We have seen a very sudden, dramatic adjustment in the value of the Australian equity market over the past few months. A period of high volatility has tested many investment strategies, but as with all periods of volatility, opportunities can present themselves to vigilant investors who remain disciplined in their strategy.

AFIC’s focus has always been on good investment fundamentals and trusting our long-term investment perspective. In following this approach, AFIC has participated in several select capital raises over the last quarter, aiming to increase holdings in companies we believe are higher quality to further improve the quality of the portfolio.

Our objective is to emerge from this crisis with an even stronger portfolio based on a more attractive weighting in the highest quality companies.

Capital Raising Opportunities

Cochlear Limited

One of the major raisings we participated in was Cochlear Limited. Cochlear is a quality business with a strong balance sheet. More recently they had to make a payment due to a patent infringement case against them in the US. To ensure they remained strong through this unsure period they raised additional capital, which provided AFIC with the opportunity to increase our allocation at what we saw as a good price.

Reece Group

We also invested in the capital raising by Reece, Australia's largest provider of bathroom and plumbing supplies. Reece made an acquisition in the United States some 18 months ago, which was funded partly by taking on debt. The Company is also undertaking a process of business improvement across all of its businesses which requires investment. In the face of a potential economic downturn they wanted to ensure they had a strong balance sheet, by paying down some of its debt, allowing it to continue on its path of business improvement.

Auckland Airport

There was also an opportunity to participate in a raising by Auckland Airport. The pandemic has had a significant impact on airports globally. Auckland Airport had sufficient financial resources to operate for approximately, 18 months without additional capital. However, the uncertainty surrounding domestic and international travel, they raised capital to buffer for a longer period. We saw this as a good opportunity to increase our investment in this holding at what we thought represented good, long term value in a quality asset.

The Right Balance

Companies raise capital for many different reasons, however a significant underlying theme this time round was to ensure balance sheets remain strong through this period of uncertainty.

AFIC considers a variety of factors when considering investments, with a key focus on companies with strong balance sheets, good management, and their ability to maintain a sustainable competitive advantage.

In this context, we have been able to capture opportunities in the current landscape to increase our position in what we see as the highest quality companies in the portfolio at an attractive price.

Creating the right balance in our portfolio is also always critical. To participate in the capital raising of these high-quality companies, we have freed up capital in other areas of the portfolio by reducing our position in some companies in what we asses to be lower on the quality curve.

We also seek out new stocks, often smaller companies, to enhance the portfolio with prospects for attractive long-term growth. Some of these we will discuss in more detail with the release our End of Financial Year reports.

As markets begin to recover, we believe AFIC is emerging in a position with a portfolio of high quality. Importantly, we are confident that our shareholders will benefit from the opportunities we have captured through this difficult time.