AFIC’s position as a long-term investor focused on quality companies has produced portfolio performance ahead of the Index.

AFIC’s $9.5bn portfolio delivered a strong performance in the six months to December 2023, outperforming the S&P/ASX 200 Accumulation Index with a return of 9% including franking compared to 8.3% for the index over this period. We also declared an 11.5 cents per share interim dividend, up from 11 cents per share last year.

The increase in the interim dividend was despite the fall half-year profit after tax ($150.1 million) and investment income ($162.7 million) both falling from the previous corresponding periods, down 8.3% and 6% respectively. The change in investment income was driven primarily due to lower dividends received from three of our top holdings, BHP Billiton, Rio Tinto and Woodside Energy.

Our management expense ratio remains at one of the lowest at 0.14% annualised with no additional fees.

Strong performance against uncertainty

Market fluctuations over the past six months have shown the value of our long-term investment approach. Rather than chasing the latest market theme, we focus on quality companies where we see long-term value and look for opportunities to invest when they are out of favour.

In the 12 months to 31 December 2023 our portfolio return including franking was 16.0%, compared to the Index return over this period including franking of 14.0%.

Despite recent volatility, many of our long-term holdings have been key contributors to our half-year portfolio performance.

The largest contributors to our most recent relative outperformance - materials company James Hardie, digital car marketplace CAR Group, four wheel-drive parts and accessories manufacturer ARB Corporation and plumbing supplier /retailer Reece.

Adjustments & recycling capital to better opportunities

We are mindful of the tax impact on shareholder returns so we aim to keep turnover low but also look for opportunities to recycle capital into better opportunities.

In the half-year period we have exited Ansell Limited and IRESS Limited. The decision was made to sell these companies considering their long-term prospects will be increasingly challenged as competitive intensity increases. The small position in FINEOS Corporation was also sold completely reflecting our concern over the ability of the business to demonstrate attractive long term returns on its investments.

We increased our holdings in National Australia Bank, Telstra Group, CSL, ResMed, the ASX, WiseTech Global, Woodside Energy Group and Goodman Group at attractive prices during the period.

Biotech giant CSL and sleep apnoea company ResMed experienced significant share price weakness during the period due to the perceived competitive threat posed by the increased adoption of weight loss drugs. However we believe their long-term growth prospects will not be materially impacted. Both companies maintain market leader positions in their core markets and generate significant cash flow to invest in further research and development. It is interesting to note that their share prices have since recovered substantially.

We also recently initiated positions in Mineral Resources and Region Group (neighbourhood and sub-regional shopping centres). Mineral Resources is an Australian mining services company and an iron ore and lithium producer. We are particularly attracted to the long-term opportunity for low-cost lithium production as demand for electric vehicles continues to increase.

What’s the outlook?

While the strength of recent market performance has been pleasing, operating conditions remain volatile and current market valuations make us somewhat cautious.

Cost inflation is easing but remains elevated, while consumer sentiment is weakening, and household savings rates are starting to decline amid the higher cost of living. It is also not yet entirely apparent that the recent moderation in interest rate expectations is justified. Geopolitical factors, which have had little negative impact on the market more recently, may still have a role to play in investor sentiment as we move into this calendar year.

Regardless of the broader economic conditions, we are confident our portfolio remains well-positioned with a good mix between growth and income producing business. As patient investors, the one certainty we do know is that the market in periods like this will often provide good buying opportunities across a range of companies as it overreacts to short term news flow and AFIC currently has sufficient cash resources to take advantage of such opportunities.