CEO and Managing Director Mark Freeman and Portfolio Manager David Grace discuss the FY24 half-year results of Australian Foundation Investment Company (ASX:AFI).

Geoff Driver: Welcome. My name's Geoff Driver, General Manager, Business Development and Investor Relations for Australian Foundation Investment Company. I have with me today Mark Freeman, the CEO and Manager Director of Australian Foundation Investment Company, and David Grace, a Portfolio Manager for Australian Foundation Investment Company.

We're here to talk about the half-year results, which we've just released. I'll throw to you first, Mark. Our profit was down slightly, but we did actually increase the dividend from 11 to 11.5 cents. Do you have any further comments about the results you'd like to make?

Mark Freeman: Well, thanks Geoff. I'll start from making some general comments about the result. So, the investment income for the six months to 31 December was down from the corresponding period, as you pointed out. This fall was primarily a result of the decline, as expected, in dividends that we receive from our holdings in BHP (ASX:BHP), Rio (ASX:RIO), Woodside Energy (ASX:WDS) for that six-month period. Importantly, the MER, or the Management Expense Ratio, for AFIC is 0.014 per cent. That's on an annualised basis, and there's obviously no additional fees or performance fees around that, so it's still a very low MER.

The portfolio return for the half was 9 per cent, when you include the value of the franking credits. The return from the market accumulation index was 8.3, when you include franking as well. If we actually look back over the last 12 months or the full calendar year, the portfolio return was 16 per cent, again including franking. And from the index, the corresponding return was 14 per cent. So, a good, strong year for the portfolio.

Geoff Driver: Thanks, Mark. David, Mark commented on the strength of the portfolio. It had a very strong performance over the six- and 12-month period. Do you want to comment on what were the major factors behind that strong performance?

David Grace: Yeah, thanks, Geoff. So, it's been a pretty uncertain time in markets, and a lot of investor focus has really been around the level of interest rates and where inflation ultimately settles, and really impossible to predict either of those two metrics. But when you couple that with low liquidity in the market, we've seen quite volatile moves in share prices, really for the best part of 18 to 24 months. So, a really pleasing part of our performance was the strong performance of a number of quality companies in the portfolio. So, that's the likes of James Hardie (ASX:JHX), Reece (ASX:REH), ARB (ASX:ARB), Goodman Group (ASX:GMG) and CAR Group (ASX:CAR). And what's interesting is all of those companies had a tough 2022 and were actually a drag on performance in that year, but we were able to use the short-term share price weakness to add to those holdings. I think it gets to our long-term investment focus and the ability to buy high-quality companies when attractive valuations presented.

Geoff Driver: Thanks, Dave. So, you touched a little bit on the portfolio adjustments that were made through the period. Do you want to just elaborate a bit more? What are the major adjustments that were made through the six-month period?

David Grace: Yeah, sure. So, we're long-term investors and we're very conscious of the impact that tax has on shareholder returns. So, we aim to be low-turnover. However, we do look to trim positions in the portfolio where they get to extreme valuations, and really the thinking there is to recycle that capital into better opportunities when they present. So, in that regard, we trimmed our position in CBA (ASX:CBA), in Woolworths (ASX:WOW), and some of those that have been really strong performers for us throughout the year, and just bringing that to a core holding. So, that was the likes of James Hardie (ASX:JHX), Reece (ASX:REH) and CAR group (ASX:CAR). We exited holdings in Ansell (ASX:ANN), IRESS (ASX:IRE) and FINEOS (ASX:FCL). And, on all of those, our thinking there is that the competitive intensity is set to increase, and we think the economics and the returns those companies will generate will be more challenged going forward. And we don't think that's been factored in to the share prices at the price we sold. And then we were able to recycle that capital into really... Most of that went into adding to existing positions in the portfolio, but what we believe are attractive valuations. So, that was the likes of NAB (ASX:NAB) and Telstra (ASX:TLS) from an income perspective. We also added to Goodman Group (ASX:GMG), and particularly to ResMed (ASX:RMD) and CSL (ASX:CSL), where we saw quite a lot of negative sentiment just around the threat that obesity drugs could potentially pose for their businesses. We felt the share prices were attractive and they'd fallen a fair way, and a lot of that was priced in and attractive buying opportunities for us.

Geoff Driver: Thanks, David. So, I've just talked about, I guess, the last six to 12 months. Mark, what are your thoughts about moving forward over the next six to 12 months in terms of how the market's looking?

Mark Freeman: Sure. As per usual, markets are very hard to predict over the short term, and we certainly don't try and do that. The market was quite strong, obviously, toward the end of that half, particularly as markets started to view that interest rates had peaked and in fact will probably start to come off, and that really drove share markets not just here in Australia but globally as well. And the quality end of the market really benefited from that. So, a lot of our stocks have had a really good run during the period.

However, if we look back over the last six months, the results they produced, the full-year results around August, generally quality companies produce better quality results. And then we had the AGM season as well, and again we had some great updates from some of our stocks. So, yes, quality has benefited from the view that rates are coming off, but they've also produced much better results. So, as we go into this year, the market looks a bit fuller. Prices and valuations on quality are higher. But we would expect the trend that we've seen for decades to come through again, is that this reporting season will show that better-quality companies produce better-quality results. And, as a long-term investor, we really focus on seeing profits go up over the long-term, and therefore dividends go up. Prices will move around, we know that, but we are a bit cautious. The market's had a pretty good run in the short term, but we think the portfolio is really well positioned, being in high-quality companies, and a good mix between growth- and income-related businesses as well.

Geoff Driver: All right. Thanks, Mark and David for your time, and thanks for joining us today.

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