AFIC profit lower as major investments disappoint, pay lower dividends

Australia’s biggest listed investment company will keep the faith with its blue-chip plays rather than chase potentially larger gains on offer in a booming mining sector.

Australian Foundation Investment Company’s almost exclusive focus on mainly industrial companies and banks with proven long term growth and dividends meant the group has missed out on the sharp recovery in mid and small-cap mining stocks over the past year.

It has also been hurt by some big stocks that had run hard to record highs retreating to “fairer values”.

AFIC’s investment portfolio declined 2 per cent in value during the December half-year to $9.8 billion, falling well short of the 4.2 per cent returned by the S&P-ASX200 Accumulation Index for the period, as big stocks including CSL, James Hardie, Reece, ARB and CAR group disappointed and other equity investments paid reduced dividends.

AFIC’s net profit for the half-year subsequently fell 4.6 per cent to $147 million, with revenue off 2.8 per cent to $168.7m.

The S&P-ASX200’s materials sub-index leapt 34 per cent over the six-month period, led by mid-tier gold and lithium stocks that more than doubled.

However, AFIC’s exposure to mining is limited to BHP and Rio Tinto, accounting for about 13.5 per cent of its portfolio - and while chief executive Mark Freeman suggested the group may have been to cautious on the sector, he said it wasn’t changing tack.

“We are not planning on joining the party now; it’s like all things investing, if something is about to take off you have got to get in early. If you get into a stock late, you’re always going to lose money,” Mr Freeman said on Wednesday.

AFIC’s view is that the highly cyclical nature of many mid-cap resources companies and their lack of consistent earnings growth makes them a riskier bet.

It prefers to chase companies with strong earnings prospects, good management and strong balance sheets.

That’s not to say it won’t sometimes get burnt.

“We’ve seen plenty of good companies do bad things over the years, but if they really are a good company they tend to recover,” Mr Freeman said.

AFIC said the biggest contributors to the half-year’s underperformance included CSL, ARB Corporation, James Hardie Industries, CAR Group, Mainfreight and REA Group.

“IDP Education has also been a disappointing investment for us having a material negative impact on performance,” it said.

As well as the weaker performances by key investments, AFIC also called out reduced dividend income during the half-year from BHP, Woolworths and Woodside Energy.

AFIC said the Australian equity market remains expensive when considering long-term earnings multiples and yields and noted the “extreme geopolitical uncertainty and more indeterminate outlook for economic growth and inflation in Australia and elsewhere”.

“While we remain cautious in this environment, in a market that is seemingly driven by a greater short- term focus and swings in momentum, we have been able to take advantage of buying opportunities in selected companies that we judge to be high quality and have attractive long term growth prospects.”

The group held its interim dividend steady at a fully franked 14.5¢ a share but will also pay a special dividend of 2.5¢.