2018 Annual General Meeting Presentation

9 October 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
2018 Annual General Meeting Presentation


Dear Sir / Madam

Please find attached a presentation that will be delivered to shareholders at the
Company’s Annual General Meeting to be held today.


Yours faithfully


Matthew Rowe
Company Secretary

Annual General Meeting
2018
Presentation

Annual General Meeting 2018
Disclaimer
Australian Foundation Investment Company Limited and its subsidiary AICS (AFSL 303209), their related
entities and each of their respective directors, officers and agents (together the Disclosers) have prepared
the information contained in these materials in good faith. However, no warranty (express or implied) is made
as to the accuracy, completeness or reliability of any statements, estimates or opinions or other information
contained in these materials (any of which may change without notice) and to the maximum extent permitted
by law, the Disclosers disclaim all liability and responsibility (including, without limitation, any liability arising
from fault or negligence on the part of any or all of the Disclosers) for any direct or indirect loss or damage
which may be suffered by any recipient through relying on anything contained in or omitted from these
materials.
This information has been prepared and provided by AICS. To the extent that it includes any financial product
advice, the advice is of a general nature only and does not take into account any individual’s objectives,
financial situation or particular needs. Before making an investment decision an individual should assess
whether it meets their own needs and consult a financial advisor.

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Our Investment Approach

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AFIC is a Long Term Investor in a Diversified Portfolio of
Quality Companies

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Growth of a $1,000 Investment in AFIC Shares (including benefit of
franking) – 10 years to 30 September 2018
Assumes the reinvestment of AFIC dividends and an investor can take full advantage of the franking credits

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Share Price is trading at a very slight premium to Net Asset Backing

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Financial Results

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Financial Results
Management expense ratio of 0.14%

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Ending refundability of franking credits
• We are again highlighting that the Labor Party has announced that if elected
it will stop excess franking credits being refunded to some shareholders.
• This will impact individuals and super funds – in particular, self-managed
super funds.
• If an investor does not have sufficient other taxable income, they will have to
pay 30% tax on their dividends.
• An income of $50,000 per year in dividends (including franking credits) will
be reduced to $35,000.
• Low income earners and individuals in retirement will be very hard hit.

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Ending refundability of franking credits – our response
• AFIC has provided a template letter on its website for shareholders to write
to their parliamentary representatives -personal examples are likely to
have the biggest impact on local members.
• We have engaged through various industry groups to lobby on your behalf.
• Publicisedwhere appropriate through the media.
• Submission by AFIC to the house economics committee.
Email:economics.reps@aph.gov.au
Mail:Committee Secretary
Standing Committee on Economics
PO Box 6021,Parliament House, Canberra ACT 2600

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Market Settings and the
Portfolio

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Large companies have underperformed over the year to 30 September 2018
Source: FactSet

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With some growth sectors very strong and banks at the other extreme
– returns to 30 September 2018
Returns include dividends

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High growth firms now trade above 30x forward P/E, in line with the
peak of the dotcom bubble
Source: FactSet, Goldman Sachs Global Investment Research.
ASX 200 Valuation dispersion

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High PE stocks have outperformed low PE names by 25% year to date
Source: FactSet, UBS

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Relative Portfolio and Share Price Performance, including
franking – Per Annum Returns to 30 September 2018
Assumes an investor can take full advantage of franking credits.

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Market moves as well as purchases/sales have changed the profile
of the Portfolio – top 10 holdings 30 September 2018
RankCompany% ofPortfolio
Major changes –
%as at Sept 2017
1
Commonwealth Bank of Australia7.7%
8.9%
2
BHP6.7%
5.4%
3
Westpac Banking Corporation5.9%
7.4%
4
CSL5.2%
3.7%
5
Wesfarmers4.6%
6
Rio Tinto3.6%
7
TransurbanGroup*3.6%
8
National Australia Bank3.5%
4.7%
9
Australia and New Zealand Banking Group3.3%
3.8%
10
Macquarie Group3.1%
1.1%
* Options were outstanding against part of the holding.

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RankCompany% of Portfolio
Major changes –
%as at Sept 2017
11
Woolworths Group*2.5%
1.9%
12
Amcor2.3%
13
Oil Search2.0%
14
Woodside Petroleum*2.0%
1.4%
15
Brambles1.8%
16
Telstra Corporation1.7%
2.7%
17
Sydney Airport*1.6%
Not in top 20
18
James Hardie Industries1.3%
Not in top 20
19
Qube Holdings1.3%
20
Treasury Wine Estates1.3%
Market moves as well as purchases/sales have changed the profile
of the Portfolio – next 10 holdings 30 September 2018
* Options were outstanding against part of holding.

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Profile of the portfolio by size of company September 2018 – looking
for growth opportunities some of which is outside of large companies

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The other interesting feature of the portfolio is the exposure to
businesses with revenue generated from overseas – 43% of the portfolio
•BHP Billiton
•CSL
•Rio Tinto
•Amcor
•Oil Search
•Macquarie Group
•Woodside Petroleum
•Brambles
•James HardieIndustries
•Computershare
Source: FactSet, AFIC.
Key examples:
•Seek
•ResMed
•Fisher & Paykel
Healthcare
•Mainfreight

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Australian Banks – growth in household debt has been a major tailwind
Upward trend in housing prices driven by
increased household debt:
•Growing population, with immigration a
key component.
•Supportive commodity cycle.
•Unbroken record of economic growth.
•Low interest rates post GFC.
•Easier credit standards.
Sources: ABS; APM; APRA; Core Logic; RBA.
Housing prices
Household debt
Housing Prices and Household Debt
Ratio to annual household disposable income

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Australian Banks – Net Income growth has been strong on the back of
these trends however going forward.....
Credit growth likely to be more subdued:
•Lower income growth.
•Tighter lending standards:
APRA
Hayne Royal Commission
Slowing foreign investment in housing
Impact on Bank Sector
•Lower balance sheet growth.
•Higher regulatory costs.
•Slowing housing market can be healthy.
•Banks will look to drive further costs out.
•Benign profit growth but dividends stable.
Source: FactSet
$ billion
Net Income of 4 major banks

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Featured Holdings – Macquarie Group
What we like:
•Owner driver culture.
•Infrastructure exposure.
Energy (renewable)
Emerging markets
GDP/ population growth
•Technology exposure.
Source: FactSet.
Share
price

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Featured Holdings – Woolworths
What we like:
•‘New’ management with clear strategy.
•Progress on turnaround:
Australian supermarkets regained
market leadership
IT Investment
Exit Masters
Simplify BigW
•Next phase: Ongoing investment
opportunities.
•From here, maintain focus.
•Stable profit and dividend growth.
Source: FactSet.
Share
price

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Featured Holdings – Reliance Worldwide
Source: FactSet.
What we like:
•Category leader in Push to Connect
plumbing fittings market.
•Innovative company with R&D focus.
•Multiple growth drivers in North American
and European markets.
•Self funding, cash generative business
model.
•Strong balance sheet.
•Participated in rights issue.
Share
price

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Closing Remarks

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Recent Company Reporting Season
•CBA, bank sector: struggling for earnings growth.
•Healthcare: very strong earnings growth but on high P/E’s (Hospitals the exception).
•Resources: very strong cash generation, returning capital to shareholders.
•Energy sector: rising cash flows, strong oil price, new major projects moving forward.
•Telco’s: evolving sector, NBN, competition, TPG/Vodafone merger.
•Industrials: Offshore earnings driving growth.
•Technology: Exhibiting strong growth but very expensive P/E’s.

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Current Issues We Are Focusing On
• Met with 100+ companies in recent reporting season.
• Investment team visited UK/Europe/US in September and in November will be
visiting China/HK.
•Themes:
Australian credit growth/ housing market – slowing.
Continued impact of technology on businesses, including emergence of new
opportunities.
Finding value –expected long term growth versus what you have to currently
pay.
Fallout from trade disputes.
Impact of rising interest rates in the US on equity markets.

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Last 10 years and next 10 years?

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Other factors are still at play...