AFI - Australian Foundation Investment Company

[So_Cynical]

Dumped AMP at the bottom of the price cycle, very far from genius level stock selection..

 

[sptrawler]

Dumped AMP at the bottom of the price cycle, very far from genius level stock selection..

Maybe they think AMP aren't at the bottom of the price cycle?
Also noticed AMP aren't in MLT's top 20 holdings.

 

[Belli]

Maybe they think AMP aren't at the bottom of the price cycle?
Also noticed AMP aren't in MLT's top 20 holdings.

AFI sold a large portion of AMP a couple of years ago I understand.

 

[Ferret]

Dumped AMP at the bottom of the price cycle, very far from genius level stock selection..

They did the same with STO a couple of years ago. Not one of their best moves.

 

[Dona Ferentes]

Dumped AMP at the bottom of the price cycle, very far from genius level stock selection..

Well not really, matey.

AFI sold a large portion of AMP a couple of years ago I understand.

Belli is closer to the mark. Easy to do a perusal.

From the Annual accounts, AFI held 20.1 million AMP shares at 30 June for three years, 2015, 2016 and 2017. Market values on these days, $121 mill, $103.7mill and $104.3 mill.

At 30/12/17 showing market value of $104mill an #18 holding in portfolio. Then in months to follow, $105.5mill, $106.3 mill and at 29/3/18, still #18 at $100.3mill. By 30/4/18, down to $76mill at #23 and, by next month, off the Top 25; by 30/6/18, 12.9mill shares held with market value $45.9mill. Last FY at 30/6/19, holding 9.6million AMP shares with market value $20.4million. Then at 30/12/19 announced disposal of a further $15.9million of AMP during the six months

So, to my untrained eye, AFI kept a sizable holding until the Feb 2018 shocker result from AMP, selling 7.2mill shares as the AMP price dropped from $5+ to under $4. In the next year, as SP declined from $3.60 to $2.20 a further 3.3 million shares sold. I assume the further disposal has cleared out the rump holding. The current share price for AMP is now $1.88.

Its a lot harder disposing of $100mill of stock; especially if you are the market.

AFI also state in their reports that AMP was a long time holding, probably since demutualisation. This affects cost base tax treatment etc.

 

[sptrawler]

They did the same with STO a couple of years ago. Not one of their best moves.

Yes STO another great stock, finally nearly recovered to the 2005 price, what's that 15 years?

 

[Belli]

Yes STO another great stock, finally nearly recovered to the 2005 price, what's that 15 years?

First I don't hold AFI as I'm set with my present holdings. I take an interest in what a number of LICs do but not very closely and some tidbits I hear on market commentary although I don't follow those closely either. So this is only from memory.

Apart from price issues, hasn't STO reduced its dividends over the last while and when did AFI sell its STO holdings?

ARG management admits they have made some wrong selections and I'd assume AFI may have done that as well. As far as I know no one always gets it right.

 

[Ferret]

Apart from price issues, hasn't STO reduced its dividends over the last while and when did AFI sell its STO holdings?

According to their 2017 report, they had completed disposal of STO by early 2017. That was before the bottom for STO, but it has recovered well since mid 2017 (I hold).

ARG management admits they have made some wrong selections and I'd assume AFI may have done that as well. As far as I know no one always gets it right.

Absolutely.

Anyway, I like where the AFI portfolio is at the moment and I think I will participate in the dividend reinvestment plan for the first time in many years. It has a 2.5% discount, which is pretty high these days!

 

[Dona Ferentes]

"Economic conditions have been extremely challenging for many businesses, as the fallout from the COVID-19 outbreak negatively impacts many Australians. Equity markets have also been very volatile following the all-time highs reached in late February, as governments and central banks try and respond to deteriorating conditions and control of the virus remains uncertain."

 The Full Year Profit was $240.4 million. The profit for the corresponding period last year was $406.4 million. Investment income was down, as a number of one-off items were not repeated this year. This included participation in the Rio Tinto and BHP off-market share buy-backs, special dividends and the receipt of a dividend because of the Coles demerger from Wesfarmers ($134.2 million in total). In addition, several companies reduced or deferred dividends in the second half of the financial year, which also meant a fall in dividend income.
 AFIC, as a long-standing listed investment company, has reserves that can be used in difficult times. Drawing upon these reserves, the final dividend was maintained at 14 cents per share fully franked despite the fall in income in the second half. Total fully franked dividends applicable for the year are 24 cents per share. Last financial year total dividends were 32 cents per share. This included a special interim dividend of 8 cents per share. No special dividend has been paid or declared this year.
 During the period, AFIC continued to adjust the portfolio and took advantage of the decline in share prices to increase holdings in companies it wanted to own more of. This included participation in the recent deeply discounted capital raisings that have occurred.
 The positioning of the portfolio to ensure quality companies with strong industry positions formed the core of the portfolio has lessened the impact of the negative market. Portfolio return for the year, including franking, was negative 3.1%. Including franking, the S&P/ASX 200 Accumulation Index was down 6.6%. Over 10 years, the corresponding figures are 9.3% for AFIC and 9.4% for the Index. AFIC’s performance numbers are after costs. AFIC’s management expense ratio is 0.13% for the year.

A number of purchases were undertaken during the year. This included placements in National Australia Bank, Cochlear, Auckland International Airport, Oil Search, NEXTDC, Ramsay Health Care, Reece and Qube Holdings. Major additions included Goodman Group, Telstra (to bring some income into the portfolio), Macquarie Group, Cleanaway and Sydney Airport.

While there has been a reduction in the number of holdings in the portfolio over the year from 76 to 61, three new companies were added, given we consider the long term opportunity for each business to be attractive: Altium, Netwealth and Ryman Healthcare. Major sales included the complete disposal of holdings in Treasury Wine Estates, Suncorp Group, Scentre Group, Adelaide Brighton and Perpetual.

 

[sptrawler]

AFI preliminary final report.

https://www.asx.com.au/asxpdf/20200727/pdf/44kvq5j6xwvn1z.pdf

I do hold

 

[Dona Ferentes]

AFIC has revealed that it has been running a model portfolio of between 40 and 50 international stocks for about 12 months, and having seen solid returns it will now put real money to work. To be clear, this isn’t a bet-the-farm moment, with only 1 per cent to 1.5 percent of the LIC’s $7.2 billion portfolio to be allocated offshore.But as AFIC chairman John Paterson told the LIC’s annual general meeting on Wednesday, the company hasn’t been afraid to think big, suggesting the offshore portfolio could eventually morph into its own product.

“When the performance has been assessed, we will consider whether it represents an opportunity for our shareholders and other investors to invest in this global portfolio directly,” he said.

AFIC chief executive Mark Freeman says there were a range of reasons for setting up the global portfolio, including harnessing the work AFIC’s team was already doing assessing international stocks and markets as part of the research on the local blue chips and would-be blue chips that AFIC famously focuses on. Freeman has pitched in with a small team – one full time resource and one part time – to construct the portfolio based on the same principles AFIC uses for his ASX investing – a buy and hold strategy of names with strong competitive advantage, with an accent on founder-led businesses, or “owner driver” names in the AFIC parlance.

He won’t reveal any specific names in the portfolio, but says many are recognisable names. The spread of 40 to 50 stocks is a bigger basket than other Australian global specialists such as Magellan, but Freeman argues this level of diversification is more AFIC’s style.

The United States and Europe are the main markets in the model portfolio, but Freeman says there are a few names from Asia. The shift to virtual meetings forced on fund managers and companies by the pandemic has allowed Freeman and his fledgling global team to more easily buttress their research efforts with investor calls. Freeman isn’t willing to put a deadline on AFIC’s assessment period for the global strategy. The focus for now is to put real money to work and to start to assess what extra resources might be needed to run the strategy inside AFIC’s portfolio, before determining whether it could be opened up further.

“We’ve done well, but it’s early days,” Freeman says. “We just have to get really comfortable with it and that’s not something you can put a timeframe on.”
But he says a globally-focused product with AFIC-like characteristics – a long-term mindset, low turnover of stocks, a tax effective vehicle with low fees and no performance fees – remains a serious consideration. “That would be something that would fit with our group but we’ve got to understand if that’s something we can create from this.”

 

[Dona Ferentes]

and from the AGM : Outlook
•The onset of COVID-19 means low interest rates and significant government stimulus for the foreseeable future.
•Full impact of economic conditions on company earnings and dividends still to play out.
•Difficult to reconcile expansion of market valuations, although it is being driven by a small number of stocks – particularly Information Technology, Healthcare.
•We believe the portfolio is well positioned given the quality of the holdings and further adjustments made through the March/April downturn.
•Upcoming US election may provide further volatility.
•We can remain patient

 

[Dona Ferentes]

Providing general information to investors, I notice a bit of a pivot by AFI, probably to differentiate itself from other investment options.

1. Discount vs Premium: how AFIC looks at NTA

"Simply put, NTA is the total value of the portfolio divided by the number of shares on issue. If an LIC has a $100 portfolio and 100 shares outstanding, the NTA per share is $1. What is important to understand is that the NTA per share does not always reflect the market price of those shares; this is due to many reasons, some easier to analyse than others.

"This is what is meant by trading at a discount or premium to NTA; if the share price is higher than NTA per share (say at $1.05 from the example above), the stock is trading at a premium, and if it is lower than NTA per share, (say at $0.95 from the example above), the stock is trading at a discount. It is a conventional investment belief that shares in LICs trading at a discount to NTA represent a good buying opportunity, but it is not always as straightforward as this....

The driving forces of NTA:
... Investment Performance and Costs
... Dividends
... Size
...... read more at :

Discount vs Premium: how AFIC looks at NTA

Find the latest news and updates from AFIC. Read now.

www.afi.com.au

2. No longer only focusing only on the ASX200

Although their benchmark for performance for many years has been the (major) index, < and they use the S&P/ASX200 Accumulation as a benchmark > the updated website has a section on Investment Objectives

Our Company

Discover an easy way to invest in Australian companies with AFIC. Find security and dividend history, performance data, and reports for shareholders, advisors, and new investors.

www.afi.com.au

and includes :
Nursery development
We aim to maintain a ‘nursery’ of smaller stocks in the portfolio and therefore remain constantly on the lookout for new companies that have the capacity to develop into major businesses over time. While such companies may be small, they typically exhibit similar characteristics to those in the core investment portfolio and provide AFIC with future growth options.

 

[Belli]

I don't hold AFI although I occasionally do look at its financials. I give them, and other LICs, credit for supporting the dividends to shareholders. I have heard a number of share holders may not be traveling well financially with the decline in dividends this year and could be stressed out to some extent. So it's something at least and, in my view, it is what the profit reserves are for.

From memory I understand the payout ratio was over 100%. ARGs was the also over 100% payout ratio. Be interesting to see how long that can or will be sustained.

I became curious and had a look at older research reports going back to 2015 on the AFI web-site. I noticed they mentioned the benchmark being the ASX 200 Accumulation Index and I wonder if AFI "formally" changed its benchmark in the light of those reports and when that occurred.

 

[So_Cynical]

AFI has a market cap of just under 9 billion so due to the size of the company they have to invest in big stocks, thus they track the index somewhat, even with a few smaller stocks its going to be hard to get much out performance without a bit of risk.

 

[Dona Ferentes]

AFI has a market cap of just under 9 billion so due to the size of the company they have to invest in big stocks ...

or,.... AFI has, over the long term, invested in stocks that have assumed blue chip status, and hence has a market cap of 9 bill

 

[Belli]

Those who hold AFI will find out how its half-year has been on 20 January 2021 when it releases its report.

Dividend will be payable on 23 February.

 

[Dona Ferentes]

Just poking around, with access to full history; and it looks like I have held AFI for nearly 30 years., in two holdings. Initially in my own name and from 2007 when I transferred most into my SMSF, but kept the original parcel (CGT considerations)

During the entire period, AFI has paid a bi-annual dividend, increasing over time. There has been an opportunity to participate in DRPs and also in SPPs and Rights Issues.

An investment pathway is often determined by personal circumstances. For me it was buying direct shares in 1985/86 prior to going overseas. Was out of contact (Asia) and slept through the '87 crash. Back in Aust, then heading OS again in '92, I resolved to diversify , in a less volatile investment. Received dividends, kept records. The connectivity offered by internet and direct trading has also changed investment patterns but, as a core holding, AFI has been a Buy and Hold, which matches the LIC's Investment Philosophy.

In my own name. Bought 6000 @ $1.65 in Apr 1992. ($10K, nearly $90 in brokerage). Participated in DRPs 1994 to 2000, received Bonus shares 1995, took up SPP and Rights issues when offered 1998 to 2006. Transferred 21,300 to SMSF in 2007, keeping original 6K. Still hold.

In SMSF - Some 21,300 held since March 2007 , cost base $5.18; with 4 DRPs in '11 & '12 (ranging from 4.25 to 4.72), participation in SPP in '14 at 5.88, then sold same at 6.09, and purchased a few in 2016 to hold 25,000; sold 4,000 at $7.12 in Feb 2020

I have access to XPlan calculations, and have achieved the following IRR numbers (Note: Internal Rate of Return calculations include Imputation Credits.). I realise the Accumulation Index and Franking boosts the numbers, but that is the name of the game.
In my own name
One Year ........... 2.70%
Three Years ....... 10.42%pa
Five Years .......... 9.64%pa
Ten Years ........... 9.81%pa
Since Inception (1992) ..16.81%pa

In my SMSF
One Year ........... 5.42%
Three years ..... 11.17% pa
Five Years ....... 10.10%pa
Ten Years ......... 10.20%pa
Since Inception (2007) .. 8.24%pa

From AFI website - numbers to end November
Net asset / share growth plus dividends, inc. franking ..... Share price growth plus dividends, inc. franking
One year ...................... 2.6% ...................................................... 10.6%
Five Years .................... 10.0%pa ................................................. 11.2%pa
Ten Years .................... 9.8%pa .................................................. 10.2%pa

Takeouts.
1. Having invested for the duration, I read the reports and familiarise myself with their style and investments.
2. From Dividends of 3.5c and 6.5c a share in 1992, these have lifted to 10c and 14c a share in 2020 (apart from occasional Special Dividend, divis have kept at this level since 2015. )
3. Always been 100% franked
4. the near $10k invested in 1992 now yields 14.5% plus franking.... and has a market value of $43,800
5. Timing issues, buying and selling can deliver better or worse returns.
6. Tax is not taken into account. The SMSF is more efficient for both dividends and CGT calculations.
7. For a MER of less than 0.15%pa, active management is cheap. As a core holding, I can focus more on the small caps.

 

[Belli]

A very good summation there @Dona Ferentes. Thank you.

For those who may be interested, the AFIC web-site does have a list of dividends paid and capital issues going back to the mid-1980s.

I know MIR and ARG have as well and I will assume a number of other LICs have similar details.

 

[Dona Ferentes]

A very good summation there @Dona Ferentes. Thank you.

And I think the point I should have made was, how relatively easy it was to get a significant holding, albeit over a couple of decades, while receiving increasing dividends along the way. The only big outlay was the initial 10k, then a few divis foregone for DRPs and some corporate actions (SPPs were limited to $5k for a long time) and voilà. ...

Compounding, the 8th wonder of the world.

Rule of 72.