AFIC responds to key shareholder questions at AGM
At AFIC, we value transparency and actively engage with our shareholders. At our recent AGM, we addressed several important topics reflecting both the current market environment and AFIC’s long-term strategy for delivering consistent value to shareholders. In this article we’ve summarised the key points of discussion and questions from our AGM.
FY 24 Performance Recap
In the financial year to 30 June 2024, the AFIC portfolio returned a $296.4 million profit, down from $310.2 million the previous year. The portfolio outperformed the S&P/ASX 200 Accumulation Index with a return of 15.1% including franking compared to 13.5% for the index over this period.
This decrease in profit was driven by the expected lower dividends across the ASX, particularly from a challenged resources and commodities sector. However, we did receive some special dividends from other holdings, particularly in the banking sector.
We also declared a fully franked final dividend of 14.5 cents per share, a 0.5 cent increase on last year. This brings total fully franked dividends applicable for the year to 26.0 cents per share, an increase of 4.0% from the previous financial year’s total fully franked dividend of 25.0 cents per share.
How does AFIC navigate through challenging economic times?
We’re long-term investors in quality companies and we want to capture the benefits of compounding value for our shareholders. Our investment is the underlying asset value of the companies we hold, in this regard we want to invest in companies that have a defined competitive advantage, generate cash flow, have strong balance sheets, and are run by highly capable Boards and management teams.
We want to be diversified in companies and industries to allow us to perform in most economic settings. We do this by ensuring we have a mix of what we define as growth companies, stalwarts, cyclicals, and income generating.
What is AFIC’s response to the growing popularity of ETFs and the pressure on the LIC model?
It’s true that ETFs are gaining popularity in the retail funds management space, and LICs have been trading at larger discounts recently. For example, AFIC is currently trading at a 10% discount to NTA. However, three years ago, we were trading at a 10% premium. We believe it’s important to consider the long-term perspective, rather than focusing on short-term market fluctuations.
There are clear distinctions between owning an ETF and a Listed Investment Company like AFIC. One key difference is our ability to maintain consistent dividends. During the COVID-19 period, many ETFs were forced to cut their dividends, while AFIC was able to maintain its dividend at 24 cents. This is because LICs can build reserves and manage distributions more effectively, whereas ETFs are required to distribute all income received. AFIC has built 42 cents of franking credits, giving us more stability and lower volatility in dividends compared to the broader market.
We recognize the challenges of large discounts, and that’s why we’ve made improvements to our communication with shareholders and prospective investors. For instance, we now publish our weekly and monthly NTA figures. Additionally, we recently began a share buyback program, as we believe buying AFIC shares at a 10% discount is in the best interest of shareholders.
Our long-term approach remains, and we’re confident that the LIC sector will continue to offer value to investors over time.
How does geopolitical uncertainty impact AFIC’s investments?
Geopolitical events and macroeconomic factors are always considered in our investment process, but we take a bottom-up approach, focusing on finding and investing in high-quality companies. Over the long term, these types of external factors tend to have a shorter-term impact. Our investment horizon is 10, 20, or even 30 years, and we believe that trying to predict short-term geopolitical movements is often futile.
That said, geopolitical disruptions can sometimes present opportunities. If market overreactions lead to significant mispricing, we may use these moments to increase our holdings in quality companies that are temporarily undervalued but we believe will deliver strong long-term results for our shareholders.
How does AFIC approach ESG factors in its investment process?
ESG considerations are embedded in our investment process, though we do not market ourselves as an ESG-focused fund. We believe that social responsibility, good governance, and environmental sustainability are integral to the long-term success of any business. For example, we avoid investing in pure-play gambling stocks and actively assess the governance and social license of the companies we invest in.
We engage regularly with company boards and directors to ensure that these factors are properly addressed. If a company fails to meet acceptable standards, we consider this in our decision-making, as it often impacts the long-term prospects of the business.
We expect the companies we invest in to adhere to all regulatory and social obligations, which contributes to stronger, more sustainable returns for our shareholders.
What is AFIC’s market outlook?
The equity market is trading at the top end of a fair value range and the operating environment is expected to become more challenging, which means we need to be more discerning about how we allocate capital through this time. We continue to identify opportunities within these conditions, but we believe earnings growth will become more challenging with price rises expected to slow and consumer spending softening. Additionally, a historically tight labour market is impacting productivity.
In this context of navigating a slower operating environment when market valuations are full, we’re allocating capital to companies providing strong valuation support following period of bad news, and those with earnings growth dependent more on self-help drivers than underlying economic conditions. We remain committed to holding a diversified portfolio of quality companies who own strategic assets, with strong balance sheets, and strong leadership.