NZ Information Meetings – Presentation

2 December 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
NZ Information Meetings – Presentation



Dear Sir / Madam

Please find attached a presentation that will be delivered to shareholders at
information meetings being held in New Zealand.

Yours faithfully

Matthew Rowe
Company Secretary

New Zealand Shareholder Meetings
December 2019

NZ Shareholder Meetings December 2019
Disclaimer
Australian Foundation Investment Company Limited and its subsidiary Australian Investment Company
Services Limited (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.

NZ Shareholder Meetings December 2019
Financial Results

NZ Shareholder Meetings December 2019
Management expense ratio of 0.13%
Financial results*
8 special dividend paid with interim dividend
*in Australian dollars and cents

NZ Shareholder Meetings December 2019
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
*in Australian cents

NZ Shareholder Meetings December 2019
Our Approach

NZ Shareholder Meetings December 2019
Benefits of a
closed 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

NZ Shareholder Meetings December 2019
Dividends are a key driver of shareholder returns in Australia

NZ Shareholder Meetings December 2019
Effective yield (in orange) on AFIC’s average cost base of $6.18 in
Transurban highlights the benefit of being a long term investor having
retained capital working for you

NZ Shareholder Meetings December 2019
Market Settings and
the Portfolio

NZ Shareholder Meetings December 2019
Market and key sector performance – year to 31 October 2019
Includes dividends

NZ Shareholder Meetings December 2019
Relative portfolio performance – per annum returns to 31 October 2019

NZ Shareholder Meetings December 2019
•
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.

NZ Shareholder Meetings December 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

NZ Shareholder Meetings December 2019
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

NZ Shareholder Meetings December 2019
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

NZ Shareholder Meetings December 2019
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.

NZ Shareholder Meetings December 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.

NZ Shareholder Meetings December 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.

NZ Shareholder Meetings December 2019
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.

NZ Shareholder Meetings December 2019
Recent volatility has provided buying opportunities in quality
companies – James Hardie Industries
• Leadership position in fibre cement
exterior cladding market in the US
• Fibre cement 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.

NZ Shareholder Meetings December 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.

NZ Shareholder Meetings December 2019
Selected ‘Nursery’ holdings
1.5% of the portfolio
0.8% of the portfolio
0.4% of the portfolio
• Dominant position in
logistics
• Moorebank opportunity
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

NZ Shareholder Meetings December 2019
Top 20 holdings as at 31 October 2019
Rank Company% of Portfolio
1
Commonwealth Bank of Australia8.0%
2
CSL 6.9%
3
BHP Group* 6.3%
4
Westpac Banking Corporation5.7%
5
National Australia Bank* 4.7%
6
Transurban Group 4.4%
7
Macquarie Group 3.7%
8
Wesfarmers 3.5%
9
Australia and New Zealand Banking Group* 3.2%
10
Woolworths Group 2.7%
* Options were outstanding against part of the holding.

NZ Shareholder Meetings December 2019
Rank Company% of Portfolio
11
Rio Tinto 2.3%
12
Amcor 2.3%
13
Sydney Airport2.2%
14
James Hardie Industries2.0%
15
Brambles 1.9%
16
Woodside Petroleum* 1.9%
17
Telstra Corporation 1.8%
18
Oil Search*1.7%
19
Ramsay Health Care 1.6%
20
Mainfreight 1.6%
Top 20 holdings as at 31 October 2019
continued
* Options were outstanding against part of the holding.

NZ Shareholder Meetings December 2019
In strong markets AFIC’s share price can sometimes trade at a
discount to NTA – at end October 2019 the premium was 0.5%

NZ Shareholder Meetings December 2019
Closing Remarks

NZ Shareholder Meetings December 2019
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

NZ Shareholder Meetings December 2019
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)

NZ Shareholder Meetings December 2019
Heightened volatility in equity markets

NZ Shareholder Meetings December 2019
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.