2020 AGM – Chairman’s Address and Presentation

14 October 2020



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
2020 Annual General Meeting Chairman’s Address and Presentation


Dear Sir / Madam

The following Chairman’s address and presentation will be delivered to shareholders
at the Company’s Annual General Meeting to be held today.

Yours faithfully


Matthew Rowe
Company Secretary


Authorised for release by the Company Secretary

AFIC AGM Chairman’s Address - Introductory Remarks

If I had been told on the first of July 2019 that the Australian Equity market would
produce a total return of negative 6.6% for the year it would not have surprised me.
Market valuations were getting high , growth was slowing and some predicted a mild
recession in the first half of 2020. The negative 6.6% return was what emerged but
that totally hides what an extraordinary and disruptive year it was.
In this environment we are pleased to have been able to deliver 3 things to our
shareholders :
- Firstly by outperforming the ASX 200 Index by 3.5% we have softened the
downturn in such a disruptive year. This is achieved in a portfolio exhibiting
lower volatility than the market .
- Secondly we have kept the cost of running AFIC to just 0.13% allowing
almost all of our income to flow through to our shareholders. This is very
competitive against other investment funds.
- Thirdly our policy of accumulating some profit and franking reserves in good
years has allowed us to pay a steady 24c annual dividend despite our
earnings falling to 19.9c due to significant dividend cuts or deferrals .
We have had a lot of queries as to our likely dividend this year. Unfortunately , as it is
early in what will remain a difficult year for many companies we can not make any
reliable forecasts yet. Suffice to say we are well aware of the importance of dividends
to our shareholders in these difficult times.
The 2019/20 year was a tale of two very different halves with our profits in the June
half year under considerable pressure due to dividend cuts and deferrals. We have a
partial view of the current half year after the recent reporting period with income levels
remaining subdued. In the next month the bank results will reflect both the pandemic
and the constraint APRA has put on the banks for dividends to be no more than half
of profits. It will again be a difficult half.
The June half of 2021 may see some benefit as our economy opens up as long as the
pandemic is kept under control. However as we go into 2021 it will be impacted by the
gradual wind back of the fiscal stimulus measures . It is sobering to reflect on the scale
of those measures that have underpinned the economy through the last 6 months :
- Job keeper and Job Seeker have injected $60bn
- Superannuation fund withdrawals have approximated $50bn
- And deferrals of interest and capital have occurred on a quarter of a trillion
dollars of loans.
An examination of the recent Federal Budget shows that greatest stimulus is over the
12 months from March 2020 to March 2021 and without further measures the level of
support will decline significantly after that. The effect of the superannuation
withdrawals and loan payment deferrals largely ends now.
Over the last two years we have reduced the number of stocks in our portfolio and
increased our commitment to a number of our favourite companies . This has given

the portfolio better industry diversification and we believe stronger growth potential.
The recent positive performance numbers appear to confirm the benefits of this
strategy.
Shareholders will be aware that over recent years many of our core holdings have
expanded their businesses internationally. Some have done so to the extent that they
now operate primarily in offshore markets, for example Amcor, Brambles and James
Hardie to name just a few.
This has meant that our investment team have increasingly developed capabilities and
processes to follow these companies and their competitors offshore. It has become an
important part of our investment process.
Acknowledging AFIC’s rising capabilities in understanding and analyzing global
companies, along with the heightened flow of information through technology, the
Board wanted to test whether our established successful style would work with
International Equities.
Over the past year we have put together and followed a model international portfolio
based on our investment principles and processes the results to date are encouraging.
As a result the Board believed it was now time to actually invest a small part of our
funds (up to one and a half percent ) in this diversified global equities portfolio . It will
consist of high quality companies with strong competitive advantage, good growth
potential and offering a broader range of industries. It will add to the growth prospects
and diversification of our existing Australian based portfolio.
Down the track, when the performance has been assessed, we will consider whether
it represents an opportunity for our shareholders and other investors to invest in this
global portfolio directly.

Annual General
Meeting
Presentation

Annual General Meeting 2020
• Objectives and Investment Process (Mark Freeman)• Result Summary (Andrew Porter)• Markets and the Portfolio (David Grace)• Outlook (Mark Freeman)
Presentation Agenda
5

Annual General Meeting 2020
Disclaimer
Australian Foundation Investm
ent Company Limited and its subsid
iary AICS (AFSL 303209), their
related entities and each of their respective directors, office
rs and agents (together the Disclosers)
have prepared the information cont
ained in these materials in g
ood faith. However, no warranty
(express or implied) is made as to the accuracy, completeness o
r reliability of any statements,
estimates or opinions or other information contained in these m
aterials (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 ar
ising from fault or negligence on the part of
any or all of the Disclosers) for any direct or indirect loss o
r damage which may be suffered by any
recipient through relying on anythi
ng contained in or omitted f
rom 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 mak
ing an investment decision an individual
should assess whether it meets t
heir own needs and consult a fi
nancial advisor.
6

Annual General Meeting 2020
Objectives
7

Annual General Meeting 2020
Sustainable competitive advantage – unique assets producing strong returns on capitalStrong management team and boardRecurring, predictable earnings are preferredFinancial strength – strong cash flow and balance sheet
AFIC offers a diversified portfolio of quality stocks – what we
look for
Businesses that can grow over the long term, producing growing dividendsNursery stocks – developing the preceding attributesLook to buy when we see long term value
8

Annual General Meeting 2020
•
Invest in companies that have strong governance and risk manage
ment
processes that include environmental and social risks.
•
We are seeking remunerations plans and outcomes that align with
AFIC’s
interests as long term shareholders.
•
We engage with investee companies
on these issues
and will vote
as
shareholders accordingly.
“As shareholders, we are ultimately the owners of
the assets of companies we invest in. If we
believe these to be good assets that can generat
e satisfactory returns for our shareholders
we believe it is our obligation to engage with
Boards and management to make sure these
assets are being managed effectively. This incl
udes having a meaningful social licence to
operate and complying with practice
s that reinforce this position, including having acceptable
behaviours and accountabilities”
ESG is integrated into our investment framework
9

Annual General Meeting 2020
Result Summary
10

Annual General Meeting 2020
Result Summary
* Assumes a shareholder can ta
ke full advantage of the franking
credits.
11

Annual General Meeting 2020
Profit per share – changes from full year result in 2019 to 2020
•
Westpac no interim dividend
•
NAB decreased interim dividend
•
ANZ no interim dividend
•
Sydney Airport no interim distribution  
•
Transurbanreduced distribution
•
Alumina reduced dividend
•
James Hardieno final dividend
12

Annual General Meeting 2020
AFIC’s share price was trading at a 7% premium to the NTA at 30 September 2020
13

Annual General Meeting 2020
Markets and the Portfolio
14

Annual General Meeting 2020
Market and key sector performance – Year to 30 September 2020
Includes dividends, but not franking
15

Annual General Meeting 2020
Fiscal Stimulus response is unprecedented in the post war perio
d
Source: 
Goldman Sachs Global Investment Research
Fiscal Easing* in Response to Coronacrisis
*Discretionary policy actions taken since the outbreak that lea
d to higher government expenditures or lower tax receipts
** GS expected easing
16

Annual General Meeting 2020
Dividend Trends
ASX Percent of cut or suspended dividend (stocks covered by Macquarie Research)
Source:
Macquarie Research, September 2020
62% of companies paid a June half dividend, but over half of th
ese
companies payments were reduced
Reported Half Year Dividends (% of Companies)
Source:
Macquarie Research, September 2020
17

Annual General Meeting 2020
Relative portfolio performance, including franking* – per annum returns to 30 September 2020
Note AFIC portfolio returns have a slightly lower level of vola
tility (Beta) than the Index
18

Annual General Meeting 2020
Recent changes to the portfolio reflected a move to businesses
with
well positioned assets
Purchases
Sales
Cochlear/Sydney Airport included participation in placements
19

Annual General Meeting 2020
Top 15 Overweight Positions in AFIC
Emerging leader in logistics solutions globally. Unique owner/driver culture which enables long term view of investment.
Bunnings (60% of Wesfarmers) is a leading DIY retailer generating very attractive growth
and returns. Lowest cost and
scale provide competitive advantage. Management very focused on growing returns on capital. Strong balance sheet.Very unique toll road assets whi
ch benefit from population grow
th
and have set inflation linked prici
ng. Further opportunities to
add
new growth projects which support long term cash flow growth.
Global Leader in consumer packagi
ng with a strong balance
sheet and highly rated management team.Founder led management team who have built a successful Australian business which generates attractive returns. Seeking

to replicate this in the United States.
20

Annual General Meeting 2020
Very strong market position with
broadening distribution networ
k and
sustainable competitive advan
tage. Strong balance sheet.
Top 15 Overweight Positions in AFIC
continued
Leading manufacturer of respirato
ry and humidification medical
products, with a near monopoly positio
n in humidified high flow

oxygen therapy. High quality management who have been in the business for many years.
Competitive advantage in growing
green energy opportunities wit
h a
strong Return on Equity and bal
ance sheet. Strong owner/driver
culture.
Dominant market position in Australia auto classifieds with a growing presence in South Korea and South America. Technology

investment provides competitive advantage. Strong management team. Founder led business which has developed a very strong brand in
the
Australian 4WD parts market. Long runway of growth in overseas markets provides opportunity to
capture substantial market shar
e.
21

Annual General Meeting 2020
Top 15 Overweight Positions in AFIC
continued
Quality portfolio of difficult to
replicate assets seeking to red
uce freight
costs and benefit from the modal s
hift from road to rail. Focu
sed
management who take a long term view.High quality portfolio of pathology assets globally. Opportuni
ties to
increase scale via industry conso
lidation. Medical leadership
culture.
High quality portfolio of difficult to replicate hospital asset
s, with growth
driven by an ageing population. So
lid financial metrics and qua
lity
management.
Attractive monopolistic assets whi
ch generate attractive return
s.
Opportunities to inve
st to generate further g
rowth. Strong mana
gement
team.
Growing leadership position in s
trongly growing data centre mark
et.
Good ROIC when facilities fully utilised.
22

Annual General Meeting 2020
Top 30 holdings as at 30 September 2020
Rank Company
% of Portfolio
1
CSL
8.7%
2
Commonwealth Bank of Australia
7.1%
3
BHP Group*
7.0%
4
Wesfarmers
4.6%
5
Transurban Group
4.6%
6
Westpac Banking Corporation
3.7%
7
Macquarie Group
3.7%
8
Woolworths Group
3.3%
9
National Australia Bank
3.0%
10
Rio Tinto*
2.7%
* Options were outstanding against part of the holding.
Total Portfolio 61 Holdings
23

Annual General Meeting 2020
Rank Company
% of Portfolio
11
Amcor
2.5%
12
James Hardie Industries
2.2%
13
Telstra Corporation
2.1%
14
Sydney Airport
2.1%
15
Australia and New Zealand Banking Group
2.1%
16
Mainfreight
2.0%
17
Sonic Healthcare
1.9%
18
Brambles
1.8%
19
Ramsay Health Care
1.8%
20
Coles Group
1.7%
Top 30 holdings as at 30 September 2020
continued
Total Portfolio 61 Holdings
24

Annual General Meeting 2020
Rank Company
% of Portfolio
21
Goodman Group
1.7%
22
Fisher & Paykel Healthcare
1.5%
23
Carsales.com
1.5%
24
Reece
1.5%
25
ARB Corporation
1.4%
26
NextDC
1.4%
27
Resmed
1.3%
28
ASX
1.3%
29
Qube Holdings
1.2%
30
Seek
1.2%
Top 30 holdings as at 30 September 2020
continued
Total Portfolio 61 Holdings
25

Annual General Meeting 2020
Outlook
26

Annual General Meeting 2020
Outlook
•
The onset of COVID-19 means low i
nterest rates and significant
government stimulus for
the foreseeable future.
•
Full impact of economic conditions on company earnings and divi
dends still to play out.
•
Difficult to reconcile expansion of market valuations, although
it is being driven by a small
number of stocks– particularly Information Technology, Healthcar
e.
•
We believe the portfolio is well positioned given the quality o
f the holdings and further
adjustments made through the March/April downturn.
•
Upcoming US election may provide further volatility.
•
We can remain patient.
27

Annual General Meeting 2020
Questions
28