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AFIC’s Overview & Outlook: Strong market position and a patient strategy
AFIC’s Overview & Outlook: Strong market position and a patient strategy

AFIC’s Overview & Outlook: Strong market position and a patient strategy

At the start of this year, the idea that the market could produce a negative return would not have been surprising to many investors, however the ASX returning -6.6 per cent for Financial Year 2020 hides what an extraordinary year it has been.

In this environment we are pleased to have been able to deliver 3 things to our shareholders:

  • Firstly, by outperforming the ASX 200 Index by 3.5% we have softened the downturn in such a disruptive year. This is achieved in a portfolio exhibiting lower volatility than the market.
  • Secondly, we have kept the cost of running AFIC to just 0.13% allowing almost all our income to flow through to our shareholders. This is very competitive against other investment funds.
  • Thirdly our policy of accumulating some profit and franking reserves in good years has allowed us to pay a steady 24c annual dividend despite our earnings falling to 19.9c due to significant dividend cuts or deferrals.

We now look to the year ahead and the global economic recovery.

It will be a difficult path as the government’s fiscal stimulus measures begin to wind-back, however we are confident that our market position will sustain the company into the future and our prospects over time remain strong.

Focus on the bigger picture

As long-term investors, we only buy stocks when we are confident the share price represents attractive value in light of long-term prospects.

This means that in addition to assessing individual companies and their share price at the time of considering an investment we also review the long-term prospects for the sector and industry they operate in. We exited a number of companies during the year so as to deploy funds elsewhere. This included sales in Treasury Wine Estates, Suncorp Group, Scentre Group, Adelaide Brighton, and Perpetual in 2020.

When companies operate in cyclical industries with returns correlated strongly with the prevailing economic environment, there is potential for increased long-term investment risk. Additionally, structural change, such as the challenges the retail sector has faced in recent years, will impact the long-term position of companies. These changes can restrict the ability of companies to deliver recurring earnings and strong cash flow.

As an alternative, we prefer to have funds in companies such as CSL Limited and James Hardie Industries where they are less reliant on external economic factors and can grow their earnings irrespective of these challenging times.

It is interesting to note that many of the high-quality businesses that are in the portfolio are emerging from this period of uncertainty in a stronger position because of their industry position, quality of leadership, and sound financial position.

AFIC’s approach to ESG

We acknowledge and understand an increasing interest from our shareholders, and investors generally, in how companies manage environmental, social, and governance risk. Assessing companies through an ESG risk management lens has been a key part of AFIC’s approach for many years and will continue to be so.

Importantly our approach to ESG is deeply embedded into our investment process.

We have always sought to invest in companies with strong governance and risk management processes. We engage with companies to understand the sustainability of their business model from an environmental, social, and broad risk perspective and to understand their independence from outside influences.

We seek remuneration plans and outcomes that align with AFIC’s interest as long-term shareholders and we vote as shareholders in our companies, accordingly, based on our assessment of these factors.

What is the market outlook?

The COVID-19 pandemic will continue to be disruptive globally moving into 2021. We will need to carefully observe the long-term impact of the significant fiscal stimulus the government has injected into the economy that has helped sustain share prices. Coupled with the current low-interest rates, a lot of capital will continue to flow into equities as many investors struggle to find viable alternate investments.

The full impact of the current economic conditions on companies is still being played out and will continue to do so over the next few years. Although we have seen the Australian market stay very strong with low-interest rates, which are likely to continue in the near term, driving high valuations, we remain very aware that at some point this will change and any increase in interest rates is likely to create headwinds for markets.

In the short term, the upcoming election in the United States could provide further volatility for investors, and at this stage, it is very difficult to predict how the result of the election will impact our markets. However, with markets at elevated levels, any uncertainty could lead to high short-term volatility.

We remain confident that the adjustments we have made through this financial year have further strengthened the AFIC portfolio. Good companies find a way to navigate and perform in these difficult times, and we believe we are well positioned in quality companies that will allow us to continue to deliver value to our shareholders.

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