AFIC: turning a big ship

AFIC's results highlighted a growing exposure to medium sized and smaller companies

Listed investment company (LIC) results tend to be a bit of a non-event. If you’ve kept up with the announcements on net tangible assets (NTA) you’ll know how an LIC has performed through the year. On the basis of Chart 1, we could tell that Australian Foundation Investment Company’s 2016 performance was going to be down on last year.

Key Points

  • Increased dividend

  • Negative portfolio return

  • More exposure to smaller stocks

The portfolio, including dividends, suffered a 1.6% loss for the year, falling short of the S&P/ASX 200 Accumulation Index, which returned 0.6%. AFIC announced a 14 cent fully franked dividend today, taking total dividends for the year to 24 cents – 1 cent more than last year. The management expense ratio remained low at 0.16%, in line with last year’s costs.

More than any of this, though, what caught the attention was an increase in AFIC’s weighting in small- and mid-capitalisation stocks, from 15% to 22%, since last year. When you’re managing a $6.4bn portfolio and selling larger holdings is likely to incur tax costs, a 7% shift is significant.

Management noted in its outlook statement that subdued returns were ‘likely for quite some time’ and, to deliver reasonable growth, they clearly feel they need to take a broader approach. Given the outperformance of small and mid-caps over the past year and more, though, they may have missed the boat – or at least the best cabins.

It takes time to turn such a big ship as AFIC, though, and we expect this process to continue, with the majority of its dividend still coming from income paid by its core holdings, topped up by profits taken on smaller positions.

With such a low management expense ratio, AFIC remains one of the cheapest ways to get Australian equity exposure, even compared to ETFs. As a result, it’s a reasonable option for long-term investors that don’t want to pick their own stocks – despite the 6% premium to its current pre-tax NTA of $5.50.

For it to offer value, though – against other stocks (including those it holds) – we’d need to see its share price closer to its post-tax NTA, which currently stands at $4.79. The stock is up 3% since 6 Oct 15 (Hold – $5.67). HOLD.