Mark Freeman, chief executive of Australian Foundation Investment Company (AFIC), observes unusual trends in today’s financial markets. AFIC is Australia’s oldest and largest listed investment company, managing a $10.2 billion portfolio. Freeman favours analysing trends over a 25-year period, noting anomalies in the price-to-earnings ratios and dividend yields of major holdings like Commonwealth Bank (CBA) and Wesfarmers.
Specifically, CBA’s price-to-earnings ratio stands at 27.6 times compared to its long-run average of 14.9 times, while its dividend yield is just 2.9 per cent versus a 25-year average of 5.3 per cent. Wesfarmers is trading at 32.6 times earnings, against a long-term average of 19.3 times, with a dividend yield of 2.7 per cent. In response, AFIC trimmed its holdings in both stocks, resulting in a special dividend of 5¢ per share alongside a final dividend of 14.5¢, fully franked.
However, this strategy has caused AFIC to underperform its benchmark, the ASX 200 Accumulation Index. For the past financial year, AFIC delivered a 10.7 per cent portfolio return after costs, while the Accumulation Index returned 15.1 per cent. Freeman argues that adjusting for tax, AFIC’s returns are broadly in line with the index, highlighting the benefit of franking credits. He emphasises patience, acknowledging that while caution has impacted recent performance, AFIC’s active approach and franking credits offer value, especially during market corrections.
Despite AFIC’s portfolio being worth $8.33 a share, the stock traded at $7.57 recently, reflecting a discount of 9.1 per cent, which is a common problem for Listed Investment Companies (LICs). Freeman believes investors are getting a great deal and highlights AFIC’s low management expense ratio of 0.16 per cent, hoping a market correction will highlight the advantages of active management over passive investments. AFIC has increased business development and marketing efforts to broaden its appeal.
