The Australian Financial Review’s, James Thomson, uncovers how Australia’s biggest and oldest LIC is staying patient and hunting for value
Last month we hosted an evening shareholder meeting in Melbourne where the portfolio managers of AFIC and our other Listed Investment Companies talked about our investment strategies, approach to navigating volatile markets and where we currently see opportunities. The panel discussion was hosted by AFR journalist James Thomson and included questions from our shareholders.
The discussion was both educational and insightful and we’ve summarised the key questions and points raised by our Managing Director, Mark Freeman and AFIC portfolio manager, David Grace, in the following article.
What does such a long and impressive history in the Australian markets mean for the way AFIC goes about its business?
In nearly 30 years of being at AFIC, I’ve witnessed changes in the composition of the Australian share market with new healthcare and technology players emerging alongside traditional sectors like banking. So, the types of businesses we look at have changed over time, but the way we invest has not. We’re long-term investors and we focus on identifying quality companies that we can buy when we see value on offer.
We look at businesses that we think can grow profits over the long term. We consider all sectors and in recent times we’ve identified value in the energy and healthcare sectors.
We prioritise the underlying performance of businesses and view market fluctuations as an opportunity to strategically add stocks to our portfolio. Unlike passively managed ETFs that react to daily market movements, we focus on identifying quality companies that can adapt to a volatile environment and improve profits. We also value the ability to directly engage with our shareholders, a benefit not commonly available with ETFs.
We invest when we want to invest. We think it allows us to be a more patient investor when we need to be wary, but it also gives us the opportunity to be more opportunistic.
“I always think AFIC is the bluest of blue chips. Take us through the performance in the last 12 months, and how you're seeing some of these barbell sectors of the Australian market, banking and mining, shifting around a bit.” – James Thomson
The performance of the market in the last 12 months to May has seen significant disparity in sector performance, with Information Technology up 38.6%, and Consumer Staples experiencing a decline at 8.8%.
We view the energy sector favourably despite its underperformance over the last 12 months. With new projects being harder to commission, the supplier response is more constrained. Combined with an oil price of $65 per barrel, we anticipate higher oil prices over the next five to 10 years.
This outlook underpins our recent investment in Woodside. Their strengthened balance sheet post-merger with BHP Petroleum positions them to generate significant cash flow, potentially translating into higher shareholder dividends.
We added to our BHP holdings during the recent period of share price weakness, which presented a buying opportunity. We previously viewed BHP’s proposed acquisition of copper assets from Anglo American as strategically sound. While the deal fell through, we see potential in the copper market, which has seen a shortage but remains attractive due to the role it plays in the energy transition and AI revolution. We anticipate stable dividends from our current holdings, though significant dividend growth is not expected in the next two to three years due to projected softening iron ore prices.
We also view the healthcare sector favourably, which saw relative underperformance in the last 12 months, but presented attractive buying opportunities. Concerns surrounding GLP-1 drugs impacting companies like ResMed and CSL resulted in a market downturn but allowed us to add to our holdings in these strong companies at a discounted price. We believe both GLP-1s and CPAP therapy have a place in the market, with potential for superior outcomes when used together.
Meanwhile, the May bank reporting season saw a solid performance. Dividends remained stable, and concerns about rising debt levels did not materialise. While we don't anticipate significant dividend growth in the next two to three years, the banking sector offers stability with consistent dividends.
In response to a question about investing overseas it was noted that many of the companies that we hold in our portfolio tend to be global businesses, such as CSL, ResMed, and James Hardie and as a result we have significant exposure to offshore markets.
Why is AFIC trading at a discount to the NTA and is it an opportunity?
The fact that AFIC’s currently trading at a slight discount to NTA is driven by a few factors. At the margin, retail investors tend to be more cautious during periods of economic uncertainty and with interest rates returning to ‘normal levels’ retail investors are reviewing their asset allocation and options such as term deposits and fixed rates are back as a consideration. But we believe the market's focus will eventually return to long-term value creation and investors who acquire shares at a discount can benefit from both the portfolio's performance and the initial discount. We remain committed to delivering strong returns for our shareholders over the long term.
Also, AFIC's ability to maintain dividends throughout market fluctuations stems from our franking credit reserves. When investors are looking for long-term stability of income rather than just capital growth these conditions will often produce a share price trading closer to the NTA.