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Sharing AFIC’s approach to delivering strong returns and dividends in a challenging market
Sharing AFIC’s approach to delivering strong returns and dividends in a challenging market

Sharing AFIC’s approach to delivering strong returns and dividends in a challenging market

In a recent webinar with GFM Wealth Advisory, AFIC portfolio manager David Grace discussed AFIC’s investment objectives and how the portfolio is able to withstand current market volatility. We’ve summarised the conversation here.

What are AFIC’s investment objectives?

AFIC has two core investment objectives, one is to pay attractive total returns over the medium to long term and the second is to be able to pay a growing dividend profile over time. To achieve these objectives we identify quality companies, and we buy when we see value. We're trying to hunt for value within quality companies.

How is AFIC positioned in the current economic environment?

As long-term investors, every investment we make has a five to 10 year view or longer. We avoid chasing short-term market cycles and we don’t trade around the next data point or try to pick where interest rates are going to go. We focus on building a portfolio that can survive over our long-term investment horizon.

We look for companies that reinvest back in their business, hold a market leadership position, have strong management teams, and maintain healthy balance sheets.

Around a third of our portfolio has exposure to growth companies. These are companies that we think are the best position to be able to deliver meaningful earnings growth over the long term.

Resources and gas producers make up 16% of the portfolio. These companies are a necessary part of the economy and are positioned to benefit from economic growth and energy transition. We're focused on the highest quality operators in this sector so even if we start to see commodity prices fall, they're still expected to generate a growing cash flow profile.

Around a quarter of the portfolio is invested in stalwart companies like Woolworths, Coles, and Transurban. These companies own assets that are difficult to replicate and have high barriers to entry. This strong positioning allows them to generate consistent cash flow, which then translates into reliable dividends for shareholders.

The remaining portfolio is invested in income-focused holdings such as banks, REITs, and Telstra. We believe these companies are well-positioned to deliver a stable to growing dividend profile.

After the strong price appreciation in the Australian share market we've recently seen, how does AFIC view valuations in the Australian share market?

We have seen strong running markets since the end of October last year. We saw five or six expected interest rate cuts being priced into the market at the time, and equity markets rallied in response. Expectations have now shifted to one or two interest rate cuts.

We believe the Australian share market is trading slightly above long-term averages and with earnings growth harder to find, we're more discerning on where we're deploying capital in the current market.

We’ve recently made some changes to the portfolio in context of current valuation levels. We recently trimmed positions in companies that had strong runs, such as James Hardie, Reece, CBA, and Woolworths.

These sales provided capital for us to buy more shares for ResMed, CSL, Teslstra and Woodside, and add Ampol and Region Group to our portfolio.

AFIC’s performance in the last 12 months

Over the last 12 months to 30 April, AFIC delivered a return including franking of 11.0%, with the ASX 200 Index delivering 10.5% including franking over this period.

Looking at sector performance, Information Technology, Real Estate, and Financial Services (driven by banks) have seen significant growth in the past year, up over 38%, 19%, and 19%, respectively. Other sectors such as Healthcare were down over this period which gave us an opportunity to strategically add to existing portfolio positions in CSL and ResMed. This is a good example of our investment approach.

How AFIC achieves consistency with dividends

Paying a consistent or growing dividend to our investors is one of our key investment objectives. To achieve this we look for companies that are generating sufficient cash flow to enable them to reinvest in their business and produce good dividends.

One of the benefits of a Listed Investment Company (LIC) structure is that it allows us to create profit and franking credits reserves. Over the last five financial years we've been able to maintain dividends delivered to AFIC shareholders by accessing these franking credit reserves to support the dividend during the period where a lot of companies were cutting their dividends as a result of the COVID -19 pandemic. As market conditions improved and company earnings rebounded in 2023, our total dividend has increased.

As it stands today, our reserve franking credit balance is sufficient to cover approximately two years of dividends (even if in the unlikely event that we did not receive any dividends from the companies in the portfolio).

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