2018 Annual Reports, Notice of AGM and Proxy Form
31 August 2018
The Manager
ASX Market Announcements
Australian Securities Exchange
Exchange Centre
Level 4
20 Bridge Street
Sydney NSW 2000
Electronic Lodgement
Australian Foundation Investment Company Limited
Statutory Annual Report, Annual Shareholder Review,
Notice of Meeting and Proxy Form
Dear Sir / Madam
Please find attached the 2018 Statutory Annual Report, Annual Shareholder
Review, Notice of Meeting and Proxy Form being sent to shareholders.
Yours faithfully
Matthew Rowe
Company Secretary
Annual Report 2018
90
YEARS OF INVESTMENT
EXPERIENCE
2 Directors’ Report
2 5 Year Summary
3 About the Company
4 Review of Operations and Activities
10 Top 25 Investments
11 Board and Management
13 Remuneration Report
34 Non-audit Services
35 Auditor’s Independence Declaration
36 Financial Statements
37 Consolidated Income Statement
38 Consolidated Statement
of Comprehensive Income
39 Consolidated Balance Sheet
40 Consolidated Statement
of Changes in Equity
42 Consolidated Cash Flow Statement
43 Notes to the Financial Statements
43 A. Understanding AFIC’s Financial
Performance
47 B. Costs, Tax and Risk
50 C. Unrecognised Items
51 Additional Information
51 D. Balance Sheet Reconciliations
53 E. Income Statement Reconciliations
54 F. Other Information
60 Directors’ Declaration
61 Independent Audit Report
66 Other Information
66 Information About Shareholders
67 Major Shareholders
68 Major Transactions in the
Investment Portfolio
69 Sub-underwriting
69 Substantial Shareholders
70 Transactions in Securities
71 Holdings of Securities
74 Issues of Securities
76 Company Particulars
77 Shareholder Meetings
Contents
Australian Foundation Investment Company Limited ABN 56 004 147 120
Australian Foundation Investment Company
is a listed investment company investing
in Australian and New Zealand equities.
This year marks the 90th anniversary of the
establishment of AFIC in 1928.
Year in Summary
Profit for the Year
$279.0m
Up 13.7% from 2017
Fully Franked Dividend
14¢
Final
Same as 2017
24¢
Total
10.8%
S&P/ASX 200 Accumulation
Index +13.0%
Total Portfolio Return
Total Shareholder Return
10.3%
Share price plus dividend
0 .14 %
0.14% in 2017
Management Expense Ratio
Total Portfolio
$7. 4b
Including cash at 30 June
$6.9 billion in 2017
1
Australian Foundation Investment Company Limited Annual Report 2018
5 Year Summary
DIRECTORS’ REPORT
279.0
2018
Net Profit After Tax ($ Million)
254.3
2014
293.6
2015
265.8
2016
245.3
2017
23.6
2018
Net Profit Per Share (Cents)
24.4
2014
27.2
2015
23.8
2016
21.3
2017
24
2018
Dividends Per Share (Cents)
(b)
22
2014
23
2015
24
2016
24
2017
7,274
2018
Investments at Market Value
($ Million)
(a)
6,324
2014
6,414
2015
6,250
2016
6,790
2017
627.0
2018
Net Asset Backing Per Share
(Cents)
(c)
584.5
2014
585.1
2015
550.4
2016
589.5
2017
129,948
2018
Number of Shareholders
(30 June)
103,188
2014
107,622
2015
113,482
2016
119,463
2017
Notes
(a) Excludes cash.
(b) All dividends were fully franked. The LIC attributable gain attached to the dividend was: 2018: 2.86 cents, 2017: nil, 2016: 2.1 cents, 2015: 7.1 cents,
2014: nil.
(c) Net asset backing per share based on year-end data before the provision for the final dividend. The figures do not include a provision for capital gains tax
that would apply if all securities held as non-current investments had been sold at balance date as Directors do not intend to dispose of the portfolio.
2
Australian Foundation Investment Company Limited Annual Report 2018
About the Company
Australian Foundation Investment
Company (AFIC) is a listed investment
company investing in Australian and
New Zealand equities.
Investment Objectives
The Company aims to provide shareholders
with attractive investment returns through
access to a growing stream of fully franked
dividends and growth in capital invested.
The Company’s primary investment
goals are:
• to pay dividends which, over time, grow
faster than the rate of inflation; and
• to provide attractive total returns
over the medium to long term.
Approach to Investing
The investment philosophy is built on taking
a medium to long-term view on companies
in a diversified portfolio with an emphasis
on identifying quality companies that are
likely to sustainably grow their earnings
and dividends over this time frame.
Quality in this context is an outcome of our
assessment of the board and management
as well as some key financial metrics such
as the level of gearing in the balance sheet,
product margins and free cash flow. The
structure of the industry and a company’s
competitive position in this industry is also
an important indicator of quality. Linked
to this assessment of quality is the ability
of companies to grow earnings over time,
which ultimately should produce good
dividend growth.
Recognising value is also an important
aspect of sound long-term investing.
Short-term measures such as the price
earnings ratio, price to book or price to
sales may be of some value, but aren’t
necessarily strong predictors of future
performance. Our assessment of
value tries to capture the opportunity
a business has to prosper and thrive
over the medium to long term.
In building the investment portfolio in this
way, we believe we can offer investors
a well-diversified portfolio of high-quality
companies that is intended to deliver total
returns ahead of the Australian equity market
and with less volatility over the long term.
The Company also uses options written
against a small proportion of its investments
and a small trading portfolio to generate
additional income.
From time to time, some borrowings
may be used where potential investment
returns justify the use of debt. This is
managed within very conservative limits,
as determined by the Board.
AFIC is managed for the benefit of its
shareholders with fees based on the
recovery of costs rather than as a fixed
percentage of the portfolio. There are no
performance fees. As a result, the benefit
of scale over time results in a very low
expense ratio for investors. For the
12 months to 30 June 2018 this was
0.14 per cent (annualised), or 14 cents
for each $100 invested.
How AFIC Invests – What We Look
For in Companies
Quality First
Growth
Including dividends
Value
A portfolio that is actively
managed to achieve long-term
capital and dividend growth
3
Australian Foundation Investment Company Limited Annual Report 2018
Profit and Dividend
Profit for the year to 30 June 2018 was
$279.0 million, up 13.7 per cent from
$245.3 million in the corresponding period
last year. Investment income increased
$31.5 million (up 11.6 per cent), due primarily
to a lift in dividends across a range of
companies, particularly resource companies,
including participation in the Rio Tinto
off-market buy-back. Finance costs were
also down $8.1 million following the
conversion or redemption of convertible
notes in February 2017.
Earnings per share were 23.6 cents, up
from 21.3 cents. The final dividend was
maintained at 14 cents per share fully
franked, bringing total dividends for the
year to 24 cents per share fully franked,
the same as last year. Two cents of the
final dividend are sourced from taxable
capital gains, on which the Company has
paid or will pay tax. The amount of the pre
tax attributable gain on this portion of the
dividend, known as an ‘LIC capital gain’,
is therefore 2.86 cents. This enables some
shareholders to claim a tax deduction
in their tax return.
Market and Portfolio
Performance
The return of the market over the year
was characterised by a pronounced
divergence of performance across sectors
and companies. Ongoing growth across
global economies, in particular the United
States and China, led to rising commodity
prices, with the Australian Resources Index
up 41 per cent over the 12-month period
(represented by energy and materials in
Figure 1). Within this growth, the small and
mid cap resource sectors were up 49 per
cent and 42 per cent respectively. However,
during the same period the industrial sector
was up only 8 per cent, whilst the banking
sector fell just over 1 per cent.
Furthermore, in an environment where
many large companies are facing subdued
growth, there has been an increased flow
of funds into the small and mid cap section
of the market. This has pushed these
sectors higher relative to the S&P/ASX 50,
which represents larger companies in the
market (Figure 2). This has also seen very
strong share price performance in those
small companies with the strongest growth
expectations, primarily through a re-rating
of valuations (Figure 3).
AFIC’s portfolio was up 10.8 per cent for
the 12 months to 30 June 2018 compared
with the S&P/ASX 200 Accumulation Index
which increased 13.0 per cent. In the
resources sector AFIC’s primary exposure
is to companies with long-life assets and
low-cost production such as BHP and Rio
Tinto, rather than the more cyclical small
and mid-sized companies.
The best performing companies in the
AFIC portfolio outside the large resource
companies were CSL, Wesfarmers,
Macquarie Group, Oil Search and
Woolworths.
The long-term performance of the portfolio,
which is more in line with the Company’s
investment timeframes, was 6.5 per cent
per annum for the 10 years to 30 June 2018
versus the Index return of 6.4 per cent per
annum. Including the full benefit of franking,
these returns are 8.5 per cent per annum
for AFIC and 8.0 per cent per annum for the
Index. AFIC’s portfolio performance numbers
(Figure 4 on page 6) are after costs and
tax paid whereas the Index does not have
expenses or tax.
Review of Operations and Activities
Figure 2: Performance of Different Sectors of the Market by Company Size
S&P/ASX 50
total return
S&P/ASX Mid Cap 50
total return
S&P/ASX 200 Small Ordinaries
total return
Source: FactSet
130
125
120
115
110
105
100
95
90
Index
May 18
Apr 18
Mar 18
Feb 18
Jan 18
Dec 17
Jun 18
Nov 17
Oct 17
Sep 17
Aug 17
Jul 17
Jun 17
Figure 1: Performance of S&P/ASX 200 Companies Relative to the Energy
and Materials Sectors
S&P/ASX 200
total return index
S&P/ASX 200
materials total return index
S&P/ASX 200
energy total return index
Source: FactSet
150
140
130
120
110
100
90
Index
May 18
Apr 18
Mar 18
Feb 18
Jan 18
Dec 17
Jun 18
Nov 17
Oct 17
Sep 17
Aug 17
Jul 17
Jun 17
4
Australian Foundation Investment Company Limited Annual Report 2018
Australian Resources
Index Up
41%
Figure 5 on page 6 illustrates the cumulative
long term performance of the AFIC portfolio
versus the S&P/ASX 200 Accumulation Index
over the 10 years to 30 June 2018. It also
includes the benefits of franking credits
for both.
The share price return was trading at a
slight discount to the net asset backing
(before tax on unrealised gains) at the end
of June (Figure 6 on page 7) and is the
reason the Dividend Reinvestment Plan did
not have any discount associated with it.
Nevertheless, the share price return,
including reinvestment of dividends,
over the 12 months to 30 June 2108 was
10.3 per cent. Whilst the share price can
often fluctuate between a premium and
discount, over the long term the share price
return is often very close to the portfolio
return (Figure 4).
Figure 3: Price Earnings Ratio of Small Industrial Sector of the Australian Market
Source: FactSet
19.5
19
18.5
18
17.5
17
16.5
16
Times
May 18
Apr 18
Mar 18
Feb 18
Jan 18
Dec 17
Jun 18
Nov 17
Sep 17
Oct 17
Aug 17
Jul 17
5
Australian Foundation Investment Company Limited Annual Report 2018
Review of Operations and Activities continued
Positioning the Portfolio for
Long Term Opportunities
A key restraint on the current Australian
market is the prolonged, subdued growth
outlook facing many large companies.
This arises from their market positions
with no further consolidation possible,
increased competition and disruption, and
greater regulatory intervention. AFIC has
continued to adjust the portfolio to respond
to this situation. Whilst larger companies
continue to make up a significant proportion
of the portfolio, AFIC has been increasing
its holdings in a number of mid-sized
and small companies with good growth
prospects. This has been done having
regard to balancing the need to grow
dividends as well as provide meaningful
capital growth within the portfolio over
the long term. Overall purchases in the
investment portfolio for the year totalled
$739.3 million with sales totalling
$712.6 million, which is higher
than last year.
Major purchases included adding to
holdings in Macquarie Group, CSL, Sonic
Healthcare, James Hardie Industries and
Alumina, all of which have unique industry
exposures in global markets, and Sydney
Airport and Boral. Additions were also made
to smaller companies, Reliance Worldwide
and Reece, including participation in
their respective capital raisings to fund
offshore acquisitions, and Carsales.com.
Unibail-Rodamco-Westfield (which acquired
Westfield Corporation through a scrip
bid), NEXTDC and Qantas were the more
significant new additions to the portfolio.
NEXTDC, which is a data centre operator,
is an example of the type of company that
AFIC is looking to add to the portfolio. It has
a unique position in an industry that is likely
to grow in excess of nominal economic
growth. It is leveraged to the growth in the
demand for cloud computing services as
many businesses seek to outsource these
services to companies with carrier neutral
data centres that have greater scale and
efficiencies. Given the investment required
and the competitive advantage afforded by
ownership of key sites, barriers to entry for
this industry are high. NEXTDC currently
operates five data centres in Melbourne,
Sydney, Perth, Canberra and Brisbane
and is in the process of building some
additional new data centres in Sydney,
Melbourne and Brisbane.
Major sales included the complete disposal
of Incitec Pivot, Coca-Cola Amatil and
Japara Healthcare. Westfield Corporation
and Tox Free Solutions were sold because
of takeovers.
Other major sales included a small
reduction in the positions of QBE Insurance,
AMP, Telstra and Treasury Wine Estates,
all of which have been long term holdings
in the portfolio, and Vicinity Centres.
AFIC had 91 holdings in the portfolio
at 30 June 2018. Whilst the S&P/ASX
200 Index can provide a useful point
of reference for investors, AFIC actively
manages its investments. As a result,
the portfolio will differ quite markedly from
the Index. Figure 7 (page 8) highlights the
profile of AFIC’s portfolio by the various
sectors of the market at the end of the
financial year and how it differs from
the Index.
Net asset per share growth plus dividends
Share price growth plus dividends
3 year return5 year return
6.5%
6.5%
6.4%
10 year return
S&P/ASX 200 Accumulation Index
9.0 %
6.8 %
4.4 %
1 year return
8.2%
6.7%
10.0%
10.8
%
13.0%
10.3%
Figure 4: Relative Portfolio and Share Price Performance – Per Annum Returns
to 30 June 2018
Note assumes an investor can take full advantage of the franking credits. This chart calculates the benefit of franking credits
at the time dividends are paid for both AFIC and the Index. In practice there is a timing difference between receipt of the
dividend and the realisation of the franking benefit in the following tax year.
Jun 17
Jun 18
Jun 08Jun 09Jun 10Jun 11Jun 12Jun 13Jun 14Jun 15Jun 16
$2,500
$2,000
$1,500
$1,000
$500
$0
AFIC PortfolioS&P/ASX 200 Accumulation Index
Figure 5: Growth in Investment of $1,000 (Including Benefit of Franking)
− 10 Years to 30 June 2018
6
Australian Foundation Investment Company Limited Annual Report 2018
The most notable change is the position of
banks in the portfolio, which has declined
over recent years relative to the market
weight. Whilst banks continue to supply
a large part of the dividend income, the
outlook for growth relative to recent years,
in our view, has diminished as credit
for housing slows and competitive and
regulatory pressures become greater.
In addition, AFIC traditionally has not
been a large investor in Property Trusts
given the observation that over the long
term, industrial companies have tended
to outperform Property Trusts and the
distribution from these Trusts do not carry
franking credits. The other major variation
from the Index is in Consumer Discretionary,
which includes gambling stocks.
A significant percentage of the AFIC
portfolio, by value, remains exposed to the
large companies in the Australian market.
Nevertheless, there are a significant number
of companies that sit outside of these,
many of which we believe have the capacity
to grow their business and dividends over
time. This is outlined in Figure 8 (page 8),
with 71 holdings outside of the S&P/ASX 20.
Going Forward
The ongoing strength of the Australian
market continues to create a challenging
investment environment. In particular, the
drive by investors towards companies
displaying good growth prospects is
pushing share prices for these businesses
very high. In this context, high valuation
levels at a time when interest rates are
starting to move from very low levels may
create some uncertainty for markets and
therefore could then provide appropriate
investment opportunities.
In addition, the geo-political environment
remains unpredictable, with issues such
as trade, leading concerns. Markets at this
point have largely overlooked any potential
implications given economic fundamentals
appear sound across most large developed
markets. However, the key implication
for Australia is the impact any significant
change to global trade through imposition
of trade tariffs and retaliatory measures has
on China, and the influence this has on the
ongoing demand for Australian exports,
particularly resources.
For AFIC, it is a matter of being alert but
patient, and when appropriate, making
adjustments to the portfolio over time that
make sense as a long-term investor in
quality and growing companies.
Directorship Matters
As previously announced in September
2017 and detailed in the Company’s
Half-Yearly Review, Ross Barker retired as
Managing Director and Chief Executive
Officer (CEO) on 31 December 2017.
Mark Freeman, who was previously the
Chief Investment Officer of AFIC, became
the Managing Director and CEO of AFIC
on 1 January 2018.
The Board wishes to record its deep
appreciation to Ross Barker for his 16
years of outstanding service as Managing
Director and Chief Executive Officer and
wish him well in his retirement. He has
shown enduring leadership through this
period and made a significant contribution
to the growth in AFIC throughout his
distinguished tenure at the Company.
Mr Barker remains on the Board
of AFIC as a Non-Executive Director.
Company Position
Capital Changes
The following changes occurred to the
Company’ share capital during the year.
Under the Company’s Dividend Substitution
Share Plan, 454,954 new shares were
issued at nil cost in August 2017 and
342,843 new shares were issued at nil
cost in February 2018.
Under the Company’s Dividend
Reinvestment Plan, 5,447,400 new
shares were issued at a price of $5.92
in August 2017 and 3,821,934 new
shares were issued at a price of $6.11
in February 2018.
The Company’s buy-back facility remains
open although no shares were bought
back during the year.
The Company’s contributed equity, net
of share issue costs, rose $55.5 million
to $2.8 billion. At the close of the year
the Company had 1,186 million shares
on issue.
Dividends
Directors have declared a fully franked final
dividend of 14 cents per share, the same
as last year.
Figure 6: Share Price Premium/Discount to Net Asset Backing
Source: FactSet
Jun 18Jun 08Jun 10Jun 12Jun 14Jun 16
-10%
15%
0%
5%
10%
-5%
7
Australian Foundation Investment Company Limited Annual Report 2018
Review of Operations and Activities continued
The dividends paid during the year ended
30 June 2018 were as follows:
$’000
Final dividend for the year
ended 30 June 2017 of
14 cents fully franked at 30 per
cent paid 30 August 2017161,955
Interim dividend for the year
ended 30 June 2018 of 10 cents
per share fully franked at 30 per
cent, paid 23 February 2018116,099
278,054
Dividend Substitution Share
Plan (DSSP)
The Company has in place a Dividend
Substitution Share Plan.
This enables shareholders to elect to
receive shares in the Company instead
of dividends, forgoing any franking credit
and LIC gains that would otherwise be
attached to the dividend but deferring
any tax due on the receipt of such shares
(for Australian tax payers) until such time as
the shareholding is sold. Shareholders will
need to seek their own taxation advice in
determining if this Plan is suitable for them.
Further details are available on the
Company’s website or by request from
the Company’s Share Registrar.
Financial Condition
The Company’s primary source of
funds consists of its shareholders’ funds.
The Company also had agreements with
Commonwealth Bank of Australia for loan
facilities totalling $140 million (see Note D2).
At various points during the year, some of
these facilities were drawn down. The Board
takes a prudent and conservative approach
to the use of borrowed funds. Currently,
when used, they are maintained within a
limit of 10 per cent of total assets. As at
30 June 2018, the facilities are drawn
by $100,000.
Listed Investment Company
Capital Gains
Listed investment companies (LIC)
which make capital gains on the sale of
investments held for more than one year
are able to attach to their dividends an
LIC capital gains amount, which some
shareholders are able to use to claim a tax
deduction. This is called an ‘LIC capital
gain attributable part’. The purpose of this
is to put shareholders in listed investment
companies on a similar footing with
holders of managed investment trusts
with respect to capital gains tax on
the sale of underlying investments.
Tax legislation sets out the definition of a
‘listed investment company’ which AFIC
satisfies. Furthermore, from time to time
the Company sells securities out of the
investment portfolio held for more than one
year which may result in capital gains being
made and tax being paid. The Company
is therefore on occasion in a position to
be able to make available to shareholders
a LIC capital gain attributable part with
our dividends.
In respect of this year’s final dividend of
14.0 cents per share for the year ended
30 June 2018, it carries with it a 2.86 cents
per share LIC capital gain attributable part
(2017: nil). The amount which shareholders
may be able to claim as a tax deduction
depends on their individual situation.
Further details are provided in the
dividend statements.
S&P/ASX 100 excluding 20 Leaders: 42 Holdings
Outside of S&P/ASX 200: 29 Holdings
S&P/ASX 20: 20 Holdings
61%28%
11%
Figure 8: AFIC Investment by Company Size – Percentage of the
Portfolio by Value
AFIC portfolio weightS&P/ASX 200 Index weight
Banks
Materials
Industrial
Healthcare
Consumer
Staples
Energy
Other
Financials
21.3%18.6%12.1%10.9%9.9%9.0%
Cash
1.3%5.4%
Telecom
Services
2.0%
Information
Technology
3.9%
Property
Trusts
1.7%
Utilities
1.9%
Consumer
Discretionary
2.0%
25%
20%
15%
10%
5%
0%
Figure 7: AFIC Investment by Sector versus the S&P/ASX 200 Index
as at 30 June 2018
8
Australian Foundation Investment Company Limited Annual Report 2018
Likely Developments
The Company intends to continue its
investment activities going forward as
it has done since its inception in 1928.
The results of these investment activities
depend upon the performance of the
companies and securities in which we
invest. Their performance in turn depends
on many economic factors. These include
economic growth rates, inflation, interest
rates, exchange rates and taxation levels.
There are also industry and company-
specific issues such as management
competence, capital strength, industry
economics and competitive behaviour.
We do not believe it is possible or
appropriate to make a prediction on the
future course of markets or the performance
of our investments. Accordingly, we do
not provide a forecast of the likely results
of our activities. However, the Company’s
focus is on results over the medium to long
term and its twin objectives are to grow
dividends at a rate faster than inflation
and to provide shareholders with
attractive capital growth.
Significant Changes
in the State of Affairs
Directors are not aware of any
other significant changes in the operations
of the Company, or the environment
in which it operates, that will adversely
affect the results in subsequent years.
Events Since Balance Date
The Directors are not aware of any matter
or circumstance not otherwise disclosed
in the financial statements or the Directors’
Report which has arisen since the end of
the financial year that has affected or may
affect the operations, or the results of those
operations, or the state of affairs of the
Company in subsequent financial years.
Environmental Regulations
The Company’s operations are such that
they are not directly materially affected
by environmental regulations.
Rounding of Amounts
The Company is of the kind referred to
in the ASIC Corporations (Rounding in
Financial/Directors’ Reports) Instrument
2016/191, relating to the ‘rounding off’ of
amounts in the Financial Report. Amounts
in the Financial Report have been rounded
off in accordance with that Instrument, to
the nearest thousand dollars, or in certain
cases, to the nearest dollar.
Corporate Governance Statement
The Company’s Corporate Governance
Statement for the financial year ended
30 June 2018 will be found on the
Company’s website at:
afi.com.au/Corporate-Governance.aspx
As an overseas listed issuer on the
New Zealand Stock Exchange (NZX), the
Company is generally deemed to comply
with the NZX Listing Rules provided that
the Company remains listed on the ASX,
complies with the ASX Listing Rules and
provides the NZX with all the information
and notices that it provides to the ASX.
The ASX Governance Principles differ
from the NZX’s corporate governance
rules and the principles contained in the
NZX Corporate Governance Code. More
information about the corporate governance
rules and principles of the ASX can be
found at asx.com.au and, in respect
of the NZX, at nzx.com
Industrial Sector Up
8%
AFIC has been increasing its holdings in a number of mid-sized
and small companies with good growth prospects.
“
“
9
Australian Foundation Investment Company Limited Annual Report 2018
Top 25 Investments
As at 30 June 2018
Includes investments held in both the investment and trading portfolios.
Valued at Closing Prices at 30 June 2018
Total Value
$ Million
% of the
Portfolio
1Commonwealth Bank of Australia575.77.9
2BHP*477.76.6
3Westpac Banking Corporation455.56.3
4CSL*372.65.1
5Wesfarmers331.84.6
6Rio Tinto288.44.0
7National Australia Bank256.13.5
8Australia and New Zealand Banking Group239.73.3
9Transurban Group237.33.3
10Macquarie Group*206.42.8
11Amcor180.52.5
12Woolworths Group*174.62.4
13Oil Search146.72.0
14Woodside Petroleum129.31.8
15Telstra Corporation115.31.6
16Brambles107.81.5
17Sydney Airport*107.31.5
18AGL Energy96.81.3
19Treasury Wine Estates94.91.3
20James Hardie Industries91.91.3
21Computershare85.91.2
22Qube Holdings84.31.2
23Sonic Healthcare82.01.1
24Seek*77.91.1
25Ramsay Health Care76.41.1
Total5,092.6
As a percentage of total portfolio value (excludes cash)70.0%
* Indicates that options were outstanding against part of the holding.
10
Australian Foundation Investment Company Limited Annual Report 2018
Directors
Terrence A Campbell AO BCom (Melb). Chairman and Independent Non-Executive Director. Chairman of the Investment Committee
and member of the Remuneration and Nomination Committees.
Mr Campbell has been a Director of the Company since September 1984, appointed Deputy Chairman in September 2008 and Chairman
in October 2013. He is Chairman Emeritus Goldman Sachs Australia (formerly Goldman Sachs JBWere) and a former Advisory Director of
Goldman Sachs. Mr Campbell was formerly Chairman and Chief Executive of Goldman Sachs JBWere. He is also Chairman of Mirrabooka
Investments Limited and a former Director of Djerriwarrh Investments Limited and AMCIL Limited.
Mark Freeman BE, MBA, Grad Dip App Fin (Sec Inst), AMP (INSEAD). Managing Director. Member of the Investment Committee.
Managing Director of the Company’s subsidiary, Australian Investment Company Services Limited (AICS).
Mr Freeman became Chief Executive Officer and Managing Director in January 2018 having been Chief Investment Officer since joining the
Company in February 2007. Prior to this he was a Partner with Goldman Sachs JBWere where he spent 12 years advising the investment
companies on their investment and dealing activities. He has a deep knowledge and experience of investments markets and the Company’s
approaches, policies and processes. He is also Managing Director of Djerriwarrh Investments Limited, AMCIL Limited and Mirrabooka
Investments Limited.
Ross E Barker BSc (Hons) (Melb), MBA (Melb), F Fin. Non-Executive Director. Member of the Investment Committee.
Mr Barker transitioned to a Non-Executive Director in January 2018 having been appointed Chief Executive Officer of the Company in
February 2001 and Managing Director in October 2001 and prior to that an Alternate Director of the Company since April 1987. He is also
Chairman of Melbourne Business School Ltd. He is a Non-Executive Director of AMCIL Limited and Mirrabooka Investments Limited.
Jacqueline C Hey B.Com (Melb), Grad Cert (Mgmt). GAICD. Independent Non-Executive Director. Member of the Investment Committee
and Nomination Committee.
Ms Hey was appointed to the Board in July 2013. She is a Non-Executive Director of Qantas Limited, Bendigo and Adelaide Bank Limited,
AGL, Melbourne Business School Ltd and Cricket Australia. She was formerly Managing Director of Ericsson United Kingdom and Ireland
and Managing Director of Ericsson Australia and New Zealand.
Graeme R Liebelt B Ec (Hons), FAICD FTSE. Independent Non-Executive Director. Chairman of the Remuneration Committee.
Mr Liebelt was appointed to the Board in June 2012. He is Chairman of Amcor Limited and DuluxGroup Limited, a Director of Australia
and New Zealand Banking Group Limited, and a Director of Carey Baptist Grammar School. He is a Fellow of the Australian Academy of
Technological Sciences and Engineering and a Fellow of the Australian Institute of Company Directors. He was formerly Managing Director
and CEO of Orica Limited, Chairman and Director of the Global Foundation and Deputy Chairman of Melbourne Business School.
John Paterson BCom (Hons) (Melb), CPA, F Fin. Independent Non-Executive Director. Chairman of the Nomination Committee. Member
of the Remuneration Committee, Investment Committee and Audit Committee. Chairman of the Company’s subsidiary, Australian Investment
Company Services Limited.
Mr Paterson is a Company Director who was appointed to the Board in June 2005. He was a former Alternate Director of the Company
for Mr Campbell from April 1987 to June 2005. He is Chairman of Djerriwarrh Investments Limited. He was formerly a Director of Goldman
Sachs JBWere and is a former member of the Board of Guardians of Australia’s Future Fund.
David A Peever BEc MSC (Mineral Economics). Independent Non-Executive Director. Member of the Audit Committee.
Mr Peever was appointed to the Board in November 2013. He was Managing Director of Rio Tinto Australia from 2009 to 2014.
He is Chairman of Cricket Australia and Brisbane Airport Group Pty Ltd. Mr Peever is a member of the Foreign Investment Review Board.
He chaired the Minister of Defence’s First Principles Review of Defence and following the acceptance of the review by Government now chairs
the Oversight Board which helps guide implementation of the Review’s recommendations. David is also a Non-Executive Director of Naval
Group Australia and Stars Foundation, a not for profit body which promotes education of Indigenous girls.
Catherine M Walter AM LLB (Hons), LLM, MBA (Melb), FAICD. Independent Non-Executive Director. Member of the Investment Committee,
Remuneration Committee and the Audit Committee.
Mrs Walter is a solicitor and Company Director. She was appointed to the Board in August 2002. Mrs Walter is Chairman of Melbourne
Genomics Health Alliance and the Financial Adviser Standards and Ethics Authority (FASEA). Mrs Walter is a Director of the RBA’s Payments
System Board and a Trustee of the Helen Macpherson Smith Trust. She was formerly Chair of Federation Square Pty Ltd and Australian
Synchrotron Company Ltd and a Director of ASX, National Australia Bank Ltd, Orica Ltd and Melbourne Business School.
Board and Management
11
Australian Foundation Investment Company Limited Annual Report 2018
Board and Management continued
Peter J Williams Dip.All, MAICD, FAIM. Independent Non-Executive Director. Chairman of the Audit Committee. Member of the Investment
Committee and Nomination Committee. Director of the Company’s subsidiary, Australian Investment Company Services Limited.
Mr Williams was appointed to the Board in February 2010. He is Chairman of Fiig Securities Limited – MIPS Advisory Committee. He is
a Director of the NAB Trustees Services Limited (NAB Subsidiary), Cricket Victoria Ltd, Foundation for Young Australians Ltd, House with
No Steps and an Advisory Board Member of TLC Aged Care Limited. Mr Williams was formerly Chairman of Olympic Park Sports Medical
Centre Pty Ltd, Managing Director of Equity Trustees Limited, a Director of the Trustee Corporations Association of Australia, a Director
of the Australian Baseball Federation Inc and a General Manager with AXA/National Mutual in Australia and Hong Kong.
Senior Executives
Geoffrey N Driver B Ec, Grad Dip Finance, MAICD. General Manager, Business Development and Investor Relations.
Mr Driver joined the Company in January 2003. Previously, he was with National Australia Bank Ltd for 18 years in various roles covering
business strategy, marketing, distribution, investor relations and business operations. Mr Driver is Chairman of Trust for Nature (Victoria).
Andrew JB Porter MA (Hons) (St And), FCA, MAICD. Chief Financial Officer.
Mr Porter joined the Company in January 2005. He is a Chartered Accountant and has had over 20 years of experience in accounting and
financial management both in the United Kingdom with Andersen Consulting and Credit Suisse First Boston and in Australia where he was
Regional Chief Operating Officer for the Corporate and Investment Banking Division of CSFB. He is currently President of the G100, the peak
body for CFOs and a Director of Melbourne Anglican Foundation and was formerly a Non-Executive Director of the Royal Victorian Eye and
Ear Hospital.
Matthew Rowe BA (Hons), MSc Corp Gov, FGIA, FCIS. Company Secretary.
Mr Rowe joined the Company in July 2016. He is a Chartered Secretary with over 12 years of experience in corporate governance with
a particular focus in listed investment companies. He was previously a corporate governance advisor at a professional services firm which
included acting as Company Secretary for three ASX listed companies. Prior to that Matthew was the Company Secretarial Manager for
a funds management company based in the United Kingdom.
Meetings of Directors
The number of meetings of the Company’s Board of Directors and of each Board Committee held during the year ended 30 June 2018
and the numbers of meetings attended by each Director were:
BoardInvestment
Audit
Committee
Remuneration
Committee
Nomination
Committee
Eligible to
AttendAttended
Eligible to
AttendAttended
Eligible to
AttendAttended
Eligible to
AttendAttended
Eligible to
AttendAttended
TA Campbell13112119-2*2211
M Freeman^66109-2*-2*-1*
RE Barker13122118-2*-2*--
JC Hey 13132119-1*--11
GR Liebelt 1313-15*--22--
J Paterson13132119442211
DA Peever 1313-16*44----
CM Walter131321214422--
PJ Williams1313212144-1*11
* Attended meetings by invitation.
^ M Freeman appointed Managing Director on 1 January 2018.
Insurance of Directors and Officers
During the financial year, the Company paid insurance premiums to insure the Directors and Officers named in this report to the extent
allowable by law. The terms of the insurance contract preclude disclosure of further details.
12
Australian Foundation Investment Company Limited Annual Report 2018
Contents
The Directors present AFIC’s 2018 Remuneration Report which outlines key aspects of our remuneration policy and remuneration awarded
this year.
During the year our long-standing MD and CEO Ross Barker retired (he remains on the Board as a Non-Executive Director), to be replaced
by Mark Freeman, the Chief Investment Officer. Mr Freeman remains as Chief Investment Officer. His remuneration for the year is 50 per cent
as Chief Investment Officer, and 50 per cent as CEO, reflecting the fact that he started in this new role on 1 January 2018. Next year he will
be remunerated purely as CEO, not as a member of the investment team.
Shareholders should be aware that AFIC does not bear the total cost of remuneration alone. Due to agreements that the Group’s subsidiary,
Australian Investment Company Services Limited (AICS) also has with Djerriwarrh Investments Limited, Mirrabooka Investments Limited and
AMCIL Limited, a substantial proportion of the total remuneration cost (usually 30 per cent to 40 per cent, depending on the individual), is
borne by these other companies. AICS expenses the total amount and recovers the proportion borne by the investment companies through
the fees that it charges. This report, therefore, shows the total expense that is borne by AICS and that an individual receives.
The report is structured as follows:
1. Remuneration Policy and Link to Performance
2. Structure of Remuneration
3. Executive Remuneration Expense
4. Contract Terms
5. Non-Executive Director Remuneration
Appendix
A. Remuneration Governance
B. Annual Incentives: Details of Outcomes and Conditions
C. Long Term Incentives: Details of Outcomes and Conditions
D. Directors and Executives: Equity Holdings and Other Transactions
E. Detailed Performance Measures by Investment Company
1. Remuneration Policy and Link to Performance
1.1 What is Our Remuneration Policy?
AFIC is an investor in securities listed primarily in Australia and New Zealand. Our primary objectives are to grow dividends at a faster
rate than inflation and provide shareholders with capital growth over the medium to long term. To achieve this, we need to attract and
retain professional, competent and highly motivated Executives and staff through offering attractive remuneration arrangements which:
• reflect market conditions;
• recognise the skills, experience, roles, and responsibilities of the individuals;
• align with shareholder interests; and
• align with the risk management strategies.
Generally, we seek to set total remuneration at the upper or second quartile of the sectors in which we operate.
Periodically, we review our remuneration policies and plans to ensure that they continue to meet these objectives, and such a review
is currently underway.
Remuneration for the Group’s Executives has two main elements:
• fixed annual remuneration (FAR), and
• performance-related pay, being annual incentives and long term incentives (LTI).
FAR is determined with reference to levels necessary to recruit and retain staff with the relevant skills and experience in the industry
in which the Group operates. We seek external input to ensure that the FAR meets these conditions. This includes industry data provided
by the Financial Institutions Remuneration Group Inc. (FIRG) and McLagan for the financial services industry.
Remuneration Report
13
Australian Foundation Investment Company Limited Annual Report 2018
Remuneration Report continued
Through performance-related pay, the remuneration is adjusted to reflect the risks that the Company and its shareholders face and how
the Company has responded to those risks. In particular:
• the key performance indicators chosen to determine performance-related pay are those that the Company considers most relevant
to its objectives of improving shareholder wealth over the medium to long term;
• the focus is on performance over the medium to long term with only a small proportion of both annual incentives and LTI being dependent
on a single year’s performance; and
• Executives other than the Chief Investment Officer (CIO) agree to invest 50 per cent of the annual cash incentive (after tax) in AFIC shares
and shares of the other investment companies (including AMCIL Limited, Djerriwarrh Investments Limited and Mirrabooka Investments
Limited) and to hold these shares for a minimum of two years. The CIO and other members of the investment team are not required
under any of the remuneration schemes to purchase shares in the investment companies, but are encouraged to do so.
The Remuneration Committee may, at its discretion, cancel any performance rights that are yet to vest or to be tested in the event
of any negative issues that may arise, including material misstatement of the Company’s financial statements.
1.2 What is Our Target Remuneration Mix?
The target remuneration mix for Executives is as follows:
* Note: relevant for Ross Barker and for 50 per cent of Mark Freeman’s remuneration for the year ended 30 June 2018.
** Relevant for Mark Freeman for 2017 and for 50 per cent of his remuneration for the year ended 30 June 2018.
1.3 How is the Remuneration Paid in 2018 Linked to Performance?
Table 1 discloses the actual remuneration outcomes received by the Company’s Executives during the year and the LTI that may vest in future
years. These amounts are different to the statutory remuneration expense disclosed in Table 7. The Board considers the information about
remuneration outcomes in Table 1 relevant for users because the statutory remuneration expense includes accounting charges for long term
incentives that may or may not be received in future years. See Table 1 on the following page for details of the differences.
Managing Director’s Target
Remuneration Mix*
Annual incentive 29%
Long term incentive 14%
Fixed annual remuneration 57%
Other Executives’ Target
Remuneration Mix
Annual incentive 21%
Long term incentive 10%
Fixed annual remuneration 69%
Investment Team’s Target
Remuneration Mix**
Annual incentive 29%
Long term incentive 12%
Fixed annual remuneration 59%
14
Australian Foundation Investment Company Limited Annual Report 2018
Table 1: Actual Executive Remuneration Outcomes
Total
FAR
$
Other
$
1
Annual
Incentive
$
Prior Years’
LTI
Received
$
4
Dividends
on Unvested
ELTIP
Shares
$
Total
Remuneration
$
5
Annual
Incentive
Forfeited
$
3
LTI
Forfeited
$
Possible
Future LTI
(to Vest Over
Next 4 Years)
$
6
Ross Barker – Managing Director (until 31 December 2017)
2018378,180-106,843--485,023(79,132)(227,181)745,543
2017741,837-176,15694,5732,0631,014,629(195,794)(265,639)806,039
Mark Freeman – Chief Investment Officer until 31 December 2017, Managing Director from 1 January 2018
2018841,000-225,76512,320-1,079,085(194,735)(147,680)507,456
2017832,000-228,59256,225-1,116,817(187,408)(98,239)501,920
Andrew Porter – Chief Financial Officer
2018653,438-114,188--767,626(81,843)(114,839)439,362
2017637,500-90,57648,6371,125777,838(100,674)(139,188)412,578
Geoff Driver – General Manager – Business Development and Investor Relations
2018538,432-93,122--631,554(68,408)(91,746)361,964
2017525,300-73,68939,146905639,040(83,901)(111,998)337,019
Matthew Rowe – Company Secretary
2
2018235,000-40,220--275,220(30,280)-75,053
2017195,5132,00028,056--225,569(31,944)-32,280
1. Other relates to a ‘sign-on’ charge in relation to incentives foregone by Matthew Rowe in joining AFIC.
2. Joined on 11 July 2016.
3. For Mark Freeman, the amount forfeited is the difference between the target amount that would have been paid if all targets were met and the amount
paid, under the investment team LTI. The amount shown for the other Executives (excluding Mark Freeman and Matthew Rowe who was not eligible
for an award under the 2012 and 2013 LTIP) is the amount that would have been paid to them with respect to the 2013 LTIP should all targets have
been achieved (2017: 2012 LTIP). See Table 4.
The value of Annual Incentive forfeited is the difference between the target amount and the amount awarded. See Table 10.
The differences between the amounts disclosed in Table 1 and the amounts in Table 7 are as follows:
4. Prior year’s LTI received in Table 1 shows the value of performance shares that vested during the year, measured at the closing price on the day
that they were received. In respect of the investment team, it shows the cash payment received during the year for the previous financial year.
In contrast, Table 7 shows the accounting expense recognised in relation to the LTI plans during the year.
5. Total remuneration in Table 1 includes the amount of dividends paid to Executives in relation to unvested ELTIP shares during the 2017 year.
There were none outstanding in 2018. For accounting purposes, the dividends are recognised as distributions in equity and not as an expense.
6. The future LTI in Table 1 reflects potential future remuneration that may be received by the Executives over the next four years if the performance
conditions are satisfied. This includes the estimated amounts payable under the two LTIP plans assuming the performance conditions will
be satisfied at the time of vesting. For accounting purposes, these amounts are recognised as expense over the vesting period.
Information about Non-Executive Director remuneration is provided in Section 5 Non-Executive Director Remuneration.
15
Australian Foundation Investment Company Limited Annual Report 2018
Remuneration Report continued
1.3.1 Fixed Remuneration
Most Executives received modest inflationary increases in their fixed annual remuneration this year. AFIC continues to operate in a highly
competitive market, and salary levels are reviewed at least annually with the aim of remunerating its Executives to the extent required
to attract and retain Executives who are leaders in their field.
1.3.2 Performance-related Pay
This section shows:
• How Annual Incentive measurements are split between AFIC and the other investment companies:
Executives
%
CIO
%Result
AFIC investment performance24.539.75Table 3
AFIC other metrics 28.5-Table 2
AFIC qualitative assessment -13.25n/a
Percentage of annual incentive determined by AFIC performance5353
Other LIC investment performance12.516.67Table 16
Other LIC other metrics14.5-Table 16
Other LIC qualitative assessment-10.33n/a
Percentage of annual incentive determined by other LICs performance2727
Total percentage of annual incentive determined by AFIC/Other LIC performance8080
Personal metrics2020n/a
100100
See Table 5 for more details on what the measures are.
• The outcomes for the two long term incentive awards (LTI) that were tested for vesting during the year (Table 4).
Refer to sections 2.2 and 2.3 for explanations of the measures used.
Share price performance underperformed the Index as the share price moved from a premium to a discount. However, the investment
performance over the short to medium term was also below the benchmark. Only for the 10-year benchmark, which is the Company’s
preferred timeline, were returns above the Index. It should be noted that AFIC’s returns are after taxes and expenses and represent the
‘net’ return to the shareholders, whereas Index returns do not include either. Furthermore, many returns quoted by managed funds exclude
either tax or expenses, or both. The use of ‘gross returns’ mitigates the tax disparity to some extent, as it adds back franking credits to the
nominal dividend that the Index pays, and also that AFIC pays.
The MER continues to be of importance to the Board, and this continues to be below the benchmark set. The increase in payouts
by companies that AFIC invests in has also led to an increase in earnings per share, with that figure now almost completely covering
the dividend.
With regard to the other investment companies, Djerriwarrh did not meet most of its shorter or medium-term benchmarks, although in
the longer term (10 year) many, like AFIC, were exceeded. Mirrabooka’s short-term performance was affected by the strength in the small
and mid-cap resources sector, a volatile market in which it does not materially invest, but the medium and longer term figures continue
to out-perform. Some of AMCIL’s short-term metrics were above the Index as were most of its medium to short-term figures.
During the second half of the year two new senior portfolio managers have been employed by AICS.
The 2014 award under the Executive Long Term Incentive Plan was available for vesting as of 30 June 2018. However, the calculations needed
to determine how much actually vests are not performed until after the date of the Annual Report. Therefore, the full amount that may vest is
shown, and the actual settlement of the 2014 award will take place in the year ended 30 June 2019. The actual amount settled will be reported
in the relevant year. The 2013 award was available for vesting but was forfeited in its entirety due to the hurdles not having been met. It is this
forfeiture which is reflected in Table 1 above.
For the investment team whose LTIP encompasses all of the investment companies (unlike Executives, for which only the AFIC performance
is counted) the recent short-term underperformance was reflected in the figures which are measured over four years for all of the investment
companies. Consequently, all LTIP available under this metric as forfeited. Detailed information about the performance of each investment
company is provided in Section E of the Appendix (Table 16).
16
Australian Foundation Investment Company Limited Annual Report 2018
Table 2: Executive Team Performance (Excluding Investment Returns)
Performance Measure
Benchmark
Result
AFIC
Result
Comparison to
Benchmark
Total shareholder return (14.6 per cent)
Share price return – one year13.0%10.3%Unfavourable
Share price return – three years9.0%4.4%Unfavourable
Share price return – five years10.0%6.7%Unfavourable
Share price return – eight years9.4%7.8%Unfavourable
Share price return – ten years6.4%6.5%Favourable
Growth in net operating result per share (8.3 per cent)2.0%9.6%Favourable
Management expense ratio compared to base of 0.19 per cent (5.6 per cent)0.19%0.14%Favourable
Outcome
Achieved
Partially achieved
Not achieved
Table 3: Investment Team Performance (Including Investment Returns Used for Executives)
Measure
Benchmark
Result
AFIC
Result
Comparison to
Benchmark
Investment return – one year13.0%11.3%Unfavourable
Investment return – three years9.0%7.3%Unfavourable
Investment return – five years10.0%8.7%Unfavourable
Investment return – eight years9.4%9.2%Unfavourable
Investment return – ten years6.4%7.0%Favourable
Gross return – one year14.6%12.7%Unfavourable
Gross return – three years10.7%8.7%Unfavourable
Gross return – five years11.6%10.1%Unfavourable
Gross return – eight years11.1%10.7%Unfavourable
Gross return – ten years8.0%8.5%Favourable
Reward to risk – three years1
st
qtr123
rd
/155 4
th
qtrUnfavourable
Reward to risk – five years 1
st
qtr115
th
/147 3
rd
qtrUnfavourable
Reward to risk – eight years1
st
qtr76
th
/121 3
rd
qtrUnfavourable
Reward to risk – ten years1
st
qtr43
rd
/104 2
nd
qtrUnfavourable
Outcome
Achieved
Partially achieved
Not achieved
17
Australian Foundation Investment Company Limited Annual Report 2018
Remuneration Report continued
Table 4: Vesting and Forfeiture of Long Term Incentives During the Year*
Award Date
Assessment
Dates
Measure
Tested 2017
Benchmark
Result
AFIC
Result
%
Vested
%
Forfeited
ELTIP – performance rights*
1 July 201330 June 2017Total gross shareholder return10.6%7.4%0%50%
Total portfolio return9.2%7.6%0%50%
Investment team LTI
1 July 201430 June 2018Gross return9.8%7.9%0%100%
* Of the rights awarded on 1 July 2013, 100 per cent were forfeited as the targets were not achieved. Under the investment team LTI, all amounts are forfeited.
2. Structure of Remuneration
2.1 Fixed Annual Remuneration (FAR)
The FAR component of an Executive’s remuneration comprises base salary, superannuation guarantee contributions and fringe benefits.
Executives can elect to receive a portion of their FAR in form of additional superannuation contributions or fringe benefits. This will not affect
the gross amount payable by the Group. Dividends received by the Executives in relation to unvested shares awarded under the old ELTIP
are taken into account when setting remuneration levels.
2.2 Annual Incentive
There are two annual incentive plans, one for the Executives (excluding the CIO) and one for the investment team (including the CIO).
As the roles and objectives of the Senior Executives and investment team are different, it is desirable to provide separate incentives
to focus each team on the different business-critical measures they are able to impact. Table 5 below outlines the key terms and conditions.
Table 5: Annual Incentives – Key Terms and Conditions
Targeted % of FAR
Managing Director
50%
Other Executives
30%
Investment Team
50%
ObjectivesAlign remuneration with the creation of shareholder wealth over
the past year and over a longer period.
Measures reflect the management of the Group and the other
investment companies, as well as the key investment returns
that reflect the creation of shareholder wealth.
Align remuneration with
the outcomes of the Group’s
investment objectives over
a period of between one
and 10 years.
The key metrics are for portfolio
performance, and also include
dividends paid and franking
credits, as well as actual portfolio
return and the risk profile of
the investments.
18
Australian Foundation Investment Company Limited Annual Report 2018
Targeted % of FAR
Managing Director
50%
Other Executives
30%
Investment Team
50%
Performance measures• Company performance (43 per cent)
• Investment performance (37 per cent)
• Personal objectives (20 per cent)
• See Table 11 for details
See Table 12
Relative weightings of
investment companies
for investment related
performance
AFIC: 53 per cent
Djerriwarrh Investments Limited: 16 per cent
AMCIL Limited: 4 per cent
Mirrabooka Investments Limited: 7 per cent
Personal objectives: 20 per cent
Delivery of awardIncentive is paid in cash, but 50 per cent of the after-tax amount
received is used by recipients to acquire shares in AFIC and the
other investment companies, which they agree to hold for minimum
of two years.
Paid in cash or shares
or combination of both,
at discretion of the
Remuneration Committee.
Performance measured
in 2018
Some longer-term measures achieved but shorter-term measures
with the exception of the MER and profit per share were not
(see Tables 2 and 3 above).
Some longer-term measures
achieved but shorter-term
measures were not
(see Tables 2 and 3 above).
Outcomes for 2018
(see Table 10 for details)
57.5 per cent (Ross Barker)
58.8 per cent (Mark Freeman)
Average 57.7 per cent48.5 per cent (CIO)
The performance measures of each annual incentive plan are reviewed by the Remuneration Committee. The Committee may, from time
to time, revise the performance conditions and weightings in order to better meet the objectives of the annual incentive policies. They may
also change or suspend any part of the incentive payment arrangements. If relevant targets are not achieved but performance is close to the
target, some of the incentive may be paid. This is noted as ‘partially achieved’ in Table 3. Where stretch levels of performance are achieved
above target, then higher amounts may be paid. To date, total annual incentives paid to each Executive have never exceeded target.
For more detailed information about the Annual Incentive performance conditions and outcomes for 2018, please refer to Section B Annual
Incentives: details of outcomes and conditions in the Appendix.
2.3 Long Term Incentive Plans (LTIP)
As for the annual incentives, there are also two LTI plans, one for the Executives (excluding the CIO) which is called the ELTIP, and one
for the investment team (including the CIO). Table 6 outlines the purpose and the key terms and conditions of each plan.
Table 6: Long Term Incentives – Key Terms and Conditions
Executive ELTIP (Performance Rights)Investment Team LTI Plan
Target50 per cent of targeted STI 20 per cent of FAR
ObjectivesAlign remuneration with growth in shareholder wealth over a forward looking period of four years.
Reward outperformance.
Performance measuresSee Table 15 in the Appendix for details. See Table 15 in the Appendix for details.
Performance for awards tested
in 2018 (Table 4)
July 2013: 0 per cent vested (see Table 4).July 2014: 0 per cent vested (see Table 4).
For more detailed information about the LTI plans and their performance conditions, including vesting schedules and outcomes for 2018,
please refer to Section C Long Term Incentives: details of outcomes and conditions in the Appendix.
19
Australian Foundation Investment Company Limited Annual Report 2018
Remuneration Report continued
3. Executive Remuneration Expense
This section discloses the remuneration expense recognised under accounting standards for each Executive (Table 7). These amounts are
different to the remuneration outcomes disclosed in Table 1 as noted in that table.
Table 7: Remuneration Expense
Short TermShort TermShort TermPost EmploymentShort TermLong-term Share-based Payments
Base
Salary
$
Non-cash
Benefits
1
$
Other
4
$
Superannuation
$
Total Fixed
Remuneration
$
Annual
Incentives
$
LTI Cash-settled
$
3
Other Long-term
Payments
$
3
Total
Remuneration
$
% Fixed/
Performance
Related
Ross Barker – Managing Director (until 31 December 2017)
2018359,4506,230-12,500
378,180106,843(9,892)-475,13180%/20%
2017701,43610,401-30,000741,837176,15638,830-956,82378%/22%
Mark Freeman – Chief Investment Officer until 31 December 2017, Managing Director from 1 January 2018
2018816,000--25,000
841,000225,76521,025(16,625)1,071,16579%/21%
2017807,000--25,000832,000228,592-64,1611,124,75374%/26%
Andrew Porter – Chief Financial Officer
2018628,438--25,000
653,438114,18810,899-778,52584%/16%
2017612,500--25,000637,50090,57619,386-747,46285%/15%
Geoff Driver – General Manager – Business Development and Investor Relations
2018513,432--25,000
538,43293,12211,839-643,39384%/16%
2017495,300--30,000525,30073,68916,901-615,89085%/15%
Matthew Rowe – Company Secretary
2
2018214,612--20,388235,00040,22019,643-294,86380%/20%
2017178,377-2,00017,136197,51328,0568,070-233,63985%/15%
1. Non-cash benefits relate to the provision of a car parking space.
2. Joined effective 11 July 2016.
3. Includes amounts credited for non-vesting.
4. Other relates to ‘sign-on’ charge in relation to incentives foregone by Matthew Rowe in joining AFIC.
20
Australian Foundation Investment Company Limited Annual Report 2018
3. Executive Remuneration Expense
This section discloses the remuneration expense recognised under accounting standards for each Executive (Table 7). These amounts are
different to the remuneration outcomes disclosed in Table 1 as noted in that table.
Table 7: Remuneration Expense
Short TermShort TermShort TermPost EmploymentShort TermLong-term Share-based Payments
Base
Salary
$
Non-cash
Benefits
1
$
Other
4
$
Superannuation
$
Total Fixed
Remuneration
$
Annual
Incentives
$
LTI Cash-settled
$
3
Other Long-term
Payments
$
3
Total
Remuneration
$
% Fixed/
Performance
Related
Ross Barker – Managing Director (until 31 December 2017)
2018359,4506,230-12,500
378,180106,843(9,892)-475,13180%/20%
2017701,43610,401-30,000741,837176,15638,830-956,82378%/22%
Mark Freeman – Chief Investment Officer until 31 December 2017, Managing Director from 1 January 2018
2018816,000--25,000
841,000225,76521,025(16,625)1,071,16579%/21%
2017807,000--25,000832,000228,592-64,1611,124,75374%/26%
Andrew Porter – Chief Financial Officer
2018628,438--25,000
653,438114,18810,899-778,52584%/16%
2017612,500--25,000637,50090,57619,386-747,46285%/15%
Geoff Driver – General Manager – Business Development and Investor Relations
2018513,432--25,000
538,43293,12211,839-643,39384%/16%
2017495,300--30,000525,30073,68916,901-615,89085%/15%
Matthew Rowe – Company Secretary
2
2018214,612--20,388235,00040,22019,643-294,86380%/20%
2017178,377-2,00017,136197,51328,0568,070-233,63985%/15%
1. Non-cash benefits relate to the provision of a car parking space.
2. Joined effective 11 July 2016.
3. Includes amounts credited for non-vesting.
4. Other relates to ‘sign-on’ charge in relation to incentives foregone by Matthew Rowe in joining AFIC.
21
Australian Foundation Investment Company Limited Annual Report 2018
Remuneration Report continued
4. Contract Terms
Each Executive is employed under an open-ended contract, the terms of which can be varied by mutual agreement. There is no provision
for cessation of employment. Either the Company or the Executive can give notice in accordance with statutory requirements (typically
four weeks’ notice; this can be altered at the Board’s discretion but in no case to be more than 12 months). There are no specific payments
to be made as a consequence of termination beyond those required by statute. Should there be any payments, these will be at the
Board’s discretion.
Material breaches of the terms of employment will normally result in the termination of an Executive’s employment.
5. Non-Executive Director Remuneration
Shareholders approve the maximum aggregate amount of remuneration per year available to be allocated between Non-Executive Directors
(NEDs) as they see fit. In proposing the amount for consideration by shareholders, the Remuneration Committee takes into account the time
demands made on Directors together with such factors as the general level of fees paid to Australian corporate directors.
For NEDs charged with the responsibility of oversight of the Company’s activities, a fixed annual fee is paid with no element of performance-
related pay.
The amount approved at the AGM in October 2007 was $1,000,000 per annum, which is the maximum amount that may be paid in total
to all NEDs. Retirement allowances for Directors were frozen at 30 June 2004.
NEDs do not receive any performance-based remuneration. On appointment, the Company enters into a deed of access and indemnity
with each NED. There are no termination payments due at the cessation of office, and any Director may retire or resign from the Board,
or be removed by a resolution of shareholders.
The amounts paid to each NED, and the figures for the corresponding period, are set out in Table 8.
22
Australian Foundation Investment Company Limited Annual Report 2018
Table 8: Non-Executive Director Remuneration
Primary
(Fee/Base Salary)
$
Post Employment
(Superannuation)
$
Total
Remuneration
$
TA Campbell AO – Chairman
2018168,95016,050185,000
2017164,38415,616180,000
RE Barker – Non-Executive Director (Non-Executive from 1 January 2018)
201843,3794,12147,500
2017---
JC Hey – Non-Executive Director
201884,4758,02592,500
201782,1927,80890,000
GR Liebelt – Non-Executive Director
201884,4758,02592,500
201782,1927,80890,000
J Paterson – Non-Executive Director
201884,4758,02592,500
201782,1927,80890,000
DA Peever – Non-Executive Director
201884,4758,02592,500
201782,1927,80890,000
CM Walter AM – Non-Executive Director
201884,4758,02592,500
201782,1927,80890,000
PJ Williams – Non-Executive Director
201884,4758,02592,500
201782,1927,80890,000
Total Remuneration of Non-Executive Directors
2018719,17968,321787,500
2017657,53662,464720,000
Amounts Payable on Retirement
The amounts payable to the current NEDs who were in office at 30 June 2004, which will be paid when they retire, are set out in Table 9.
These amounts were expensed in prior years as the retirement allowances accrued.
Table 9: Non-Executive Director Retirement Allowance
Amount Payable on Retirement
$
TA Campbell AO114,500
CM Walter AM 42,385
Total156,885
23
Australian Foundation Investment Company Limited Annual Report 2018
Remuneration Report continued
Appendix
A. Remuneration Governance
Responsibilities of the Board and the Remuneration Committee
It is the Board’s responsibility to review and approve the recommendations of the Remuneration Committee.
For more information, the Charter of the Board is available on the Company’s website.
The Remuneration Committee’s primary responsibilities include:
• reviewing the level of fees for NEDs and the Chairman;
• reviewing the Managing Director’s remuneration arrangements;
• evaluating the Managing Director’s performance;
• reviewing the remuneration arrangements for other Senior Executives;
• monitoring legislative developments with regards to Executive remuneration; and
• monitoring the Group’s compliance with requirements in this area.
For more information, the Charter of the Remuneration Committee is available on the Company’s website.
The Remuneration Committee is composed of four NEDs (GR Liebelt (Chairman), TA Campbell AO, J Paterson and CM Walter AM)
and meets at least twice per year.
Policy on Hedging
The Company provides no lending or leveraging arrangements to its Executives, who are prohibited by Company policy from entering
into hedging arrangements that mitigate the possibility that ‘at risk’ incentive payments may not vest.
Use of Remuneration Consultants
The Remuneration Committee has appointed Ernst & Young to provide it with advice about Executive Remuneration. The Remuneration
Committee uses Ernst & Young from time to time, as it sees fit, to independently test management’s recommendations.
Specifically, Ernst & Young would provide advice on:
(a) proposed remuneration levels and remuneration structure for the Managing Director;
(b) proposed remuneration levels and remuneration structure for the Managing Director’s direct reports; and
(c) proposed remuneration levels of NEDs.
During the year, the Remuneration Committee engaged Ernst & Young to provide advice on the remuneration levels of Non-Executive
Directors. Ernst & Young received $13,030 (including GST) for this report.
The Board is satisfied that these arrangements seek to ensure that any remuneration recommendations made by remuneration consultants
are free from influence by management.
24
Australian Foundation Investment Company Limited Annual Report 2018
The use of the remuneration advisers by management is limited to specific areas to seek to ensure that the independent advice
that the Remuneration Committee receives is not perceived as having been compromised by management.
Ernst & Young are separately engaged by management to report on the following:
(a) trends in remuneration for the sectors in which the Group operates (provision of market practice data);
(b) the relative positioning of the remuneration of the Group’s employees (including Executives) within those sectors;
(c) proposed remuneration levels for employees other than designated Senior Executives; and
(d) advice on the operation of the incentive plans (e.g., tax and accounting advice).
The Managing Director then makes recommendations to the Remuneration Committee with regards to the remuneration levels and structure
of the KMP.
Ernst & Young also reviews the calculations used in determining the vesting of awards and certifies them as being correct and in accordance
with the terms and conditions of the ELTIP.
Ernst & Young were paid $0 during the year ended 30 June 2018 for other general remuneration advice including confirmation of vesting
calculations (2017: $3,965) and during the year the Group also paid $245,723 for other professional advice received, which included acting
as the internal auditor for AICS and general taxation and accountancy advice (2017: $115,880)(all including GST).
Ernst & Young were remunerated on an invoiced basis, based on work performed.
The Company also participates in the annual McLagan and FIRG surveys of fund managers to understand current remuneration levels
and practices.
B. Annual Incentives: Details of Outcomes and Conditions
Table 10 below shows the annual incentives paid to individual Executives as a result of AFIC’s and the other investment companies’
performance on financial metrics and the individual’s achievement of their own personal objectives. Tables 11 and 12 set out the
detailed terms and conditions of the annual incentives. For a high-level summary see Section 2.2 and Table 5 of the main part
of the Remuneration Report.
Table 10: Annual Incentive Outcomes
ExecutivePercentage of Target Paid$ PaidPercentage of Target Forfeited$ Forfeited
Ross Barker57.4%$106,84342.6%$79,132
Mark Freeman53.7%$225,76546.3%$194,735
Andrew Porter58.2%$114,18841.8%$81,843
Geoff Driver57.7%$93,12242.3%$68,408
Matthew Rowe57.1%$40,22042.9%$30,280
25
Australian Foundation Investment Company Limited Annual Report 2018
Remuneration Report continued
Table 11: Executive Annual Incentive Performance Conditions
Performance Areas and Relative WeightingPerformance MeasuresObjectives These Measures Aim to Achieve
Company performance (43 per cent)
The relevant weightings of the investment
companies are:
• AFIC: 66.25 per cent
• Djerriwarrh Investments Limited: 20 per cent
• AMCIL Limited: 5 per cent
• Mirrabooka Investments Limited: 8.75 per cent
• Relative total shareholder return (TSR):
TSR is the movement in share price plus
the dividends paid by the Company
assumed to be reinvested. TSR
performance is measured against the
S&P/ASX 200 Accumulation Index over
1, 3, 5, 8 and 10-year periods (Combined
Mid Cap 50 and Small Ordinaries
for Mirrabooka).
• TSR: This is a direct measure of
the increase in shareholder’s wealth
against the performance of the Index.
• Growth in net profit per share:
measured against CPI.
• Growth in net profit per share reflects the
ability of the Company to meet its stated
aim of ‘paying out dividends which, over
time, grow faster than the rate of inflation’.
• Management expense ratio (MER):
measured against prior years’ results
or, in the case of AFIC, measured
against a base of 0.19 per cent.
• MER reflects the costs of running
the Company.
Investment performance (37 per cent)The NEDs consider that the metrics used equate, over the medium to long term,
with the stated objectives of the Company, namely ‘to provide attractive total returns
and pay dividends, which, over time, grow faster than the rate of inflation’.
The relevant weightings of the investment
companies are:
• AFIC: 66.25 per cent
• Djerriwarrh Investments Limited: 20 per cent
• AMCIL Limited: 5 per cent
• Mirrabooka Investments Limited:
8.75 per cent
• Relative investment return: measure of the
return on the portfolio invested (including
cash) over the previous 1, 3, 5, 8 and
10 years, relative to the S&P/ASX 200
Accumulation Index (Combined Mid Cap
50 and Small Ordinaries for Mirrabooka).
• Investment return: reflects the returns
generated by the mix of the investments
that the Company has invested in. These
reflect the value added to shareholders
wealth by the investment decisions
of the Company.
• Gross return (GR): measure of the
movement in the net asset backing of the
Company (per share) plus the dividends
assumed to be reinvested grossed up for
franking credits over the previous 1, 3, 5,
8 and 10 years. This return is compared
to the S&P/ASX 200 Accumulation Index
grossed up for franking credits (Combined
Mid Cap 50 and Small Ordinaries for
Mirrabooka).
• Gross return (GR): reflects the movement
in the value of the underlying portfolio over
the period with the additional recognition
of the importance of franking credits.
• Risk/reward return: This is a measure
over 3, 5, 8 and 10 years of the past
performance of the Company, compared
to the performance of the Company’s
peers (i.e. investment funds) as reported
by Mercer. (Note: this measure is used for
AFIC’s performance only, reflecting that
Company’s focus on producing stable
returns over the medium to long term).
• Risk/reward return: best reflects the
return of the portfolio against the risks
to shareholders of investing in the
companies selected.
Note: The Remuneration Committee has
discretion to determine, at the time of the
review, what it considers to be the appropriate
level of return to be used.
26
Australian Foundation Investment Company Limited Annual Report 2018
Performance Areas and Relative WeightingPerformance MeasuresObjectives These Measures Aim to Achieve
Personal objectives (20 per cent)Includes:
• advice to the Board;
• succession planning;
• management of staff;
• risk management;
• promotion of the corporate culture; and
• satisfaction of key internal stakeholders.
These measures all contribute to
the efficient running of the Group,
and the other investment companies,
enhancing investment outcomes.
Personal objectives are included in incentive
calculations to encourage outperformance
on non-financial metrics. These metrics
can be important determinants of business
success in the medium term. The Managing
Director reviews the performance of each
Executive with the Remuneration Committee,
and the Remuneration Committee alone
determines how the Managing Director
is performing against these objectives.
Table 12: Investment Team Annual Incentive Performance Conditions
Performance Areas and Relative WeightingPerformance MeasuresObjectives These Measures Aim to Achieve
Investment return
The relevant weightings of the investment
companies are:
• AFIC: 66.25 per cent
• Djerriwarrh Investments Limited: 20 per cent
• AMCIL Limited: 5 per cent
• Mirrabooka Investments Limited:
8.75 per cent
• Measure of the return on the portfolio
invested (including cash) over the previous
1, 3, 5, 8 and 10 years. Measured relative
to the S&P/ASX 200 Accumulation
Index (Combined Mid Cap 50 and
Small Ordinaries for Mirrabooka).
• Investment return reflects the returns
generated by the mix of the investments
that the Company has invested in. These
reflect the value added to shareholders’
wealth by the investment decisions
of the Company.
Gross return
The relevant weightings of the investment
companies are:
• AFIC: 66.25 per cent
• Djerriwarrh Investments Limited: 20 per cent
• AMCIL Limited: 5 per cent
• Mirrabooka Investments Limited:
8.75 per cent
• Measure of the movement in the net asset
backing of the Company (per share) plus
the dividends assumed to be reinvested
grossed up for franking credits over the
previous 1, 3, 5, 8 and 10 years. This
return is compared to the S&P/ASX
200 Accumulation Index grossed up for
franking credits (Combined Mid Cap 50
and Small Ordinaries for Mirrabooka).
• Gross return reflects the movement in
the value of the underlying portfolio over
the period with the additional recognition
of the importance of franking credits.
Risk/reward return
Note: this measure is used for AFIC’s
performance only.
• This is a measure over the previous 3, 5,
8 and 10 years of Company performance.
It is calculated by using the movement
in the net asset backing of the Company
(per share) plus the dividends reinvested
divided by the standard deviation of the
movement in the net asset backing of the
Company (per share) plus the dividends
reinvested over the same period.
This is compared to the performance of
the Company’s peers (i.e. investment funds)
as reported by Mercer.
• Risk /reward return best reflects the
return of the portfolio against the risks to
shareholders of investing in the companies
selected, therefore aligning Executives
to shareholders.
Reflects AFIC’s focus on producing stable
returns over the medium to long term.
Note: The Remuneration Committee
has discretion to determine, at the time
of the review, what it considers to be the
appropriate level of return to be used.
Income generation• This is relevant for measuring Djerriwarrh
Investments Limited’s operating earnings
as a percentage of the average investable
assets. It is a one-year measure only,
and measures the ability of the investment
team to generate returns from the assets
of Djerriwarrh Investments Limited.
It is compared to the return generated
in prior years.
• Reflects the objective for Djerriwarrh
Investments Limited to create an enhanced
income from its portfolio.
27
Australian Foundation Investment Company Limited Annual Report 2018
Remuneration Report continued
Performance Areas and Relative WeightingPerformance MeasuresObjectives These Measures Aim to Achieve
Qualitative measures • Investment process – including the
identification of quality stocks.
• Diversifying the portfolio – for example,
developing a ‘nursery’ of smaller,
potential growth stocks.
• These qualitative processes provide
the opportunities for the future growth
of the Company’s investments.
Personal objectives• Includes research, stock ideas,
portfolio management, meeting
participation, interaction with staff
and presentation skills.
Personal objectives are included in incentive
calculations to encourage outperformance
on non-financial metrics. These metrics
can be important determinants of business
success in the medium term. The Managing
Director reviews the performance of each
member of the investment team with
the Remuneration Committee.
C. Long Term Incentives: Details of Outcomes and Conditions
This section shows the outstanding cash bonuses under the new ELTIP and the investment team LTI schemes (Table 13). It also explains the
detailed terms and conditions of the two LTIs that are currently in operation (Table 14). For a high-level overview see Section 2.3 of the main
body of the Remuneration Report.
Table 13: Vesting of ELTIP and Investment Team LTI
ELTIP Award Date
Vesting Date
Subject to
Performance
Hurdles
Value at
Award Date
$
Number
of Rights
Awarded
Value Per
Right
$
Award Vested
for the Year
Number of
Rights/%
Value Yet to Vest
30 June 2018
$
Ross Barker – Managing Director (until 31 December 2017)
1 July 201330 June 2017$182,00033,562$5.4230/0%-
1 July 201430 June 2018$178,75029,707$6.017-$214,799
1 July 201530 June 2019$182,32529,459$6.189-$205,269
1 July 201630 June 2020$185,97533,205$5.601-$221,924
1 July 201730 June 2021$92,88816,153$5.757-$103,551
Mark Freeman – Managing Director (from 1 January 2018)
1 January 201830 June 2021$85,00014,765$5.757-$94,656
28
Australian Foundation Investment Company Limited Annual Report 2018
ELTIP Award Date
Vesting Date
Subject to
Performance
Hurdles
Value at
Award Date
$
Number
of Rights
Awarded
Value Per
Right
$
Award Vested
for the Year
Number of
Rights/%
Value Yet to Vest
30 June 2018
$
Andrew Porter – Chief Financial Officer
1 July 201330 June 2017$92,00016,965$5.4230/0%-
1 July 201430 June 2018$92,00015,290$6.017-$110,554
1 July 201530 June 2019$93,75015,148$6.189-$105,548
1 July 201630 June 2020$95,62517,074$5.601-$114,109
1 July 201730 June 2021$98,01617,026$5.757-$109,151
Geoff Driver – General Manager – Business Development and Investor Relations
1 July 201330 June 2017$73,50013,554$5.4230/0%-
1 July 201430 June 2018$75,75012,589$6.017-$91,027
1 July 201530 June 2019$77,25012,482$6.189-$86,971
1 July 201630 June 2020$78,79514,069$5.601-$94,026
1 July 201730 June 2021$80,76514,030$5.757-$89,940
Matthew Rowe – Company Secretary (joined 11 July 2016)
11 July 201630 June 2020$30,0005,356$5.601-$35,799
1 July 201730 June 2021$35,2506,123$5.757-$39,254
Investment Team LTI
Award Date
Vesting Date
Subject to
Performance
Hurdles
Target
Amount
$
Value Yet to Vest
30 June 2018
$$%
Mark Freeman – Chief Investment Officer (investment team LTI) – Until 31 December 2017
1 July 201430 June 2018$160,00000%-
1 July 201530 June 2019$163,200--$163,200
1 July 201630 June 2020$166,400--$166,400
1 July 201730 June 2021$83,200--$83,200
See Table 1 for actual amounts vested and Table 4 for details of vesting calculations.
Award Vested for the Year
29
Australian Foundation Investment Company Limited Annual Report 2018
Remuneration Report continued
The value of the outstanding ELTIP performance rights as in the table above was estimated at 30 June 2018 using the Total Share Return (TSR
– which includes dividends reinvested) based on a closing price on 29 June 2018 of AFI shares of $6.16 (the TSR for AFI at 30 June 2018 was
4.0 per cent p.a. for four years, 4.4 per cent p.a. for three years, 9.1 per cent for two years and 10.3 per cent for one year). The value of the
investment team LTI that is yet to vest is the target amount. Actual amounts awarded may exceed this amount, depending on performance
over the four-year vesting period.
During the year ended 30 June 2018, Mark Freeman received $12,320 in respect of the four years ended 30 June 2017, which was
7.7 per cent of the target amount of $160,000. The benchmark annualised return for the period was 10.9 per cent whilst AFIC’s return
was 9.4 per cent. As noted last year, Mirrabooka’s performance was such that although AFIC narrowly under-performed, a proportion
of the award still vested. No vesting of LTIP will be made in the year ended 30 June 2019.
Table 14 – Long Term Incentive Plans
ELTIP (Performance Rights)
Nature of grantRights to receive cash that must then be used by the Executives to acquire AFIC shares on market.
Performance conditions1. Total gross shareholder return (50 per cent): the movement in the AFIC share price and the Index
price, grossed up to reflect the value of franking credits. This is compared to that of the market
such that only outperformance is rewarded. Outperformance of this Index over time should be
an indicator of the value added by the Company to shareholders’ wealth. Both the Company’s
return and the Index return are smoothed over 30 days to remove excess volatility.
2. Total portfolio return (50 per cent): the movement in the net asset backing of the Company (per
share) plus the dividends paid by the Company reinvested. This compares AFIC’s investment
performance against that of other fund managers (based on the Mercer Investment Consulting
Survey of Australian Retail Fund Managers which provides the industry benchmark of funds
management performance over the relevant period), so that only outperformance relative
to its peers is rewarded.
Vesting schedule: total gross
shareholder return
Company Performance Relative
to Gross Accumulation Index
Percentage of rights vesting
Underperformance 0 per cent
< or = 20 per cent outperformanceStraight line between 25 per cent and 50 per cent
> 20 per cent outperformance50 per cent
Vesting schedule: total portfolio
return
Company performance Percentage of rights vesting
Less than median performance0 per cent
Median to < or = 75th percentileStraight line between 25 per cent and 50 per cent
> 75 per cent percentile50 per cent
Valuation of performance rightsAt 1 July each year, the 30-day volume weighted average price of AFIC shares up to, but not including
1 July will be calculated. The amount of ELTIP available will then be divided by this average price
to determine the number of performance rights that may vest in four years’ time.
The value of the performance rights will be adjusted each year by the total shareholder return for
the year, calculated based on the 30-day volume weighted average price of AFIC shares up to 1 July.
At vesting time, the value of the performance rights that will vest is converted to cash, based
on the value of the rights at that time.
Accounting treatmentUnder current accounting standards, the ELTIP scheme is classified as a cash-settled scheme.
The expected amount payable upon vesting must therefore be estimated each year and adjusted not
only for the likelihood of vesting, but also for changes in the value of the performance rights. In the
first year, 25 per cent of the expected amount payable will be booked as an expense. At the end of the
second year, 50 per cent of the new expected final value less the amount booked in the previous year
will be booked. At the end of the third year, 75 per cent of the total, estimated final value less amounts
previously expensed will be booked. At the end of the fourth year, the actual liability will be calculated
and a balancing adjustment made.
30
Australian Foundation Investment Company Limited Annual Report 2018
Investment Team LTI Plan
Nature of grantCash or shares, at discretion of the Company.
Performance conditionGross return which measures the movement in the net asset backing of the Company (per share)
plus the dividends assumed to be reinvested grossed up for franking credits. This return is compared
to the relevant accumulating index as set out below.
Indices which investment
portfolios are assessed against
Investment portfolioRelevant accumulation Index
AFIC (60 per cent)S&P/ASX 200 Accumulation Index, grossed
up for franking credits
Djerriwarrh Investments Limited (25 per cent)S&P/ASX 200 Accumulation Index, grossed
up for franking credits
Mirrabooka Investments Limited (10 per cent)S&P/ASX Mid Cap 50 Accumulation Index
and the S&P/ASX Small Ordinaries Accumulation
Index, grossed up for franking credits
AMCIL Limited (5 per cent)S&P/ASX 200 Accumulation Index, grossed
up for franking credits
Vesting schedule: Company
gross return
Company performance relative to the
relevant accumulation index
Percentage of rights vesting
< 90 per cent performance0 per cent
90 – 99 per cent performanceBoard discretion
> 100 per cent up to 110 per cent performanceStraight line between 50 per cent and 100 per cent
> 110 per cent up to 120 per cent performanceStraight line between 100 per cent and 150 per cent
120 per cent + performance150 per cent
D. Directors and Executives: Equity Holdings and Other Transactions
Tables 15 sets out reconciliations of shares and convertible notes issued by the Group and held directly, indirectly or beneficially
by Non-Executive Directors and Executives of the Group, or by entities to which they were related.
Table 15: Shareholdings of Directors and Executives
Opening BalanceChanges During YearClosing Balance
TA Campbell409,26212,469421,731
RM Freeman139,2222,961142,183
RE Barker897,2541,287898,541
JC Hey19,18977519,964
GR Liebelt236,89381,570318,463
J Paterson557,23713,200570,437
DA Peever23,8142,99526,809
CM Walter311,16912,572323,741
PJ Williams67,431-67,431
GN Driver129,9523,076133,028
MJ Rowe1978201,017
AJB Porter175,5702,875178,445
31
Australian Foundation Investment Company Limited Annual Report 2018
Remuneration Report continued
Other Arrangements with Non-Executive Directors
Non-Executive Directors Ross Barker, John Paterson and Catherine Walter have rented office space and, for Ross Barker and John Paterson,
a parking space from the Group at commercial rates during the year. Sub-lease rental income (included in revenue) received or receivable,
excluding GST, by the Group during the year was:
Rental Income Received/Receivable
$
RE Barker10,098
J Paterson26,047
CM Walter14,169
E. Detailed Performance Measures by Investment Company
Table 16 below shows the performance of AFIC and the other investment companies over the past five years, including details of total
shareholder return (TSR), total portfolio return (TPR) and gross return (GR). These measures, which represent growth in shareholder wealth,
determine the vesting of AFIC’s LTI plans to Executives and the investment team.
Table 16: Detailed Performance Measures for AFIC and the Other Investment Companies
Year Ending 30 June
10-year
Return
8-year
Return
5-year
Return
4-year
Return
3-year
Return 20182017201620152014
Comparative returns
S&P/ASX 200 Accumulation
Return6.4%9.4%10.0%8.2%9.0%13.0%14.1%0.6%5.7%17.4%
Gross S&P/ASX 200
Accumulation Return8.0%11.1%11.6%9.8%10.7%14.6%15.7%2.2%6.8%19.2%
Combined Midcap 50
and Small Ordinaries
Accumulation Return
(used for Mirrabooka
Investments Limited)4.9%9.1%14.0%13.3%16.0%19.3%12.7%16.1%5.6%16.9%
Gross Combined Midcap
50 and Small Ordinaries
Accumulation Return (used
for Mirrabooka Investments
Limited)5.9%10.2%15.1%14.4%17.1%20.4%13.8%17.2%6.3%18.0%
AFIC
Total shareholder return6.5%7.8%6.7%4.0%4.4%10.3%8.0%-4.4%2.8%17.9%
Total portfolio return6.5%8.8%8.2%6.0%6.8%10.8%11.7%-1.6%3.9%17.3%
Growth in net operating
result per share1.1%3.3%0.8%-0.8%-4.9%9.6%-9.6%-12.4%11.8%7.5%
Management expense ration/an/an/an/an/a0.14%0.14%0.16%0.16%0.17%
Risk/reward return
1
43
rd
/10476
th
/121115
th
/147123
rd
/152123
rd
/155105
th
/156119
th
/169n/a
2
139
th
/17636
th
/177
Gross return8.5%10.7%10.1%7.9%8.7%12.7%13.7%0.2%5.6%19.2%
Investment return7.0%9.2%8.7%6.6%7.3%11.3%12.3%-1.0%4.6%17.0%
1. This represents the Company’s ranking in the Mercer IDPS Australian Share Universe – i.e. 10th out of 71 funds. The period used is Year to May.
2. n/a as cannot be calculated when return is negative.
32
Australian Foundation Investment Company Limited Annual Report 2018
Year Ending 30 June
10-year
Return
8-year
Return
5-year
Return
4-year
Return
3-year
Return 20182017201620152014
Djerriwarrh Investments Limited
Total shareholder return4.0%4.4%1.3%-2.4%-4.8%-2.8%-3.8%-7.7%5.2%17.4%
Total portfolio return4.9%7.0%6.3%4.2%5.5%8.8%13.0%-4.5%0.2%15.6%
Growth in net operating
profit per share-3.1%-2.9%0.4%-4.2%-9.5%5.7%-19.9%-10.0%10.8%20.7%
Management expense ration/an/an/an/an/a0.44%0.46%0.46%0.41%0.39%
Gross return8.2%10.3%9.6%7.4%8.8%11.7%16.6%-1.1%3.2%19.1%
Investment return6.7%8.8%7.9%5.6%6.6%9.7%13.0%-2.7%2.8%16.3%
Operating earnings as a
percentage of available
investable assetsn/an/an/an/an/a7.1%7.1%8.7%7.9%7.6%
Mirrabooka Investments Limited
Total shareholder return10.0%12.3%9.1%6.3%6.9%4.9%3.0%13.1%4.3%21.2%
Total portfolio return9.4%12.0%11.7%9.1%11.2%14.7%7.1%12.0%3.1%22.8%
Growth in net operating
result per share-0.5%2.9%1.7%4.0%8.4%35.7%-17.8%16.6%-10.0%-7.0%
Management expense ration/an/an/an/an/a0.60%0.62%0.65%0.67%0.64%
Gross return12.3%15.0%15.0%12.3%14.2%17.3%9.9%15.4%6.8%26.4%
Investment return11.8%14.6%14.6%11.7%13.4%16.0%9.3%14.8%6.5%26.5%
AMCIL Limited
Total shareholder return8.7%10.9%8.0%4.6%6.4%9.1%-1.2%11.8%-0.9%22.7%
Total portfolio return8.8%10.0%8.4%6.8%8.4%12.3%5.3%7.6%2.2%14.7%
Growth in net operating
result per share2.6%-1.1%-5.1%-4.0%-7.0%14.4%-32.6%4.8%4.3%-9.6%
Management expense ration/an/an/an/an/a0.69%0.68%0.65%0.67%0.65%
Gross return10.8%12.1%10.8%8.9%10.2%13.9%7.0%9.7%5.1%18.8%
Investment return10.5%11.8%10.2%8.4%10.0%14.0%7.1%9.3%3.9%17.9%
33
Australian Foundation Investment Company Limited Annual Report 2018
Details of non-audit services performed by the auditors may be found in Note F2 of the Financial Report.
The Board of Directors has considered the position and, in accordance with the advice received from the Audit Committee, is satisfied
that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the
Corporations Act 2001. The Directors are satisfied that the provision of non-audit services by the auditor, as set out below, did
not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons:
• all non-audit services have been reviewed by the Audit Committee to ensure they do not impact the impartiality and objectivity
of the auditor; and
• none of the services undermine the general principles relating to auditor independence as set out in the Corporations Act 2001 including
reviewing or auditing the auditor’s own work, acting in a management or a decision-making capacity for the Company, acting as advocate
for the Company, or jointly sharing economic risk and rewards.
A copy of the Auditor’s Independence Declaration is set out on page 35.
This report is made in accordance with a resolution of the Directors.
Terrence Campbell AO
Chairman
Melbourne
23 July 2018
Non-audit Services
34
Australian Foundation Investment Company Limited Annual Report 2018
Auditor’s Independence Declaration
35
Australian Foundation Investment Company Limited Annual Report 2018
36 Financial Statements
37 Consolidated Income Statement
38 Consolidated Statement of
Comprehensive Income
39 Consolidated Balance Sheet
40 Consolidated Statement of
Changes in Equity
42 Consolidated Cash Flow Statement
43 Notes to the Financial Statements
43 A. Understanding AFIC’s Financial
Performance
43 A1. How AFIC Manages its Capital
43 A2. Investments Held and How
They are Measured
44 A3. Operating Income
45 A4. Dividends Paid
46 A5. Earnings Per Share
47 B. Costs, Tax and Risk
47 B1. Management Costs
47 B2. Tax
48 B3. Risk
50 C. Unrecognised Items
50 C1. Contingencies
51 Additional Information
51 D. Balance Sheet Reconciliations
51 D1. Current Assets – Cash
51 D2. Credit Facilities
51 D3. Revaluation Reserve
52 D4. Realised Capital Gains Reserve
52 D5. Retained Profits
52 D6. Shared Capital
53 E. Income Statement Reconciliations
53 E1. Reconciliation of Net Cash Flows from
Operating Activities to Profit
53 E2. Tax Reconciliations
54 F. Other Information
54 F1. Related Parties
54 F2. Remuneration of Auditors
54 F3. Segment Reporting
55 F4. Summary of Other Accounting Policies
57 F5. Performance Bond
57 F6. Share-based Payments
58 F7. Lease Commitments
58 F8. Principles of Consolidation
59 F9. Subsidiaries
59 F10. Parent Entity Financial Information
FINANCIAL STATEMENTS
36
Australian Foundation Investment Company Limited Annual Report 2018
Note
2018
$’000
2017
$’000
Dividends and distributionsA3302,389270,887
Revenue from deposits and bank billsA31,4091,659
Other revenueA34,7035,105
Total revenue308,501277,651
Net gains on trading portfolio and non-equity investmentsA32643,065
Income from operating activities308,765280,716
Finance costs(848)(8,969)
Administration expensesB1(14,533)(14,483)
Profit before income tax expense293,384257,264
Income tax expenseB2, E2(14,377)(11,964)
Profit for the year279,007245,300
Profit is attributable to:
Equity holders of Australian Foundation Investment Company Ltd278,709245,029
Minority interest298271
279,007245,300
CentsCents
Basic earnings per shareA523.5721.32
This Consolidated Income Statement should be read in conjunction with the accompanying notes.
Consolidated Income Statement
For the Year Ended 30 June 2018
37
Australian Foundation Investment Company Limited Annual Report 2018
Year to 30 June 2018Year to 30 June 2017
Revenue
1
Capital
1
TotalRevenueCapitalTotal
$’000$’000$’000$’000$’000$’000
Profit for the year279,007-279,007245,300-245,300
Other comprehensive income
Items that will not be recycled through the Income
Statement
Gains for the period -454,180454,180-500,389500,389
Tax on above-(136,841)(136,841)-(154,791)(154,791)
Total other comprehensive income-317,339317,339-345,598345,598
Total comprehensive income 279,007317,339596,346245,300345,598590,898
1. ‘Capital’ includes realised or unrealised gains or losses (and the tax on those) on securities in the investment portfolio, including non-equity investments
held in the investment portfolio. Income in the form of distributions and dividends is recorded as ‘revenue’. All other items, including expenses, are included
in profit for the year, which is categorised under ‘revenue’.
Year to 30 June 2018Year to 30 June 2017
Revenue
$’000
Capital
$’000
Total
$’000
Revenue
$’000
Capital
$’000
Total
$’000
Total comprehensive income is attributable to:
Equity holders of Australian Foundation Investment
Company Ltd278,709317,339596,048245,029345,598590,627
Minority Interests298-298271-271
279,007317,339596,346245,300345,598590,898
This Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes.
Consolidated Statement of Comprehensive Income
For the Year Ended 30 June 2018
38
Australian Foundation Investment Company Limited Annual Report 2018
Note
2018
$’000
2017
$’000
Current assets
Cash D199,183105,125
Receivables77,23452,011
Total current assets176,417157,136
Non-current assets
Investment portfolioA27,280,7066,790,368
Deferred tax assets1,257349
Total non-current assets7,281,9636,790,717
Total assets7,458,3806,947,853
Current liabilities
Payables7126,953
Tax payable8,2451,980
Borrowings – bank debtD2100-
Trading portfolio6,757546
Provisions4,3854,448
Total current liabilities20,19913,927
Non-current liabilities
Provisions1,3941,332
Deferred tax liabilities – investment portfolioB21,097,527967,091
Total non-current liabilities1,098,921968,423
Total liabilities1,119,120982,350
Net assets6,339,2605,965,503
Shareholders’ equity
Share capitalA1, D62,811,7212,756,256
Revaluation reserveA1, D32,422,5682,123,209
Realised capital gains reserveA1, D4448,892430,912
General reserveA123,63723,637
Retained profitsA1, D5631,725631,070
Parent entity interest6,338,5435,965,084
Minority interest717419
Total equity6,339,2605,965,503
This Consolidated Balance Sheet should be read in conjunction with the accompanying notes.
Consolidated Balance Sheet
As at 30 June 2018
39
Australian Foundation Investment Company Limited Annual Report 2018
Year Ended 30 June 2018Note
Share
Capital
$’000
Revaluation
Reserve
$’000
Realised
Capital Gains
$’000
General
Reserve
$’000
Retained
Profits
$’000
Total
Parent Entity
$’000
Minority
Interest
$’000
Total
$’000
Total equity at the beginning of the year2,756,2562,123,209430,91223,637631,0705,965,0844195,965,503
Dividends paid to shareholdersA4----(278,054)(278,054)-(278,054)
– Dividend Reinvestment PlanD655,601----55,601-55,601
Other share capital adjustments(136)----(136)-(136)
Total transactions with shareholders55,465---(278,054)(222,589)-(222,589)
Profit for the year----278,709278,709298279,007
Other comprehensive income (net of tax)
Net gains for the period-317,339
---317,339-317,339
Other comprehensive income for the year-317,339---317,339-317,339
Transfer to realised capital gains of cumulative gains on investments sold-(17,980)17,980----
Total equity at the end of the year2,811,7212,422,568448,89223,637631,7256,338,543717 6,339,260
Year Ended 30 June 2017Note
Share
Capital
$’000
Revaluation
Reserve
$’000
Realised
Capital Gains
$’000
General
Reserve
$’000
Retained
Profits
$’000
Total
Parent Entity
$’000
Minority
Interest
$’000
Total
$’000
Total equity at the beginning of the year2,521,4411,767,628457,59323,637637,0945,407,3931,1485,408,541
Dividends paid to shareholdersA4--(16,698)-(251,053)(267,751)-(267,751)
– Dividend Reinvestment PlanD655,242----55,242-55,242
– Conversion of notesD6179,755----179,755-179,755
Other share capital adjustments(182)----(182)-(182)
Total transactions with shareholders234,815-(16,698)-(251,053)(32,936)-(32,936)
Profit for the year----245,029 245,029271245,300
Other comprehensive income (net of tax)
Net gains for the period-345,598
---345,598- 345,598
Other comprehensive income for the year-345,598---345,598- 345,598
Transfer to realised capital gains of cumulative losses on investments sold-9,983(9,983)-----
Dividend paid to minority interests by AICS------(1,000)(1,000)
Total equity at the end of the year2,756,2562,123,209430,91223,637631,0705,965,0844195,965,503
This Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes.
Consolidated Statement of Changes in Equity
For the Year Ended 30 June 2018
40
Australian Foundation Investment Company Limited Annual Report 2018
Year Ended 30 June 2018Note
Share
Capital
$’000
Revaluation
Reserve
$’000
Realised
Capital Gains
$’000
General
Reserve
$’000
Retained
Profits
$’000
Total
Parent Entity
$’000
Minority
Interest
$’000
Total
$’000
Total equity at the beginning of the year2,756,2562,123,209430,91223,637631,0705,965,0844195,965,503
Dividends paid to shareholdersA4----(278,054)(278,054)-(278,054)
– Dividend Reinvestment PlanD655,601----55,601-55,601
Other share capital adjustments(136)----(136)-(136)
Total transactions with shareholders55,465---(278,054)(222,589)-(222,589)
Profit for the year----278,709278,709298279,007
Other comprehensive income (net of tax)
Net gains for the period-317,339
---317,339-317,339
Other comprehensive income for the year-317,339---317,339-317,339
Transfer to realised capital gains of cumulative gains on investments sold-(17,980)17,980----
Total equity at the end of the year2,811,7212,422,568448,89223,637631,7256,338,543717 6,339,260
Year Ended 30 June 2017Note
Share
Capital
$’000
Revaluation
Reserve
$’000
Realised
Capital Gains
$’000
General
Reserve
$’000
Retained
Profits
$’000
Total
Parent Entity
$’000
Minority
Interest
$’000
Total
$’000
Total equity at the beginning of the year2,521,4411,767,628457,59323,637637,0945,407,3931,1485,408,541
Dividends paid to shareholdersA4--(16,698)-(251,053)(267,751)-(267,751)
– Dividend Reinvestment PlanD655,242----55,242-55,242
– Conversion of notesD6179,755----179,755-179,755
Other share capital adjustments(182)----(182)-(182)
Total transactions with shareholders234,815-(16,698)-(251,053)(32,936)-(32,936)
Profit for the year----245,029 245,029271245,300
Other comprehensive income (net of tax)
Net gains for the period-345,598
---345,598- 345,598
Other comprehensive income for the year-345,598---345,598- 345,598
Transfer to realised capital gains of cumulative losses on investments sold-9,983(9,983)-----
Dividend paid to minority interests by AICS------(1,000)(1,000)
Total equity at the end of the year2,756,2562,123,209430,91223,637631,0705,965,0844195,965,503
This Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes.
41
Australian Foundation Investment Company Limited Annual Report 2018
Note
2018
$’000
Inflows/
(Outflows)
2017
$’000
Inflows/
(Outflow)
Cash flows from operating activities
Sales from trading portfolio 66,47829,002
Purchases for trading portfolio (4,770)(18,305)
Interest received1,3471,668
Dividends and distributions received243,605259,553
306,660271,918
Other receipts4,9575,111
Administration expenses(14,803)(14,173)
Finance costs paid(848)(12,550)
Taxes paid(14,808)(23,645)
Net cash inflow/(outflow) from operating activitiesE1281,158226,661
Cash flows from investing activities
Sales from investment portfolio689,030216,497
Purchases for investment portfolio (753,667)(269,443)
Net cash inflow/(outflow) from investing activities(64,637)(52,946)
Cash flows from financing activities
Redeeming of convertible notes-(10,722)
Net bank borrowings100-
Share issue transaction costs(136)(59)
Dividends paid(222,427)(213,712)
Net cash inflow/(outflow) from financing activities(222,463)(224,493)
Net increase/(decrease) in cash held(5,942)(50,778)
Cash at the beginning of the year105,125155,903
Cash at the end of the yearD199,183105,125
For the purpose of the Cash Flow Statement, ‘cash’ includes cash and deposits held at call.
This Consolidated Cash Flow Statement should be read in conjunction with the accompanying notes.
Consolidated Cash Flow Statement
For the Year Ended 30 June 2018
42
Australian Foundation Investment Company Limited Annual Report 2018
A. Understanding AFIC’s Financial Performance
A1. How AFIC Manages its Capital
AFIC’s objective is to provide shareholders with attractive investment returns through access to a growing stream of fully franked dividends
and enhancement of capital invested.
AFIC recognises that its capital will fluctuate with market conditions. In order to manage those fluctuations, the Board may adjust the amount
of dividends paid, issue new shares, buy back the Company’s shares or sell assets.
AFIC’s capital consists of its shareholders’ equity plus any net borrowings. A summary of the balances in equity is provided below:
2018
$’000
2017
$’000
Share capital2,811,7212,756,256
Revaluation reserve2,422,5682,123,209
Realised capital gains reserve448,892430,912
General reserve23,63723,637
Retained profits631,725631,070
6,338,5435,965,084
Refer to notes D3 –D6 for a reconciliation of movement from period to period for each equity account (except the general reserve,
which is historical, relates to past profits which can be distributed and has had no movement).
A2. Investments Held and How They Are Measured
AFIC has two portfolios of securities: the investment portfolio and the trading portfolio.
The investment portfolio holds securities which the Company intends to retain on a long-term basis, and includes a small sub-component
over which options may be written. The trading portfolio consist of securities that are held for short-term trading only, including call option
contracts written over securities that are held in the specific sub-component of the investment portfolio and on occasion put options and
is relatively small in size. The Board has therefore focused the information in this section on the investment portfolio. Details of all holdings
(except for the specific option holdings) as at the end of the reporting period can be found at the end of the Annual Report.
The balance and composition of the investment portfolio was:
2018
$’000
2017
$’000
Equity instruments (excluding below) at market value6,940,6386,495,320
Equity instruments (over which options may be written)327,764282,754
Hybrids12,30412,294
7,280,7066,790,368
How Investments Are Shown in the Financial Statements
The accounting standards set out the following hierarchy for fair value measurement:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices, which can be observed either directly (as prices) or indirectly (derived from prices).
Level 3: Inputs for the asset or liabilities that are not based on observable market data.
All financial instruments held by AFIC are classified as Level 1 (other than the options sold by the Company which are Level 2).
Their fair values are initially measured at the costs of acquisition and then remeasured based on quoted market prices at the
end of the reporting period.
NOTES TO THE FINANCIAL STATEMENTS
43
Australian Foundation Investment Company Limited Annual Report 2018
Notes to the Financial Statements continued
Net Tangible Asset Backing Per Share
The Board regularly reviews the net asset backing per share both before and after provision for deferred tax on the unrealised gains in AFIC’s
long-term investment portfolio. Deferred tax is calculated as set out in Note B2. The relevant amounts as at 30 June 2018 and 30 June 2017
were as follows:
30 June 2018
$
30 June 2017
$
Net tangible asset backing per share
Before tax6.275.89
After tax5.345.07
Equity Investments
The shares in the investment portfolio are designated under the accounting standards as financial assets measured at fair value through
‘other comprehensive income’ (OCI), because they are equity instruments held for long-term capital growth and dividend income, rather
than to make a profit from their sale. This means that changes in the value of these shares during the reporting period are included in OCI
in the Consolidated Statement of Comprehensive Income. The cumulative change in value of the shares over time is then recorded in the
revaluation reserve. On disposal, the amounts recorded in the revaluation reserve are transferred to the realisation reserve.
Puttable Instruments and Convertible Notes
Puttable instruments and convertible notes are classified as financial assets at fair value through profit and loss under the accounting
standards and therefore need to be treated differently in the financial statements, even though they are managed in the same way as
the rest of the investment portfolio. Changes in the value of these investments are reflected in the Consolidated Income Statement and
not in the Consolidated Statement of Comprehensive Income with the other investments. Any gains or losses on these securities are
transferred from retained profits to the revaluation reserve. On disposal, the amounts recorded in the revaluation reserve are transferred
to the realisation reserve.
Securities Sold and How They Are Measured
Where securities are sold, any difference between the sale price and the cost is transferred from the revaluation reserve to the realisation
reserve and the amounts noted in the Consolidated Statement of Changes in Equity. This means the Company is able to identify the realised
gains out of which it can pay a ‘Listed Investment Company’ (LIC) gain as part of the dividend, which conveys certain taxation benefits to
many of AFIC’s shareholders.
During the period $712.6 million (2017: $217.2 million) of equity securities were sold. The cumulative gain on the sale of securities was
$18.0 million for the period after tax (2017: $10.0 million loss). This has been transferred from the revaluation reserve to the realisation
reserve (see Consolidated Statement of Changes in Equity). These sales were accounted for at the date of trade.
A3. Operating Income
The total income received from AFIC’s investments in 2018 is set out below.
Dividends and Distributions
2018
$’000
2017
$’000
Income from securities held in investment portfolio at 30 June272,362264,658
Income from investment securities sold during the year29,9186,120
Income from securities held in trading portfolio at 30 June-109
Income from trading securities sold during the year109-
302,389270,887
Interest income
Income from cash investments1,4091,659
Other income
Administration fees4,6815,022
Other income 2283
4,7035,105
44
Australian Foundation Investment Company Limited Annual Report 2018
Dividend Income
Distributions from listed securities are recognised as income when those securities are quoted in the market on an ex-distribution basis.
Capital returns on ordinary shares are treated as an adjustment to the carrying value of the shares.
Trading Income
Net gains on the trading and options portfolio are set out below.
Net Gains
2018
$’000
2017
$’000
Net realised gains from trading portfolio – shares 672470
– options 3,5591,912
Unrealised gains/(losses) from trading portfolio – shares-496
– options (3,967)187
2643,065
$115.7 million of shares are lodged with the ASX Clear Pty Ltd as collateral for sold option positions written by the Group (2017: $112.9 million).
These shares are lodged with ASX Clear under the terms of ASX Clear Pty Ltd which require participants in the Exchange Traded Option
market to lodge collateral, and are recorded as part of the Group’s investment portfolio. If all call options were exercised, this would lead
to the sale of $61.7 million worth of securities at an agreed price – the ‘exposure’ (2017: $82.4 million). If all put options were exercised,
this would lead to the purchase of $19.7 million of securities at an agreed price (2017: $18.4 million).
A4. Dividends Paid
The dividends paid and payable for the year ended 30 June 2018 are shown below:
(a) Dividends Paid During the Year
2018
$’000
2017
$’000
Final dividend for the year ended 30 June 2017 of 14 cents fully franked at 30 per cent paid
30 August 2017 (2017: 14 cents fully franked at 30 per cent paid on 30 August 2016).161,955155,852
Interim dividend for the year ended 30 June 2018 of 10 cents per share fully franked at 30 per cent,
paid 23 February 2018 (2017: 10 cents fully franked at 30 per cent paid 24 February 2017).116,099111,899
278,054267,751
Dividends paid in cash222,453212,509
Dividends reinvested in shares55,60155,242
278,054267,751
Dividends forgone via DSSP4,7884,241
(b) Franking Credits
Opening balance of franking account at 1 July158,730159,869
Franking credits on dividends received104,60992,267
Tax paid during the year14,06923,164
Franking credits paid on ordinary dividends paid(119,166)(114,750)
Franking credits deducted on DSSP shares issued(2,055)(1,820)
Closing balance of franking account156,187158,730
Adjustments for tax payable in respect of the current year’s profits and the receipt of dividends
recognised as receivables22,53416,008
Adjusted closing balance178,721174,738
Impact on the franking account of dividends declared but not recognised as a liability at the end
of the financial year:(71,169)(70,565)
Net available 107,552104,173
These franking account balances would allow AFIC to frank additional dividend payments
up to an amount of:250,955243,070
AFIC’s ability to continue to pay franked dividends is dependent upon the receipt of franked dividends from the trading and investment
portfolios and on AFIC paying tax.
45
Australian Foundation Investment Company Limited Annual Report 2018
Notes to the Financial Statements continued
(c) New Zealand Imputation Account
2018
$’000
2017
$’000
(Figures in A$ at year-end exchange rate: 2018: $NZ1.093: $A1; 2017: $NZ1.047: $A1)
Opening balance 13,3577,660
Imputation credits on dividends received5,9876,284
Imputation credits on dividends paid(12,348)-
Closing balance6,99613,944
(d) Dividends Declared After Balance Date
Since the end of the year Directors have declared a final dividend of 14 cents per share fully franked
at 30 per cent. The aggregate amount of the final dividend for the year to 30 June 2018 to be paid
on 31 August 2018, but not recognised as a liability at the end of the financial year is: 166,061
(e) Listed Investment Company Capital Gain Account
2018
$’000
2017
$’000
Balance of the listed investment company (LIC) capital gain account:32,6869,883
This equates to an attributable amount of:46,69414,118
Distributed LIC capital gains may entitle certain shareholders to a deduction in their tax return, as set out in the dividend statement. LIC capital
gains available for distribution are dependent on the disposal of investment portfolio holdings that qualify for LIC capital gains, or the receipt
of LIC distributions from LIC securities held in the portfolios. $33.9 million attributable gain is attached to the final dividend to be paid on
31 August 2018.
A5. Earnings Per Share
The table below shows the earnings per share based on the profit for the year: 20182017
Basic earnings per share NumberNumber
Weighted average number of ordinary shares used as the denominator1,182,444,5101,149,255,591
$’000 $’000
Profit for the year 278,709245,029
Cents Cents
Basic earnings per share 23.57 21.32
46
Australian Foundation Investment Company Limited Annual Report 2018
B. Costs, Tax and Risk
B1. Management Costs
The total management expenses for the period are as follows:
2018
$’000
2017
$’000
Rental expense relating to non-cancellable leases (621)(636)
Employee benefit expenses(8,911)(9,138)
Depreciation charge--
Other administration expenses(5,001)(4,709)
(14,533)(14,483)
Employee Benefit Expenses
A major component of employee benefit expenses is Directors’ and Executives’ remuneration. This has been summarised below:
Short-term
Benefit
$
Other
Long-term
Benefits
$
Post-
employment
Benefits
$
Share
Based
Payments
$
Total
$
2018
Non-Executive
Directors 719,179-68,321-787,500
Executives3,118,300(16,625)107,88853,5143,263,077
Total3,837,479(16,625)176,20953,5144,050,577
2017
Non-Executive
Directors657,536-62,464-720,000
Executives3,404,08364,161127,13683,1873,678,567
Total4,061,61964,161189,60083,1874,398,567
Detailed remuneration disclosures are provided in the Remuneration Report.
The Group (i.e. AFIC and its subsidiary, Australian Investment Company Services (AICS) – see Note F8) does not make loans
to Directors or Executives.
B2. Tax
AFIC’s tax position, and how it accounts for tax, is explained here. Detailed reconciliations of tax accounting to the financial statements
can be found in Note E2.
The income tax expense for the period is the tax payable on this financial year’s taxable income, adjusted for any changes in deferred
tax assets and liabilities attributable to temporary differences and for any unused tax losses. Deferred tax assets and liabilities (except
for those related to the unrealised gains or losses in the investment portfolio) are offset, as all current and deferred taxes relate to the
Australian Taxation Office and can legally be settled on a net basis.
A provision has been made for taxes on any unrealised gains or losses on securities valued at fair value through the Income Statement
– i.e. the trading portfolio, puttable instruments and convertible notes that are classified as debt.
A provision also has to be made for any taxes that could arise on sale of securities in the investment portfolio, even though there is
no intention to dispose of them. Where AFIC disposes of such securities, tax is calculated according to the particular parcels allocated
to the sale for tax purposes, offset against any capital losses carried forward.
47
Australian Foundation Investment Company Limited Annual Report 2018
Notes to the Financial Statements continued
Tax Expense
The income tax expense for the period is shown below:
(a) Reconciliation of Income Tax Expense to Prima Facie Tax Payable
2018
$’000
2017
$’000
Profit before income tax expense 293,384257,264
Tax at the Australian tax rate of 30 per cent (2017: 30 per cent)88,01577,179
Tax offset for franked dividends received(70,989)(63,495)
Tax effect of sundry items taxable in current year but not included in income (15)322
17,01114,006
Over provision in prior years(2,634)(2,042)
Total tax expense14,37711,964
Deferred Tax Liabilities – Investment Portfolio
The accounting standards require us to recognise a deferred tax liability for the potential capital gains tax on the unrealised gain in
the investment portfolio. This amount is shown in the Balance Sheet. However, the Board does not intend to sell the investment portfolio,
so this tax liability is unlikely to arise at this amount. Any sale of securities would also be affected by any changes in capital gains tax
legislation or tax rate applicable to such gains when they are sold.
2018
$’000
2017
$’000
Deferred tax liabilities on unrealised gains in the investment portfolio1,097,527967,091
Opening balance at 1 July967,091812,947
Tax on realised gains(6,405)(647)
Charged to OCI for ordinary securities on gains or losses for the period136,841154,791
1,097,527967,091
B3. Risk
Market Risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices.
As a LIC that invests in tradeable securities, AFIC can never be free of market risk as it invests its capital in securities which are not risk
free – the market price of these securities will fluctuate.
A general fall in market prices of 5 per cent and 10 per cent, if spread equally over all assets in the investment portfolio, would have
led to a reduction in AFIC’s comprehensive income of $254.8 million and $509.6 million respectively, at a tax rate of 30 per cent
(2017: $237.7 million and $475.3 million).
AFIC seeks to reduce market risk at the investment portfolio level by ensuring that it is not, in the opinion of the Investment Committee,
overly exposed to one company or one particular sector of the market. The relative weightings of the individual securities and the relevant
market sectors are reviewed by the Investment Committee and risk can be managed by reducing exposure where necessary. AFIC does
not have a minimum or maximum amount of the portfolio that can be invested in a single company or sector.
48
Australian Foundation Investment Company Limited Annual Report 2018
AFIC’s total investment exposure by sector is as below:
2018
%
2017
%
Energy5.444.37
Materials18.6116.73
Industrials12.0810.96
Consumer discretionary2.011.80
Consumer staples 8.998.64
Banks 21.3124.52
Other financials 10.8610.69
Property trusts1.722.18
Telecommunications2.023.79
Health care9.909.80
Information technology3.862.67
Utilities1.852.33
Cash1.351.52
Securities representing over 5 per cent of the investment portfolio at 30 June were:
Commonwealth Bank7.99.6
BHP6.64.8
Westpac6.37.0
CSL5.13.5
AFIC is also not directly exposed to material currency risk as most of its investments are quoted in Australian dollars.
The writing of call options provides some protection against a fall in market prices as it generates income to partially compensate for a fall
in capital values. Options are only written against securities that are held in the trading or the specific sub-section of the investment portfolio.
Interest Rate Risk
The Group is not currently materially exposed to interest rate risk as all its cash investments and borrowings are short term for a fixed
interest rate.
Credit Risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.
AFIC is exposed to credit risk from cash, receivables, securities in the trading portfolio and securities in the investment portfolio respectively.
None of these assets are overdue. The risk in relation to each of these items is set out below.
Cash
All cash investments not held in a transactional account are invested in short-term deposits with Australia’s ‘big four’ commercial banks
or in cash management trusts which invest predominantly in securities with an A1+ rating. In the unlikely event of a bank default or default
on the underlying securities in the cash trust, there is a risk of losing the cash deposits and any accrued unpaid interest.
Receivables
Outstanding settlements are on the terms operating in the securities industry, which usually require settlement within two days of the date
of a transaction. Receivables are non-interest bearing and unsecured. In the event of a payment default, there is a risk of losing any difference
between the price of the securities sold and the price of the recovered securities from the discontinued sale.
49
Australian Foundation Investment Company Limited Annual Report 2018
Notes to the Financial Statements continued
Trading and Investment Portfolios
Converting and convertible notes or other interest-bearing securities that are not equity securities carry credit risk to the extent of their carrying
value. This risk will be realised in the event of a shortfall on winding-up of the issuing companies.
Liquidity Risk
Liquidity risk is the risk that an entity will not be able to meet its financial liabilities.
AFIC monitors its cash-flow requirements daily. The Investment Committee also monitors the level of contingent payments on a regular basis
by reference to known sales and purchases of securities, dividends and distributions to be paid or received, put options that may require
AFIC to purchase securities, and facilities that need to be repaid. AFIC ensures that it has either cash or access to short-term borrowing
facilities sufficient to meet these contingent payments.
AFIC’s inward cash flows depend upon the dividends received. Should these drop by a material amount, AFIC would amend its outward
cash flows accordingly. AFIC’s major cash outflows are the purchase of securities and dividends paid to shareholders, and both of these
can be adjusted by the Board and management. Furthermore, the assets of AFIC are largely in the form of readily tradeable securities
which can be sold on-market if necessary.
The table below analyses AFIC’s financial liabilities into relevant maturity groupings. The amounts disclosed in the table are the contractual
undiscounted cash flows. Balances due within 12 months equal their carrying amounts as the impact of discounting is not significant.
30 June 2018
Less than
6 Months
$’000
6–12
Months
$’000
Greater
than 1 Year
$’000
Total
Contractual
Cash Flows
$’000
Carrying
Amount
$’000
Non-derivatives
Payables712--712712
Borrowings – bank debt100--100100
812--812812
Derivatives
Options in trading portfolio*19,726--19,7266,757
19,726--19,7266,757
30 June 2017
Less than
6 Months
$’000
6–12
Months
$’000
Greater
than 1 Year
$’000
Total
Contractual
Cash Flows
$’000
Carrying
Amount
$’000
Non-derivatives
Payables6,953--6,9536,953
6,953--6,9536,953
Derivatives
Options in trading portfolio*18,352--18,3523,839
18,352--18,3523,839
* In the case of call options, there are no contractual cash flows as if the option is exercised the contract will be settled in the securities over which the option
is written. The contractual cash flows for put options written are the cash sums the Company will pay to acquire securities over which the options have been
written, and it is assumed for purpose of the above disclosure that all options will be exercised (i.e. maximum cash outflow).
C. Unrecognised Items
Unrecognised items, such as contingencies, do not appear in the financial statements, usually because they don’t meet the requirements
for recognition. However, they have the potential to have a significant impact on the Group’s financial position and performance.
C1. Contingencies
Directors are not aware of any material contingent liabilities or contingent assets other than those already disclosed elsewhere
in the Financial Report.
50
Australian Foundation Investment Company Limited Annual Report 2018
ADDITIONAL INFORMATION
Additional information that shareholders may find useful is included here. It is grouped into three sections:
D. Balance Sheet Reconciliations
E. Income Statement Reconciliations
F. Other Information
D. Balance Sheet Reconciliations
This section provides further information about the basis of calculation of line items in the financial statements.
D1. Current Assets – Cash
2018
$’000
2017
$’000
Cash at bank and in hand (including on-call)95,183103,125
Fixed term deposits 4,0002,000
99,183105,125
Cash holdings yielded an average floating interest rate of 1.80 per cent (2017: 1.93 per cent). All cash investments are held in a transactional
account or an over-night ‘at call’ account invested in cash management trusts which invest predominantly in securities with an A1+ rating.
D2. Credit Facilities
2018
$’000
2017
$’000
Commonwealth Bank of Australia – cash advance facilities140,000140,000
Amount drawn down 1000
Undrawn facilities139,900140,000
Westpac Bank – cash advance facilities-10,000
Amount drawn down-0
Undrawn facilities-10,000
Total short-term loan facilities140,000150,000
Amount drawn down1000
Undrawn facilities139,900150,000
The above borrowings are unsecured. Repayment of facilities is done either through the use of cash received from distributions or the sale
of securities, or by rolling existing facilities into new ones. Facilities are usually drawn down for no more than three months.
D3. Revaluation Reserve
2018
$’000
2017
$’000
Opening balance at 1 July2,123,2091,767,628
Gains on investment portfolio
– Equity instruments454,180500,389
Provision for tax on above(136,841)(154,791)
Cumulative taxable realised (gains)/losses (net of tax)(17,980)9,983
2,422,5682,123,209
This reserve is used to record increments and decrements on the revaluation of the investment portfolio as described in accounting policy
Note A2.
51
Australian Foundation Investment Company Limited Annual Report 2018
Additional Information continued
D4. Realised Capital Gains Reserve
2018
$’000
2017
$’000
Opening balance at 1 July430,912457,593
Dividends paid-(16,698)
Cumulative taxable realised gains/(losses) for period through OCI (net of tax)17,980(9,983)
448,892430,912
This reserve records gains or losses after applicable taxation arising from disposal of securities in the investment portfolio as described in A2.
D5. Retained Profits
2018
$’000
2017
$’000
Opening balance at 1 July631,070637,094
Dividends paid(278,054)(251,053)
Profit for the year278,709245,029
631,725631,070
This reserve relates to past profits.
D6. Share Capital
Movements in Share Capital
DateDetailsNotes
Number of
Shares
’000
Issue
Price
$
Paid-up
Capital
$’000
1/07/2016Balance1,130,3052,521,441
30/08/2016Dividend Reinvestment Plan(i)5,8235.5832,493
30/08/2016Dividend Substitution Share Plan(ii)4285.58n/a
31/08/2016Convertible note conversion(iv)1,0095.095,133
24/02/2017Dividend Reinvestment Plan(i)3,8955.8422,749
24/02/2017Dividend Substitution Share Plan(ii)3175.84n/a
28/02/2017Convertible note conversion(iv)34,3315.09174,622
VariousCancellation of ELTIP shares not vested(29)n/a(123)
VariousCosts of issue--(59)
30/06/2017Balance1,176,0792,756,256
30/08/2017Dividend Reinvestment Plan(i)5,4485.9232,249
30/08/2017Dividend Substitution Share Plan(ii)4555.92n/a
23/02/2018Dividend Reinvestment Plan(i)3,8226.1123,352
23/02/2018Dividend Substitution Share Plan(ii)3436.11n/a
VariousCosts of issue--(136)
30/06/2018Balance1,186,1472,811,721
(i) Shareholders elect to have all or part of their dividend payment reinvested in new ordinary shares under the Dividend Reinvestment Plan (DRP). The price
of the new DRP shares is based on the average selling price of shares traded on the Australian Securities Exchange and Chi-X in the five days after the
shares begin trading on an ex-dividend basis.
(ii) The Group has a Dividend Substitution Share Plan (DSSP) whereby shareholders may elect to forgo a dividend and receive shares instead. Pricing for the
DSSP shares is done as per the DRP shares.
(iii) The Group has an on-market share buy-back program. During the financial year, no shares were bought back (2017: nil).
(iv) 1,797,547 Feb 2017 convertible notes were converted into shares during the year ending 30 June 2017. All remaining convertible notes were redeemed
at their face value.
All shares have been fully paid, rank pari passu and have no par value.
52
Australian Foundation Investment Company Limited Annual Report 2018
E. Income Statement Reconciliations
E1. Reconciliation of Net Cash Flows from Operating Activities to Profit
2018
$’000
2017
$’000
Profit for the year279,007245,300
Net decrease/(increase) in trading portfolio6,211320
Dividends received as securities under DRP investments-(1,870)
Decrease/(increase) in current receivables(25,223)(6,653)
– Less increase/(decrease) in receivables for investment portfolio22,3665,129
Increase in deferred tax liabilities129,528154,829
– Less (increase)/decrease in deferred tax liability on investment portfolio(130,436)(154,144)
Increase/(decrease) in current payables(6,241)(13,979)
– Less decrease/(increase) in payables for investment portfolio6,1139,943
– Less increase/(decrease) in dividends payable(27)80
Increase/(decrease) in provision for tax payable6,265(12,413)
Capital gains tax charge taken through equity(6,405)(647)
Increase/(decrease) in other provisions/non-cash items (including convertible note expenses)-766
Net cash flows from operating activities281,158226,661
E2. Tax Reconciliations
Tax Expense Composition
2018
$’000
2017
$’000
Charge for tax payable relating to the current year17,91913,321
Over provision in prior years(2,634)(2,042)
(Increase)/decrease in deferred tax assets(908)685
14,37711,964
Amounts Recognised Directly Through Other Comprehensive Income
Net increase in deferred tax liabilities relating to capital gains tax on the movement
in gains in the investment portfolio136,841154,791
136,841154,791
Deferred Tax Assets and Liabilities
The deferred tax balances are attributable to:
2018
$’000
2017
$’000
(a) Tax on unrealised gains or losses in the trading portfolio1,190(100)
(b) Provisions and expenses charged to the accounting profit which are not yet tax deductible1,7381,740
(c) Interest and dividend income receivable which is not assessable for tax until receipt(1,671)(1,291)
1,257349
Movements:
Opening asset balance at 1 July3491,034
Credited/(charged) to Income Statement908(685)
1,257349
Deferred tax assets arise when provisions and expenses have been charged but are not yet tax deductible. These assets are realised when
the relevant items become tax deductible, as long as enough taxable income has been generated to claim the assets against, and as long
as there are no changes to the tax legislation that affect AFIC’s ability to claim the deduction.
53
Australian Foundation Investment Company Limited Annual Report 2018
Additional Information continued
F. Other Information
This section covers other information that is not directly related to specific line items in the financial statements, including information about
related party transactions, share-based payments, assets pledged as security and other statutory information.
F1. Related Parties
All transactions with deemed related parties were made on normal commercial terms and conditions and approved by independent Directors.
(a) Arrangements with Non-Executive Directors
Non-Executive Directors R Barker, J Paterson and C Walter have rented office space and, for R Barker and J Paterson, a parking space from
the Group at commercial rates during the year. Sub-lease rental income (included in revenue) received or receivable by the Group, excluding
GST, during the year was $50,314 (2017: $39,945).
(b) AICS Transactions with Minority Interests
The below transactions were with Djerriwarrh Investments Ltd as a minority interest holder in the Company’s subsidiary.
2018
$’000
2017
$’000
Administration expenses charged for the year2,4502,437
(c) AICS Transactions with Other Listed Investment Companies
AICS had the following transactions with other listed investment companies to which it provides services:
2018
$’000
2017
$’000
Administration expenses charged for the year to Mirrabooka Investments Ltd1,4001,481
Administration expenses charged for the year to AMCIL Ltd899918
F2. Remuneration of Auditors
For the year the auditor earned or will earn the following remuneration:
2018
$
2017
$
PricewaterhouseCoopers
Audit or review of Financial Reports 190,820248,256
AFSL compliance audit and review7,7969,925
Non-audit services
Taxation compliance services38,81981,444
Total remuneration237,435339,625
F3. Segment Reporting
Operating segments are reported in a manner consistent with the internal reporting used by the chief operating decision-maker. The Board,
through its sub-committees, has been identified as the chief operating decision-maker, as it is responsible for allocating resources and
assessing performance of the operating segments.
Description of Segments
The Board makes the strategic resource allocations for AFIC. AFIC has therefore determined the operating segments based on the reports
reviewed by the Board, which are used to make strategic decisions.
The Board is responsible for AFIC’s entire portfolio of investments and considers the business to have a single operating segment.
The Board’s asset allocation decisions are based on a single, integrated investment strategy, and AFIC’s performance is evaluated
on an overall basis.
Segment Information Provided to the Board
The internal reporting provided to the Board for AFIC’s assets, liabilities and performance is prepared on a consistent basis with the
measurement and recognition principles of Australian Accounting Standards, except that net assets are reviewed both before and after
the effects of capital gains tax on investments (as reported in AFIC’s Net Tangible Asset announcements to the ASX).
54
Australian Foundation Investment Company Limited Annual Report 2018
Other Segment Information
Revenues from external parties are derived from the receipt of dividend, distribution and interest income, and income arising on the trading
portfolio and realised income from the options portfolio.
AFIC is domiciled in Australia and most of AFIC’s income is derived from Australian entities or entities that maintain a listing in Australia.
AFIC has a diversified portfolio of investments, with only one investment comprising more than 10 per cent of AFIC’s income, including
realised income from the trading and options written portfolios – Commonwealth Bank (11.0 per cent) ((2017: two investments:
Commonwealth Bank (11.8 per cent) and Westpac Bank (10.4 per cent)).
F4. Summary of Other Accounting Policies
This general purpose Financial Report has been prepared in accordance with Australian Accounting Standards, Interpretations issued
by the Australian Accounting Standards Board and the Corporations Act 2001. This Financial Report has been authorised for issue and
is presented in the Australian currency. AFIC has the power to amend and reissue the Financial Report.
AFIC has attempted to improve the transparency of its reporting by adopting ‘plain English’ where possible. Key ‘plain English’ phrases
and their equivalent AASB terminology are as follows:
PhraseAASB Terminology
Market valueFair value for actively traded securities
CashCash and cash equivalents
Share capitalContributed equity
OptionsDerivatives written over equity instruments that are valued at fair value through profit or loss
HybridsEquity instruments that have some of the characteristics of debt
AFIC complies with International Financial Reporting Standards (IFRS). AFIC is a ‘for profit’ entity.
AFIC has not applied any Australian Accounting Standards or AASB Interpretations that have been issued as at balance date but are not yet
operative for the year ended 30 June 2018 (‘the inoperative standards’) except for AASB 9 (2009), which was adopted on 7 December 2009.
The impact of the inoperative standards has been assessed and the impact has been identified as not being material. AFIC only intends
to adopt other inoperative standards at the date at which their adoption becomes mandatory.
Basis of Accounting
The financial statements are prepared using the valuation methods described in A2. All other items have been treated in accordance
with the historical cost convention.
Fair Value of Financial Assets and Liabilities
The fair value of cash and cash equivalents, and non-interest bearing monetary financial assets and liabilities of AFIC approximates
their carrying value.
Convertible Notes
On the issue of convertible notes, the Group estimates the fair value of the liability component of the convertible notes, being the obligation
to make future payments of principal and interest to holders, using a market interest rate for a non-convertible note of similar terms and
conditions. The residual amount is included in equity as other equity securities with no recognition of any change in the value of the option
in subsequent periods. The liability component is then included in borrowings. Expenses incurred in connection with the issue of the notes
are deducted from the total face value and the expense is then incurred over the life of the notes.
The total liability is subsequently carried on an amortised cost basis with interest on the notes recognised as finance costs on an effective
yield basis until the liability is extinguished on conversion or maturity of the notes.
55
Australian Foundation Investment Company Limited Annual Report 2018
Additional Information continued
Employee Benefits
(i) Wages, Salaries and Annual Leave
Liabilities for wages and salaries, including annual leave, expected to be settled within 12 months of balance date are recognised as current
provisions in respect of employees’ services up to balance date and are measured at the amounts expected to be paid when the liabilities
are settled.
(ii) Long Service Leave
In calculating the value of long service leave, consideration is given to expected future wage and salary levels, experience of employee
departures and periods of service. Expected future payments are discounted using market yields at balance date on national government
bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows.
(iii) Cash Incentives
Cash incentives are provided under the Senior Executive Annual Incentive Plan and are dependent upon the performance of the Group.
A provision is made for the cost of unsettled cash incentives at balance date. The Investment Team Annual Incentive Plans are also settled
on a cash basis.
(iv) Share Incentives
Share incentives are provided under the Senior Executive Annual Incentive Plan, Senior Executive Long Term Incentive Plan, Investment Team
Long Term Incentive Plan and the Employee Share Acquisition Scheme.
For the Employee Share Acquisition Scheme and the Senior Executive Annual Incentive Plan, the incentives are based on the performance
of the individual, the Group and investment companies to which the Group provides administration services, for the financial year. For the
Employee Share Acquisition Scheme and a portion of the Senior Executive Annual Incentive, the recipient agrees to purchase (or have
purchased for them) shares on-market, but receives a cash amount. A provision for the amount payable under the Annual Incentive
Plans is recognised on the Balance Sheet.
For the Investment Team Long Term Incentive Plan, the incentives are based on the performance of the Group and investment companies
to which the Group provides administration services over a four-year period. The incentives may be settled in shares (but based on a cash
amount) or cash. Historically, all awards have been cash. Expenses are recognised over the four-year assessment period based on the
amount expected to be payable under this plan, resulting in a provision for incentive payable being built up on the Balance Sheet over
the assessment period.
Under the Senior Executive Long Term Incentive Plan which was introduced for the year ended 30 June 2013, the amount awarded is
represented by performance shares. The 30-day Volume Weighted Average Price (VWAP) of AFIC shares up to but not including 1 July
is calculated. The amount of ELTIP available is then divided by this 30-day VWAP price to determine the number of performance shares
that may vest at the vesting point in four years’ time. The value of each performance shares will be adjusted by the accumulation return
on the AFI share price (being the movement in the share price assuming the reinvestment of any dividends) up to vesting date, based
on a final share price calculated on the 30-day VWAP price up to 30 June. No shares vested during the year ended 30 June 2018.
The expense will be charged directly through the Income Statement in the following manner – 25 per cent of the total estimated cost in Year 1,
50 per cent of the total estimated cost in Year 2 less the expense charged in Year 1, 75 per cent of the total estimated cost in Year 3 less the
expense charged in Years 1 and 2 and 100 per cent of the total estimated cost in Year 4 less the expense charged in Years 1, 2 and 3.
Directors’ Retirement Allowances
The Group recognises as ‘amounts payable’ Directors’ retirement allowances that have been crystallised. No further amounts will
be expensed as retirement allowances.
Administration Fees
The Group currently provides administrative services to other listed investment companies. The associated fees are recognised
on an accruals basis as income throughout the year. Any amounts outstanding at balance date are recognised as receivable, subject
to the assessment of recoverability by the Directors.
56
Australian Foundation Investment Company Limited Annual Report 2018
Operating Leases
The Group currently has an operating lease in respect of its premises. Payments made under operating leases are charged to the Income
Statement on a straight-line basis over the period of the lease.
Rounding of Amounts
AFIC is a company of the kind referred to in the ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, relating
to the ‘rounding off’ of amounts in the Financial Report. Amounts in the Financial Report have been rounded off in accordance with that
Instrument, to the nearest thousand dollars, or in certain cases, to the nearest dollar.
F5. Performance Bond
The Group’s subsidiary, AICS, has under the terms of its Australian Financial Services Licence in place a performance bond to the sum
of $20,000 underwritten by the Commonwealth Bank of Australia in favour of the Australian Securities and Investments Commission (ASIC),
payable on demand to ASIC.
F6. Share Based Payments
Share Based Payments
The Group has a number of share incentive arrangements. These are accounted for in accordance with Note F4. Where shares are issued
to employees of AICS, AICS compensates AFIC for the fair value of the shares.
(a) Executive Incentive Plans
The Executives’ remuneration arrangements incorporate an ‘at risk’ component as set out in the Remuneration Report. Part of this ‘at risk’
component is paid in shares in the Group.
(i) Senior Executive Annual Incentive Plan
Each financial year, the Remuneration Committee sets the target (cash) amount of remuneration that could be paid should all performance
targets and measures be achieved. If all are achieved, 100 per cent of the remuneration will be awarded. If stretch levels of performance
are achieved above target, then higher amounts may be paid. On the other hand there is no set minimum that will be paid regardless
of performance.
The performance measures are a combination of the performance of the Group, the investment companies to which the Group provides
administration services, and personal objectives.
All of the incentive remuneration awarded is paid in cash, with 50 per cent of the after-tax amount being used by the Executive to purchase
shares. All remuneration under the plan, is paid in the financial year following the year of assessment.
The Executive agrees to the shares being subject to being held for two years (holding term), during which they cannot be sold. Dividends
are paid to Executives on these shares prior to the expiry of the holding term. Should an Executive leave the Group before the holding term
expires, the restriction will be lifted.
10,706 shares (2017: 14,331 shares) were purchased by Executives in the year (in relation to the prior year) with a fair value (being the
acquisition price) of $64,277 (2017: $80,048).
(ii) Senior Executive Long Term Incentive Plan
Under the Senior Executive Long Term Incentive Plan, the amount awarded will be represented by Performance Rights. The 30-day Volume
Weighted Average Price (VWAP) of AFIC shares up to but not including 1 July will be calculated. The amount of ELTIP available will then
be divided by this 30-day VWAP price to determine the number of Performance Rights that may vest at the vesting point in four years’ time.
The value of each Performance Right will be adjusted by the accumulation return on the AFI share price (being the movement in the share
price assuming the reinvestment of any dividends) up to vesting date, based on a final share price calculated on the 30-day VWAP price
up to 30 June.
The estimated fair value of the award will be calculated in accordance with AASB 2 – Share Based Payments at the end of each year until
the final year of vesting. The liability shown after the final year of vesting will represent the actual amount being paid to eligible employees
as a cash-settled share-based payment.
68,098 rights were awarded under the plan during the year ended 30 June 2018 (2017: 69,704). An expense of $481,768 (2017: $437,634)
was incurred for the 2014/15, 2015/16, 2016/17 and 2017/18 plans. 64,081 rights under the 2013/14 plan were forfeited during the year.
57
Australian Foundation Investment Company Limited Annual Report 2018
Additional Information continued
(iii) Investment Team Long Term Incentive Plan
Similar to the Annual Incentive Plans, a target cash amount of long term incentive is set each year in respect of that year, which will vest
in four years’ time. The percentage of this target that ultimately vests four years after the award depends on the gross return of the Group
and the investment companies it provides administration services to.
The amount that vests will be paid in cash or shares (purchased on-market at that time, based on the cash amount that vests)
at the discretion of the Group.
$52,563 vested in the period (2017: $140,114) and was paid in cash.
(b) Employee Share Acquisition Scheme
Under the current Employee Share Acquisition Scheme, each employee who is not a participant in the Senior Executive or Investment Team
Incentive Plans is awarded $5,000 per annum. After PAYG is deducted, $2,500 is used to buy shares in the Company which need to be held
for three years. After three years, or the departure of the employee from employment with the Group, the shares come out of the holding lock.
In addition, each employee is eligible for an additional award of up to $5,000. 50 per cent of the amount awarded is used to buy shares
in one of the other LICs that AICS provides services to. The amount that is awarded is dependent on the metrics used for the vesting
of the Investment Team’s Short Term Incentive (excluding personal measures). During the year, 48.4 per cent of the possible maximum
was awarded, and 50 per cent of this was used to buy shares in AMCIL Limited.
(c) Expenses Arising From Share Based Payment Transactions
Total expenses arising from share based payment transactions recognised during the period as part of the employee benefit expense
(excluding any reversals and the Investment Team Long Term Incentive Plan) were as follows:
2018
$’000
2017
$’000
Share-based payment expense534 498
(d) Liability
The total liability arising from share based payment transactions is included in the current and non-current liabilities for ‘provisions’.
F7. Lease Commitments
The Group has entered into a non-cancellable operating lease for the use of its premises for seven years. Current commitment relating
to leases at balance date, for the current lease (including GST), is:
2018
$’000
2017
$’000
Due within one year667667
Later than one year but less than five2,0012,669
Greater than five years--
2,6683,336
F8. Principles of Consolidation
AFIC’s consolidated financial statements consist of the financial statements of AFIC, the parent, and its subsidiary, Australian Investment
Company Services Ltd (AICS). 25 per cent of AICS is owned by Djerriwarrh Investments Ltd, another investment company for which AICS
performs operational and investment administration services, and for which it is paid monthly.
No subsidiaries were acquired or disposed of during the year. Intercompany transactions and balances between AFIC and AICS
are eliminated on consolidation.
The financial information for the parent entity, disclosed in F10 below, has been prepared on the same basis as the consolidated
financial statements. All notes are for the consolidated group unless specifically noted otherwise.
58
Australian Foundation Investment Company Limited Annual Report 2018
F9. Subsidiaries
The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries:
Equity Holding
Name of EntityCountry of IncorporationClass of Shares20182017
Australian Investment Company Services LtdAustraliaOrdinary75%75%
The investment in AICS is accounted for at cost in the individual financial statements of AFIC.
F10. Parent Entity Financial Information
Summary Financial Information
The individual financial statements for the parent entity show the following aggregate amounts:
2018
$’000
2017
$’000
Balance sheet
Current assets162,696150,696
Total assets7,450,2066,941,111
Current liabilities15,6078,612
Total liabilities1,113,655977,124
Shareholders’ equity
Issued capital2,811,7212,756,256
Reserves
Revaluation reserve2,422,5682,123,209
Realised capital gains reserve448,892430,912
General reserve23,63723,637
Retained earnings629,733629,973
3,524,8303,207,731
Total shareholders’ equity6,336,5515,963,987
Profit or loss for the year277,815247,216
Total comprehensive income 595,154592,814
59
Australian Foundation Investment Company Limited Annual Report 2018
In the Directors’ opinion:
(1) the financial statements and notes set out on pages 37 to 59 are in accordance with the Corporations Act 2001 including:
(a) complying with the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting
requirements; and
(b) giving a true and fair view of the entity’s financial position as at 30 June 2018 and of its performance for the financial year ended
on that date; and
(2) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.
Note F4 to the financial statements confirms that the financial statements also comply with International Financial Reporting Standards
as issued by the International Accounting Standards Board.
This declaration is made in accordance with a resolution of the Directors.
This declaration has been made after receiving the declarations required to be made to the Directors by the Managing Director and the
Chief Financial Officer regarding the financial statements in accordance with Section 295A of the Corporations Act 2001 for the financial year
ended 30 June 2018. The declarations received were that, in the opinion of the Managing Director and the Chief Financial Officer to the best
of their knowledge, the financial records of the Company have been properly maintained, that the financial statements comply with accounting
standards and that they give a true and fair view.
Terrence Campbell AO
Chairman
Melbourne
23 July 2018
DIRECTORS’ DECLARATION
60
Australian Foundation Investment Company Limited Annual Report 2018
INDEPENDENT AUDIT REPORT
61
Australian Foundation Investment Company Limited Annual Report 2018
Independent Audit Report continued
62
Australian Foundation Investment Company Limited Annual Report 2018
63
Australian Foundation Investment Company Limited Annual Report 2018
Independent Audit Report continued
64
Australian Foundation Investment Company Limited Annual Report 2018
65
Australian Foundation Investment Company Limited Annual Report 2018
At 31 July 2018 there were 130,615 holdings of ordinary shares. These holdings were distributed in the following categories:
Size of HoldingShareholdings
1 to 1,00040,119
1,001 to 5,00043,712
5,001 to 10,00020,118
10,001 to 100,00025,628
100,000 and over1,038
Total130,615
Percentage held by the 20 largest holders5.49%
Average shareholding9,081
There were 2,640 shareholdings of less than a marketable parcel of $500 (79 shares).
Voting Rights of Ordinary Shares
The Constitution provides for votes to be cast:
(i) on a show of hands, one vote for each shareholder; and
(ii) on a poll, one vote for each fully paid ordinary share.
OTHER INFORMATION
Information About Shareholders
66
Australian Foundation Investment Company Limited Annual Report 2018
Major Shareholders
The 20 largest registered holdings of ordinary shares as at 31 July 2018 are listed below:
Ordinary Shares
Shareholder NameShares Held% Held
HSBC Custody Nominees (Australia) Limited9,463,1940.80
IOOF Investment Management Limited <IPS Super A/C>6,001,4710.51
Nulis Nominees (Australia) Limited <Navigator Mast Plan Sett A/C>5,890,0510.50
Citicorp Nominees Pty Limited5,083,7170.43
Bougainville Copper Limited5,027,7340.42
Navigator Australia Ltd <MLC Investment Sett A/C>4,544,8930.38
Custodial Services Limited <Beneficiaries Holding A/C>3,100,5520.26
Trustees of The Redemptorist Fathers2,878,0000.24
Netwealth Investments Limited <Wrap Services A/C>2,678,3480.23
Bushways Pty Ltd2,570,5920.22
Investment Custodial Services Limited <C A/C>2,540,1640.21
Investment Custodial Services Limited <C A/C>2,210,5610.19
J P Morgan Nominees Australia Limited2,160,9450.18
Kalymna Pty Ltd1,852,1860.16
IOOF Investment Management Limited <IPS IDPS A/C>1,803,4490.15
Peter & Lyndy White Foundation Pty Ltd <P & L White Foundation A/C>1,725,0720.15
Twibill Pty Ltd1,443,2160.12
Netwealth Investments Limited <Super Services A/C>1,396,8420.12
Australian Executor Trustees Limited <No 1 Account>1,382,5180.12
The Winston Churchill Memorial Trust1,369,7200.12
67
Australian Foundation Investment Company Limited Annual Report 2018
Acquisitions
Cost
$’000
Macquarie Group105,902
CSL48,838
Sydney Airport47,044
Boral41,944
Unibail-Rodamco* (takeover of Westfield Corporation)36,078
Sonic Healthcare35,347
James Hardie Industries29,605
NEXTDC*28,558
Reliance Worldwide (includes $10.91 million in 1 for 1.98 issue at $4.15 per share)27,188
Alumina24,308
Carsales.com22,962
Reece (includes $10.56 million in 1 for 11 issue and placement at $9.30 per share)20,903
Qantas Airways*20,637
Disposals
Proceeds
$’000
Incitec Pivot
#
79,970
Westfield Corporation
#
(taken over by Unibail-Rodamco)70,902
Healthscope57,338
Coca-Cola Amatil
#
43,656
QBE Insurance34,096
Tox Free Solutions
#
(taken over by Cleanaway Waste Management)30,592
Vicinity Centres29,826
AMP28,171
Japara Healthcare
#
26,928
Telstra24,288
Treasury Wine Estates23,782
* New holding in the portfolio.
# Complete disposal from the portfolio.
New Companies Added to the Investment Portfolio
Unibail-Rodamco-Westfield
NEXTDC
Qantas Airways
Cleanaway Waste Management
Adelaide Brighton
AUB Group
Goodman Group
Major Transactions in the Investment Portfolio
68
Australian Foundation Investment Company Limited Annual Report 2018
The Company participated as a sub-underwriter in the following transaction during the year:
CompanyUnderwritten ByDescriptionAmount Underwritten
Cleanaway Waste Management
Limited
Macquarie Capital (Australia)
Limited
$590 million 1 for 3.65 pro rata
accelerated non-renounceable
entitlement offer
$4,494,082
The Company has not been notified of any substantial shareholders.
Sub-underwriting
Substantial Shareholders
69
Australian Foundation Investment Company Limited Annual Report 2018
During the year ended 30 June 2018, the Company recorded 1,332 transactions in securities. $3,692,889 in brokerage (including GST)
was paid or accrued for the year.
Transactions in Securities
70
Australian Foundation Investment Company Limited Annual Report 2018
Individual investments for the combined investment and trading portfolios as at 30 June 2018 are listed below. The list should not, however,
be used to evaluate portfolio performance or to determine the net asset backing per share at other dates. Net asset backing is advised
to the Australian Securities Exchange each month and is recorded on the toll free telephone service at 1800 780 784 and posted
to AFIC’s website site afi.com.au
Individual holdings in the portfolios may change during the course of the year. In addition, holdings which are part of the trading portfolio
may be subject to call options or sale commitments by which they may be sold at a price significantly different from the market price
prevailing at the time of the exercise or sale.
CodeOrdinary Shares, Trust Units or Stapled Securities
Number
Held
2017
’000
Number
Held
2018
’000
Market
Value
2018
$’000
ABCAdelaide Brighton01,72011,954
AGLAGL Energy4,4654,30596,776
AIAAuckland International Airport1,7701,77011,027
ALQALS9,2058,50064,090
ALUAltium 62562514,069
AMCAmcor12,30012,527180,517
AMPAMP20,10012,91045,961
ANNAnsell1,2841,28434,908
ANZAustralia and New Zealand Banking Group8,4888,488239,693
APAAPA Group5,0754,04039,794
APEAP Eagers1,4041,40411,976
ARBARB Corporation1,1981,19827,352
ASXASX 70970945,632
AUBAUB Group 07299,904
AWC*Alumina5,51315,04840,433
BGABega Cheese2,8732,87321,287
BHP*BHP 14,11814,091477,690
BKWBrickworks1,5031,50323,506
BLDBoral4,0089,66063,080
BXBBrambles13,44212,139107,791
CARCarsales.com1,5203,17748,034
CBACommonwealth Bank of Australia7,9007,900575,673
CGFChallenger 4,2655,54865,631
COHCochlear12413727,423
CPUComputershare4,6604,66085,884
CSL*CSL1,7391,943372,576
CTXCaltex Australia66976925,026
CVWClearView Wealth6,1796,1797,168
CWYCleanaway Waste Management07,73613,074
CYB*CYBG PLC5,1247,81843,550
DJWDjerriwarrh Investments7,5057,50525,368
DLXDuluxGroup2,5563,02923,171
DUIDiversified United Investment12,03012,03049,324
EQTEQT Holdings 1,3031,30327,107
Holdings of Securities
At 30 June 2018
71
Australian Foundation Investment Company Limited Annual Report 2018
Holdings of Securities continued
At 30 June 2018
CodeOrdinary Shares, Trust Units or Stapled Securities
Number
Held
2017
’000
Number
Held
2018
’000
Market
Value
2018
$’000
EVTEvent Hospitality and Entertainment1,0301,03013,795
F LTFlight Centre Travel Group24119312,313
FNPFreedom Foods Group4,5076,01140,455
FPHFisher and Paykel Healthcare Corporation5,0084,40060,192
GMGGoodman Group01,0009,620
HSOHealthscope26,7004,0008,840
IAGInsurance Australia Group6,0664,97642,447
ICQiCar Asia 22,03020,1564,737
IELIDP Education8808809,246
ILUIluka Resources3,6422,36726,463
IREIRESS3,7374,02448,455
IVCInvoCare1,1501,32518,206
JHXJames Hardie Industries3,1114,05091,854
LICLifestyle Communities5,4705,47032,002
LNKLink Administration Holdings3,3963,20023,456
MFTMainfreight2,8402,99076,155
MIRMirrabooka Investments8,7288,72823,478
M LTMilton Corporation10,84110,84149,979
MPLMedibank Private2,0002,0005,840
MQG*Macquarie Group7001,680206,396
NABNational Australia Bank9,9699,342256,066
NVTNavitas3,6783,67816,328
NXTNEXTDC04,18031,601
ORAOrora 12,86411,67041,663
ORG*Origin Energy6,0006,50064,833
ORIOrica2,7122,71248,131
OSHOil Search16,48316,483146,694
PPTPerpetual1,0611,06144,142
QANQantas Airways03,25020,020
QBEQBE Insurance Group7,8744,35542,418
QUBQube Holdings34,96234,96284,258
REAREA Group38438434,891
REHReece 3183,62145,803
RHCRamsay Health Care1,4151,41576,382
RIORio Tinto3,6523,457288,441
RMDResMed3,9353,93555,484
RWCReliance Worldwide Corporation2,4008,60046,096
S32South3215,24115,24155,020
SCGScentre Group12,95015,65068,704
72
Australian Foundation Investment Company Limited Annual Report 2018
CodeOrdinary Shares, Trust Units or Stapled Securities
Number
Held
2017
’000
Number
Held
2018
’000
Market
Value
2018
$’000
SEK*Seek3,3153,59577,889
SHLSonic Healthcare1,8413,34281,982
SOLWashington H Soul Pattinson1,7091,70935,350
SUN*Suncorp Group3,7704,39063,954
SYD*Sydney Airport8,50015,000107,262
TCLTransurban Group18,33519,822237,268
TGGTempleton Global Growth Fund12,1069,68513,752
TLSTelstra Corporation52,44544,000115,280
TPMTPG Telecom6,2286,50033,605
TWETreasury Wine Estates6,8825,45994,932
URWUnibail-Rodamco-Westfield02,47236,263
VCXVicinity Centres16,3784,70012,173
WBCWestpac Banking Corporation15,54515,545455,469
WESWesfarmers6,7236,723331,823
WOW*Woolworths Group5,0655,732174,616
WPLWoodside Petroleum3,2833,648129,346
XROXero 43774133,330
Total7,261,645
* Part of the security was subject to call options written by the Company.
CodeConvertible Notes, Preference Shares and Other Interest-bearing Securities
Number
Held
2017
’000
Number
Held
2018
’000
Market
Value
2018
$’000
RHCPARamsay Health Care Convertible Adjustable Rate Equity Securities11511512,304
Total12,304
73
Australian Foundation Investment Company Limited Annual Report 2018
Date of IssueTypePriceRemarks
23 February 2018DRP/DSSP*$6.11
30 August 2017DRP/DSSP*$5.92
24 February 2017DRP/DSSP*$5.84
30 August 2016DRP/DSSP*$5.582.5 per cent discount
19 February 2016DRP/DSSP*$5.432.5 per cent discount
25 November 2015SPP$5.515.0 per cent discount
28 August 2016DRP/DSSP*$6.032.5 per cent discount
20 February 2015DRP/DSSP*$5.972.5 per cent discount
6 October 2014 SPP$5.882.5 per cent discount
29 August 2014 DRP/DSSP*$5.932.5 per cent discount
21 February 2014DRP/DSSP*$5.862.5 per cent discount
30 August 2013 DRP/DSSP*$5.642.5 per cent discount.
DSSP = Dividend Substitution Share Plan
22 February 2013DRP$5.37
31 August 2012DRP$4.36
24 February 2012DRP$4.26
19 December 2011Convertible notes$100 face valueMature 28 February 2017. Interest rate 6.25 per cent
per annum. Conversion price: $5.0864
31 August 2011DRP$4.18
25 February 2011DRP$4.722.5 per cent discount
1 September 2010DRP$4.652.5 per cent discount
2 June 2010SPP$4.622.5 per cent discount. SPP = Share Purchase Plan
26 February 2010DRP$4.825.0 per cent discount
1 September 2009DRP$4.695.0 per cent discount
2 March 2009 DRP$3.725.0 per cent discount
25 August 2008 DRP$4.98
11 April 2008SAP$5.26
27 February 2008DRP$5.265.0 per cent discount
22 August 2007DRP$5.78
8 March 2007DRP $5.60
Issues of Securities
74
Australian Foundation Investment Company Limited Annual Report 2018
Date of IssueTypePriceRemarks
22 December 2006SAP$4.90
23 August 2006DRP $4.70
7 March 2006DRP $4.55
4 November 2005SAP $3.96
23 August 2005DRP $3.90
18 March 2005DRP $3.68
19 August 2004DRP $3.29
12 March 2004DRP $3.29
22 October 20031 for 8 rights issue $3.00
15 August 2003DRP $3.47
16 April 2003SAP $3.04
7 March 2003DRP $3.11
14 August 2002DRP $3.11
5 April 2002SAP$3.16
7 March 2002DRP$3.24
15 August 2001DRP$3.08
29 June 2001DRP $2.87
7 March 2001DRP $2.56
16 August 2000DRP$2.47
7 March 2000DRP $2.64
11 August 1999DRP $2.95
12 April 1999SAP$2.54 SAP = Share Acquisition Plan
15 March 1998DRP $2.79
4 September 1998DRP $2.43 DRP = Dividend Reinvestment Plan
Note for issues of securities in earlier years please consult the Company’s website, afi.com.au or via telephone (03) 9650 9911.
* Note that for the shares issued under the DSSP, the price shown is the indicative price used to determine the number of shares issued to participants.
Shares issued under the DSSP are issued at nil cost. Shareholders who sell shares issued under the DSSP should consult their tax adviser as to
the correct treatment of such sales for taxation purposes.
75
Australian Foundation Investment Company Limited Annual Report 2018
Australian Foundation Investment Company Limited (AFIC)
ABN 56 004 147 120
Directors
Terrence A Campbell AO, Chairman
Robert M Freeman, Managing Director
Ross E Barker
Jacqueline C Hey
Graeme R Liebelt
John Paterson
David A Peever
Catherine M Walter AM
Peter J Williams
Company Secretaries
Matthew J Rowe
Andrew JB Porter
Auditor
PricewaterhouseCoopers
Chartered Accountants
Country of Incorporation
Australia
Registered Office and Mailing Address
Level 21, 101 Collins Street
Melbourne Victoria 3000
Contact Details
Telephone (03) 9650 9911
Facsimile (03) 9650 9100
Website afi.com.au
Email invest@afi.com.au
For enquiries regarding net asset backing (as advised each month
to the Australian Securities Exchange):
Telephone 1800 780 784 (toll free)
Share Registrar
Australia
Computershare Investor Services Pty Ltd
Yarra Falls, 452 Johnston Street
Abbotsford Victoria 3067
New Zealand
Computershare Investor Services Limited
159 Hurstmere Road
Takapuna Auckland 0622
Shareholder
Enquiry Line 1300 662 270
0800 333 501 (within New Zealand)
+61 3 9415 4373 (from overseas)
Facsimile (03) 9473 2500
Website investorcentre.com/au/contact
For all enquiries relating to shareholdings, noteholdings, dividends
and related matters, please contact the share registrar as above.
Australian and New Zealand Securities Exchange Codes
AFI Ordinary shares (ASX and NZX)
Company Particulars
76
Australian Foundation Investment Company Limited Annual Report 2018
Shareholder Meetings
Australia
Annual General Meeting
Time 10.00am
Date Tuesday 9 October 2018
Venue ZINC Function Centre
Location Corner of Swanston Street and Flinders Street
Melbourne
Sydney Shareholder Meeting
Time 10.00am
Date Monday 15 October 2018
Venue Four Seasons Hotel
Location 199 George Street
Sydney
Adelaide Shareholder Meeting
Time 10.00am
Date Friday 19 October 2018
Venue Adelaide Convention Centre
Location Panorama Rooms, North Terrace
Adelaide
Brisbane Shareholder Meeting
Time 10.00am
Date Monday 22 October 2018
Venue Brisbane Hilton Hotel
Location 190 Elizabeth Street
Brisbane
New Zealand
Auckland Shareholder Meeting
Time 10.00am
Date Monday 3 December 2018
Venue Hilton Hotel
Location 147 Quay Street
Auckland
77
Australian Foundation Investment Company Limited Annual Report 2018
Design: MDM Investorcom
Printed on environmentally friendly paper
Annual Review 2018
90
YEARS OF INVESTMENT
EXPERIENCE
Contents
2 5 Year Summary
4 About the Company
6 Review of Operations
and Activities
16 Top 25 Investments
17 Income Statement
18 Balance Sheet
19 Summarised Statement
of Changes in Equity
20 Holdings of Securities
26 Major Transactions in the
Investment Portfolio
28 Company Particulars
29 Shareholder Meetings
Australian Foundation Investment Company is a
listed investment company investing in Australian
and New Zealand equities.
This year marks the 90th anniversary of the establishment
of AFIC in 1928.
1
Australian Foundation Investment Company Limited Annual Review 2018
Australian Foundation Investment Company Limited ABN 56 004 147 120
Year in Summary
Profit for the Year
$279.0m
Up 13.7% from 2017
Fully Franked Dividend
14¢
Final
Same as 2017
24¢
Total
10.8%
S&P/ASX 200 Accumulation
Index +13.0%
Total Portfolio Return
Total Shareholder Return
10.3%
Share price plus dividend
0 .14 %
0.14% in 2017
Management Expense Ratio
Total Portfolio
$7. 4b
Including cash at 30 June
$6.9 billion in 2017
1
Australian Foundation Investment Company Limited Annual Review 2018
Australian Foundation Investment Company Limited ABN 56 004 147 120
279.0
2018
Net Profit After Tax ($ Million)
254.3
2014
293.6
2015
265.8
2016
245.3
2017
23.6
2018
Net Profit Per Share (Cents)
24.4
2014
27.2
2015
23.8
2016
21.3
2017
24
2018
Dividends Per Share (Cents)
(b)
22
2014
23
2015
24
2016
24
2017
7,274
2018
Investments at Market Value
($ Million)
(a)
6,324
2014
6,414
2015
6,250
2016
6,790
2017
627.0
2018
Net Asset Backing Per Share
(Cents)
(c)
584.5
2014
585.1
2015
550.4
2016
589.5
2017
129,948
2018
Number of Shareholders
(30 June)
103,188
2014
107,622
2015
113,482
2016
119,463
2017
5 Year Summary
3
Australian Foundation Investment Company Limited Annual Review 2018
2
Australian Foundation Investment Company Limited Annual Review 2018
279.0
2018
Net Profit After Tax ($ Million)
254.3
2014
293.6
2015
265.8
2016
245.3
2017
23.6
2018
Net Profit Per Share (Cents)
24.4
2014
27.2
2015
23.8
2016
21.3
2017
24
2018
Dividends Per Share (Cents)
(b)
22
2014
23
2015
24
2016
24
2017
7,274
2018
Investments at Market Value
($ Million)
(a)
6,324
2014
6,414
2015
6,250
2016
6,790
2017
627.0
2018
Net Asset Backing Per Share
(Cents)
(c)
584.5
2014
585.1
2015
550.4
2016
589.5
2017
129,948
2018
Number of Shareholders
(30 June)
103,188
2014
107,622
2015
113,482
2016
119,463
2017
279.0
2018
Net Profit After Tax ($ Million)
254.3
2014
293.6
2015
265.8
2016
245.3
2017
23.6
2018
Net Profit Per Share (Cents)
24.4
2014
27.2
2015
23.8
2016
21.3
2017
24
2018
Dividends Per Share (Cents)
(b)
22
2014
23
2015
24
2016
24
2017
7,274
2018
Investments at Market Value
($ Million)
(a)
6,324
2014
6,414
2015
6,250
2016
6,790
2017
627.0
2018
Net Asset Backing Per Share
(Cents)
(c)
584.5
2014
585.1
2015
550.4
2016
589.5
2017
129,948
2018
Number of Shareholders
(30 June)
103,188
2014
107,622
2015
113,482
2016
119,463
2017
Notes
(a) Excludes cash.
(b) All dividends were fully franked. The LIC attributable gain attached to the dividend was:
2018: 2.86 cents, 2017: nil, 2016: 2.1 cents, 2015: 7.1 cents, 2014: nil.
(c) Net asset backing per share based on year-end data before the provision for the final dividend.
The figures do not include a provision for capital gains tax that would apply if all securities held
as non-current investments had been sold at balance date as Directors do not intend to dispose
of the portfolio.
3
Australian Foundation Investment Company Limited Annual Review 2018
2
Australian Foundation Investment Company Limited Annual Review 2018
Australian Foundation Investment
Company (AFIC) is a listed investment
company investing in Australian and
New Zealand equities.
Investment Objectives
The Company aims to provide shareholders
with attractive investment returns through
access to a growing stream of fully franked
dividends and growth in capital invested.
The Company’s primary investment
goals are:
• to pay dividends which, over time, grow
faster than the rate of inflation; and
• to provide attractive total returns
over the medium to long term.
Approach to Investing
The investment philosophy is built on taking
a medium to long-term view on companies
in a diversified portfolio with an emphasis
on identifying quality companies that are
likely to sustainably grow their earnings
and dividends over this time frame.
Quality in this context is an outcome of our
assessment of the board and management
as well as some key financial metrics such
as the level of gearing in the balance sheet,
product margins and free cash flow. The
structure of the industry and a company’s
competitive position in this industry is also
an important indicator of quality. Linked
to this assessment of quality is the ability
of companies to grow earnings over time,
which ultimately should produce good
dividend growth.
Recognising value is also an important
aspect of sound long-term investing.
Short-term measures such as the price
earnings ratio, price to book or price to
sales may be of some value, but aren’t
necessarily strong predictors of future
performance. Our assessment of
value tries to capture the opportunity
a business has to prosper and thrive
over the medium to long term.
In building the investment portfolio in this
way, we believe we can offer investors
a well-diversified portfolio of high-quality
companies that is intended to deliver total
returns ahead of the Australian equity market
and with less volatility over the long term.
About the Company
How AFIC Invests – What We Look
For in Companies
Quality First
Growth
Including dividends
Value
A portfolio that is actively
managed to achieve long-term
capital and dividend growth
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Australian Foundation Investment Company Limited Annual Review 2018
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Australian Foundation Investment Company Limited Annual Review 2018
The Company also uses options written
against a small proportion of its investments
and a small trading portfolio to generate
additional income.
From time to time, some borrowings
may be used where potential investment
returns justify the use of debt. This is
managed within very conservative limits,
as determined by the Board.
AFIC is managed for the benefit of its
shareholders with fees based on the
recovery of costs rather than as a fixed
percentage of the portfolio. There are no
performance fees. As a result, the benefit
of scale over time results in a very low
expense ratio for investors. For the
12 months to 30 June 2018 this was
0.14 per cent (annualised), or 14 cents
for each $100 invested.
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Australian Foundation Investment Company Limited Annual Review 2018
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Australian Foundation Investment Company Limited Annual Review 2018
Profit and Dividend
Full year profit of $279.0 million was up
13.7 per cent from $245.3 million in the
corresponding period last year. Investment
income increased $31.5 million (up
11.6 per cent), due primarily to a lift in
dividends across a range of companies,
particularly resource companies, including
participation in the Rio Tinto off-market
buy-back. Finance costs were also down
$8.1 million following the conversion
or redemption of convertible notes in
February 2017.
Earnings per share were 23.6 cents, up
from 21.3 cents. The final dividend was
maintained at 14 cents per share fully
franked, bringing total dividends for the
year to 24 cents per share fully franked,
the same as last year. Two cents of the
final dividend are sourced from taxable
capital gains, on which the Company has
paid or will pay tax. The amount of the pre
tax attributable gain on this portion of the
dividend, known as an ‘LIC capital gain’,
is therefore 2.86 cents. This enables some
shareholders to claim a tax deduction
in their tax return.
Market and Portfolio
Performance
The return of the market over the year
was characterised by a pronounced
divergence of performance across sectors
and companies. Ongoing growth across
global economies, in particular the United
States and China, led to rising commodity
prices, with the Australian resources index
up 41 per cent over the 12-month period
(represented by energy and materials in
Figure 1). Within this growth, the small
and mid cap resource sectors were up
49 per cent and 42 per cent respectively.
However, during the same period the
industrial sector was up only 8 per cent,
whilst the banking sector fell just
over 1 per cent.
Furthermore, in an environment where
many large companies are facing subdued
growth, there has been an increased flow
of funds into the small and mid cap section
of the market. This has pushed these
sectors higher relative to the S&P/ASX 50,
which represents larger companies in the
market (Figure 2). This has also seen very
strong share price performance in those
small companies with the strongest growth
expectations, primarily through a re-rating
of valuations (Figure 3 on page 8).
AFIC’s portfolio was up 10.8 per cent for
the 12 months to 30 June 2018 compared
with the S&P/ASX 200 Accumulation Index
which increased 13.0 per cent (Figure 4
on page 9). In the resources sector AFIC’s
primary exposure is to companies with long-
life assets and low-cost production such
as BHP and Rio Tinto, rather than the more
cyclical small and mid-sized companies.
The best performing companies in the
AFIC portfolio outside the large resource
companies were CSL, Wesfarmers,
Macquarie Group, Oil Search and
Woolworths.
Review of Operations and Activities
7
Australian Foundation Investment Company Limited Annual Review 2018
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Australian Foundation Investment Company Limited Annual Review 2018
Figure 2: Performance of Different Sectors of the Market by Company Size
S&P/ASX 50
total return
S&P/ASX Mid Cap 50
total return
S&P/ASX 200 Small Ordinaries
total return
Source: FactSet
130
125
120
115
110
105
100
95
90
Index
May 18
Apr 18
Mar 18
Feb 18
Jan 18
Dec 17
Jun 18
Nov 17
Oct 17
Sep 17
Aug 17
Jul 17
Jun 17
Figure 1: Performance of S&P/ASX 200 Companies Relative to the Energy
and Materials Sectors
S&P/ASX 200
total return index
S&P/ASX 200
materials total return index
S&P/ASX 200
energy total return index
Source: FactSet
150
140
130
120
110
100
90
Index
May 18
Apr 18
Mar 18
Feb 18
Jan 18
Dec 17
Jun 18
Nov 17
Oct 17
Sep 17
Aug 17
Jul 17
Jun 17
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Australian Foundation Investment Company Limited Annual Review 2018
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Australian Foundation Investment Company Limited Annual Review 2018
Review of Operations and Activities continued
The long-term performance of the portfolio,
which is more in line with the Company’s
investment timeframes, was 6.5 per cent
per annum for the 10 years to 30 June 2018
versus the Index return of 6.4 per cent
per annum. Including the full benefit of
franking, these returns are 8.5 per cent
per annum for AFIC and 8.0 per cent
per annum for the Index. AFIC’s portfolio
performance numbers (Figure 4) are after
costs and tax paid whereas the Index
does not have expenses or tax.
Figure 5 illustrates the cumulative long
term performance of the AFIC portfolio
versus the S&P/ASX 200 Accumulation
Index over the 10 years to 30 June 2018.
It also includes the benefits of franking
credits for both.
The share price was trading at a slight
discount to the net asset backing (before
tax on unrealised gains) at the end of June
(Figure 6 on page 10) and is the reason
the Dividend Reinvestment Plan did not
have any discount associated with it.
Nevertheless, the share price return,
including reinvestment of dividends,
over the 12 months to 30 June 2108 was
10.3 per cent. Whilst the share price can
often fluctuate between a premium and
discount, over the long term the share
price return is often very close to the
portfolio return (Figure 4).
Figure 3: Price Earnings Ratio of Small Industrial Sector of the Australian Market
Source: FactSet
19.5
19
18.5
18
17.5
17
16.5
16
Times
May 18
Apr 18
Mar 18
Feb 18
Jan 18
Dec 17
Jun 18
Nov 17
Sep 17
Oct 17
Aug 17
Jul 17
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Australian Foundation Investment Company Limited Annual Review 2018
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Australian Foundation Investment Company Limited Annual Review 2018
Net asset per share growth plus dividends
Share price growth plus dividends
3 year return5 year return
6.5%
6.5%
6.4%
10 year return
S&P/ASX 200 Accumulation Index
9.0 %
6.8 %
4.4 %
1 year return
8.2%
6.7%
10.0%
10.8
%
13.0%
10.3%
Figure 4: Relative Portfolio and Share Price Performance – Per Annum Returns
to 30 June 2018
Note assumes an investor can take full advantage of the franking credits. This chart calculates the benefit of franking credits
at the time dividends are paid for both AFIC and the Index. In practice there is a timing difference between receipt of the
dividend and the realisation of the franking benefit in the following tax year.
Jun 17
Jun 18
Jun 08Jun 09Jun 10Jun 11Jun 12Jun 13Jun 14Jun 15Jun 16
$2,500
$2,000
$1,500
$1,000
$500
$0
AFIC PortfolioS&P/ASX 200 Accumulation Index
Figure 5: Growth in Investment of $1,000 (Including Benefit of Franking)
− 10 Years to 30 June 2018
9
Australian Foundation Investment Company Limited Annual Review 2018
8
Australian Foundation Investment Company Limited Annual Review 2018
Positioning the Portfolio for
Long Term Opportunities
A key restraint on the current Australian
market is the prolonged, subdued growth
outlook facing many large companies.
This arises from their market positions
with no further consolidation possible,
increased competition and disruption, and
greater regulatory intervention. AFIC has
continued to adjust the portfolio to respond
to this situation. Whilst larger companies
continue to make up a significant proportion
of the portfolio, AFIC has been increasing
its holdings in a number of mid-sized
and small companies with good growth
prospects. This has been done having
regard to balancing the need to grow
dividends as well as provide meaningful
capital growth within the portfolio over
the long term. Overall purchases in the
investment portfolio for the year totalled
$739.3 million with sales totalling
$712.6 million, which is higher
than last year.
Major purchases included adding to
holdings in Macquarie Group, CSL, Sonic
Healthcare, James Hardie Industries and
Alumina, all of which have unique industry
exposures in global markets, and Sydney
Airport and Boral. Additions were also made
to smaller companies, Reliance Worldwide
and Reece, including participation in their
respective capital raisings to fund offshore
acquisitions, and Carsales.com.
Review of Operations and Activities continued
Figure 6: Share Price Premium/Discount to Net Asset Backing
Source: FactSet
Jun 18Jun 08Jun 10Jun 12Jun 14Jun 16
-10%
15%
0%
5%
10%
-5%
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Australian Foundation Investment Company Limited Annual Review 2018
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Australian Foundation Investment Company Limited Annual Review 2018
Unibail-Rodamco-Westfield (which acquired
Westfield Corporation through a scrip
bid), NEXTDC and Qantas were the more
significant new additions to the portfolio.
NEXTDC, which is a data centre operator,
is an example of the type of company that
AFIC is looking to add to the portfolio. It has
a unique position in an industry that is likely
to grow in excess of nominal economic
growth. It is leveraged to the growth in the
demand for cloud computing services as
many businesses seek to outsource these
services to companies with carrier neutral
data centres that have greater scale and
efficiencies. Given the investment required
and the competitive advantage afforded by
ownership of key sites, barriers to entry for
this industry are high. NEXTDC currently
operates five data centres in Melbourne,
Sydney, Perth, Canberra and Brisbane and
is in the process of building some additional
new data centres in Sydney, Melbourne
and Brisbane.
Major sales included the complete disposal
of Incitec Pivot, Coca-Cola Amatil and
Japara Healthcare. Westfield Corporation
and Tox Free Solutions were sold because
of takeovers. Other major sales included
a small reduction in the positions of QBE
Insurance, AMP, Telstra and Treasury
Wine Estates, all of which have been
long term holdings in the portfolio,
and Vicinity Centres.
AFIC had 91 holdings in the portfolio at
30 June 2018. Whilst the S&P/ASX 200
Index can provide a useful point of
reference for investors, AFIC actively
manages its investments. As a result,
the portfolio will differ quite markedly from
the Index. The following chart (Figure 7
on page 12) highlights the profile of AFIC’s
portfolio by the various sectors of the
market at the end of the financial year
and how it differs from the Index.
The most notable change is the position
of banks in the portfolio, which has declined
over recent years relative to the market
weight. Whilst banks continue to supply
a large part of the dividend income, the
outlook for growth relative to recent years,
in our view, has diminished as credit
for housing slows and competitive and
regulatory pressures become greater.
In addition, AFIC traditionally has not
been a large investor in Property Trusts
given the observation that over the long
term industrial companies have tended
to outperform Property Trusts and the
distribution from these Trusts do not carry
franking credits. The other major variation
from the Index is in Consumer Discretionary,
which includes gambling stocks.
A significant percentage of the AFIC
portfolio, by value, remains exposed
to the large companies in the Australian
market. Nevertheless, there are a significant
number of companies that sit outside
of these, many of which we believe have
the capacity to grow their business and
dividends over time. This is outlined in
Figure 8 on page 12, with 71 holdings
outside of the S&P/ASX 20.
11
Australian Foundation Investment Company Limited Annual Review 2018
10
Australian Foundation Investment Company Limited Annual Review 2018
Review of Operations and Activities continued
AFIC portfolio weightS&P/ASX 200 Index weight
Banks
Materials
Industrial
Healthcare
Consumer
Staples
Energy
Other
Financials
21.3%18.6%12.1%10.9%9.9%9.0%
Cash
1.3%5.4%
Telecom
Services
2.0%
Information
Technology
3.9%
Property
Trusts
1.7%
Utilities
1.9%
Consumer
Discretionary
2.0%
25%
20%
15%
10%
5%
0%
Figure 7: AFIC Investment by Sector versus the S&P/ASX 200 Index
as at 30 June 2018
S&P/ASX 100 excluding 20 Leaders: 42 Holdings
Outside of S&P/ASX 200: 29 Holdings
S&P/ASX 20: 20 Holdings
61%28%
11%
Figure 8: AFIC Investment by Company Size – Percentage of the
Portfolio by Value
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Australian Foundation Investment Company Limited Annual Review 2018
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Australian Foundation Investment Company Limited Annual Review 2018
AFIC has been increasing its holdings in a number of mid-sized
and small companies with good growth prospects.
“
“
Australian Resources
Index Up
41%
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Australian Foundation Investment Company Limited Annual Review 2018
12
Australian Foundation Investment Company Limited Annual Review 2018
Review of Operations and Activities continued
Going Forward
The ongoing strength of the Australian
market continues to create a challenging
investment environment. In particular, the
drive by investors towards companies
displaying good growth prospects is
pushing share prices for these businesses
very high. In this context, high valuation
levels at a time when interest rates are
starting to move from very low levels may
create some uncertainty for markets and
therefore could then provide appropriate
investment opportunities.
In addition, the geo-political environment
remains unpredictable, with issues such
as trade, leading concerns. Markets at this
point have largely overlooked any potential
implications given economic fundamentals
appear sound across most large developed
markets. However, the key implication
for Australia is the impact any significant
change to global trade through imposition
of trade tariffs and retaliatory measures has
on China, and the influence this has on the
ongoing demand for Australian exports,
particularly resources.
For AFIC, it is a matter of being alert but
patient, and when appropriate, making
adjustments to the portfolio over time
that make sense as a long-term investor
in quality and growing companies.
Directorship Matters
As previously announced in September
2017 and detailed in the Company’s
Half-Yearly Review, Ross Barker retired as
Managing Director and Chief Executive
Officer (CEO) on 31 December 2017.
Mark Freeman, who was previously the
Chief Investment Officer of AFIC, became
the Managing Director and CEO of AFIC
on 1 January 2018.
The Board wishes to record its deep
appreciation to Ross Barker for his
16 years of outstanding service as
Managing Director and Chief Executive
Officer and wish him well in his retirement.
He has shown enduring leadership
through this period and made a significant
contribution to the growth in AFIC
throughout his distinguished tenure at
the Company. Mr Barker remains on the
Board of AFIC as a Non-Executive Director.
15
Australian Foundation Investment Company Limited Annual Review 2018
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Australian Foundation Investment Company Limited Annual Review 2018
For AFIC, it is a matter of being alert but patient, and when
appropriate, making adjustments to the portfolio over time
that make sense as a long-term investor in quality and
growing companies.
“
”
Industrial Sector Up
8%
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Australian Foundation Investment Company Limited Annual Review 2018
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Australian Foundation Investment Company Limited Annual Review 2018
Top 25 Investments
As at 30 June 2018
Includes investments held in both the investment and trading portfolios.
Valued at Closing Prices at 30 June 2018
Total Value
$ Million
% of the
Portfolio
1Commonwealth Bank of Australia575.77.9
2BHP*477.76.6
3Westpac Banking Corporation455.56.3
4CSL*372.65.1
5Wesfarmers331.84.6
6Rio Tinto288.44.0
7National Australia Bank256.13.5
8Australia and New Zealand Banking Group239.73.3
9Transurban Group237.33.3
10Macquarie Group*206.42.8
11Amcor180.52.5
12Woolworths Group*174.62.4
13Oil Search146.72.0
14Woodside Petroleum129.31.8
15Telstra Corporation115.31.6
16Brambles107.81.5
17Sydney Airport*107.31.5
18AGL Energy96.81.3
19Treasury Wine Estates94.91.3
20James Hardie Industries91.91.3
21Computershare85.91.2
22Qube Holdings84.31.2
23Sonic Healthcare82.01.1
24Seek*77.91.1
25Ramsay Health Care76.41.1
Total5,092.6
As a percentage of total portfolio value (excludes cash)70.0%
* Indicates that options were outstanding against part of the holding.
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Australian Foundation Investment Company Limited Annual Review 2018
16
Australian Foundation Investment Company Limited Annual Review 2018
2018
$’000
2017
$’000
Dividends and distributions302,389270,887
Revenue from deposits and bank bills1,4091,659
Other revenue2283
Net gains on trading portfolio (including unrealised gains or losses)2643,065
Total income304,084275,694
Finance costs(848)(8,969)
Administration expenses (net of recoveries)(9,852)(9,461)
Profit before income tax 293,384257,264
Income tax (14,377)(11,964)
Net profit 279,007245,300
CentsCents
Net profit per share23.5721.32
Income Statement
For the Year Ended 30 June 2018
17
Australian Foundation Investment Company Limited Annual Review 2018
16
Australian Foundation Investment Company Limited Annual Review 2018
2018
$’000
2017
$’000
Current assets
Cash 99,183105,125
Receivables77,23452,011
Total current assets176,417157,136
Non-current assets
Investment portfolio 7,280,7066,790,368
Deferred tax assets1,257349
Total non-current assets7,281,9636,790,717
Total assets7,458,3806,947,853
Current liabilities
Payables7126,953
Tax payable8,2451,980
Borrowings – bank debt100-
Trading portfolio6,757546
Provisions4,3854,448
Total current liabilities20,19913,927
Non-current liabilities
Provisions1,3941,332
Deferred tax liabilities – investment portfolio1,097,527967,091
Total non-current liabilities1,098,921968,423
Total liabilities1,119,120982,350
Net assets6,339,2605,965,503
Shareholders’ equity
Share capital2,811,7712,756,306
Revaluation reserve2,422,5682,123,209
Realised capital gains reserve448,892430,912
General reserve23,63723,637
Retained profits632,392631,439
Total shareholders’ equity (including minority interests)6,339,2605,965,503
Balance Sheet
As at 30 June 2018
19
Australian Foundation Investment Company Limited Annual Review 2018
18
Australian Foundation Investment Company Limited Annual Review 2018
Summarised Statement of Changes in Equity
For the Year Ended 30 June 2018
2018
$’000
2017
$’000
Total equity at the beginning of the year5,965,5035,408,541
Dividends paid(278,054)(267,751)
Shares – Dividend Reinvestment Plan issued55,60155,242
– Conversion of Convertible Notes-179,755
Other Share Capital Adjustments(136)(182)
Total transactions with shareholders(222,589)(32,936)
Profit for the year 279,007245,300
Revaluation of investment portfolio454,180500,389
Provision for tax on revaluation(136,841)(154,791)
Revaluation of investment portfolio (after tax)317,339345,598
Total comprehensive income for the year596,346590,898
Realised gains/(losses) on securities sold24,385(9,336)
Tax expense on realised gains on securities sold(6,405)(647)
Net realised gains/(losses) on securities sold17,980(9,983)
Transfer from revaluation reserve to realised gains reserve(17,980)9,983
Dividends paid to minority interests by AICS-(1,000)
Total equity at the end of the year6,339,2605,965,503
A full set of AFIC’s final accounts are available on the Company’s website.
19
Australian Foundation Investment Company Limited Annual Review 2018
18
Australian Foundation Investment Company Limited Annual Review 2018
Individual investments for the combined investment and trading portfolios as at
30 June 2018 are listed below. The list should not, however, be used to evaluate
portfolio performance or to determine the net asset backing per share at other dates.
Net asset backing is advised to the Australian Securities Exchange each month and
is recorded on the toll free telephone service at 1800 780 784 and posted to AFIC’s
website afi.com.au
Individual holdings in the portfolios may change during the course of the year. In addition,
holdings that are part of the trading portfolio may be subject to call options or sale
commitments by which they may be sold at a price significantly different from the
market price prevailing at the time of the exercise or sale.
Code
Ordinary Shares, Trust Units
or Stapled Securities
Number
Held
2017
’000
Number
Held
2018
’000
Market
Value
2018
$’000
ABCAdelaide Brighton0
1,72011,954
AGLAGL Energy4,465
4,30596,776
AIAAuckland International Airport1,770
1,77011,027
ALQALS9,205
8,50064,090
ALUAltium 625
62514,069
AMCAmcor12,300
12,527180,517
AMPAMP20,100
12,91045,961
ANNAnsell1,284
1,28434,908
ANZAustralia and New Zealand Banking Group8,488
8,488239,693
APAAPA Group5,075
4,04039,794
APEAP Eagers1,404
1,40411,976
ARBARB Corporation1,198
1,19827,352
ASXASX 709
70945,632
Holdings of Securities
At 30 June 2018
21
Australian Foundation Investment Company Limited Annual Review 2018
20
Australian Foundation Investment Company Limited Annual Review 2018
Code
Ordinary Shares, Trust Units
or Stapled Securities
Number
Held
2017
’000
Number
Held
2018
’000
Market
Value
2018
$’000
AUBAUB Group 0
7299,904
AWC*Alumina5,513
15,04840,433
BGABega Cheese2,873
2,87321,287
BHP*BHP 14,118
14,091477,690
BKWBrickworks1,503
1,50323,506
BLDBoral4,008
9,66063,080
BXBBrambles13,442
12,139107,791
CARCarsales.com1,520
3,17748,034
CBACommonwealth Bank of Australia7,900
7,900575,673
CGFChallenger 4,265
5,54865,631
COHCochlear124
13727,423
CPUComputershare4,660
4,66085,884
CSL*CSL1,739
1,943372,576
CTXCaltex Australia669
76925,026
CVWClearView Wealth6,179
6,1797,168
CWYCleanaway Waste Management0
7,73613,074
CYB*CYBG PLC5,124
7,81843,550
DJWDjerriwarrh Investments7,505
7,50525,368
DLXDuluxGroup2,556
3,02923,171
DUIDiversified United Investment12,030
12,03049,324
EQTEQT Holdings 1,303
1,30327,107
EVTEvent Hospitality and Entertainment1,030
1,03013,795
F LTFlight Centre Travel Group241
19312,313
21
Australian Foundation Investment Company Limited Annual Review 2018
20
Australian Foundation Investment Company Limited Annual Review 2018
Holdings of Securities continued
At 30 June 2018
Code
Ordinary Shares, Trust Units
or Stapled Securities
Number
Held
2017
’000
Number
Held
2018
’000
Market
Value
2018
$’000
FNPFreedom Foods Group4,507
6,01140,455
FPHFisher & Paykel Healthcare Corporation5,008
4,40060,192
GMGGoodman Group0
1,0009,620
HSOHealthscope26,700
4,0008,840
IAGInsurance Australia Group6,066
4,97642,447
ICQiCar Asia 22,030
20,1564,737
IELIDP Education880
8809,246
ILUIluka Resources3,642
2,36726,463
IREIRESS3,737
4,02448,455
IVCInvoCare1,150
1,32518,206
JHXJames Hardie Industries3,111
4,05091,854
LICLifestyle Communities5,470
5,47032,002
LNKLink Administration Holdings3,396
3,20023,456
MFTMainfreight2,840
2,99076,155
MIRMirrabooka Investments8,728
8,72823,478
M LTMilton Corporation10,841
10,84149,979
MPLMedibank Private2,000
2,0005,840
MQG*Macquarie Group700
1,680206,396
NABNational Australia Bank9,969
9,342256,066
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Australian Foundation Investment Company Limited Annual Review 2018
22
Australian Foundation Investment Company Limited Annual Review 2018
Code
Ordinary Shares, Trust Units
or Stapled Securities
Number
Held
2017
’000
Number
Held
2018
’000
Market
Value
2018
$’000
NVTNavitas3,678
3,67816,328
NXTNEXTDC0
4,18031,601
ORAOrora 12,864
11,67041,663
ORG*Origin Energy6,000
6,50064,833
ORIOrica2,712
2,71248,131
OSHOil Search16,483
16,483146,694
PPTPerpetual1,061
1,06144,142
QANQantas Airways0
3,25020,020
QBEQBE Insurance Group7,874
4,35542,418
QUBQube Holdings34,962
34,96284,258
REAREA Group384
38434,891
REHReece 318
3,62145,803
RHCRamsay Health Care1,415
1,41576,382
RIORio Tinto3,652
3,457288,441
RMDResMed3,935
3,93555,484
RWCReliance Worldwide Corporation2,400
8,60046,096
S32South3215,241
15,24155,020
SCGScentre Group12,950
15,65068,704
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Australian Foundation Investment Company Limited Annual Review 2018
22
Australian Foundation Investment Company Limited Annual Review 2018
Holdings of Securities continued
At 30 June 2018
Code
Ordinary Shares, Trust Units
or Stapled Securities
Number
Held
2017
’000
Number
Held
2018
’000
Market
Value
2018
$’000
SEK*Seek3,315
3,59577,889
SHLSonic Healthcare1,841
3,34281,982
SOLWashington H Soul Pattinson1,709
1,70935,350
SUN*Suncorp Group3,770
4,39063,954
SYDSydney Airport8,500
15,000107,262
TCLTransurban Group18,335
19,822237,268
TGGTempleton Global Growth Fund12,106
9,68513,752
TLSTelstra Corporation52,445
44,000115,280
TPMTPG Telecom6,228
6,50033,605
TWETreasury Wine Estates6,882
5,45994,932
URWUnibail-Rodamco-Westfield0
2,47236,263
VCXVicinity Centres16,378
4,70012,173
WBCWestpac Banking Corporation15,545
15,545455,469
WESWesfarmers6,723
6,723331,823
WOW*Woolworths Group5,065
5,732174,616
WPLWoodside Petroleum3,283
3,648129,346
XROXero 437
74133,330
Total
7,261,645
* Part of the security was subject to call options written by the Company.
25
Australian Foundation Investment Company Limited Annual Review 2018
24
Australian Foundation Investment Company Limited Annual Review 2018
Code
Convertible Notes, Preference Shares
and Other Interest-bearing Securities
Number
Held
2017
’000
Number
Held
2018
’000
Market
Value
2018
$’000
RHCPARamsay Health Care Convertible
Adjustable Rate Equity Securities
115
11512,304
Total
12,304
25
Australian Foundation Investment Company Limited Annual Review 2018
24
Australian Foundation Investment Company Limited Annual Review 2018
Acquisitions
Cost
$’000
Macquarie Group105,902
CSL48,838
Sydney Airport47,044
Boral41,944
Unibail-Rodamco-Westfield* (as a result of the takeover of Westfield Corporation)36,078
Sonic Healthcare35,347
James Hardie Industries29,605
NEXTDC*28,558
Reliance Worldwide (includes $10.91 million in 1 for 1.98 issue at $4.15 per share)27,188
Alumina24,308
Carsales.com22,962
Reece (includes $10.56 million in 1 for 11 issue and placement at $9.30 per share)20,903
Qantas Airways*20,637
* New holding in the portfolio.
Major Transactions in the Investment Portfolio
27
Australian Foundation Investment Company Limited Annual Review 2018
26
Australian Foundation Investment Company Limited Annual Review 2018
Disposals
Proceeds
$’000
Incitec Pivot
#
79,970
Westfield Corporation
#
(taken over by Unibail-Rodamco)70,902
Healthscope57,338
Coca-Cola Amatil
#
43,656
QBE Insurance34,096
Tox Free Solutions
#
(taken over by Cleanaway Waste Management)30,592
Vicinity Centres29,826
AMP28,171
Japara Healthcare
#
26,928
Telstra24,288
Treasury Wine Estates23,782
#
Complete disposal from the portfolio.
New Companies Added to the Investment Portfolio
Unibail-Rodamco-Westfield
NEXTDC
Qantas Airways
Cleanaway Waste Management
Adelaide Brighton
AUB Group
Goodman Group
27
Australian Foundation Investment Company Limited Annual Review 2018
26
Australian Foundation Investment Company Limited Annual Review 2018
Australian Foundation Investment Company
Limited (AFIC)
ABN 56 004 147 120
Directors
Terrence A Campbell AO, Chairman
Robert M Freeman, Managing Director
Ross E Barker
Jacqueline C Hey
Graeme R Liebelt
John Paterson
David A Peever
Catherine M Walter AM
Peter J Williams
Company Secretaries
Matthew J Rowe
Andrew JB Porter
Auditor
PricewaterhouseCoopers
Chartered Accountants
Country of Incorporation
Australia
Registered Office and Mailing Address
Level 21, 101 Collins Street
Melbourne Victoria 3000
Contact Details
Telephone (03) 9650 9911
Facsimile (03) 9650 9100
Website afi.com.au
Email invest@afi.com.au
For enquiries regarding net asset backing
(as advised each month to the Australian
Securities Exchange):
Telephone 1800 780 784 (toll free)
Share Registrar
Australia
Computershare Investor Services Pty Ltd
Yarra Falls, 452 Johnston Street
Abbotsford Victoria 3067
New Zealand
Computershare Investor Services Limited
159 Hurstmere Road
Takapuna Auckland 0622
Shareholder
Enquiry Line 1300 662 270
0800 333 501
(within New Zealand)
+61 3 9415 4373
(from overseas)
Facsimile (03) 9473 2500
Website investorcentre.com/au/contact
For all enquiries relating to shareholdings,
noteholdings, dividends and related matters,
please contact the share registrar as above.
Australian and New Zealand Securities
Exchange Codes
AFI Ordinary shares (ASX and NZX)
Company Particulars
29
Australian Foundation Investment Company Limited Annual Review 2018
28
Australian Foundation Investment Company Limited Annual Review 2018
The Annual Report for 2018 is available
on AFIC’s website afi.com.au or by contacting
the Company on (03) 9650 9911.
Shareholder Meetings
Australia
Annual General Meeting
Time 10.00am
Date Tuesday 9 October 2018
Venue ZINC Function Centre
Location Corner of Swanston Street
and Flinders Street
Melbourne
Sydney Shareholder Meeting
Time 10.00am
Date Monday 15 October 2018
Venue Four Seasons Hotel
Location 199 George Street
Sydney
Adelaide Shareholder Meeting
Time 10.00am
Date Friday 19 October 2018
Venue Adelaide Convention Centre
Location Panorama Rooms, North Terrace
Adelaide
Brisbane Shareholder Meeting
Time 10.00am
Date Monday 22 October 2018
Venue Brisbane Hilton Hotel
Location 190 Elizabeth Street
Brisbane
New Zealand
Auckland Shareholder Meeting
Time 10.00am
Date Monday 3 December 2018
Venue Hilton Hotel
Location 147 Quay Street
Auckland
29
Australian Foundation Investment Company Limited Annual Review 2018
28
Australian Foundation Investment Company Limited Annual Review 2018
Design: MDM Investorcom
Printed on environmentally friendly paper
Notice of Annual
General Meeting 2018
90
YEARS OF INVESTMENT
EXPERIENCE
The Annual General Meeting of Australian Foundation
Investment Company Limited, ABN: 56 004 147 120
(the ‘Company’) will be held at:
ZINC at Federation Square, Corner of Swanston Street
and Flinders Street, Melbourne, Victoria 3000 at 10.00am
(AEDT) on Tuesday 9 October 2018.
The Company has determined that, for the purpose of
voting at the meeting, shares will be taken to be held by
those persons recorded on the Company’s register at
7.00pm (AEDT) on Sunday 7 October 2018.
1. Financial Statements
and Reports
To consider the Directors’ Report, Financial
Statements and Independent Audit Report
for the financial year ended 30 June 2018.
(Please note that no resolution will be
required to be passed on this matter.)
2. Adoption of Remuneration
Report
To consider and, if thought fit, to pass
the following resolution (as an ordinary
resolution):
“That the Remuneration Report for
the financial year ended 30 June 2018
be adopted.”
(Please note that the vote on this item
is advisory only.)
3 and 4 Re-election
of Directors
To consider and, if thought fit, to pass
the following resolutions (as ordinary
resolutions):
3. “That Graeme Liebelt, a Director retiring
from office in accordance with Rule 46
of the Constitution, being eligible is re-
elected as a Director of the Company.”
4. “That Ross Barker, a Director retiring
from office in accordance with Rule 53(f)
of the Constitution, being eligible is re-
elected as a Director of the Company.”
5. Renewal of Proportional
Takeover Provisions in
the Constitution
To consider and, if thought fit, pass
the following resolution (as a special
resolution):
“That, pursuant to sections 136(2) and 648G
of the Corporations Act 2001 (Cth), the
proportional takeover provisions in Rules 79
and 80 of the Company’s Constitution are
renewed for a period of three years from
the date of this meeting.”
By Order of the Board
Matthew Rowe
Company Secretary
30 August 2018
BUSINESS OF THE MEETING
2
Australian Foundation Investment Company Limited Notice of Annual General Meeting 2018
Explanatory Notes
The Explanatory Notes below provide
additional information regarding the items
of business proposed for the Annual
General Meeting.
IMPORTANT: Shareholders are urged
to direct their proxy how to vote by
clearly marking the relevant box for
each item on the proxy form.
Please ensure that your properly
completed proxy form reaches the
Share Registry by the deadline of
10.00am (AEDT) on Sunday 7
October 2018.
1. Financial Statements
and Reports
During this item there will be a reasonable
opportunity for shareholders to ask questions
and comment on the Directors’ Report,
Financial Statements and Independent
Audit Report for the financial year ended
30 June 2018. No resolution will be required
to be passed on this matter.
Shareholders who have not elected to
receive a hard copy of the Company’s
2018 Annual Report can view or download
it from the Company’s website at:
afi.com.au/Reports-by-year.aspx
2. Adoption of Remuneration
Report
Board recommendation and undirected
proxies: The Board recommends that
shareholders vote in FAVOUR of Item 2.
The Chairman of the meeting intends
to vote undirected proxies in FAVOUR
of Item 2.
During this item there will be a reasonable
opportunity for shareholders at the meeting
to comment on and ask questions about
the Remuneration Report which can be
found in the Company’s 2018 Annual
Report. As prescribed by the Corporations
Act, the vote on the proposed resolution
is an advisory one.
Voting Exclusions on Item 2
Pursuant to sections 250BD and 250R
of the Corporations Act 2001 (Cth), votes
many not be cast, and the Company will
disregard any votes cast, on the resolution
proposed in Item 2 (‘Resolution 2’):
• by or on behalf of any member of the
key management personnel of the
Company’s consolidated group (a ‘KMP
member’) whose remuneration details
are included in the Remuneration Report,
or any of their closely related parties,
regardless of the capacity in which
the votes are cast; or
• by any person who is a KMP member as
at the time Resolution 2 is voted on at the
Annual General Meeting, or any of their
closely related parties, as a proxy,
unless the votes are cast as a proxy
for a person who is entitled to vote on
Resolution 2:
• in accordance with a direction in the
proxy appointment; or
• by the Chairman of the meeting in
accordance with an express authorisation
in the proxy appointment to cast the
votes even if Resolution 2 is connected
directly or indirectly with the remuneration
of a KMP member.
If the Chairman of the meeting is appointed,
or taken to be appointed, as a proxy, the
shareholder can direct the Chairman to vote
for or against, or to abstain from voting on,
Resolution 2 by marking the appropriate
box opposite Item 2 on the proxy form.
Pursuant to sections 250BD(2) and
250R(5) of the Corporations Act 2001, if
the Chairman of the meeting is a proxy
and the relevant shareholder does not
mark any of the boxes opposite Item
2, the relevant shareholder will be
expressly authorising the Chairman to
exercise the proxy in relation to Item 2.
For the purposes of these voting exclusions:
• A ‘closely related party’ of a KMP
member means (1) a spouse or child of
the KMP member, (2) a child of the KMP
member’s spouse, (3) a dependant of the
KMP member or of the KMP member’s
spouse, (4) anyone else who is one of
the KMP member’s family and may be
expected to influence the KMP member,
or be influenced by the KMP member,
in the KMP member’s dealings with the
Company, or (5) a company the KMP
member controls.
• The Company will also apply these
voting exclusions to persons appointed
as attorney by a shareholder to attend
and vote at the Annual General Meeting
under a power of attorney, as if they were
appointed as a proxy.
Items 3 and 4 Re-election
of Directors
Board recommendation and undirected
proxies: The Board recommends (with the
exception of each Director in relation to their
own re-election) that shareholders vote in
FAVOUR of items 3 and 4. The Chairman
of the meeting intends to vote undirected
proxies in FAVOUR of items 3 and 4.
Graeme Liebelt was re-elected as a Director
by shareholders at the 2015 AGM. As
such he is required to seek re-election by
shareholders at this AGM. Ross Barker
retired as Chief Executive Officer of the
Company on 31 December 2017 and the
Board resolved that Mr Barker should
remain as a Non-Executive Director of the
Company. Pursuant to Rule 53(f) of the
Company’s Constitution Mr Barker is also
required to seek re-election at this AGM.
3
Australian Foundation Investment Company Limited Notice of Annual General Meeting 2018
BUSINESS OF THE MEETING continued
Their biographical details are set out below:
Graeme R Liebelt
B Ec (Hons), FAICD. Independent
Non-Executive Director. Chairman
of the Remuneration Committee.
Mr Liebelt was appointed to the Board
in June 2012. He is Chairman of Amcor
Limited and DuluxGroup Limited, a
Director of Australia and New Zealand
Banking Group Limited and a Director
of Carey Baptist Grammar School.
He is a Fellow of the Australian Academy
of Technological Sciences and Engineering
and a Fellow of the Australian Institute
of Company Directors. He was formerly
Managing Director and CEO of Orica
Limited, Chairman and Director of the
Global Foundation and Deputy Chairman
of Melbourne Business School.
Ross E Barker
BSc (Hons) (Melb), MBA (Melb), F Fin.
Non-Executive Director. Member of the
Investment Committee.
Mr Barker transitioned to a Non-Executive
Director in January 2018 after retiring as
Chief Executive Officer and Managing
Director of the Company in December 2017.
Mr Barker was appointed Chief Executive
Officer of the Company in February 2001
and Managing Director in October 2001
and prior to that an Alternate Director of
the Company since April 1987. He is also
Chairman of Melbourne Business School
Ltd. He is a Non-Executive Director
of AMCIL Limited and Mirrabooka
Investments Limited.
Further information regarding the
Company’s Corporate Governance
arrangements and the Board’s role can
be found on the Company’s website at:
afi.com.au/Corporate-Governance.aspx
5. Renewal of Proportional
Takeover Provisions in
the Constitution
Board recommendation and undirected
proxies: The Board recommends that
shareholders vote in FAVOUR of Item 5.
The Chairman of the meeting intends to
vote undirected proxies in FAVOUR
of Item 5.
Background
The Corporations Act 2001 (Cth) permits a
company to include rules in its constitution
which enable the company to refuse to
register a transfer of shares resulting
from a proportional takeover bid unless
shareholders in the bid class in a meeting
approve the takeover bid.
It is a requirement of the Corporations Act
that such proportional takeover approval
provisions in a company’s constitution
apply for a maximum period of three years,
unless earlier renewed. In the case of the
Company, such proportional takeover
approval provisions (existing Rules 79 and
80 of the Company’s Constitution) were
approved by shareholders at the 2015
AGM and will expire on 7 October 2018.
The Directors consider that it is in the
best interests of shareholders to renew
these provisions in their existing form.
Accordingly, a special resolution is being
put to shareholders under Section 648G
of the Corporations Act to renew Rules 79
and 80 of the Company’s Constitution.
If approved by shareholders at the meeting,
Rules 79 and 80 will operate for three years
from the date of the meeting (that is, until
9 October 2021) unless renewed earlier.
Proportional Takeover Bids
A proportional takeover bid involves the
bidder offering to buy a proportion only
of each shareholder’s shares in the
target company.
This means that control of the target
company may pass without members
having the chance to sell all their shares
to the bidder. It also means the bidder
may acquire control of the target company
without paying an adequate premium
for gaining control.
To address this possibility, a company may
provide in its constitution that, in the event
of a proportional takeover bid being made
for shares in the company, the directors
must convene a meeting of shareholders
to vote on a resolution to approve that bid.
A meeting convened under the proportional
takeover approval provisions is treated as
a general meeting of the company and the
majority decision of the company’s members
will be binding on all individual members.
Effect of Proposed Proportional
Takeover Approval Provisions
Where a proportional takeover bid is made,
the Directors must convene a meeting of
shareholders to vote on a resolution to
approve the proportional bid before the 14th
day prior to the closing of the bid period.
The vote is decided on a simple majority.
Each person who, as at the end of the day
on which the first offer under the takeover
bid was made, held bid class shares is
entitled to vote. Neither the bidder nor
its associates are entitled to vote on
the resolution.
If a meeting is not held, Section 648E of
the Corporations Act deems a resolution
approving the proportional bid to have been
passed thereby allowing the proportional
bid to proceed. Further, the Directors will
contravene the Act if they fail to ensure a
resolution to approve the bid is voted on.
If the resolution is rejected, the registration
of any transfer of shares resulting from that
proportional takeover bid will be prohibited
and the bid will be deemed to be withdrawn.
If the resolution is passed or deemed to have
been passed, the transfer of shares resulting
from acceptance of an offer under that bid
will be permitted and the transfer of shares
will be registered provided they comply
with the other provisions of the Constitution.
Rules 79 and 80 will not apply to full
takeover bids.
4
Australian Foundation Investment Company Limited Notice of Annual General Meeting 2018
Reason for Proposing the
Resolution
The Directors consider that the renewal
of Rules 79 and 80 is in the best interests
of all shareholders of the Company. In the
Directors’ view, shareholders should have
the opportunity to vote on a proposed
proportional takeover bid.
In the absence of Rules 79 and 80 (as
renewed), a proportional takeover bid for
the Company may enable effective control
of the Company to be acquired by a party
who has not offered to acquire 100 per cent
of the Company’s shares (and, therefore,
has not offered to pay a ‘control premium’
that reflects 100 per cent ownership).
As a result, if a proportional takeover bid
for the Company is made:
• shareholders may not have the opportunity
to dispose of all their shares; and
• shareholders risk being locked into
a minority position in the Company or
suffering loss following such a change
of control if the bid causes a decrease
in the market value of shares.
If Rules 79 and 80 are renewed, the Board
considers that this risk will be minimised
by enabling shareholders to decide whether
or not a proportional takeover bid should
be allowed to proceed.
Present Acquisition Proposals
As at the date of this notice, the Directors
are not aware of any proposal by any
person to acquire, or increase the extent
of, a substantial interest in the Company.
Review of Proportional Takeover
Approval Provisions
The Corporations Act requires
these Explanatory Notes to discuss
retrospectively the potential advantages
and disadvantages of the proportional
takeover approval provisions for both
Directors and shareholders.
While the proportional takeover approval
provisions have been in effect, there have
been no takeover bids for the Company –
either proportional or otherwise. So there
are no actual examples against which to
review the advantages and disadvantages
of the existing proportional takeover
approval provisions for the Directors and
shareholders of the Company. The Directors
are not aware of any potential takeover bid
which was discouraged by Rules 79 and 80.
Advantages and Disadvantages
In addition to looking at the provisions
retrospectively, the Corporations Act
also requires these Explanatory Notes to
discuss the potential future advantages and
disadvantages of the proposed proportional
takeover approval provisions for both
Directors and shareholders.
The Directors consider that there are
no advantages or disadvantages for
the Directors in renewing the proposed
proportional takeover approval provisions.
In particular, there is no restriction on their
ability to make a recommendation on
whether a proportional takeover bid
should be accepted.
For shareholders, the potential advantage
of renewing the proportional takeover
approval provisions is that they provide
shareholders with the opportunity to
consider, discuss in a meeting called
specifically for the purpose, and vote
on whether a proportional takeover bid
should be approved. This ensures that
shareholders have an opportunity to have
a say in the future ownership and control
of the Company. The Directors believe
that this would encourage any future
proportional bids to be structured so as to
be attractive to a majority of shareholders.
It may also discourage the making of a
proportional takeover bid that might be
considered opportunistic. Finally, knowing
the view of a majority of the shareholders
may help each individual shareholder to
assess the likely outcome of the proportional
takeover bid and decide whether or not to
accept an offer under the bid.
A potential disadvantage for shareholders
arising from renewing the proportional
takeover approval provisions is that they
may discourage proportional takeover
bids being made and may reduce any
speculative element in the market price
of the Company’s shares arising from the
possibility of a proportional bid being made.
As a result, shareholders may not have
the opportunity to dispose of a portion of
their shares at an attractive price where
the majority rejects an offer from a party
seeking control of the Company.
The Directors consider that the potential
advantages for shareholders of the proposed
proportional takeover approval provisions
outweigh the potential disadvantages.
5
Australian Foundation Investment Company Limited Notice of Annual General Meeting 2018
BUSINESS OF THE MEETING continued
Shareholder Approval
To pass as a special resolution, this item
of business requires the support of
75 per cent or more of the votes cast
on the resolution.
Shareholder Information
Proxies
1. A shareholder entitled to attend and vote
at this meeting is entitled to appoint not
more than two proxies (who need not
be members of the Company) to attend,
vote and speak in the shareholder’s
place and to join in any demand
for a poll.
2. Where a shareholder appoints more
than one representative, proxy or
attorney, those appointees are entitled
to vote on a poll but not on a show
of hands.
3. A shareholder who appoints two
proxies may specify a proportion or
number of the shareholder’s votes
each proxy is appointed to exercise.
Where no such specification is made,
each proxy may exercise half of the
votes (any fractions of votes resulting
from this are disregarded).
4. Proxy forms may be lodged online
by visiting investorvote.com.au or by
scanning the QR Code on the proxy
form with a mobile device.
5. Relevant custodians may lodge
their proxy forms online by visiting
intermediaryonline.com
6. Proxy forms and any authorities (or
certified copies of those authorities)
under which they are signed may be
delivered in person, by mail or by fax
to the Company’s Share Registry (see
details below) no later than 48 hours
before the meeting, being 10.00am
(AEDT) on Sunday 7 October 2018.
Further details are on the proxy form.
7. A proxy need not vote in that capacity
on a show of hands on any resolution
nor (unless the proxy is the Chairman
of the meeting) on a poll. However, if the
proxy’s appointment specifies the way
to vote on a resolution, and the proxy
decides to vote in that capacity on that
resolution, the proxy must vote the way
specified (subject to the other provisions
of this Notice, including the voting
exclusions noted above).
8. In certain circumstances the Chairman
of the meeting will be taken to have been
appointed as the proxy of the relevant
shareholder in respect of the meeting
or the poll on that resolution even if the
shareholder has not expressly appointed
the Chairman of the meeting as their
proxy. This will occur where:
• an appointment of a proxy specifies
the way the proxy is to vote on a
particular resolution; and
• the appointed proxy is not the
Chairman of the meeting; and
• at the meeting, a poll is called
on the resolution; and
• either of the following apply:
– if a record of attendance is made
for the AGM and the proxy is not
recorded as attending; and
– the proxy does not vote on
the resolution.
Corporate Representatives
A body corporate which is a shareholder,
or which has been appointed as a proxy,
may appoint an individual to act as its
representative at the meeting. Unless it
has previously been given to the Company,
the representative should bring evidence
of their appointment to the meeting,
together with any authority under which it is
signed. The appointment must comply with
Section 250D of the Corporations Act 2001.
Attorneys
A shareholder may appoint an attorney
to vote on their behalf. To be effective for
the meeting, the instrument effecting the
appointment (or a certified copy of it) must
be received by the deadline for the receipt
of proxy forms (see above), being no later
than 48 hours before the meeting.
Share Registry
The Company’s Share Registry details
are as follows:
Computershare Investor
Services Pty Limited
Street Address
Yarra Falls
452 Johnston Street
Abbotsford Victoria 3067
Postal Address
GPO Box 242
Melbourne Victoria 3001
Telephone
1300 662 270 (within Australia)
0800 333 501 (within New Zealand)
+61 3 9415 4373 (outside Australia)
Facsimile
1800 783 447 (within Australia)
+61 3 9473 2555 (outside Australia)
Internet
investorcentre.com/au/contact
6
Australian Foundation Investment Company Limited Notice of Annual General Meeting 2018
Annual General Meeting Venue
The Annual General Meeting of Australian Foundation Investment Company Limited, ABN: 56 004 147 120 (the ‘Company’) will be held at:
ZINC at Federation Square, Corner of Swanston Street and Flinders Street, Melbourne, Victoria 3000 at 10.00am (AEDT) on Tuesday 9 October 2018.
Flinders St
Swanston St
Princes Bridge
Flinders St Station
Visitor
Info
Centre
ACMI
Yarra
Building
The Ian
Potter
Centre
Deakin Edge
Carpark
Lift/stairs
Atrium
Entrance
Russell St Extension
Plaza
FEDERATION SQUARE
Cross
Bar
River Terrace
Yarra River
St Pauls
Cathedral
ZINC
Transport
Bar
Flinders
Gate
Carpark
Birrarung Marr
By foot
By car
By tram
Lift
7
Australian Foundation Investment Company Limited Notice of Annual General Meeting 2018
237318_022XRB
Lodge your proxy:
Online:
www.investorvote.com.au
By Mail:
Computershare Investor Services Pty Limited
GPO Box 242 Melbourne
Victoria 3001 Australia
In Person:
Computershare Investor Services Pty Limited
Yarra Falls, 452 Johnston Street
Abbotsford, Victoria
Alternatively you can fax your form to
(within Australia) 1800 783 447
(outside Australia) +61 3 9473 2555
For Intermediary Online users only (Custodians)
www.intermediaryonline.com
For all enquiries call:
(within Australia) 1300 662 270
(within New Zealand) 0800 333 501
(outside Australia) +61 3 9415 4373
Proxy Form
How to direct your proxy to vote
Voting 100% of your holding: Direct your proxy how to vote by
marking one of the boxes opposite each item of business. If you do
not mark a box your proxy may vote or abstain as they choose (to the
extent permitted by law). If you mark more than one box on an item
your vote will be invalid on that item.
Voting a portion of your holding: Indicate a portion of your voting
rights by inserting the percentage or number of shares you wish to
vote in the For, Against or Abstain box or boxes. The sum of the votes
cast must not exceed your voting entitlement or 100%.
Appointing a second proxy: You are entitled to appoint up to two
proxies to attend the meeting and vote on a poll. If you appoint two
proxies you must specify the percentage of votes or number of
shares for each proxy, otherwise each proxy may exercise half of the
votes. When appointing a second proxy write both names and the
percentage of votes or number of shares for each in Step 1 overleaf.
A proxy need not be a shareholder of the Company.
Lodgement of proxy form
This proxy form (and any authority under which it is signed or a
certifi ed copy of it) must be received at an address given above by
10.00am (AEDT) on Sunday 7 October 2018, being not later than
48 hours before the commencement of the meeting. Any proxy form
received after that time will not be valid for the scheduled meeting.
Signing instructions for postal forms
Individual: Where the holding is in one name, the shareholder or
attorney must sign.
Joint Holding: Where the holding is in more than one name, all of
the shareholders or attorneys should sign.
Power of Attorney: If you have not already lodged the Power of
Attorney with the registry, please attach a certifi ed photocopy of the
Power of Attorney to this form when you return it.
Companies: Where the company has a Sole Director who is also the
Sole Company Secretary, this form must be signed by that person.
If the company (pursuant to section 204A of the Corporations Act
2001) does not have a Company Secretary, a Sole Director can also
sign alone. Otherwise this form must be signed by a Director jointly
with either another Director or a Company Secretary. Please sign in
the appropriate place to indicate the offi ce held.
Attending the meeting
If a representative of a corporate shareholder or proxy is to attend
the meeting you will need to provide the appropriate “Certifi cate of
Appointment of Corporate Representative” prior to admission. A form
of the certifi cate may be obtained from Computershare or online at
www.investorcentre.com under the help tab, “Printable Forms”.
Comments & Questions: If you have any comments or questions
for the Company, please write them on a separate sheet of paper and
return with this form.
GO ONLINE TO APPOINT YOUR PROXY,
or turn over to complete the form
For your proxy form to be effective it must be received by 10.00am (AEDT) on Sunday 7 October 2018
ABN 56 004 147 120
Appoint your proxy and view the Annual Report online
Go to www.investorvote.com.au or scan the QR Code with your mobile device.
Follow the instructions on the secure website to appoint your proxy.
Your access information that you will need to appoint your proxy online:
Control Number:
SRN/HIN:
PLEASE NOTE: For security reasons it is important that you keep your SRN/HIN confi dential. Please
dispose of this form carefully if you appoint your proxy online.
MR JOHN SAMPLE
FLAT 123
123 SAMPLE STREET
THE SAMPLE HILL
SAMPLE ESTATE
SAMPLEVILLE VIC 3030
I9999999999
999999
XX
237318_022XRB
I/We being a shareholder/s of AUSTRALIAN FOUNDATION INVESTMENT COMPANY LIMITED hereby appoint
the Chairman
of the meeting
OR
or failing the individual or body corporate named in relation to the meeting generally or in relation to a poll on a given resolution, or if no individual or
body corporate is named, the Chairman of the meeting, as my/our proxy to act generally at the meeting or in relation to a poll on the given resolution
(as applicable) on my/our behalf, including to vote in accordance with the following directions (or if no directions have been given, and to the extent
permitted by law, as the proxy sees fi t), at the Annual General Meeting of Australian Foundation Investment Company Limited to be held
at ZINC Federation Square, Corner of Flinders and Swanston Street, Melbourne, Victoria at 10.00am (AEDT) on Tuesday
9 October 2018
and at any adjournment or postponement of that meeting.
Chairman to vote undirected proxies as follows: I/We acknowledge that the Chairman of the meeting intends to vote undirected proxies
in favour of each item of business, to the extent permitted by law.
Chairman authorised to exercise proxies on remuneration related matters: If I/we have appointed the Chairman of the meeting as my/our
proxy (or the Chairman of the meeting becomes my/our proxy by default), I/we expressly authorise the Chairman of the meeting, to the extent
permitted by law, to exercise my/our proxy in respect of item 2 even though the item is connected directly or indirectly with the remuneration of
a member of key management personnel of Australian Foundation Investment Company Limited and its consolidated group, which includes the
Chairman of the meeting.
Items of Business
STEP 2
PLEASE NOTE: If you mark the Abstain box for an item, you are directing your proxy not to vote on your
behalf on a show of hands or a poll and your votes will not be counted in computing the required majority
Appoint a proxy to vote on your behalf
Signature of Shareholder(s) This section must be completed.
SIGN
STEP 1
PLEASE NOTE: Leave this box blank if
you have selected the Chairman of the
meeting. Do not insert your own name(s).
Individual or Shareholder 1
Sole Director and Sole Company Secretary
Shareholder 2
Director
Shareholder 3
Director/Company Secretary
Contact
Name
Contact
Daytime
Telephone
Date
/ /
Please mark to indicate your directions
Proxy Form
Change of address. If incorrect,
mark this box and make the correction
in the space to the left. Shareholders
sponsored by a broker (reference
number commences with ’X’) should
advise their broker of any changes.
AFI237318A
Item 2Adoption of Remuneration Report
Item 3Re-election of Director – Mr Graeme Liebelt
Item 4Re-election of Director – Mr Ross Barker
Item 5Renewal of proportional takeover provisions in the constitution
Board recommendations and undirected proxies: The board recommends shareholders vote in favour of each item of business. The
Chairman of the meeting intends to vote undirected proxies in favour of each item of business, to the extent permitted by law.
For
Against
Abstain
I 9999999999 I N D
XX
MR JOHN SAMPLE
FLAT 123
123 SAMPLE STREET
THE SAMPLE HILL
SAMPLE ESTATE
SAMPLEVILLE VIC 3030
*I1234567890*
Data sourced from publicly available filings. Our datasets may not be complete. Automated analysis can produce errors. If you believe any data on this page is incorrect, please contact us at hello@nzxplorer.co.nz. For informational purposes only. Not investment advice.