Australian Foundation Investment Co. Ltd. · ASX:AFI
Australian Foundation Investment — Australian Investors' Association National Investors Conference 2003
50 slides from Australian Foundation Investment's conference presentation, Jun 11, 2003
Slide 1: Presentation to the Australian Investors' Association
PRESENTATION TO THE AUSTRALIAN INVESTORS’ ASSOCIATION BY ROSS BARKER WEDNESDAY, 11 JUNE 2003 GOOD AFTERNOON LADIES AND GENTLEMEN, 1. ITIS A PLEASURE TO BE WITH YOU AT THIS PRE- LUNCHTIME MEETING TO DISCUSS THE ROLE OF LISTED INVESTMENT COMPANIES IN YOUR PORTFOLIO. 2. MY NAME IS ROSS BARKER AND | LEA
Slide 2: What is a listed investment company
AVERSE CONDITIONS THAT HAVE APPLIED IN RECENT TIMES, INVESTORS HAVE BEEN DRAWN TO THEIR COMBINATION OF YIELD AND CONSERVATIVE RISK APPROACH. (PERHAPS THE ANALOGY OF THE TORTOISE AND THE HARE APPLIES). SLIDE 1 5. THAT BRINGS ME TO THE MOST IMPORTANT QUESTION THAT MANY OF YOU MAY BE PONDERING, WHAT IS
Slide 3: Attributes of listed investment companies
A PUBLIC MARKET IN THE SHARES OF THE COMPANY WHERE BUYERS AND SELLERS CAN MEET TO EXCHANGE SHARES WITHOUT AFFECTING THE UNDERLYING ASSETS OF THE COMPANY. THIS IS QUITE DIFFERENT FROM INVESTMENT TRUSTS. THESE ARE USUALLY NOT LISTED AND HAVE A PROCESS OF ISSUING UNITS TO NEW INVESTORS AND REDEEMING UN
Slide 4: Investment objectives
SLIDE 2 10.A KEY OBJECTIVE OF MOST OF THESE LARGE INVESTMENT COMPANIES IS TO GROW THE STREAM OF FULLY FRANKED DIVIDENDS FOR THEIR SHAREHOLDERS. 11. THE SECOND OBJECTIVE IS TO GENERATE ATTRACTIVE CAPITAL GROWTH OVER THE MEDIUM TO LONG TERM. FOR THIS PURPOSE WE WOULD BE TALKING OF THE ORDER OF 3-5 YEA
Slide 5: Risk and diversification
RISK. AS WITH MOST FUND MANAGERS, THE KEY RISK REDUCTION TECHNIQUE IS TO MAINTAIN A DIVERSIFIED PORTFOLIO WHERE THE FUNDS ARE INVESTED INA LARGE NUMBER OF STOCKS, USUALLY 20 OR MORE. IN THIS WAY THE FUND IS NOT EXPOSED TO TOO GREAT A RISK FROM THE POOR PERFORMANCE OF ONE INVESTMENT, (IE THEY TAKE NO
Slide 6: Risk management and closed-end structure
TO THIS SECTOR. THIS CAUSED NEGATIVE SENTIMENT TOWARDS THE INVESTMENT COMPANIES WHILE THE BOOM WAS UNDER WAY, BUT REFLECTED WELL ON THEM ONCE THE ENORMOUS BUBBLE HAD BURST AND INVESTORS COULD SEE THAT PRICES WHICH WERE PAID FOR THESE ‘TECH’ STOCKS DURING THE BOOM WERE EXCESSIVE, EVEN EXTRAORDINARILY
Slide 7: Premium and discount to net asset backing
PER SHARE. ON THE OTHER HAND, AT OTHER TIMES WHEN MARKET SENTIMENT TOWARDS THEM IS POOR THE SHARE PRICE CAN TRADE AT A DISCOUNT TO NET ASSET BACKING. IT IS IMPORTANT TO UNDERSTAND THIS PROCESS, AS IT CAN AFFECT THE PRICE YOU SHOULD BE WILLING TO PAY FOR THE SHARES OR WILLING TO ACCEPT IF YOU CHOOSE
Slide 8: AFIC portfolio structure and sector allocation
22.IT ALSO HAS A TRADING PORTFOLIO WHICH THE BOARD HAS MANDATED TO BE LESS THAN 10% OF THE INVESTMENT FUND AND IS CURRENTLY AROUND 3%. WE USE THE TRADING PORTFOLIO FOR SHORT TERM POSITIONS AND IN PARTICULAR TO BUY SHARES AND WRITE OPTIONS TO GENERATE FURTHER INCOME FOR THE SHAREHOLDERS. 23.ALSO, DEP
Slide 9: AFIC share price versus net asset backing
26. OTHER FINANCIALS INCLUDES INVESTMENTS SUCH AS INSURANCE COMPANIES, PROPERTY TRUSTS, OTHER INVESTMENT COMPANIES AND THE LIKE. 27.YOU CAN SEE THE PERCENTAGES INVESTED IN THE OTHER INDUSTRY SECTORS. SLIDE 6 28. THIS GRAPH SHOWS HOW AUSTRALIAN FOUNDATION INVESTMENT COMPANY’S SHARE PRICE HAS TRADED R
Slide 10: Efficient structure
29.1 THOUGHT IT WAS HELPFUL FOR INVESTORS TO SEE A PRACTICAL EXAMPLE OF HOW THE SHARE MARKET SETS A PRICE FOR OUR SHARES, RATHER THAN IT BEING AT THE ASSET BACKING. SLIDE 7 29.1 WOULD LIKE TO TALK ABOUT ANOTHER KEY FEATURE OF INVESTMENT COMPANIES WHICH IS THE EFFICIENCY OF THEIR STRUCTURE. 30. ONE O
Slide 11: Lower management expense ratios
MANAGEMENT OF THE PORTFOLIO. AS 1 SAID, THIS IS NOT THE CASE WITH ALL LISTED INVESTMENT COMPANIES, BUT IT CERTAINLY IS FOR THE LARGER ONES. 32. THE SECOND KEY POINT IS THAT THE COMPANY STRUCTURE HAS RESULTED IN SIGNIFICANTLY LOWER MANAGEMENT EXPENSE RATIOS THAN APPLY FOR TRUSTS. FOR THE LARGER INVES
Slide 12: Entry and exit fees
WHILE LISTED INVESTMENT COMPANIES HAVE BEEN AROUND A LONG TIME THEY STILL HAVE A VERY LOW PROFILE BECAUSE THEY SPEND VERY LITTLE ON PROMOTION. 35. THE NEXT POINT RELATES TO ENTRY AND EXIT FEES. MANY INVESTMENT TRUSTS HAVE ENTRY AND EXIT FEES WHICH APPLY WHEN INVESTORS APPLY FOR NEW UNITS AND/OR REDE
Slide 13: Tax treatment and franked dividends
NOT NEED TO PAY ANY ADDITIONAL TAX ON THE FRANKED DIVIDEND. THEY CAN THEN PASS THOSE FRANKED DIVIDENDS THROUGH TO THEIR SHAREHOLDERS. THAT IS WHAT USUALLY HAPPENS. 37. TRUSTS ON THE OTHER HAND HAVE MANY COMPONENTS OF INCOME IN THEIR DISTRUBUTIONS SUCH AS INTEREST, FULLY FRANKED DIVIDENDS, CONCESSION
Slide 14: Expense example and transparency
COSTING HIM OR HER $45 A YEAR FOR US TO MANAGE THE PORTFOLIO. IF THE FUNDS WERE INVESTED INA TRUST WHICH WAS CHARGING AN EXPENSE RATIO OF 1.5% P.A. IT WOULD COST THAT SAME INVESTOR $450 PER YEAR. SLIDE 9 41.THE NEXT ISSUE RELATING TO INVESTMENT COMPANIES WHICH SETS THEM A BIT APART FROM TRUSTS IS TH
Slide 15: How investment companies invest
SLIDE 10 43. FINALLY, IN MY EXPLANATION OF INVESTMENT COMPANIES | WOULD LIKE TO TALK A BIT ABOUT HOW THE COMPANIES GO ABOUT MAKING INVESTMENTS. 44. AS | HAVE EXPLAINED BEFORE, THERE ARE TWO KEY COMPONENTS TO THIS. THE FIRST IS THAT INVESTMENT DECISIONS SHOULD BE BASED ON WHAT IS PERCEIVED TO BE ‘VAL
Slide 16: Buy and hold approach
46. THE OTHER KEY POINT OF OUR INVESTMENT APPROACH IS THAT WE BUY STOCKS TO HOLD FOR THE LONG TERM. WE ARE NOT ABOUT BUYING STOCKS TO SELL WHEN WE THINK THE MARKET HAS PEAKED, WITH A VIEW TO BUYING BACK IN WHEN PRICES FALL. 47.WE DO NOT BELIEVE IT IS POSSIBLE TO KNOW WHEN THE MARKET HAS PEAKED OR TR
Slide 17: Investment committee
51. THE COMMITTEE APPROVES ALL THE COMPANY'S INVESTMENTS, REVIEWS ALL TRANSACTIONS IN THE TRADING ACCOUNT, REVIEWS AND APPROVES VOTING ON PROXIES ON THE COMPANIES IN WHICH WE INVEST, REVIEWS AND APPROVES ANY PARTICIPATION IN DIVIDEND REINVESTMENT PLANS AND REVIEWS AND APPROVES ANY SUB-UNDERWRITING,
Slide 18: Buy decisions
THE COMPANIES TO LOOK AFTER THEIR SHAREHOLDERS’ FUNDS. 55.A THIRD KEY ELEMENT IS THAT THE PRICE WHICH ONE IS PAYING REPRESENTS GOOD FUNDAMENTAL VALUE AND IS NOT OVERLY INFLUENCED BY EMOTION OR SENTIMENT. AS | HAVE MENTIONED MANY TIMES DURING THE PRESENTATION, THE ABILITY OF COMPANIES TO PRODUCE GOOD
Slide 19: Sell decisions
SLIDE 13 58.ON THE OTHER SIDE, WHAT WOULD CAUSE US TO SELL STOCKS OUT OF OUR PORTFOLIO? 59.AS | MENTIONED BEFORE, OUR BUY AND HOLD STRATEGY MEANS THAT SALES ARE NOT A COMMON EVENT. THE MOST FREQUENT REASON FOR US TO SELL A STOCK IS WHEN A TAKEOVER OCCURS. IN THESE SITUATIONS THE DECISION IS OFTEN TA
Slide 20: Reasons to sell
63. THE THIRD REASON WHICH COULD CAUSE US TO SELL SOME OR ALL OF OUR HOLDINGS WOULD BE EXTREME OVERVALUATIONS SO THAT AN INVESTMENT POSITION BECOMES SO HIGHLY VALUED THAT IT MAKES SENSE FROM A RISK MANAGEMENT POINT OF VIEW TO SELL SOME OF THE HOLDING TO PROTECT OUR SHAREHOLDERS FROM THE POSSIBILITY
Slide 21: One-year LIC returns
67. THIS NEXT SLIDE SHOWS THE RETURN OVER ONE YEAR TO 31 DECEMBER 2002 FOR THE FOUR LARGEST INVESTMENT COMPANIES, AUSTRALIAN FOUNDATION INVESTMENT COMPANY, ARGO, MILTON AND AUI AND COMPARES IT WITH THE ALL ORDINARIES ACCUMULATION INDEX. THEY ALL SHOW OUTPERFORMANCE AGAINST THE INDEX WHICH WAS A TOUG
Slide 22: Five-year returns and LIC size
THE VIEW THAT THE CONSERVATIVE INVESTMENT STYLE WHICH THE COMPANIES USE PROVIDES GOOD RETURNS TO SHAREHOLDERS. SLIDE 17 71. THIS NEXT SLIDE SHOWS A GRAPH OF THE APPROXIMATE SIZE OF THE FOUR LARGEST INVESTMENT COMPANIES. AUSTRALIAN FOUNDATION INVESTMENT COMPANY IS THE LARGEST. BASED ON MARKET CAPITAL
Slide 23: Top 20 investments
THEIR NET ASSET BACKING AND AUI WAS A LITTLE UNDER. SLIDE 19 73. EVERY INVESTMENT COMPANY WILL HAVE A DIFFERENT PORTFOLIO, BUT TO GIVE YOU A FLAVOUR OF HOW THE PORTFOLIOS ARE COMPRISED YOU MIGHT FIND IT INTERESTING TO SEE THE TOP 20 STOCKS IN AUSTRALIAN FOUNDATION INVESTMENT COMPANY’S PORTFOLIO AS A
Slide 24: Top stocks and AFIC returns relative to market
OUR TOP 20 STOCKS REPRESENT APPROXIMATELY 62% OF OUR PORTFOLIO. SLIDE 23 78.FINALLY, | THOUGHT YOU MIGHT BE INTERESTED TO LOOK BACK AT THE PATTERN OF RETURN OF AUSTRALIAN FOUNDATION INVESTMENT COMPANY RELATIVE TO THE MARKET. 79. THIS FIRST GRAPH SHOWS TOTAL RETURN BASED ON SHARE PRICE AND DIVIDENDS
Slide 25: Role of a listed investment company in your portfolio
WERE THREE YEARS WHERE THERE WERE MODEST DECLINES IN THE NET ASSET BACKING, BUT EIGHT IN WHICH THERE SUBSTANTIAL POSITIVE RETURNS. 81. THE PURPOSE OF SHOWING THESE TWO SLIDES IS REALLY TO CONVEY THE SENSE THAT AUSTRALIAN FOUNDATION INVESTMENT COMPANY’S SHARE PRICE AND NET ASSET BACKING PER SHARE WIL
Slide 26: The Role of a Listed Investment Company in Your Portfolio
The Role of a Listed Investment Company in Your Portfolio Australian Investors’ Association National Investors Conference 2003 =A australian Foundation LAVESTMERT COM PARY
Slide 27: What Is a Listed Investment Company?
What Is a Listed Investment Company? [Otherwise known as LIC’s] > A Company not a Trust > ASX Listed - not Unlisted > Invests in Listed Companies =A australian Foundation LAVESTMERT COM PARY
Slide 28: Typical Investment Objectives
Typical Investment Objectives > Growing fully franked dividends > Attractive capital growth over medium to long term =A australian Foundation @ LAVESTMERT COM PARY
Slide 29: Risk Considerations
Risk Considerations > Diversified portfolio (no big bets) > Conservative value investor > Typically no speculative investments > Closed end > Share price determined by the market A Australian Foundation LAVESTMERT COM PARY
Slide 30: AFIC's Investment Structure
AFIC’s Investment Structure Closed end investment vehicle ¢ Investment portfolio — Approx. 100 securities ¢ Trading portfolio - <10% total — Short term positions — Option writing strategies — Currently trading portfolio is much reduced ~¢ Cash and liquids =A australian Foundation LAVESTMERT COM PARY
Slide 31: Spread of AFIC's Investments
Spread of AFIC’s Investments — Dec 02 Other Industrials Consumer 9.52% 14.20% Discretionary ie 6.14% Consumer Staples 10.21% Materials Banking 0, 18.68% 28.42% Other financials 12.83% A, =A australian Foundation LAVESTMERT COM PARY
Slide 32: AFIC Five Year Share Price to Net Asset Backing
AFIC Five Year Share Price to Net Asset Backing - Premium / Discount Sept 99 - Proposed changes to CGT announced May 01 - Budget announcement of CGT relief 25.0% ™Y 15.0% 5.0% AG Mae mA) s PAA) 5.0% AM AL ila A) y -15.0% ae -25.0% Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-0O1 Dec-02 =A australian Found
Slide 33: Efficient Structure
Efficient Structure >» Management rights rests with shareholders > Lower management expense ratios > Lower cost distribution (no trailing commissions) > Typically lower entry and exit fees > Simpler tax treatment La Australian Foundation LAVESTMERT COM PARY
Slide 34: AFIC Expense Rate
AFIC Expense Rate “% of average portfolio value) e 2001/02..................... 0.15% e 2000/01...........0....... 0.14% e 1999/2000............... 0.11% e 1998/99.................. 0.15% e 1997/98.................. 0.16% e 1996/97................. 0.19% Excludes expenses relating to new issues =A a
Slide 35: Transparency
Transparency > Being an ASX Listed Company provides more disclosure _ » More shareholder interaction SERS. =A ‘Australian Foundation @ LAVESTMERT COM PARY
Slide 36: Investment Process
Investment Process > Value based investment decisions > Buy & hold strategy _ . =A australian Foundation @ LAVESTMERT COM PARY
Slide 37: AFIC's Investment Process
AFIC’s Investment Process nvestment Committee > Comprises individuals with investment and business skills > Approves all investments > Reviews trading account transactions > Reviews and approves proxies > Reviews and approves DRP participation > Reviews and approves sub-underwriting > Meets weekl y
Slide 38: AFIC's Investment Process - Buy decisions
AFIC’s Investment Process — Buy decisions Based on broker research from a panel of major brokers ¥ Good industry economics v Assessment of Board & Management ¥ Good fundamental value v Likelihood of dividend growth Y Contrarian buyers “Not pressured by money inflow or index =A Australian Foundation
Slide 39: AFIC's Investment Process - Sell Decisions
AFIC’s Investment Process — Sell Decisions Sells are not common, usually from takeovers Driven by risk considerations “* Corporate governance problems *«* Management problems «+ Extreme overvaluations “+ Concerns about dividend stream Not pressured from fund outflows or index =A australian Foundatio
Slide 40: LIC year total return to December 2002
LIC 1 year total return to 31 December 2002 ARGO 7.96% AFIC MILTON AUI ALL ORDS 3.22% 0.68% ACCUM. 1.14% -8.10% Based on Share Price Accum. Series =A australian Foundation LAVESTMERT COM PARY
Slide 41: LIC five year total return p.a.
MILTON 13.61% ARGO 10.26% LIC 5 year total return p.a. to 31 December 2002 AUI 14.80% ALL ORDS ACCUM. 6.59% Based on Share Price Accum. Series =A australian Foundation LAVESTMERT COM PARY
Slide 42: LIC ten year total return p.a.
LIC 10 year total return p.a. to 31 December 2002 MILTON ° AUI AFIC ARGO 15.97% ALL ORDS 13.59% ACCUM. 10.48% 13.12% 13.61% Based on Share Price Accum. Series =A australian Foundation LAVESTMERT COM PARY
Slide 43: LIC Market Capitalisation
LIC Market Capitalisation at 19 May 2003 AFIC 2.657 billion ARGO 1.813 billion MILTON 0.764 billi billion AUI 0.311 billion =A australian Foundation LAVESTMERT COM PARY
Slide 44: LIC Price premium/discount
LIC Price premium/discount to Net Asset Backing 10.20% 10.90% MILTON 0.90% AUI -1.50% Share prices as at 16/5/03, Net Asset Backing as at 30/4/03 =A australian Foundation LAVESTMERT COM PARY
Slide 45: Top Investments - Ordinary Securities
Top 20 Investments - Ordinary Securities at 31 December 2002 Rank $m Rank $mil Dec 2002 Jun 2002 1 NAB 217.2 1 242.1 2 Westpac 150.7 2 178.0 3 Wesfarmers 130.5 4 133.4 4 CBA 113.3 3 138.2 5 BHP Billiton 91.0 5 91.5 =A australian Foundation LAVESTMERT COM PARY
Slide 46: Top Investments - Ordinary Securities
Top 20 Investments - Ordinary Securities Rank $m Rank $mil Dec 2002 Jun 2002 6 Amcor 83.2 7 80.8 7 ANZ 81.1 6 90.2 8 Telstra 72.5 8 75.9 9 Coles Myer 52.2 10 52.2 10 Toll Holdings 50.8 9 63.4 =A australian Foundation LAVESTMERT COM PARY
Slide 47: Top Investments - Ordinary Securities
James Hardie WA News Milton Corp Woolworths Top 20 Investments - Ordinary Securities $m Rank Jun 2002 42.3 12 40.5 13 37.5 14 34.6 - 31.9 15 LAVESTMERT COM PARY $mil 39.7 38.6 36.9 35.5 =A australian Foundation
Slide 48: Top Investments - Ordinary Securities
Top 20 Investments - Ordinary Securities $m Rank $mil ec 2002 Jun 2002 AMP 31.8 16 33.5 Southcorp 29.5 18 29.8 Foster’s Group 29.4 17 30.8 Brambles 28.5 11 49.1 Woodside 26.7 - - =A australian Foundation LAVESTMERT COM PARY
Slide 49: AFIC Calendar Year Returns - Share Price + Dividends
AFIC Calendar Year Returns Share Price + Dividends vs ASX200 Acc. Index Hi Share Price (10 year Compound Growth Rate = 13.1%) HH S&P/ASX 200 Accumulation Index (10 year Compound Growth Rate = 10.8%) 40.00% 30.00% 20.00% 10.00% 0.00% _ -10.00% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 =A
Slide 50: AFIC Calendar Year Returns - Net Asset Backing + Dividends
AFIC Calendar Year Returns Net Asset Backing + Dividends vs ASX200 Acc. Index @ Net Asset Backing (10 year Compound Growth Rate =13.2%) BS&P/ASX 200 Accumulation Index (10 year Compound Growth Rate = 10.8%) 40.00% 5 30.00% 4 20.00% + 10.00% 0.00% TSE] T i T -10.00% 1992 1993 1994 1995 1996 1997 1998