The companies in AFIC’s diverse investment portfolio generally performed well in the last financial half-year to 31 December 2021 and are in a good position to continue to provide a steady stream of dividends to AFIC shareholders. Portfolio Manager David Grace looks at how companies in our portfolio have performed and how we are navigating the current market conditions.
The recent financial reporting season for companies was positive with most results in line with or slightly ahead of market expectations. Most companies appear to be managing the current inflationary environment well and strong demand from both consumers and businesses has enabled companies to grow their margins despite the higher costs of inputs.
Although the economic environment may become more challenging, we are relatively optimistic. Companies continue to have strong cashflow and strong balance sheets, and demand remains strong.
Stand-out performers in the portfolio included building products supplier James Hardie Industries, healthcare companies CSL and ResMed, Commonwealth Bank, supermarket operator Coles, and industrial property company Goodman Group.
We were also encouraged that many of the companies we invest in were able to show improvement in ESG (Environmental, Social and Governance) matters over the reporting period, which is becoming increasingly important to investors.
Dividends are rebounding strongly
Across the market and within our own portfolio, dividends rebounded well from the impact of the COVID pandemic.
In our portfolio, we expect good dividend growth in toll roads operator Transurban over the next few years as the economy continues to reopen and boosts traffic volumes.
Forecasts are for continued dividend growth across many industrial companies.
Company valuations have recently become more attractive
Company valuations were elevated at the end of 2021. In the first two months of 2022 the market has been volatile, reflecting anticipation of rising interest rates and inflation. Consequently, there has been a sell-off of many high-growth companies and rotation into companies that are considered to offer more value.
This means we can invest in high-quality companies at more reasonable valuations compared to the past two years. Some healthcare companies appear particularly undervalued.
We see opportunities in the likes of CSL, ResMed, Carsales.com, and Transurban, which we’ve been buying recently. We favour companies that are well positioned for earnings growth regardless of the inflationary environment ‒ those that have strong market position and pricing power, generate high gross margins, and can wear cost increases or pass them on to their customers.
Opportunities in uncertain environment
Although we still have a highly uncertain macro-economic environment – with inflation, rising interest rates in the US, the Ukraine war, and the ongoing pandemic – we have a good opportunity to continue to invest in high-quality companies now that valuations have eased.
The current uncertainty driven by geopolitical and global economic factors highlights the importance of diversification in a portfolio, which has always been a key focus for AFIC. We continue to take a long-term view of our investments and look for companies that are well managed, have good earnings growth and strong balance sheets. Although their share market valuations may fluctuate, the fundamental nature of their businesses do not.
As an investor with a long-term investment horizon and with an eye to being tax efficient in our approach, we do not aggressively rotate the stocks in our portfolio to try to capture every theme or cycle in the market. We focus on high-quality companies to deliver long-term returns to our shareholders, an approach that has worked well for us over many market cycles.