Australian Foundation Investment Company Limited (AFI.XA) Earnings Call Transcript & Summary

Hello, and welcome to the Australia (sic) [ Australian ] Foundation Investment Company Half Year Financial Results Briefing. [Operator Instructions] I'd now like to hand the presentation over to Mr. Mark Freeman, Managing Director of AFIC. Thank you. Please go ahead.

Okay. So good afternoon, everyone, and I'm Mark Freeman, the CEO and Managing Director of the Australian Foundation Investment Company. So welcome to this half year result briefing. I'd like to begin by acknowledging the traditional owners and custodians from all the lands we are gathered on today and pay my respects to their elders past, present and emerging. I have joining me today on the webinar, Brett McNeill, who is the Portfolio Manager for AFIC. Just as a bit of background, Brett has recently taken over the responsibility for the AFIC portfolio. So Brett's actually been with us for over 6 years now, having successfully managed the Djerriwarrh portfolio, which is one of the LICs we manage within the group. We believe Brett's appointment will strengthen the application of our investment processes against AFIC's long-standing investment frameworks. We also have with us in the room Winston Chong, who is the Assistant Portfolio Manager; Andrew Porter, our CFO; Matthew Rowe, our Company Secretary; Geoff Driver, our General Manager for Business Development; and Suzanne Harding, who is also involved with business development. This briefing is based on the material available on the company's website. The presentation slides will change automatically via the webcast. Finally, please note, following the presentation, there will be time for questions and answers. You can ask a question via the webcast using the tab at the bottom of the screen. So just moving to the presentations now, just starting with Chart 2, which is the disclaimer, which just says we're here to talk about what the company is doing. We're not giving any advice as such. So I'll just quickly hand over to Brett and Winston to run through that shortly. But just as an introduction, I'd just like to say that we are -- the Board, myself and the team, we are clearly disappointed with the results for last year. There's obviously been a lot going on in markets, some very strong sector moves and some very weak ones, and Brett will go into all the reasons for that. There's always -- we're always looking to improve and develop on our execution against our processes. I can say though that when I look through the portfolio, we are still holding good companies. Clearly, there are some elements in the market that we have missed. But I don't see that we're holding poor businesses in poor sectors. We do feel like we are holding good companies. There's been price reactions over the last year. But ultimately, I always look through and say, are we holding good companies with strong balance sheets that have the ability to grow their profits over the long term, and I still believe that, that is the case with the portfolio. But with that introduction, I'll pass over to Brett.

Thanks, Mark. Good afternoon, everyone. It's great to be here presenting AFIC's first half financial results today. So the agenda for today's presentation was listed on Slide 3. I'll begin with an overview of the key features of AFIC, along with restating our investment objectives. Our CFO, Andrew Porter, will then go through the financial result highlights. Winston and myself will give an update on the broader share market as well as our portfolio, and then I'll give some outlook comments before we open up for questions. So if we turn to Slide 5, this was some of the key features of the Australian Foundation Investment Company. So AFIC predominantly invests in Australian and New Zealand companies. It's the largest listed investment company on the ASX. It's got 150,000 shareholders and a structure that has an independent Board of Directors. Importantly, shareholders own the management rights to the company. This provides for low-cost operations, which you'll see in the low management expense ratio, and there's no additional fees such as performance fees or the like. We're a long-term investor. We tend to run low portfolio turnover, which we think helps provide tax effective returns and we have a long history of having delivered stable to growing fully franked dividends to shareholders. And AFIC is managed by a team that also manages three other listed investment companies being Djerriwarrh, Mirrabooka and AMCIL, and we think this gives us good benefits of scale. One, it helps keep costs low, but two, it also allows for the generation and sharing of investment ideas across the group. So given that background and approach, AFIC has two key investment objectives and these we state on Slide 6. So firstly, we aim to pay stable to growing dividends over time. And secondly, we aim to provide attractive total returns over the medium to long term. So on the next few slides, I'll go over how we've done against these objectives in recent times. So if we look firstly at how we've performed against the first of our objectives, which is to pay stable to growing dividends over time, and this chart here on Slide 7 shows AFIC's ordinary dividends, these are the blue bars, along with special dividends being the purple bars, each on a full year basis back to 2019, and we also show AFIC's earnings per share on the yellow line. So the key points to make we think from this track record is that we can clearly see the delivery of stable to growing dividends with the ordinary dividend having increased from $0.24 in 2019 to $0.265 in 2025. Importantly, we're able to maintain the dividend at $0.24 across the years 2020 and 2021. And this was despite dividend cuts across the broader share market resulting from the COVID pandemic, and you can see the result of that having flowed through to our earnings per share results in both of those years. So pleasingly, the stable to growing dividend has also been accompanied by special dividends from time to time, these having been paid in full year 2019 and full year 2025. And for the current financial year, 2026, we have declared a $0.025 special dividend on top of the $0.12 ordinary dividend for this first half '26 result and we've also announced another $0.025 special dividend, which is expected to be paid with the final year dividend later this year. On Slide 8, we address our second objective, which is to deliver attractive total returns over the medium to long term. So the chart here shows a 30-year track record, and I think it illustrates the power of really an investment style that takes a long-term approach, focuses on owning high-quality companies, benefiting from compounding returns and keeping costs low. So $10,000 invested in AFIC's portfolio 30 years ago in 1995 had grown to $155,000 by 2025, and this compares to a value of $136,000 from an equivalent investment in the broader share market. So the long-term returns have been very strong, but the short-term performance is not what we wanted to be with AFIC's total return and NTA performance being very disappointing over the last 6 and 12 months. So I'll go through the reasons for this in the market and portfolio update section of today's presentation. But at this point, I'll pass to our CFO, Andrew Porter, and he's going to give a rundown of our financial results as well as an update on our share price versus the NTA.

Thank you, Brett, and good afternoon, ladies and gentlemen. So for many of you, these four boxes will be a familiar format. The profit for the half year at $147 million was down 4.6% from last year. That's equivalent to $0.117 per share. But it's important to note, as Brett stated, that we've maintained the interim dividend at $0.12, so above the earnings per share, and also paid a special dividend of $0.025. That is, of course, one of the benefits of an LIC is that ability to pay a consistent dividend over time. As Brett said, we maintained the dividend during COVID, we maintained the dividend during the GFC, as I'm sure many of you are aware. So of that fall in the profit, the income was down $4 million on last year, and that was mainly to the -- down to some of the larger companies reducing their dividends from the prior year over 6 months. For instance, BHP, we received $23 million worth of dividend in the previous 6-month period and $19 million in this 6-month period. Woodside and Woolies were some of the other ones where we've had a reduction in dividend. There was also a change in the tax charge. For those of you who are studying the financial statement in some detail, you'll notice the tax charge looks a bit high. This has been caused by two things. There's a mix. We had lower proportion of franked dividends to unfranked income and the larger the franked dividend component of your income is, the less tax you pay. So that's had an impact. There's also some timing difference on deferred tax which will sort itself out by the end of the year. We mentioned the interim dividend of $0.12 and $0.025 in special, so $0.145 in total. As I said, the Board has had a policy and will have a policy of where possible if the ordinary dividend is going to be increased, we'll look to have a bias towards doing that at the interim so that we can increase or rather, I should say, decrease the disparity between the interim and the final dividend. But at the moment, that's flat at $0.12, but with that addition of $0.025 special as per the announcement on the 25th of November, when as Brett has said, there'll also be $0.025 at the final. Management expense ratio, that is a measure of the cost of running the company, 0.11%, that's $0.11 for every $100 invested. So the actual costs were down due to the nonvesting of incentives and some one-off costs we received in the prior period or had to pay in the prior period, I should say. That 0.11% is artificially low because of the timing of that nonvesting of incentives, but it's not out of the ballpark for what we've seen in the past. We had -- it was 0.10% in 2020, for instance, 0.13% in 2022. But the big driver of that tends to be the size of the portfolio. The portfolio itself, as I said, $9.9 billion. So that's down from $10.4 billion at the 31st December 2024, and Brett and Winston will go through some of the components of that later. Moving on to the next slide, which is something that shareholders who look at the NTA announcements each month will be familiar with. It's the share price relative to the NTA, it's at a premium, so above the 0% line, you're effectively paying more -- you're paying more than the fair price of the shares that we own that is set by the market. So you're buying $100 worth of share at $110 for instance, if it's a 10% premium. And conversely, if it's a discount we're able to buy the shares, let's say, $100 worth of shares for $90 at a 10% discount. The discount was about 9% at the end of December 2025. And it does appear, as you'll see from here, that there has been a long period of discount and what the company has been doing, we have been doing buybacks, we introduced recently a share buyback program. And as per the announcement, we will look to continue that in the next 6 months if the market conditions allow. And there's also you may see that there's been an increase in the marketing that we have Suzanne, as Mark has said, has joined us and is spending a lot of time talking to planners, et cetera, about the benefits of investing in LICs. But if we go on to the next slide, it was once attributed to Mark Twain that history doesn't repeat itself, but it often rhymes. And you can see here that actually we have been in periods of discount before. You can see here on this particular slide going back through the Black Monday, just before the GFC, the tech bubble, et cetera. So what we are going through now may will have different causes and different effects, but it is in itself not unusual, I mean, we have seen this in the past. And you can see here a much longer period back to '89 where the premium discount can bounce around the place. So with that, I will hand over to Brett, but obviously, we'll be around for any questions following the presentation.

Great. Thanks, Andrew. So turning now to our update on markets and the portfolio. So the left-hand side of Slide 14 shows AFIC's NTA performance, which is after cost and realized tax. This is our total returns shown in the blue bars, and we compare this to the performance of the broader share market being the ASX 200 Accumulation Index in the purple bars. So starting with the shorter-term performance. As we can see, AFIC's performance for the 6 months to December 2025 of minus 2% and over 1 year of 1.2% are both well below the returns of the market over both of these time periods. And the short-term underperformance has now dragged down our 3-, 5- and 10-year returns as well. So before I go into the reasons for this, just cover off on the right-hand side of Slide 14 to give some more detail on what have been the drivers of the market's 6-month returns on a basis before franking credits broken up by sectors. So if we work down the chart, we can see clearly, it's been the material sector that has contributed most of the market's gains over the last 6 months. So we've had the large-cap miners such as BHP and Rio Tinto having produced very strong share price performance. But most of the materials sector returns have actually come from the small and mid-cap resource companies, especially the gold stocks. And at the other end of the scale, it's interesting that traditional growth sectors, such as information technology and health care, have both had a very poor 6 months of share price performance. So I want to give some more detail, though, now on why AFIC's total return, so our NTA performance has been well behind the benchmark over the last year, and we list the key reasons for this on Slide 15. And we've really grouped it into three key buckets. So the first group of stocks behind this underperformance are some large cap companies that performed poorly over 2025. Starting with CSL, which delivered a total return of minus 37% for the calendar year. So it's the former market darling that suffered a huge derate in recent years. It's been a very frustrating investment for us over this time. And whilst there's still short-term pressures on the business, we think the long-term growth potential remains and hence, we intend to maintain our large investment in this company. James Hardie was down 38% for the year, and this was really following an acquisition that was not well received by the market. We still own the stock today, but we have reduced our position given our view on the company's balance sheet, in particular, as well as a lot of management and Board turnover that's happened in recent times. CAR Group was down 13%, but this was despite what we saw as continued good results as well as a very smooth leadership transition, and it's our belief that the stock looks good long-term value at this point. The second group of companies contributing to the underperformance over the last year we've grouped as some small companies that also performed very poorly during the year. In the case of both Reece and ARB, they have been strong compounders over the long term, but they have suffered from some issues in 2025 that we think are mostly short-term related. Our view is that both remain very high-quality companies, and they both have good long-term growth potential. In the case of IDP, it's been a very disappointing investment for us. We bought the stock too early, but we do intend to hold for now as long as we retain confidence in management and the balance sheet. The third group of companies covers one of the biggest stories in markets in recent times, which has been the rise in the gold price. The major gold stocks have had an unbelievable run with Evolution up 170%, Northern Star up 78% and Newmont up 156%. It's been the case that AFIC historically hasn't been a large investor in gold stocks but this has clearly been a mistake in recent times, and it's cost us over the last 12 months in terms of performance versus the benchmark. At this point, we find it hard to see value in such a hot sector but we will keep more of an open mind towards this sector in the future. So for now, I'll pass to Winston, who's going to talk about recent portfolio changes and provide a summary of the key aspects of the portfolio at year's end.

Thank you, Brett. The 6 months to 31st of December has seen transaction activity levels in line with our long-run averages. Our buying during the period has been concentrated in both Woolworths and Telstra, which presented opportunities to increase our existing weightings in high-quality blue-chip businesses at attractive valuations. You'll see there that we also increased our position in Sigma Healthcare, which is the owner of the Chemist Warehouse business. Chemist Warehouse is the market leader in health and beauty retail in Australia, a category that is experiencing strong secular growth. The company continues to take market share and roll out stores in both Australia and New Zealand with an emerging footprint further abroad as well. The shares have underperformed in the last year despite meaningful progress on growth plans, and we've taken the opportunity to build a more meaningful position given the long growth runway ahead. We also continue to add to CSL, which, as Brett mentioned, has been a disappointing investment for some time, and is currently experiencing some short-term competitive pressures. Despite this, we continue to see a good long-term investment case at current valuations. Weakening sentiments towards artificial intelligence-related stocks presented an opportunity to add some Macquarie Technology at what we believe were levels that represent a compelling value particularly when we consider the build-out of its data center project and the longer-term outlook for the business. You'll see on the bottom left of this slide that we've added three small cap stocks to the portfolio during the period. This reflects a more refined approach to the management of AFIC's small cap positions to take a more diversified portfolio approach, leveraging the expertise and experience of the Mirrabooka portfolio management team. The result of this is that we've added positions in Life360, Objective Corp and Temple & Webster. Collectively, these three additions currently represent about 0.3% of the portfolio. To fund the buying, on the right-hand side, you'll see that we've trimmed stocks in -- we've trimmed positions in stocks where the valuations were getting stretched, namely Wesfarmers, Netwealth and the banks. We've also moved to reduce our position in James Hardie to reflect the increased balance sheet risk and governance risk following the AZEK acquisition. We also exited our position in WiseTech during the period after buying some earlier in the year. We've taken a more circumspect approach to the governance risk associated with the investment. Over the next few slides, we'll provide some context to some of the transactions just mentioned to highlight our approach to buying when we see value and selling when we see valuations reaching extremes. Firstly, on Woolworths, many of you will recall that last year, Woolworths went through some operational and reputational issues. We saw its share price and market cap decline as the green line on this chart illustrates. Despite these issues and a required turnaround, we believe that Woolworths has a strong brand and significant latency in its store network. At around $27 to $28, Woolworths' market cap was about the same as that of Coles despite Woolworths having nearly 30% more stores. And so we took the opportunity to meaningfully increase our positions at around those levels. Secondly, on Telstra. Our buying in Telstra has been premised on the track record of dividend growth that the company has been establishing over the past few years following a rebasing as shown in the blue bars here. Telstra's cash flows and dividends are backed by a strong mobile business built on Australia's leading network, steady earnings from its infrastructure business and solid cost control by a capable management team. We expect this to continue, and the significant amount of cash being generated means the grossed-up dividend yield plus growth on offer looks attractive relative to other large cap industrial companies. As a result, we've been buying around the current share price. Our trimming in Wesfarmers has really been informed by valuation. We continue to view it as a high-quality business being the owner of Bunnings, Kmart and Officeworks, and we rate the management team highly. While we continue to hold a position, we materially reduced it over the last 6 months at an average price of around $92. At that price, the dividend yield was below 3%, which, as this chart illustrates, is well below its long-run average yield of 3.6% as well as the yield of the broader market. Similarly, our trimming in Netwealth was based on where valuation got to. At around $34 where we were selling, the price-to-earnings ratio was above 60x. Our view on the business hasn't changed in that it's a quality founder-led business with a long runway of growth as investment flows shift on to its platform. However, we view the valuation at those levels as extreme. And as you can see on the chart here, the PE has since returned to a more appropriate level for the growth on offer. To provide a sort of portfolio summary, you as shareholders hold a portfolio of nearly $10 billion in 59 stocks with a net tangible asset value of $7.90 per share. You'll see on this slide that our top -- in our top 25 holdings, we have exposure to some resources companies such as BHP, Rio and Woodside. These are all companies with solid management teams and world-class low-cost producing assets. We still have a meaningful position in the banks for income as well as stocks like Transurban and Telstra, which we've spoken about supporting our dividend yield. And also in the top 25, we have some high-quality industrials with the likes of Goodman, ResMed, CAR Group and Fisher & Paykel Healthcare that we expect to underpin good capital growth over the long term. In summary, we believe the portfolio is a diversified mix of high-quality companies structured to deliver on our income and capital growth objectives. And with that, I'll pass back to Brett for an update on our international portfolio and some outlook comments.

Thanks, Winston. So on Slide 22, we give an update on our international equities portfolio and strategy. So the first point to make is that the portfolio has continued to generate value for AFIC shareholders. But at this point, we aren't considering a listing of a separate fund. So we believe the better strategy for now is to continue to invest in international equities within AFIC, but to do it in a more concentrated and complementary style. To give some more detail on the portfolio, we show some of the key statistics here. So the portfolio as of the end of December was worth $170 million. This represented 1.7% as a percentage amount of AFIC's total portfolio value. And the amount of international stocks owned within this international portfolio was 27 and you can see some of the biggest holdings on the chart, including NVIDIA, Microsoft, Netflix and Visa. Obviously, we're happy to take questions on this and any other aspects of the presentation in the question session shortly. But for now, I'll make some quick comments on the outlook, which we list on Slide 24. So the market backdrop at the moment. I think one of the key features is one of extreme geopolitical uncertainty, but it's interesting when you plot that against the share market that remains close to all-time high levels. So to us, we think it leaves the market looking moderately expensive in our view, especially when we look at long-term valuation metrics, such as price-to-earnings ratios and dividend yields. Notwithstanding this, we have found some select buying opportunities recently in some high-quality companies. As Winston mentioned, these have included companies like Telstra and Woolworths, which were bought primarily to income as well as other companies like Sigma and some small caps like Macquarie Technology Objective Corp, Life360 and Temple & Webster, which we want to own more for long-term growth. Overall, we continue to believe that our investment style of focusing on owning high-quality companies for the long term is the right one for us to meet our dividend and total return objectives whilst recognizing that our short-term performance has not been where it should be, hence the focus on improved investment returns under this style and approach. And finally, AFIC's strong level of franking and profit reserves means we have declared $0.025 special dividend for this first half result, with the additional $0.025 special dividend also expected with the full year result in July this year. So with that, thank you very much for listening, and I'll pass over to Geoff to run the question-and-answer session.

Thanks, Brett and Winston. So quite a few questions here. I'll start with this one. This is quite a long one, so I'll try and, I guess, encapsulate as best as I can. We run four different listed investment companies with different objectives. Would it be better from a shareholder perspective to actually combine all of these funds and run them as one and have a sleeve of active management within the portfolio along each of these teams that we manage?

Okay. So look, we do observe, there has been some consolidation within the LIC industry. We saw that through the Soul Patts Group. And as we stand at the moment, each of our four LICs is an independent company with an independent Board of Directors. Those Boards have the responsibility to oversee the strategy and determine where the portfolios and where the company should head looking forward. In each case, I guess we've -- the sense has been that each of the LIC has been fulfilling a different need within the market. AFIC is more of a broad-based fund. Djerriwarrh gives much higher dividend yield than what you get from the market, particularly when you include franking credits. So we've certainly felt that, that fund suits a particular part of the market, particularly those in the superannuation phase where they can get full value for franking credits. And Mirrabooka, with its focus on small to mid-cap, has over long term produced some very good returns, but often, that can come with higher volatility. So I guess, while I take on board those comments and it's probably fair to say that the Boards are constantly reviewing the strategies and where they should operate in, if they are fulfilling those needs, then the sense has been to continue on that part. But as the case with all companies should be, strategy needs to be constantly reassessed as we go forward.

A question here. Good to see the MER stay ultra low at 0.11% annualized. Any comments on sustaining that edge? And also, could we share any specific internal process improvements you're implementing to reinforce current disciplined decision-making in buying, holding and selling, especially as difficult markets may persist for some time?

Okay. So I'll just make a comment on the MER, then I'll pass to Brett to talk about how we transact on the portfolio. Having an extremely low MER is a critical part of our strategy. We want to be viewed as having a similar, I guess, cost to an ETF, and it's very important philosophically that most of the gains that come from the portfolio go to the owners of the company, which are the shareholders. And so being -- or having a very low MER is certainly something we want to sustain going forward. And that's quite an important part of the way we think about the business. So that will always remain in focus, and we always continue to look for ways to improve our cost out where we can. Just the second piece, just on the portfolio management.

Yes, sure. I mean I think when you look back over the long term, AFIC's approach is tried and tested, and I think it's proven and that's what we try to show with long-term performance numbers. But when you have 6 and 12 months like we have had, there's always a need to test and retest things and question things. And the main conclusion of this that everyone was involved in is we think the overall approach is the right one. So investing in high-quality companies for the long term, and focusing on fundamental value, assessing factors and behaviors such as it was mentioned, keeping calm in volatile markets is absolutely essential, and we think the right one, but it doesn't mean that we can't do things better. And some of the ones that have stood out to us, we think, are executing on the transactions better and I think some of the selling over the last 6 and 12 months has been terrific, particularly when you look at Commonwealth Bank and Wesfarmers, the trimming of those positions at the valuations. On the other side, though, unfortunately, we've missed some buying opportunities. We've talked a lot about resources, but there's been some other high-quality blue chips as well that it would have been good to add to. So the whole team is involved, I think, in uplifting the process based on the frameworks that we've got that we think have been proven, but everyone is highly focused on doing a better job of executing against those frameworks.

Thanks, Brett. There's a few questions on international in terms of our approach going forward. So the question is, it's been 5 years we've been sort of looking at the international potentially separate LIC. I guess the question is why we sort of reached the position now where we're sort of managing more of in-house in terms of that short position. And then also the other question around this is are we looking to hold less stocks with a more concentrated portfolio. And finally, on the international questions I got here is will it -- how will it impact AFIC's approach to income within -- generating income within the portfolio given international stocks don't generate a large dividend.

So I guess we were very clear on day 1 when we started this process, and we kept shareholders up to date, we felt that the Australian market over the long term, there's some risks that our market could narrow and every time we see a takeover, it reduces another stock. We talked about the fact that many of our companies, even though they're listed in Australia are truly international businesses and our understanding what's going on globally is becoming more and more important to understanding our own stocks and that we felt that our long-term investment approach can be utilized in the global markets, as I said, because markets have really become easy to transact in just because you're seeing here in Australia doesn't mean you need to just buy Australian stock. So what we said from day 1 is that we think it can add value to the AFIC portfolio at the very least and that we will embark on a path and we'll be looking to learn from that along the way, and there are a number of outcomes that we set at the start, which could be to not do it anymore, to keep doing it or to keep it a part of just AFIC, maybe even doing a separate LIC. And we've spoken in the last couple of years how we're doing some work behind the scenes but we weren't making any final decisions. We were keeping all options open to us as we've continued down that journey. So the initial investment into international, I think, was just over $100 million. That's worth $170 million. So the investments added $70 million to the portfolio. So it's been value adding to the shareholders. And as we have continued on that journey now, we felt like we're ready to make a decision. So we were prepared for an LIC, we were prepared to continue the way we are, we were prepared for all the options but I think where we got to now is that we felt the best way for us forward at this point was to have a more concentrated view, just be a stock picker to the AFIC portfolio trying to add to businesses that can add value to the overall portfolio. And so in that context, we see this as just additional stock to the portfolio rather than a separate portfolio and be willing to buy stocks when we see opportunities and sell when we think we need to sell. And it's where we've landed on, and we think that's the best strategy to go forward from here. And hopefully, we can continue to make the same sort of returns to the portfolio. Now the amount we have in it could go up if we see weakness in overseas markets and we're starting to see good value, we could add to that. We are aware that they are lower-yielding companies. But at the moment, as a group, it's worth 1.7%. So it's almost like a single stock in one of the companies we own, for example, whether you take Brambles or [ Hardie ] or Goodman Group or CSL, they're all international businesses that probably have a similar yield, but we've got 27 stocks at the moment in we call it on holding. So it's very similar to a single holding in a more international-focused business. But we are aware of that, but as Brett touched on, that's why we look for other opportunities in our market to add stocks where we can get dividend yield from. So we're very comfortable with where now we were landed on. It means we can be much more focused, much more picky about what we go into when we get out of it. And as I said, I hope we can continue to make the same returns that we have over the last 5 years.

And it wouldn't change our income objectives.

Again, a number of questions about where the share price is trading relative to NTA. What do we see has been driving that large persistent discount? Secondly, what are we trying to do about it in terms of in the market. And the other question I've got here is the split between retail and institutional investors on the register. Well, actually, most of our -- we have very few institutional investors. But -- so most of our investors will be retail investors either through individuals or through financial advisers or stock brokers. Mark, can you talk about the discount.

So just on that discount, I mean, I'll probably just draw you back to Slide 12, if you get a chance to have a look at it again where we show you clearly that this is not something new. We've seen it before. And this is probably a little bit of a scary bit in a way, but in fact, all the previous periods where we've traded at a discount, it's been when the market's been hot in some way, shape or form. Markets had that sort of elements in it, and we've -- not just us, we see this across the sector, particularly the other, what I'd call traditional LICs. So this is not unusual to us. This is a sector theme. And when the markets get a bit hot, we kind of get left behind. And that chart clearly showed you that when you had the tech bubble, we got left behind, then tech crashed and we suddenly went to a premium. You had the late stages of the GFC, market was running hot, we got left behind. But then post GFC, we went back to a premium because in many cases, we had more, what we call, quality businesses, we were able to sustain the dividend through tough times and we didn't really have the speculative parts of the market. Then we got down Black Monday, get the same theme. I would say this time around, we were at a large premium only a couple of years ago, which was during COVID, we had quite a long period of trading at a premium, and we're kind of unwinding that. But again, there are elements in the market that are very speculative. And so this has sort of been a consistent theme, but it's tended to proceed in a significant market pullback. And I'm not giving any forecast at all, but that's -- there's been a pattern there that we haven't seen before, and this is not new. It is frustrating, though, for us, and I understand it's very frustrating for shareholders. With the special dividends we're paying at the moment, it is presenting an attractive dividend yield along the way. We are increasing our marketing efforts, and we're doing a lot more activity around that. And we understand that the marketing is important. Myself, I've been doing a few podcasts and there's a lot of activity going into this year because I think there's so many competing products out there, we certainly realize we've had to do more out in the market to educate them what is different about a traditional LIC in the way they work, and we will be doing a lot more activity on that front.

And I think the other part of the question came up about the distribution of shareholders is about how we're targeting sort of a younger audience, and I think we are doing that through other means these days in terms of podcasts and other means to try and attract a younger audience to the share registry. Question here about the results on paper are disappointing as we well understand. How is management looking at repositioning strategy to be more inclusive of mid-cap opportunities, particularly given large-cap stocks such as CSL and Telix have been damaging to the results?

Yes, sure. It's part of the overall portfolio strategy. So by no means do we give up on large caps. And sometimes when all you do is look at what has worked in recent times and then try and flip the portfolio to do that, you can just lock in the underperformance both ways. So we'd never want to react just for the sake of it. I think where we do want to take action is where we see genuine fundamental improvement potential. And one is, I think, better accessing opportunities in the small and mid-cap space. And Winston mentioned part of this. And we think a big element of it is investing in these companies, small and mid-cap, small in particular, in a more diversified approach. So taking probably smaller stakes, but in a greater group -- a greater number of small cap companies. And you can see the start of that action on the portfolio adjustment slide, where we've added Objective Corporation, Life360 and Temple & Webster. We think it makes sense when investing in this part of the market to have that more diversified approach because it's very hard to pick individual winners. As we all know, diversification is one of the most important elements of successful investing. And we think it gives a better through-the-cycle approach to rather than trying to time entry into small and mid-caps. So that's one of the things that we not only have identified, but we think are already putting into action.

Just a question on resources. Are we saying look at these more closely, given we haven't -- we missed out on the sort of gold and silver rallies, more recently?

Yes, we're definitely looking at the performance more closely because it's been stunning about what it's done to markets, and hence, it was a big thing on that slide where we ran through about the key reasons for our portfolio underperformance versus the benchmark. We want to keep an open mind on these sectors, but we don't just want to fall into the top of just chasing what's run really recently, and gold and silver would be at the top of that list. So there might be opportunities in the future, and there's definitely reasons why the gold and the silver prices run. But we'd only want to make an investment if it's for the right fundamental reasons long term as opposed to chasing short-term performance or to close a gap versus the benchmark, which can clearly work against you, remembering that these are cyclical sectors.

While on resources, a question here about the proposed Rio and Glencore merger. Do you have any comments on that, either you or Mark?

Yes, sure. I can start. I mean I think our initial approach in these situations is to be generally skeptical of mining sector M&A, and that's just based on experience of this group and what we've seen happen in that part of the market over time. And maybe it's a sign of where we are in the resources cycle. We're always looking for those indicators and observing what's happening in markets by actions rather than words. And there isn't actually a takeover or merger proposal there yet. Clearly, it's been flagged. There's been discussion. So we'll wait and see what comes out after the 5th of February and with Rio's results. But I would also say, we did like -- we really like the idea that Rio presented at their recent Capital Markets Day of having a simpler company focused on better operational performance and cost control and being invested in what they think are the best commodities long term. But overall, we'll see what comes of it.

Yes. I mean I'll just add to that. I mean we've seen some of these transactions before over time, and not with a great deal of success. And we think Rio's assets are great. And so we're keen to understand from the company why they think this time it's different. And I guess sometimes these can be presented in terms of what it can do to their exposures long term. But what we understand is how it adds valuation, how does it add net present value or NPV to us as shareholders, and that's been the issue. They can always explain this in terms of it's going to give growth in copper long term but if the financial metrics on the deal don't add up, it can destroy shareholder value to us, Rio shareholders. So these are the sort of things we want to understand from the company.

Particularly a question for Brett. Can you comment on the impact of index changes for AP Eagers and Soul Pattinson within the index going in and the recent Amcor going out and also the effect of on-market turnover due to passive ETFs?

Yes, it's been a huge factor in markets. It's probably been one of the bigger changes that's taken place, particularly over the last probably 3, 5 years is just the influence of index weightings on money flows. It's never going to be a key consideration for us. We want to invest more in quality companies that we can buy at good fundamental values. We think that, again, stands the test of time as opposed to following money flows, but it definitely has an impact on short-term performance. And you see it when stocks go in and out of the index. I mean what we -- just the big impact for us is because we are more long-term focused, we should have an advantage in being able to take advantage of short-term mispricing opportunities. So when stocks go drop out of the index and if the share price falls a lot, if we believe in the long-term fundamentals, that can present a buying opportunity. We need to take advantage of that if that's the right approach. And similarly, the other way, there might be stocks that we still like that go into an index, attract a lot of money and become overvalued temporarily, and there can be opportunities to trim that and rotate the capital into better opportunities at the time, but there's no doubt it's a big influence in the pricing of shares in our market.

I've got a few questions here on dividend policy. So what is our dividend policy in terms of yield? And also, what is our long-term capital growth target? The question then becomes, are we looking to balance the interim and final dividend over time. And then finally, would we ever think about moving to quarterly dividends?

Okay. So we are aware that there is a difference between the interim and the final dividend. And we have sort of -- we keep giving that some thought. At the moment, there is an imbalance, but obviously, it's the full year results that really determine the dividend outcome. So I suspect there will probably still be a split for some time. But we do every time we think about when we can lift the dividend, is there a way we can put more into the interim, but it doesn't always work out that simply. Sorry, Geoff...

So would we think about our quarterly, and also what's our target in terms of dividend and long-term growth.

Yes. So there is -- one of the LICs within the stable, but it is a different company, Djerriwarrh has announced they are going to quarterly dividends, but that is more of an income-focused product. And that's really a Board decision, but I guess the most recent view is that probably half yearly is okay at this point. But there has been a bit of a trend to try and move to quarterly generally in the market. So this is an issue that will probably get more discussion going forward. But yes, I'm not sure there's a strong appetite for change at this point, but it certainly needs to be looked and discussed on an ongoing basis. And this is the general approach we take, we like to pay out all the earnings as dividends. So we like to sort of pass dividends and the franking credits through to shareholders. Then obviously, we have capital gains we generate on the way. There's a little bit we hold back for a rainy day to make sure that we've got stability. But beyond that, there's a sense from the Board that we want to get excess fracking credits back out to shareholders. So obviously, we announced the $0.025 special for this and another $0.025 special with the final. And we also did say that we will reconsider at that point our franking credit position, but we're sort of establishing that if there are excess, the general sense is to try and get that back to shareholders. We want to have a mix of yield, we also want to get growth. And there certainly is there an intent to -- or want to outperform the index. If we can do that with stable dividends, very low cost, we believe it's a good product for the long term.

A question here about IDP. I think we've covered in the presentation, but I guess you said we went early. So why did we not wait in terms of actually...

Yes, sure, I can cover that one. So with IDP Education, if we kind of reflect on why we went into early, when you look at kind of the share price declining over the last couple of years, the first point of entry was at a time where one of the markets was under a bit of pressure due to policy changes. What we didn't preempt was the synchronization of policy globally during an election cycle where -- and neither did the company, and that's why we've seen the precipitous decline in the share price and the financial results consequently. When we kind of look at the moment where all the markets are sitting, Australia, which is the largest market, is back into growth. The U.K. overnight, just announced some strategic measures for international students, and even Canada, which has been one of the most difficult markets, is starting to show some early signs of green shoots. So when we experience these declines, the first question we ask is, is the balance sheet okay and the second question we ask is can we back management to manage through that situation. And with IDP, the reason we've maintained the position is because the answer to those questions is yes, and we're starting to see some early signs of improvement.

A question here about CSL and why do we continue to have confidence in it given that it's been poor results and also the canceled demerger?

Yes, sure. We do have confidence in it, but it's definitely been tested over the last 12 months. So I think there's a whole lot of negative things affecting the company at the moment. So -- and some of them are a result of market type factors like the attitude towards vaccinations and the like in the U.S., but a lot of them are self-inflicted, particularly the confusing strategy around the planned demerger of the Seqirus business. Overall, though, we think there's enough in the company to, I think, say that the competitive advantage is still very strong in CSL, particularly in the immunoglobulin products that they have got, basically life-saving treatments to patients in almost 100 countries around the world. And the returns that CSL can make of this and have made in the long term, I think, are still valid. The concerns that are there are very much impacting the share price, and you can see it in the multiple that the market gives the stock. I mean, CSL once has traded at 35, 40x earnings, it now trades on 16x earnings. So unless we believe that the business is truly broken, it seems like a very low point to give up on the stock. We have been buying in the last year, but that's been too early. But for now, we see a strong case to at least hold the position, given that long-term potential remains, particularly when you've got a balance sheet that's in good shape, so we don't think there's any problems there, and we think management and the Board are very focused on getting things right, particularly addressing things like maybe a bloated cost base and an overly complicated structure and returning CSL to being more of a growth company that it has been in the past. So clearly, it will be one of the most anticipated results in the upcoming February reporting season. But for now, that's our position. We think the company's long-term growth potential and the value that's there today warrants us holding our position at least.

Thanks, Brett. A question probably for you here, Mark. How active are your Board members with making decisions around purchase and sales of specific investments, i.e., are they making it easier or hard for your portfolio managers to make changes that they see are necessary?

Yes, that's a good question, understanding the role of the Board, it's the investment team that manage the investments. The Board members have to approve the transaction at the end of the day, but the investment team have the ability to run that. The Board are there to give us great insights to utilize their experience in terms of the sectors and markets and companies they've been involved with, and that's invaluable. But in terms of how they do it, Brett, who's Portfolio Manager now for AFIC, has talked about, we do have sort of subaccounts within AFIC and we call them, there's the A account, which is our long term. We've got a B account, and we've also got a trading amount. We've talked a lot about internally the B account, which we can do more activity, how that can be used. And I think Brett's got the license and Brett and Winston to take advantage of opportunities as they see fit in the market. And I think there could have been more use of that over the last few years, but I'm encouraging them to utilize that and to make sure we are hunting for value and capturing value within the AFIC portfolio.

Thanks, Mark. There's a question here about Telstra, a couple of points really. Why are we investing in Telstra given the share price has sort of gone out over the last few years? And also a question about market turnover in Telstra seems to be consistently high in terms of its shares.

Yes. So I guess I'd refer us back to the slide that I presented on earlier before during the transactions. And it really comes down to the role Telstra plays in our portfolio, which is really income. And the points made there around the share price are correct. It has been through a really rough period for shareholders over a long period of time. But really, from where we are today, having -- the company having gone through the NBN transition is now in a really good position where it's paying a sustainable dividend and the growth outlook for that dividend is good as well. And so at current -- in one respect, the share price performance has actually provided the opportunity for us to increase the position at an attractive price and kind of giving us dividend plus growth over the long term. So that's probably why we see at this point, a good investment.

And the same question around Woolworths in some ways, too. Why are we sort of positive around that given where the share price has been trading more recently?

Yes. Again, a similar story. So it is -- it's been a disappointing year for Woolworths. They've been through a number of challenges. But again, that's where the opportunity presents itself. The yield where we're buying looks attractive versus history. And Woolworths does have a bit of a turnaround ahead of it. We're kind of watching management. We back them at the moment. It's -- again, it's got a strong balance sheet and a lot of these characteristics like market leadership and attractive returning business, but we think there's a lot of latency in that business that's not being realized. Over the long term, we expect it to deliver.

I'd just add to that. It's about hunting for value. And with that sort of bit of negativity, you had the stock price sell off, Winston, to sort of $26, $27, and that's what we look for is those, we call them price dislocations where we think there's -- a company is going through a bit of a tough time or we were talking earlier, that every company has a tough period. And that's where you can often get the best buying. And if you're convinced it's temporary, so the team did some really good buying around those levels, and now it started to recover, it's back over $30 again. And so you get then good capital growth and a good yield, and it can turn out to be a good return for us.

So a question here about Mineral Resources. We sold it, did the exit. Was the exit a mistake in hindsight?

Yes. So far, it was because it was below the current share price, but these things take time. I think the lesson from that was our expertise and track record in picking single commodity stocks, particularly those that are up on the risk curve. And whilst the company had a lot of very strong attributes at the time being founder-led and a very attractive sector, it could change quickly, and then it's changed again. So definitely a mistake in the short term. Long term, we'll see, but we could buy the stock today, and we're not -- we've chosen not to buy it. So that's the best indicator of our view of the company at this point in time, whereas our commodity exposure has been concentrated in BHP and Rio. That's where we've seen better value and quality.

A question here. Given all the opportunities available in the U.S. and the outlook for deregulation in interest rates versus Australia, would you consider materially increasing your position in international equities? Many of your top Australian holdings are fully valued by their own admission. Granted capital gains tax on sales, some of these would be taking profits will allow further fully franked dividends, increased international exposure and will be a point of difference versus your competitors?

Okay. There's lots of questions within that question, but I'll try and pick up on most of it. Certainly, we had a view 6, 12 months ago that a lot of our stocks were very fully valued, and we are a long-term investor. We want to be tax effective. So we try and limit our activity and sometimes you wear that downside. But I would say a whole bunch of our good quality stocks are now looking much better value at the moment. And so that gives us an opportunity to hunt for good quality there. And with our renewed approach on the international, where we're being a bit more focused, we are hunting for value there. So we're taking a bit more of a view is where we see value, that's where we're going to allocate money. We are open to putting more in international if we're seeing good value that can add to the AFIC portfolio. So we can hunt for value in both locations and both of them are available to us.

You've got any view on the oil and gas sector in terms of the stocks we currently own, particularly around the Santos failed merger, failed acquisition, I should say?

Yes. So we own two stocks in the sector being Woodside and Santos we think are the higher-quality businesses within this space, and it's a sector that's offering and has for quite a while, offered some very good value, and we want to be in what we think are the better quality operators. Both have got a good case for better returns over the next few years. So they've invested in growth projects that will start to complete over the next few years, and that should generate a very attractive level of cash flow, which, if the Boards and management teams of these companies manage that widely, a large part of that should flow through to shareholders in the form of dividends, mostly fully franked dividends. So I think there's a good investment case for both Woodside and Santos, which is why we've retained a holding in both. But a lot of the short-term share price performance is going to come down to simply the oil price, which has been trading -- trending lower over the most recent year and actually on a multiyear view as well. But you see at certain points in time, it's been a pretty calm share market overall the last few years, but you see certain points in time when there is an episode offshore like what has happened in the last couple of weeks, for instance, and you get a spike in the oil price and it can make a big difference to the share price of Woodside and Santos. So again, wanting to keep, I think, a level head and a more through the cycle longer-term view of value rather than being swayed so much by the short-term stuff.

I've got quite a few questions which I'll amalgamate in terms of given the recent performance, how are we viewing both in terms of the investment team, the structure of the investment team and also remuneration around the investment team?

Well, with the structure, I'm really, really pleased with what we've had in place with Brett and Winston. I think Brett has been with us 6 years, and to my mind, is a proven quality value investor. So -- and I think myself and the Board is just wrapped that he's taken on this responsibility. So really pleased with that. In terms of remuneration, the biggest part of our incentive is performance. And so if the performance is not there, the incentives are not there. So we are all very aligned with the outcomes of the LIC, not only from incentive, but we are all shareholders, some of the significant shareholders across them all. And so performance means everything to us across all those assets.

Just to note, as Mark said, it is across all LICs. So the figures that you see in the annual report, the remuneration report include incentives that are based on performance for the four LICs, not just any.

I noticed the number of participants have gone down quite dramatically here, but I'll ask a few more of the outstanding questions that we've got, and then we'll attempt to get back to those that we couldn't answer online. Interesting question here, Andrew. Dividend declared is $181 million, cash available is $131 million, a difference of $50 million. How AFIC fund the $50 million in difference?

Well, first of all, of course, there is a strong participation from shareholders in the DRP and the DSSP. So that reduces the amount available, and that's cash we've got at the moment. So there's always cash coming in for dividends with companies that we hold and any potential cash that we're getting from the sale of facilities and from the sale of securities. We do have liquidity facilities in case there is a short-term funding gap, but that really is just to tide us over until the dividends come in from the companies that we invest in. So it's not unusual, it's not an issue.

So Winston, the rationale for the new additions, such as Objective, Life360 and Temple & Webster. What are your sort of objectives there in terms of the yield and also growth targets on these?

Yes, I'd say for the first one I make is something that might have been missed in my comments that they are relatively small positions at this stage, they're 0.3% of the portfolio. What we're really looking for in these small-cap stocks, and I think all three that were mentioned fit this bill is really the duration of growth, that they're small, they're at the early stage of their growth runways and that we have growing confidence in the their long-term opportunities, and so they're really there for capital growth as opposed to dividend yield, I'd say.

A question, is Transurban an appropriate holding for the long term?

Yes, we're very confident that it is. We think it's very hard to find companies to invest in, especially on our share market that effectively have a new monopoly position in a highly defensive and quality sector that has locked-in growth. So when you own collection of the best toll roads in a country that has population growth and a pretty solid economy, the returns and the growth that you can get from that over the long term when you factor in compounding can be very strong. And you see it when you analyze the historic results of Transurban. And then -- so within that, though, you need to have a balance sheet and a capital management policy that reflects the nature of the business. And we think, again, that's been well proven over time in the case of Transurban paying out operating cash flow as a dividend and running a very tight ship on the financials, particularly on the gearing levels, running it all in a sustainable manner can deliver great outcomes for shareholders. And I think we've seen that over the long term in Transurban, and the dividend growth in recent times has been very good, too.

I might make these last couple of questions. Got a question here. AFIC's larger holding in Mirrabooka is giving a greater exposure to small and mid-caps while in recent times, this has been valued as probably trade as a discount. Also, has the writing of call options increased as a means of improving income?

Sure. So on Mirrabooka, so yes, of course, the share price will fluctuate around NTA. It's got the same company structure as AFIC does, so you're always going to have that premium discount to NTA. I mean, interestingly, the Mirrabooka share price is still above the issue price in the equity raise that we participated in last year. The overall investment we have in Mirrabooka is quite small as a separate investment of about 0.5%. Hence, we think there's a good case to also invest in small and mid-cap equities directly. And the second question, Geoff, was what, sorry?

In terms of would we think of -- sorry, in terms of the way we manage the small mid caps in the portfolio, does it also satisfy that requirement because we're using Mirrabooka?

Yes.

Another question here on Amcor. It's being sold off. Does it present one of those opportunities you alluded to previously in regard to index changes?

Yes. So Amcor certainly has been one of the stocks that have suffered from the index changes. So that explains part of the reason. But as long-term investors, that's something that over the long term, we think is a bit of a wash. One thing that has meaningfully changed for Amcor is post the merger or the Berry acquisition, the shareholder base is -- it's a dual listed company. So the shareholder base has shifted its weight more towards the U.S., where packaging stocks are not as scarce, and so the valuations of those stocks attract -- are not as attractive. From here, we continue to hold the stock. We think that the benefits of the merger have not yet been fully appreciated by the market, and will hopefully be proven up over the next couple of years. And so yes, certainly, the index changes have been a big factor in that stock in particular.

A question on Reece here in terms of confidence in the Board and also, it seems that Reece has sort of been running their own race with regard to shareholders. Could you sort of bit of comment around that?

Yes, I'd say as a signing point, it's similar to my comments on IDP before and that Reece have been subject to the external environment. So U.S. housing is in a downturn, and Reece obviously have aspirations to grow our business there. But given where that business is in terms of its maturity has suffered quite a bit. And so in that regard, we kind of take a step back and look at the Board, the management team, are they aligned and find very much so they are and they've been buying back stock recently in support of that and also been managing the balance sheet in a very conservative way that we do think is in the interest of shareholders. When we look at the Reece management team, they have always managed the business for the long term, and that includes managing through the fluctuation. So again, we -- the things we look for when companies are experiencing headwinds like Reece is, are they aligned, do we still back management? And then secondly, do they have a strong balance sheet? And again, the answer to those two questions is yes.

I've a question here about the option strategy, Brett, just to clarify, we're sort of writing call options, and we're not buying options per se.

Correct. Yes. So when we use options and you may see it indicated on our reports, when indicated options are written against certain holdings, what we're doing there is writing call options predominantly against stocks that are held in the portfolio, and we only do it to generate more income. So we do not use options at all for hedging for speculative purposes. It's purely for income generation. It's not a significant part of our strategy. But we do have the ability to do it against certain stocks. And if it's done well, and hopefully, we've got the expertise within the group, again, proven over time to do -- to run such a strategy, it can generate a good level of extra income, which we obviously can use to pay out as dividends.

Thanks, Brett. Look, we've been going for well over an hour now. So I think the questions we've got, we've basically covered most of them within the presentation, but anything we don't have covered, we'll get back to you directly. But at that point, I think we'll close the presentation, and thanks for your -- to shareholders listening to us and also be aware that we'll have shareholder meetings around the capital cities in March, and also we'll be doing one of these presentations with the final results in July. So again, thank you very much, everyone.

That does conclude today's webinar. Thank you for your participation. You may now disconnect your lines.