over the coming 12 months.