AFIC Waiting For ‘Pullback’

Management of Australian Foundation (AFI), Australia’s biggest listed investment company (LIC), reckon the market is currently fully priced and can’t see any value and will wait for a sell off before trying to find value.

"The strength in the US market following the presidential election has also helped drive an increase in the broad Australian equity index to just over 5700 by the end of the calendar year. At current market levels it is difficult to find outstanding value,” directors said in yesterday’s interim profit report which revealed a fall in earnings for the half year, but a steady payout.

"We will continue to look for quality companies that can provide good long term growth, including dividends, but will only do this at appropriate prices where reasonable value is on offer.

"In this context we will be looking to any possible market pullback, which may arise from further interest rate rises in the US over the course of the year or heightened geopolitical tensions, as a way of adding to holdings at more reasonable prices,” AFI said.

Profit for the half year was $118.3 million compared to $145.6 million from the corresponding period last year.

Directors said the fall "was due to the decline in investment income received, primarily as a result of the significant cut in dividends across a broad range of large companies including resources, energy and supermarkets as operating conditions remained challenged in 2016.”

The contribution from the trading portfolio and options was also down $9.7 million, as the realised gains generated in the prior corresponding period were not repeated this half year.

Revenue from operating activities fell 13.5% to $135.5 million, (down $21.1 million). This excludes capital gains on investments.

The interim dividend is an unchanged 10 cents per share, fully franked. It will be paid on 24 February 2017 to ordinary shareholders on the register on 8 February 2017 and the shares are expected to commence trading on an ex-dividend basis on 7 February 2017.

"The Australian market in recent months has risen strongly with investors looking to a more positive outlook for global growth with rising commodity prices and higher interest rates. As a result, there was a recovery in resource and banking sectors, both of which had been previously out of favour for some time. This rebound pushed the resources index up 23.2% and banks increased 19.4% over the six month period,” directors said in yesterday’s report.

"AFIC’s portfolio was up 8.6% for the 6 months to 31 December 2016 compared with S&P/ASX 200 Accumulation Index which increased 10.6%. AFIC traditionally only invests in the large resource companies such as BHP Billiton and Rio Tinto.

"The portfolio was not exposed to the significant rise in the more cyclical mid-sized resource companies which increased by approximately 40.2% over the period.”

The best performing companies in the AFIC portfolio outside of the large resource companies and the banks were Woolworths, Wesfarmers and Computershare.

AFIC continued to diversify the portfolio with the addition of new holdings including Link Administration Services,, Isentia Group and AMA Group.

Other major additions were in existing holdings of CSL and Cochlear, both of which we believe are soundly positioned for the growing demand for their products arising from ageing demographics globally.

Major sales were in Asciano as a result of the combined takeover offer from Brookfield and Qube Holdings, the complete disposal of the remaining position in Santos and a slight reduction in the holding in APA Group. AFI shares eased half a per cent to $5.85.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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