The Australian share market rallied in the first half of the financial year as interest rates remained low, significant government stimulus continued, global markets improved, and confidence grew around the successful rollout of a COVID-19 vaccine.

AFIC remains focused on quality businesses and has been improving the quality of the portfolio even more over the last 6 months. It delivered a relatively strong performance during the half, with the portfolio up 15.2 per cent to 31 December 2020 compared with the S&P/ASX 200 accumulation index, which was up 13.7 per cent over the same period. Both figures include the full benefit of franking.

Companies in the portfolio that contributed strongly to returns through the 6-month period were Commonwealth Bank, BHP, Mainfreight, Xero, Wesfarmers, James Hardie Industries, ARB Corporation, and Reece.

Difficult operating conditions arising from the COVID-19 pandemic meant investment income for the six months to 31 December 2020 was down with the biggest reductions coming from the major banks, BHP, Macquarie Group, and Transurban, while a number of companies in the portfolio did not pay a dividend during the half. This meant first half profit was down 42 per cent to $84.1M on the prior corresponding period ($146.1M 1H20).

Despite this fall in earnings, AFIC declared a full interim dividend for the period of 10 cents per share fully franked, which will partly be funded from reserves.

Opportunities through the uncertainty

Having taken advantage of the large market falls in March and April to participate in selected capital raisings, further volatility during the past six months has provided opportunities to add to holdings in some quality companies such as Woolworths, CSL, and ASX.

Sydney Airport was also purchased through the participation in their entitlement issue. The company will likely face headwinds over the short-term, but we believe it still represents a good long-term investment as flight activity eventually resumes.

Two new companies were also added to the portfolio – Fineos, a software business for insurance, and Nanosonics, a medical device company – while major sales for the fund include the disposal of South32, reduction of the holding in Alumina, Oil Search and Cleanaway Waste Management.

The immediate course of the pandemic remains uncertain as does the outlook for corporate earnings and dividends. The longevity and effectiveness of monetary policy and fiscal stimulus appear to remain key to underlying economic conditions, as does the potential effectiveness of Coronavirus vaccines moving into the new calendar year.

While equity markets are continuing to be heavily influenced by low interest rates, and with valuations for many companies at a high point, any negative sentiment could produce significant volatility. We believe the portfolio is well positioned for the long-term should this occur. AFIC has sufficient funds available should good buying opportunities arise in the second half of the financial year during any market weakness.