2019 AGM – Chairman’s Address and Presentation

8 October 2019



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
2019 Annual General Meeting – Chairman’s Address and Presentation

Dear Sir / Madam

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


Yours faithfully


Matthew Rowe
Company Secretary

Chairman’s Address

During the year there have been several changes on our board. As many of you will
be aware Terry Campbell retired from the AFIC board and chairmanship at the end of
the AGM last year. Terry had made a very valuable contribution to AFIC over 34 years.
In January Jacquie Hey retired from the board after nearly 6 years of service. Her
experience and skills in the telecommunications space had been of particular value to
us. We wish her well with her busy workload at Bendigo Bank, which she chairs,
Qantas, AGL and other non ASX listed roles. In May we were very pleased to
announce that Rebecca Dee-Bradbury had joined the board. She will provide some
observations on her experience and skills when we consider her election in item 4 of
our agenda. Suffice to say she brings great experience in consumer based markets,
both in Australia and offshore, along with a number of years board service on two ASX
listed companies – BlueScope steel and Graincorp – which has provided insights into
other quite different global markets.

The first item of business is consideration of the financial statements and accounts. As
usual I will place this item after the other items of business in order to maximize time
for questions or comment. However I will comment on a couple of matters which may
come up and which are relevant.

Topical is the fact that ASIC has recently doubled the potential size of shareholder
purchase plans from $15,000 to $30,000 per shareholder per annum.

We are cogniscent of the keenness of a number of our shareholders for SPP’s and we
do like to provide the opportunity for them to increase their shareholdings. However
there are a couple of very relevant considerations that I will mention. It would not make
sense for us to be raising additional equity at times when we do not see good
opportunities to invest profitably for you.

Secondly there is a fairness issue amongst our shareholders as a SPP proportionately
allows smaller shareholders a much greater opportunity to invest (in contrast to a
conventional rights issue) and consequently has a dilutionary effect on some of our
shareholders.

We have undertaken 3 SPP’s in the last decade and will certainly consider undertaking
another when we feel it is appropriate. Also our DRP has been in continual operation
for the last decade and our DSSP for the last six years.

The second issue which comes up regularly is the question of whether we should
publish all proxy votes which we lodge.

This is an issue that we consider regularly. To date we feel that we have more influence
presenting our views face to face with, often, the chair of the ASX companies in our
own board room. Where there is a significant difference of view, this can involve a
direct vote against an issue or an abstain with a warning that if our concerns are not

addressed by next year we will be voting against. We also believe our voting needs to
be tailored to the company e.g. what may be appropriate for a start-up business where
the CEO has a big shareholding exposure aligned with the shareholders may be
inappropriate in a top 10 company. Public disclosure of votes for /against or abstain
catch none of the detail and finer nuances of what can be very complex issues.

Annual General Meeting
2019

Annual General Meeting 2019
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.

Annual General Meeting 2019
We wanted to thank you again for response to the
shareholder survey on franking
•A strong response with close to 17,000 replies received from AFIC
shareholders
•We acknowledge not all shareholders agreed with the approach – the vast
majority were however supportive
•Helped us formulate our approach and educate key stakeholders
•We are committed to supporting our shareholders when appropriate
•Your voice made a considerable contribution to the debate

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Financial Results

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Management expense ratio of 0.13%
Financial results
8 special dividend paid with interim dividend

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Income per share in 2018/19 was high because of a number of
‘one-off’ factors
Note expenses and tax equate to approximately 2 cents per share for both financial years
2018/20192017/2018

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Our Approach

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Benefits of a
close end fund
Tax effective
Very low cost –
no performance
fees
Disciplined
investment
approach
How we operate as a Listed Investment Company
Transparent
Shareholders
own the
Company

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Dividends are a key driver of shareholder returns in Australia

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Effective yield (in yellow) on AFIC’s average cost base of $6.18 in
Transurbanhighlights the benefit of being a long term investor having
retained capital working for you

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Market Settings and the
Portfolio

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Market and key sector performance – Year to 30 September 2019
Includes dividends

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Relative portfolio performance, including franking – per annum
returns to 30 September 2019

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•Underweight REIT’s – risk of capital loss with share prices well above asset backing
•No exposure to Gold sector – not a typical AFIC stock: short mine life, volatile price, limited dividends
•Underweight Technology sector (i.e. hot stocks) – valuation growth far exceeding earnings growth
High P/E firms trade at a
73% premium to the market,
which is 23% above the long
term average
Recent AFIC portfolio performance relative to the index
Source: Goldman Sachs Research

Annual General Meeting 2019
•Trade Wars
•Brexit
•Middle East tensions/conflict
•Weakening manufacturing data globally
•Falling bond yields – unchartered territory
•Equity valuations elevated against long term averages
However this uncertain backdrop is providing selective opportunities to acquire
quality companies exhibiting value.
We are currently facing heightened volatility in equity markets

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What we look for:
•Sustainable competitive advantage – unique assets producing strong returns on capital
•Strong management team and board
•Recurring, predictable earnings are preferred
•Financial strength – strong cash flow and balance sheet
•Businesses that can grow over the long term, producing growing dividends
•Nursery stocks – developing the above attributes
•Look to buy when we see long term value
AFIC offers a diversified portfolio of quality stocks

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Portfolio attributes:
•Diversified portfolio of quality holdings
•Low turnover
Portfolio positioning:
•Reduced number of stocks with capital reinvested in quality companies
•Increased exposure to preferred companies
AFIC portfolio

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A number of holdings have been sold – total holdings down
from 85 to 71 over the past 12 months
Concern about sustainable competitive advantage.
Concern about sustainable competitive advantage.
Concern about sustainable competitive advantage.
Low return profile.
Over geared balance sheet.

Annual General Meeting 2019
Using proceeds to increase exposure to preferred companies
Competitive advantage in growing green energy opportunities with
strong ROE and balance sheet.
High quality portfolio of difficult to replicate assets and fits well with an
ageing population. Strong financial metrics and management/board.
Global market-leader in the development of logistics property.
Has a strong growth profile, sound ROE and strong balance
sheet. Owner\Driver company.
Strong management team, high returns, lowest cost, good balance
sheet, investing for future earnings growth, strong growth profile.

Annual General Meeting 2019
Using proceeds to increase exposure to preferred companies continued
Very strong market position with broadening distribution network and
sustainable competitive advantage. Strong balance sheet.
High quality portfolio of pathology assets globally. Opportunities to
increase scale via industry consolidation. Medical leadership culture.
Attractive monopolistic assets which generate attractive returns.
Opportunities to invest to generate further growth. Strong
management team.
High quality portfolio of pipeline assets with high degree of earning
consistency. Have opportunities to add new projects over next few
years to drive growth.

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Examples of what we look for – Wesfarmers
•Market leadership position in Australian
and New Zealand hardware
•Strong management team
•Consistent earnings growth
•Strong balance sheet post the demerger
of Coles
•Strong returns well above the cost
of capital
Source: FactSet.
$

Annual General Meeting 2019
Recent volatility has provided buying opportunities in quality
companies – James HardieIndustries
•Leadership position in FibreCement
exterior cladding market in the US
•FibreCement siding only represents
20% of the siding market
•Strong cash flow reinvested back into
the business at attractive returns –
plant/technology
•Large number of growth opportunities
•Quality leadership team
•‘Self help’ drivers delivering growth
above housing cycle growth
Source: FactSet.
$

Annual General Meeting 2019
Recent volatility has provided buying opportunities in quality
companies – National Australia Bank
•Maximum negative news around the
Royal Commission
•Stock was exhibiting value, yielding
6.7% fully franked
•However earnings growth likely to be
low in the short term
•Long term banks will remain a key part
of financing the Australian economy
•Still producing a good ROE
•Can use options to enhance yield
Source: FactSet.
$

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Selected “Nursery” holdings
1.5% of the portfolio
0.7% of the portfolio
0.4% of the portfolio
•Dominate position in
logistics
•Moorebankopportunity is
significant
•Backable team of people,
owner/driver characteristics
•Leadership position in
accounting software
•Cloud based technology
•Dominant in Australia, NZ,
growing in the UK and US
•Invest heavily in their product
•Initially owner/driver
•Growing leadership position in
strongly growing data market
•Good ROIC when facilities fully
utilised

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Top 20 holdings as at 30 September 2019
RankCompany% ofPortfolio
1
Commonwealth Bank of Australia
8.3%
2
BHP*
6.4%
3
CSL
6.4%
4
Westpac Banking Corporation
6.0%
5
National Australia Bank*
4.9%
6
Transurban
4.4%
7
Macquarie Group
3.6%
8
Wesfarmers
3.5%
9
Australia and New Zealand Banking Group*
3.4%
10
Woolworths Group
2.7%
* Options were outstanding against part of the holding.

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RankCompany% of Portfolio
11
Rio Tinto
2.3%
12
Amcor
2.3%
13
Sydney Airport
2.0%
14
James HardieIndustries
2.0%
15
Telstra Corporation
1.8%
16
Woodside Petroleum*
1.8%
17
Brambles
1.8%
18
Oil Search*
1.7%
19
Mainfreight
1.5%
20
Sonic Healthcare
1.5%
Top 20 holdings as at 30 September 2019 continued
* Options were outstanding against part of the holding.

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In strong markets AFIC’s share price can sometimes trade at a
discount to NTA – at end September 2019 the discount was 1.6%

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Closing Remarks

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Asset Prices are at extremes
•Gold price is very high
•Bond Prices are elevated
•US and Australian equity markets close to all time highs
•Equity valuations are extreme for many stocks in the Australian market

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US is still holding up the global economy as others weaken
Source: J.P. Morgan
J.P. Morgan Forecast Revision Index
Cumulative % point revision to rolling forecast of GDP (Q-1, Q, Q+1, Q+2)

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Heightened volatility in equity markets

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We believe we have a very strong portfolio of high
quality companies exhibiting strong returns on
invested capital, that have strong balance sheets
that reduce risk and that provide strategic
flexibility for these businesses