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

Ladies and gentlemen, good morning, and welcome to the Australian Foundation Investment Company's Annual General Meeting. I'd now like to hand the meeting over to your first speaker for today, John Paterson, the Chairman. Please go ahead, Mr. Paterson.

Thank you. Thank you. Good morning, ladies and gentlemen. Welcome to the 92nd Annual General Meeting of the Australian Foundation Investment Company. My name is John Paterson, Chairman of the company. The Company Secretary has confirmed that a quorum is present online. I would like to begin by acknowledging the traditional owners and custodians from all the lands we gather on today, and to pay my respects to their elders, both past and present. Due to the ongoing coronavirus pandemic, my fellow nonexecutive directors, Ross Barker, Rebecca Dee-Bradbury, Graeme Liebelt, David Peever and Catherine Walter are joining via telephone. Unfortunately, Peter Williams is in apology during -- due to a bereavement in the family. I'm joined in our Board room by our Managing Director, Mark Freeman; our Company Secretary, Matthew Rowe; our Chief Financial Officer, Andrew Porter; our General Manager of Business Development and Investor Relations, Geoff Driver, and Portfolio Manager, David Grace, all of whom are practicing responsible physical distancing. I will also take this opportunity to introduce Nadia Carlin, partner of the company's auditors, PricewaterhouseCoopers, who is attending via telephone and available to answer questions today on the audit and preparation and content of the auditor's report at the end of the presentation. Today's meeting is being held online via the Lumi platform and via teleconference. Shareholders and proxies attending online can watch a live webcast of the meeting, and have the ability to ask questions and submit votes. Shareholders and proxies attending by telephone will be able to ask questions but not vote. Today's presentation has been released to the ASX and made available on the website. Questions can be submitted at any time via the AGM platform. To ask a question, press on the Speech Bubble icon, this will open a new screen. At the bottom of that screen, there is a section for you to type your question. Once you finish typing, please hit the arrow symbol to send. Please note that while you can submit questions from now on, I'll not address them until the relevant time in the meeting. Please also note that your questions may be moderated, or if we receive multiple questions on 1 topic, amalgamated together. For those shareholders and proxy holders joining by telephone, you can indicate you would like to ask your question by pressing star 1 on your telephone keypad and wait for your name to be announced. Voting today will be conducted by way of a poll on all items of business. In order to provide you with enough time to vote, I'll shortly open voting for all resolutions. At that time, if you're eligible to vote at this meeting, a new polling icon will appear. Selecting this icon will bring up a list of resolutions and present you with voting options. To cast your vote, simply select one of the options. There is no need to hit the Submit or Enter button as the vote is automatically recorded. You do, however, have the ability to change your vote up until the time I declare voting closed. I now declare voting open on all items of business. The polling icon will soon appear, and please submit your votes at any time. I'll give you a warning before I move to close voting. I can confirm that where undirected proxies have been given to me as Chairman, I'll vote them in line with the Board's recommendations on each agenda item. Before we move to the business of the meeting, I'd like to provide some additional comments. If I've been told on the 1st of July 2019, that the Australian equity market would produce a total return of negative 6.6% for the year, it wouldn't have surprised me. Market valuations were getting high, growth was slowing, and some predicted a mild recession in the first half of 2020. The negative 6.6% return was what emerged, but that totally hides what an extraordinary and disruptive year it was. In this environment, we are pleased to have been able to deliver 3 things for our shareholders. Firstly, by outperforming the ASX 200 index by 3.5%, we've softened the downturn in such a disruptive year. This is achieved in a portfolio exhibiting lower volatility than the market generally. Secondly, we've kept the cost of running AFIC to just 0.13%, allowing almost all of our income to flow through to our shareholders. This is very competitive against other investment funds. Thirdly, our policy of accumulating some profit and franking reserves in good years has allowed us to pay a steady $0.24 annual dividend, despite our earnings falling to $0.199 due to significant dividend cuts or deferrals. We've had a lot of queries as to our likely dividend this year. Unfortunately, as it is early in what will remain a difficult year for many companies, we cannot make any reliable forecasts yet. Suffice to say, we're well aware of the importance of dividends to our shareholders in these difficult times. The 2019/'20 year was a tale of 2 different halves, with our profits in the June half year under considerable pressure due to dividend cuts and deferrals. We have a partial view of the current half year after the recent reporting period with income levels remaining subdued. In the next month, the bank results will reflect both the pandemic and the constraint APRA has put on the banks for dividends to be no more than half of profits. It will again be a difficult half. June half 2021 may see some benefit as our economy opens up as long as the pandemic is kept under control. However, as we go into 2021, it will be impacted by the gradual wind back of the fiscal stimulus measures. It is sobering to reflect on the scale of those measures that have underpinned the economy through the last 6 months. Job Keeper and Job Seeker have injected $60 billion. Superannuation fund withdrawals have approximated $50 billion. And deferrals of interest and capital have occurred on $0.25 trillion of loans. An examination of the recent federal budget shows the greatest stimulus is over the 12 months from March 2020 to March 2021. And without further measures, the level of support will decline significantly after that. The effect of the superannuation withdrawals and loan payment deferrals, largely ends now. Over the last 2 years, we've reduced the number of stocks in our portfolio and increased our commitment to a number of our favorite companies. This has given the portfolio a better industry diversification and, we believe, stronger growth potential. The recent positive performance numbers appear to confirm the benefits of this strategy. Shareholders will be aware that over recent years, many of our core holdings have expanded their businesses internationally. Some have done so to the extent that they now operate primarily in offshore markets, for example, Amcor, Brambles and James Hardie, to name just a few. This has meant that our investment team have increasingly developed capabilities and processes to follow these companies and their competitors offshore. It has become an important part of our investment process. Over the past year, we've put together and followed a model international portfolio based on our investment principles and processes. The results today are encouraging. As a result, the Board believed it was now time to actually invest a small part of our funds, up to 1.5%, in a diversified global equities portfolio. It will consist of high-quality companies with strong competitive advantage, good growth potential and offering a broader range of industries. It will add to the growth prospects and diversification of our existing Australian-based portfolio. Down the track, when the performance has been assessed, we will consider whether it represents an opportunity for our shareholders and other investors to invest in this global portfolio directly. So now we'll move on to the business of the meeting. I'll take the notice of meeting as read. First agenda item is the consideration of the financial statements and reports for the year ended 30th of June 2020. We'll do this via a presentation, after which I'll ask shareholders to either comment or to raise any questions either about the presentation or the auditors if they have any questions about the audit. Our executives will touch on the matters that relate to our results, portfolio and performance. I'll now pass through our Managing Director, Mark Freeman, to start the presentation.

Okay. Thanks, John, and good morning to everyone. Just starting with the slides on Page 5. To start -- starting on the agenda, we are talking through the objectives and investment process we adopt here at AFIC, then I'll pass over to our CFO, Andrew Porter, to talk about the recent results. David Grace, our portfolio manager, will then talk about the markets and the overall portfolio. I will then give some outlook comments before passing back to John. Moving to Slide 6, our disclaimer, just to say we're here to talk about the company. We're not here to give financial advice. We don't have a license to do that. On to Slide 7, the objectives of the company. We've always been about paying dividends, which we want to see, over time, grow faster at a faster rate than inflation. We also want to provide attractive total returns over the medium to longer term. So how do we do this? On to Slide 8. AFIC offers a diversified portfolio of quality companies. So what do we look for? We're looking for businesses that we think have a sustainable competitive advantage which often mean unique assets or brands that produce high returns on capital. We want these businesses supported by strong management teams and board, people who are very important to the running of a business. We've got a preference for companies that have recurring and predictable earnings streams. Financial strength has always been critical, so businesses that have strong cash flow and balance sheet. Poor balance sheet has always been a recipe for poor performance in investments. We want to be in companies that can grow over time, therefore, producing growing profits and, therefore, growing dividends. We have what we call a nursery stock section in the portfolio where we're trying to capture the new, developing companies coming through, take a position in them and look to grow them over time. We're always looking to buy more of the good quality companies when we see long-term value appearing in the markets. So we eye, as we always have been, long-term, buy and hold investors into quality companies. This minimizes our turnover, last year, was only 7%. This minimizes transaction costs and, ultimately, the tax that you would pay when you sell stocks, which can be a considerable drain on overall performance. So in essence, what we're trying to do, we're trying to capture the compounding impacts of being in high-quality, growing businesses over time, and we think this is the key to successful investing. Moving on to Slide 9. We thought we'd touch on ESG. We get a lot of questions on this regularly. So we thought it would be important to touch on this. Our approach to ESG is that it is embedded into our investment process. It is not a separate item that we look at. We want to invest in companies that have strong governance and risk management processes, which include environmental and social risks. We do see that our companies have remuneration plans and outcomes that are aligned with AFIC's and our shareholders' long term interest. We engage in the companies we invest in on these issues, and we'll vote as shareholders accordingly. Environmental considerations are an important element of our assessment of whether a company is good quality or not, understanding the sustainability of our business model into the future, and the degree of its independence from outside influence are important factors we consider. So thinking about how environmental issues might impact on our company are key considerations we take and part of our quality assessment. The social component, we give the example. We don't invest in companies that are predominantly gambling stocks. That's been an approach we've had for many, many years. And it says to us that we are aware of social issues and its importance to us and our shareholders when we invest. And governance, assessing the Board and the people of the company and how they go about running the company was something that I was taught on my first day with the company some 26 years ago, and that continues. So I guess the way I look at it is ESG issues have really been a part of this company for many, many years. It's embedded in our process, and they will continue going forward. Now moving on to the results summary, and I'll pass on to Andrew Porter, our CFO.

Thank you very much, Mark, and again, good morning, ladies and gentlemen, and I reiterate the Chairman and the CEO's comments, and it's a shame we can't meet in person as we are wanting to do. Slide 11 is the results summary. And as you can see from that, the profit was down 41%. I'll come into more detail on that on the following slide. The dividend maintained at $0.14 final, $0.24 for the year. And that is, of course, excluding the special dividend of $0.08 that was paid in the previous year. There were a number of reasons for that, not least of which was participation in the buybacks from Rio and BHP. But of course, we can go into that in more detail should shareholders wish. The portfolio and shareholder returns are there, obviously, above the market, and we'll come on to that later on in the presentation. The Chairman has mentioned the management expense ratio of 0.13%, the same as last year. And to put it into context, that's $0.13 for every $100, that the shareholder has invested in AFIC. Portfolio, as a whole, were down from $7.8 billion to $7.2 billion following the fall in the market. The next slide, which is Slide 12. You can see -- this is what we call a waterfall diagram, which shows how the cents per share -- how the profits has changed over the year in cents per share. If we strip out those one-off events that we talked about, how that's contributed to the special dividends in the prior year, we would have a normalized, for want of a better word, result of just under $0.23 per share. So without those one-offs, that's what we normally expect. However, with the decline in revenue, which was $0.036, plus we're a little bit offset by some trading revenue, we were down to under $0.20 in terms of net profit per share. Now the major reasons for those declines are there in that little box for you. And I don't think they're a surprise to many people. Westpac, the banks, either no dividend or decreased dividend, even the ANZ dividend -- with interim dividend which was paid this year, was down considerably from what it had been in the prior year. So that left us with a $0.199 result. Moving on to the next slide, Slide 13. The share price performance being above the portfolio performance, that's reflected in the graph there where the premium has increased as of the end of September. Just to remind shareholders, the share price at the end of September was $6.31, and that was against an announced NTA of $5.19. Happy, of course, to take any questions for any of that at the end of the presentation. But thank you. Mark, back to you.

Thanks, Andrew. At this point, we'll pass over to David Grace to talk through the markets and the portfolio.

Thank you, Mark. And I'd also like to wish everyone a good morning. Today, I'll talk to you about current market conditions, recent changes we have made to the portfolio and how the portfolio is presently positioned. So starting on Slide 15. It's been an extremely volatile 12 months in equity markets as the impact of the COVID pandemic influenced investor sentiment around March. The results in sell-off was rapid and indiscriminate, with no sector of the Australian equity market unaffected. Around the world, measures of stimulus response from governments were rapidly deployed at unprecedented levels. Investors welcomed the response, improving sentiment for the market. Following near 40% fall over 6 weeks, the ASX 200 rebounded sharply to now being around 20% below the pre-COVID level. On a later slide, we outlined the major portfolio changes we have made, noting the market pullback provided the opportunity to add to a number of existing holdings at attractive prices. The chart on the right-hand side shows the significant dispersion of returns across market sectors over the last 12 months. What's notable is the market rally since April has been narrowed. Information technology, health care and gold sectors outperformed, while banks have had a challenging year, down over 30%. The portfolio benefited from exposure to information technology through our holdings in NEXTDC, Xero, Altium, FINEOS, IRESS, Netwealth, realestate.com, Carsales and Seek. Equally in health care, where we mainted overweight positions in CSL, Cochlear, ResMed, Fisher & Paykel Healthcare and Ramsay. The portfolio's weighting to banks has declined in recent years as we have allocated capital to other areas. Despite the current challenging environment, we consider our exposure to banks will continue to meaningfully contribute to portfolio income over the long term. And just on gold, while gold as an asset class is defensive and typically performs well in volatile times, we do not have any direct exposure to gold sector in the portfolio. ASX-listed gold companies typically offer short mine lives and accordingly come with significant mine development risk. As we are long-term investors, the requirement to have a view of the gold price over this time horizon is challenging. And we have greater confidence in the long-term prospects for the companies we currently hold within the portfolio. On to Slide 16. Slide 16 shows the large stimulus efforts that governments globally have committed to in the fight against COVID and its impact on the economy. Early withdrawals of superannuation, Job Keeper and Job Seeker payments provide a material benefit to both corporates and the consumer as fiscal stimulus response reached unprecedented levels. Stimulus measures are now being [ aged ]. The impact this will have on company earnings remains uncertain and will likely provide a volatile equity market backdrop for the foreseeable future. On to Slide 17. Despite stimulus measures, companies largely switched to capital preservation mode in dealing with the uncertainty of the situation. Preserving cash became a priority as the outlook for earnings became increasingly uncertain. The charts on this slide have been prepared by Macquarie Research and outline the impact that COVID has had on companies' preparedness to pay a dividend for the June half. 67% or 2/3 of the companies researched by Macquarie, either cut or suspended their dividends, a level comparable to what we saw during the GFC. On to Slide 18. Slide 18 outlines portfolio performance against the ASX 200 benchmark over various time periods. While disappointing to be negative in an absolute sense, pleasingly, relative to the ASX 200, we've had a good 12 months. Over the last few years, we have been focused on improving the quality of the portfolio and ensuring we have more capital in businesses we believe can win over the long term. The number of stock holdings has reduced over this period with sale proceeds reinvested in making our preferred companies represent larger weightings in the portfolio. These companies have been a significant driver of recent performance. Despite reduced stock numbers, we feel we've been able to maintain a diversified portfolio across the various sectors of the market. As mentioned, while we expect the market to remain volatile, we feel the portfolio has invested in quality companies with supportive balance sheet and having good prospects for earnings growth over the long term. On to Slide 19. Slide 19 outlines recent changes we've made to the portfolio. Before talking to the companies shown, I'll provide a summary of what we look for in assessing investment opportunities. We're seeking companies offering a sustainable competitive advantage over peers, having unique assets that provide an appropriate return on capital and a market position that will sustain the company into the future. In the hands of a strong management team and Board, these businesses typically deliver a recurring earnings profile and generate consistent free cash flow, allowing reinvestment back into business while offering a growing dividend profile. Companies that meet this criteria have the ability to grow earnings through the cycle and are less reliant on prevailing economic conditions to deliver earnings growth. As long-term investors, we only look to buy when we consider share prices represent attractive value in light of the company's long-term prospects. We are happy to remain patient until attractive opportunities emerge in companies that meet our criteria. So starting on the right-hand side of the slide, these are the companies we've exited over the last 12 or so months. While the companies themselves can be viewed as good quality, the challenges of the industries within which they operate restrict the ability to deliver recurring earnings and cash flow growth over our long-term investment horizon. All operate within cyclical end markets that are highly competitive, where returns are typically correlated with the prevailing economic environment. In certain cases, the industry is going through structural change which will likely reduce the long-term profile for companies within these industries. Online shopping and bypassing retail malls is providing a challenge for Scentre Group, the owner of Westfield Australia and New Zealand, while for Adelaide Brighton, additional port capacity in recent years has opened Australia's cement market to lower-priced import competition. The left-hand side of the slide shows purchases we have made, where we've increased our holdings in a number of high-quality companies displaying the investment attributes we look for. The recent market sell-off provided the opportunity to add these holdings at attractive prices. All of these companies are market leaders within their respective industries. So running through the 6 companies listed, Goodman Group is the largest global developer of distribution centers and warehouses and is benefiting from the increasing trend to online shopping. The company has focused its operations across 18 global gateway cities where population growth is strong, driving long-term demand for distribution centers. Importantly, they maintain a strong balance sheet with capital available to meet this demand. REA Group, or realestate.com, is the market leader for online property classifieds in Australia and currently generates almost 3x the audience of its nearest competitor. The business remains well positioned as property markets slowly return to more normal volumes. Sydney Airport has unique infrastructure into Australia's gateway city. While travel restrictions have impacted near-term earnings, we consider long-term prospects for Sydney Airport remains strong. While the timing of air travel return remains uncertain, the company improved its balance sheet during the period by undertaking the capital raising in which we participate in. Cochlear is the global market leader in the development and manufacture of cochlear implants. Given the lifelong relationship Cochlear has with its patients, maintaining a very strong balance sheet is pretty cool. We participated in the discounted equity raising when elective surgery cancellations were at their most intense. Macquarie Group has a long-established track record in developing, financing and managing infrastructure projects and sustainable energy projects in wind, solar and hydro. Macquarie is well positioned to facilitate the huge opportunity in energy transition from carbon-intensive fossil fuels to renewable and sustainable sources. And finally, Wesfarmers, the owner of Bunnings Hardware, which maintains a strong industry position, delivering a high return on capital. Online sales to trade customers remains a significant opportunity for Bunnings. Moving on to Slide 20. From Slide 20, we outline the top 15 overweight positions in the portfolio as it stands today. We remain comfortable that the prospects for all these companies remain strong over the long term. I wanted to highlight just a handful of names, by way of example, how high-quality businesses emerge from periods of uncertainty in stronger positions, enhancing their longer term prospects. Bunnings, the market leader in hardware, is now greater than 60% of the earnings for Wesfarmers. Having a well-established online presence, enabled the business to capture market share during COVID. Following the sale of Coles, Wesfarmers has a very strong balance sheet, providing optionality for future investment, while paying a 3.5% dividend yield. On Slide 21, James Hardie, manufactures and distributes a high-quality fiber cement siding products for the U.S. housing market. At the heart of the COVID impact, demand for building products was highly uncertain. As a function of its superior quality product, James Hardie earns higher margins and generates significantly more cash flow than all of its competitors. During the COVID impact, these higher cash flows, together with a strong balance sheet, enable the company to continue manufacturing, while many competitors were forced to temporarily close their operations. As a result, the company has picked up significant market share in recent times. On Slide 22, NEXTDC, in the middle of the slide, has seen demand for their data centers increase sharply as we all work and educate from home, consuming more data on video calls, et cetera. The increased data usage needs to be stored. NEXTDC is well positioned to capture this demand, having established a national footprint of data centers. The return profile on their significant capital investment is now accelerating. Moving to Slide 23. I wasn't planning on spending long on the next 3 slides, which outline the top 30 holdings in the portfolio as it stands today. Collectively, the top 20 holdings represent around 68% of portfolio value. I've spoken about a number of these companies already, and we'll be happy to answer any questions that you have later on. At this point, I'll hand over to Mark for some commentary on the outlook.

Okay. Thanks, Dave. So moving to Slide 27. So obviously, the COVID-19 has been very disruptive for economies and markets globally. David mentioned the significant stimulus that have been provided into economies that have helped supported share prices. Low interest rates has also meant that money is flowing into equities as they struggle to find alternative places to invest. The full impact of economic conditions on companies is still being played out and will continue to do so over the next few years. The market obviously has been very strong, both here and abroad, although we do understand that low interest rates will drive higher valuations, at least for the near term. At some point in the future, if interest rates do start to tick up, I expect that, that would be a headwind on markets. Technology and health care sectors have benefited particularly from this low-rate environment. We believe the AFIC portfolio is well positioned in quality companies. And the adjustments we made in March and April further strengthened the portfolio. So the portfolio is in very good shape. We are in very good companies. And very good companies, as David pointed out, find a way to grow, particularly in these tougher conditions. And we feel that these businesses are improving their competitive position, and, therefore, ability to grow in the long term. There's a U.S. election upon us. This could provide further volatility in markets. I'm not sure how the result of that will impact. It's impossible to predict. What I do know is that results in the past market movements have been driven more by where the market was seeing from a valuation perspective rather than the outcome of that election. And at this point, markets look pretty fully valued at this point. So we remain patient. We've got a good portfolio now. It's time for us to be opportunistic. We do have a list of companies that we'd like to have more of, but we believe we can be patient, and we see those opportunities will move to improve those. So at this point, until we come back to questions, I'll pass back to John.

Thank you, Matt. We'll now deal with a few questions that we're asked prior to the meeting. We received 2 questions for our auditors, PricewaterhouseCoopers, with the first question asking for an explanation on the additional audit procedures that were performed this year in response to COVID and the increased risk on the financial results and financial report. The second question concerns auditor independence and partner rotation, and if the company has gone through an audit tender. Before I hand over to Nadia Carlin, our audit partner, I can confirm the audit contract was put out to full competitive tender in 2017. So I'll now pass to Nadia. Thank you.

Thank you, Chairman, and good morning, everyone. I'll respond to the second question first since that is where you left off. So in addition to your comments on the competitive tender in 2017, I'm required to consider my independence for each year. Audit partners in Australia rotate every 5 years. And I'd note that I've completed my third year of those 5 years. And so in considering my independence each year, I do have regard to a strong framework, which is governed by the Corporations Act and also the Code of Ethics. This framework includes consideration of any conflicts of interest, including any financial interest between the firm and AFIC and also the extent and nature of any audit work performed. And so I'm satisfied as to my independence, and I have said so in my independence declaration, which you can read on Page 35 of the financial statements. And that's given -- governed under Section 307C of the Corporations Act. On to the first question which, just to remind everyone, was how has the company considered COVID-19 in our audit report. In responding to the emerging pandemic, we did review the operations of the company and all of the balances in the financial statements for susceptibility to impact from COVID. Overall, I would say there are very limited estimates or judgments in these financial statements. And so therefore, COVID-19 didn't increase the uncertainty in the accuracy of the company's reporting for this balance date, 30 June 2020. There was just 1 main area where we did perform additional procedures, and that was in the increased audit effort to assess the recoverability of the dividend income receivable that was sitting there as at balance date. So thank you for the questions, and I'll hand back to the company.

Thank you, Nadia. Before I pass to Geoff, I will address another series of questions. We've had a number of questions on the Board structure, which I'll address now. Firstly, we've been asked whether we need 8 Board members or whether we could do with less. There clearly is no magic number that's the correct answer. But we find the greatest value from 8 directors comes in the deep and diverse business experience they can bring to our investment discussions. Clearly, fewer directors would reduce our capabilities in this area. Second question was about Board diversity. This is actually addressed in our corporate governance statement, which was issued to the ASX on August 31. In that, we say that gender diversity has been a focus for the Nomination Committee. And while significant progress has been made in identifying candidates, we didn't meet our Board objective of 30%-plus by June 30. This is primarily due to the disruption of the pandemic, but I'll reiterate that this remains our primary focus for our Nomination Committee and Board. So I'll now pass to Geoff to manage some questions.

So we'll now proceed to questions relating to the presentation. What we'll do is we'll run through the written questions first as best we can and then proceed with the mixture of telephone and web questions. Just a reminder that we have several questions on the same theme or topic. We will attempt to aggregate these to answer them. Questions on the formal resolution will be taken at the time or the point when we are dealing with these resolutions. The first questions on the presentation we have are provided by shareholders prior to the meeting. And the first one is to David Grace. Why the portfolio is so low in technology stocks? Why didn't we invest in Afterpay?

Sure. Thanks for the question. So we feel we have a meaningful exposure to technology stocks, which currently is just over 7% of the portfolio spread across 9 different companies. The largest of those are Carsales, NEXTDC, Seek, Xero and REA. During the course of FY '20, we added 2 technology stocks being Altium and Netwealth. Altium is a software business designing printed circuit boards. Netwealth is an independent platform provider in the wealth management space. As I mentioned in the presentation, the information technology sector has had an incredibly sharp run during the COVID and coming out of the COVID impact, and we continue to monitor that space for any valued opportunities that would emerge. In relation to Afterpay, we've been following the company for a while now. Look, credits to the management team. They've done an amazing job on being able to win customers here and in international markets. Our concern really centers around whether or not the business is developing a long-term competitive advantage. The Buy Now, Pay Later space is extremely competitive, and it remains uncertain about what returns look like long-term in the face of this competition. But it's a business that we continue to watch closely.

I'll direct the next question to Mark Freeman. How does share -- how does owning shares in Rio Tinto, in a company that destroys priceless, indigenous heritage for profit, fit with the environmental, social and governance analysis of AFIC's investment framework? Will AFIC divest itself of Rio Tinto shares? How does AFIC and its directors reconcile company profit with destruction of aboriginal heritage?

Thanks, Geoff. Well, every business that we invest in, we want them to be run in an appropriate manner. And obviously, there are some issues that have faced Rio that we were certainly unhappy with. Our approach to our investments are that we own the company, we are the shareholder. And when we invest in a company, we identify businesses or assets that we think can create long-term value for shareholders. When we see issues with businesses that we're unhappy with, our approach is not to immediately sell stock. We'd rather see a change in the management approach because they're our assets. And certainly, what we have seen in the past is when you get good management teams in good assets, they can drive substantial shareholder creation. So as we hold all our stocks, and then this isn't the first time we've seen issues in companies we invest in. I've been doing this for 27 years. And I think there's always some sort of company that's going through some sort of problem. Our approach, though, is that we speak to the companies, we speak to the Board, we speak to the management, and they are certainly aware of our views on business, and they are certainly aware of those when we see something that we are not happy with. And certainly, some of the issues with that company, we certainly have not been happy with, and we put those views to the company. But obviously, there are a number of people in the market, I guess, that had a similar view to us. And obviously, they've seen a significant change in management at that business going forward. And the key for us is that we are still a shareholder in what are probably the best iron ore assets in the world. The risk is then if you just sell stock, you pay a lot of transaction costs and potentially tax. And if often you see the case here, you got a change in management, then you have to try and get back into the stock. So our approach again is we want to be at the whole of the assets. So what we want to see is a change in the investment or the management approach when we're not happy with the situation.

Thanks, Mark. The next questions are again about the portfolio. The emphasis in the portfolio in airports, so Sydney and Auckland, seems out of step with the future of air travel, given the positive reception of Zoom, Webex online meetings and I guess also the visibility to travel for a period of time. Please explain, with COVID-19 impacting a number of industries, especially aviation, why you purchased Sydney Airport?

Sure. Thanks, Jason. We see airports as critical infrastructure. In that regard, both Sydney and Auckland airports are fantastic assets for a long-term investor. We can't predict when travel will return, but we are encouraged that both companies' equity to improve their balance sheets, achieving a better capital structure to deal with the current disruption. The raising price for both, we feel that current conditions are factored in. The other point to make is travel has historically shown an amazing resilience to return following previous shocks. And our view is that while online conferencing may have a more sustained impact to the corporate traveler, ultimately, the vast majority will resume traveling, particularly in the leisure space.

Thank you, David. We might just see if there's any questions for the telephone, operator?

[Operator Instructions]

Are there any questions, operator?

No telephone questions at this stage. Oh, no, sorry, we do have a question, sorry. Just from the line of [ Jeff Thomas ].

Just following on the reduced holdings in the banks, I wondered if you might be able to just comment overall. Obviously, your weighting towards the banks would indicate your view of the banks, but I'm just concerned about, firstly, the ANZ. I see it's the least preferred. And I wondered if you might be able to comment on the banks. I have a couple of other questions separate to that, but just take it one at a time.

Sure. Jeff, just a quick one on the banks. Yes, I mean, our exposures declined quite considerably over the last 5 years. I think we're really sitting in the 4 major banks. It's about 15% -- just over 15% of the portfolio. I think when I first started, it was probably over 30%. So that's declined quite a lot. But they still provide quite a significant part of our income. I think it's over 30% of our income. So we understand the importance of dividends to our shareholders. So that balance we have between trying to maintain income yet our marginal capital investments has gone into other areas of the market where we're seeing better growth proposition. So I guess what we're trying to do is just understand what the future of banks. It's been a very tricky period because there's been so many issues facing them. What we're trying to understand is what their return on equity ends up being. When we used to invest in them sort of a decade ago, they used to have return on equity around 15%. That's fallen substantially. So we're trying to understand what the future returns of the banks are, and that will help guide us into how much we have in the portfolios looking forward. But at this point, we think the dividends can improve from here. I think the capital positions are pretty strong. Our challenge, though, in holding them is just growth. And we think growth is quite challenged. Hence, our investments into other areas. ANZ, look, we probably had the lowest exposure in ANZ for a long, long time. I think the management of the company is better now, but it's probably more from historical perspectives in terms of that positioning. Although we do feel that CBA certainly is achieving better returns than the others at the moment. But as I said, we will keep assessing that as we go forward.

Okay. Thanks, Mark. The other question was related to Telstra. I see they had their AGM yesterday, and the markets look favorably upon the -- I think, maintaining the dividend. It's a stock that's -- I know it's presented a lot of questions over many, many years. And I just wondered what your current view is -- well, I see it's sitting at 13 in the portfolio, but just where it's heading to, what's your view of that?

Well, because we still hold it, we hope it's heading up. But it's been a challenging period. As we saw in the earlier slides, I guess some of the adjustments to the portfolio we've been making is to move up the quality curve. Yet we still want to have some positions that we think, I guess, might be slower growth, but provide good income. And I guess, Amcor and Telstra have been in that category because we still think there is some capability for some growth. So the thesis around Telstra really relies on what happens with 5G. We've seen in the past as they ticked -- as they grew into 3G and 4G, Telstra did quite well in the early days of that. Them being the largest player, the best capitalized, they were able to roll out their networks quicker and get greater coverage. They did achieve some pretty good growth in those periods. And certainly, the demand for technology is growing. Ultimately, we think 5G will be an alternative to some people, to the NBN, not to the heavy users. So I guess we can see a reason why there could be some growth. It won't be huge, but there could be some growth. And when you attach that to the current yield and you include franking, with the franking, they don't have to grow a lot for it to be a sound investment. So that's really what we're thinking that it could be a sound investment from here, where a lot of the returns come through dividends.

Okay. And the final -- thanks, Mark. The final question was just on Coles. Are they heading in the right direction? It seemed to have been a bit cheaper in the past compared to perhaps Woolies, but I just wondered, are they going to become a real competitor to them?

Well, look, I think Coles and Woolies are both in a pretty good position at the moment. The market structure is pretty sound. And we've actually been increasing some of our Woolworths exposure more recently. So look, it's a good business. We think we've got a good holding in it. I think management are pretty good. So we think it's a comfortable stock for us in the portfolio.

Okay. Well, just thank you again for the presentation. I normally try to get along when you have the meetings in Melbourne, and it's appreciated, this format. It's not the perfect format, but at least it's easy to follow the company. And I wanted to thank you and the Board for your efforts this year.

Thank you. No, thanks to your comments, too. As we stated earlier, it is -- we would much prefer to be doing this face-to-face. It's an important part of what we do is making ourselves available and accountable to shareholders. So hopefully, fingers crossed, next time around, we'll be able to catch up with you. Operator, are there any other questions on the phone?

No other telephone questions at this stage.

Okay. I have a question from the web. I'll direct this to you, Andrew. Can you please advise to the current profit reserve in cents per share? And also has tax been paid on this profit?

Thank you, Geoff. I think it's best if I refer to the annual report, which I know shareholders will have open in front of them. And note A4, which is the dividends paid. That would indicate that, essentially, in terms of reserves, after we paid the final dividend, we had some $0.79 per share in terms of reserves. So I would say we were comfortably reserved in terms of profit reserve. However, that is not necessarily the same as franking credits per share. That particular note gives the details of the franking credits per share. And again, after we've paid the final dividend last year, that was equivalent to $0.26 per share that we still have left. Now those figures do include the tax that we are due to pay on last year's profit. As shareholders may know, companies don't have to pay their tax until December. But we do include that figure that was in the balance sheet as tax payable in that calculation. So tax is payable on that figure. And including that, we're at $0.26 per share as of the end of June after payment of the final dividend.

Thank you, Andrew. I have a couple more written questions here. What is the company's strategy for long-term and short-term impact of global warming climate change on the holdings of securities and its vast impact?

Sure. Thanks, Geoff. So the long-term investor requires to have a view around the long-term sustainability of the company's business model. And where we see that under threat, we certainly factor this into our investment decision. The portfolio exposure around sustainability is most pronounced in the energy space, being our holdings in Woodside, Oil Search and Origin Energy. Collectively, those 3 companies represent slightly more than 2% of the portfolio. However, for each of these companies, their production is predominantly LNG or gas, not liquids or oil. And with gas likely to remain the transition fuel before renewable energy for many years, yes.

Thank you, David. One more question. Will AFIC be asking Qube holders and Carsales dot -- Qube Group Holdings and Carsales.com, both companies in which they own equities, why these companies are paying their executives bonuses this year while also claiming Job Keeper subsidies from the federal government?

Thank you, Geoff. Job Keeper subsidies help both Qube and Carsales maintain employment for a greater percentage of their workforce. While the senior executives of both companies received part of their bonus, they also saw their base remuneration or their base pay cut between 20% to 50% for the period that their organizations were receiving Job Keeper companies. So on a total remuneration basis, being base pay plus bonus, we consider the approach of both companies to be appropriate.

Thank you, David. I'll just check the phone operator one more time. Do we have any further questions on the phone?

No telephone questions at this stage.

Okay. All right. Thank you. We have no further questions via the app either. So I'll hand back to the Chair, John Paterson, to deal with the formal resolutions.

Thanks, Geoff. We'll now move to the formal resolutions of the meeting. Your directors' recommendations are set out in the notice of meeting. The second agenda item is the resolution to adopt the remuneration report. This is required by the Corporations Act to be considered by shareholders annually, and is an advisory resolution only. The remuneration report can be found in the company's 2020 Annual Report. It is a very detailed report covering the remuneration of directors, the executives and the investment team. If you have any questions on this item, please submit them now if you've not already done so. We've also received several questions regarding Board and executive remuneration prior to the meeting, and I'll address those now. Firstly, I'll comment on executive remuneration. We used 2 external surveys of industry-wide remuneration to assist us in having the appropriate packages, which is sufficient to attract and retain high-quality staff, to pay them appropriately for their level of skill and performance. As a consequence, while we pay our executives well, they're not amongst the highest paid in the industry. The last pay rise occurred in December 2019, pre COVID, and we said at the prevailing inflation rate of 2%. In regard to incentive payments, we aim to align remuneration with the interest of our shareholders. That is returns over the medium, long term. So the performance is tested over 1, 3, 5, 8 and 10 years. The Australian Shareholders' Association has also asked a couple of questions, which I'll answer. The first relates to the removal of the risk return metrics from the annual incentive. We've done this because the figures are not directly comparable with the surveys previously used, as our figures include expenses and the tax comparator -- sorry, expenses and tax, and the comparator doesn't. Suffice to say, risk and reward measures are included in our Board papers, and we clearly have as one of our aims having below average volatility. The other question addresses the removal of the net tangible asset backing, or NTA, as a measure. It's been replaced with total shareholder return for that component. We felt that total shareholder return is strongly aligned with shareholders' interests as that is what they experience. But also NTA is still strongly embedded in that assessment as it's the greatest determinant of shareholder returns, particularly in the medium, long term. Finally, on the executive side, we should note that we have not received any government payments from COVID-related programs such as Job Seeker, and we haven't laid off any staff. In regard to our directors, our Board is reasonably but not excessively paid. I would note that we need to be able to attract high-quality Board members. We do have a significant workload. As can be seen in our annual report, it comprised of a total of 46 Board and committee meetings in 2020. Directors' fees increased last in July 2019 by 2.6% which, at the time, was marginally above the inflation rate. No increase is planned at present. So will pass to Geoff for the questions.

Sorry, just to see if there's any questions on this particular resolution. Operator, is there any questions on the phone relating to this resolution?

We do have one question on the line, just from the line of [ Claude McPherson ].

Just a question about the previous ones, the transaction for the -- why Treasury Wine Estates and Suncorp Group were disposed of? I just rang in. I wish to be caught up.

Yes. Okay. Well, we'll take it, probably just related to that. We'll take it and then we'll move on.

Look, they're both -- both businesses are okay businesses. But I mean, Treasury is really at the mercy of products sold into China. That's been a big part of their growth looking forward. And that's clearly got some challenges at the moment. We also had the CEO leave, who'd driven a lot of, I guess, reorganization of the business and how it's run. With him stepping away, and I think he was selling a fair bit of stock as well, we just felt it was time to step away and reassess it just because of those increased risks around that business model looking forward. I think Suncorp was the other one. Look, we've got exposure in banks through the 4 majors. So we think they've got greater competitive advantage on the banking side. A bigger part of the rest of the business is insurance. And I guess, we felt there was some structural headwinds appearing. We've got a small holding in IAG still. We just felt some challenges on growth. And also, being a long-term investor, things like motor insurance, as cars become more technology-driven, we think car insurance is going to have a few challenges on that longer-term view. So there's a couple of reasons why we stepped away. Nothing specific to the way it's run. It's really just the industry data and the industry structure is important part of our analysis. So we just felt there were stronger businesses elsewhere.

Okay. Just a reminder, we are basically taking questions on each of the resolutions. Now if there are any follow-up questions relating to the presentation, we'll take those at the end of the meeting, if we can. So back to -- operator, is there any questions, further questions on this resolution?

No further telephone questions at this stage.

I don't have any questions via the app either, John?

All right. Thanks, Geoff. I'll now show the proxies received in respect of this resolution, and that will be shown on the screen. I'll remind shareholders and proxy holders who have yet to lodge their votes via the app, to do so now as the voting is open. The third item is my own reelection, and so I've asked Director Graeme Liebelt to chair the meeting for this item of business. Graeme?

Yes. Thank you very much, John, and good morning, everyone. Ladies and gentlemen, as you'll know, John has been a long-standing director of AFIC and became Chairman in October 2018. He was reelected by shareholders at the 2017 AGM, and so he's standing for reelection by shareholders today. So in accordance with Rule 46 of the company's constitution, he retires from the Board of Directors and, being eligible, offers himself for reelection. So John, would you care to say a few words before we put the motion?

Thanks, Graeme. I've been involved in the Australian equity markets for 47 years, firstly, as stockbrocker at JBWere, and then for the last 17 years, in senior roles in institutions investing in a wide range of different investment classes globally. My most significant role at JBWere was initially as Senior Investment Analyst and then as Director of Research and Strategy. This involved putting together and training a sizable team of highly qualified investment analysts. We've spent this time identifying and recommending what they perceived were the best investment opportunities. This is identical to the task of our portfolio managers and analysts in what they do every day. I was involved in marketing those ideas to Australian and global institutions and Australian retail investors. This included 4 years residence in London, marketing Australian shares to U.K., EU and North American institutions. Since retiring from JBWere, I've sat on both the AFIC and Djerriwarrh Boards. I was also on the Board of Guardians of Australia's Future Fund during the GFC and I chaired their Audit and Risk Committee. In the charitable area, I was a member of the advisory Board for the Salvation Army Southern Region for 12 years and have chaired their investment committee for over 17 years. We've had a question asking me to address my independence, bearing in mind, I've been a long-serving director of AFIC. I believe 2 things can justify continued independence. Firstly, continually refreshing my skills and experience, which I do in my other investment roles and in attending many conferences and CEO and Chairman's presentations. Secondly, flexibility and willingness to change is important in that we are not just doing the same old things over and over again. Evidence of this resides in the fact that while retaining all of our important core principles, our portfolio has seen change in the last 2 to 3 years, reducing banks, tightening up the number of stocks, et cetera, leading to a positive performance to date. My role on the AFIC Board has been very stimulating, and I would regard it as a great privilege to be elected for another 3-year term. Thank you.

Thanks, John.

Operator, do we have any -- sorry, Graeme. Operator, do we have any questions regarding this resolution on the phone?

No telephone questions at this stage.

Graeme, I don't have any questions on the app either.

Okay. Well, I think we're in a position then to show the proxies received in respect of this resolution, which we'll now put up on the screen. I should remind shareholders and proxies who have yet to lodge their votes via the app, please do so as the voting is open. And now I'll hand back to the Chair of the meeting. John Paterson, thank you.

Thank you, Graeme. The fourth agenda item is the resolution to elect -- reelect David Peever. David was elected by shareholders at the 2017 AGM and so is standing for reelection by shareholders today. In accordance with Rule 46 of the company's constitution, he retires from the Board of Directors and, being eligible, offers himself for reelection. David, would you care to say a few words.

Thank you very much, John, and good morning, ladies and gentlemen. Could I start by saying what a pleasure it's been to serve as an AFIC director for the last 6 years? And I present myself to you as someone with broad and global business experience and, specifically, in the resources sector, where I spent 33 years before retiring in 2014, having worked in many parts of Australia and North America, Singapore and London and been involved in many jurisdictions with commodities. AFIC fits very well with my own approach to investments, which is conservative, long-term compounding growth and compounding real yield growth and yet an active approach to management. And I think the strategy of Mark and his team of quality and value and growth underpinned by patience is powerful in its simplicity. And Mark and the team execute this strategy very well, and our most competent team and also a pleasure to work with, as is John and the Board. And I can say without doubt that the Board, not only are shareholders, but think like shareholders -- and think and act like shareholders and I feel that my own AFIC investments are in good hands and that yours are also in good hands. So without going into too much more detail about my own background, which is covered in the annual report and the CV, I would seek your support for my reelection. And indeed, it would be a privilege to serve you for the next 3 years. Thank you, John.

Thank you, David. I'll now pass to Geoff.

Operator, do we have any questions on the phone for this particular resolution?

No telephone questions.

I don't have any questions on the app either.

Thanks, Geoff. I'll now show the proxies received in respect of this resolution, which is now shown on the screen. And again, I'll remind shareholders and proxy holders who haven't yet lodged their votes via the app to do so now as voting is open. The fifth agenda item is the resolution to reelect Catherine Walter. Cathy was reelected by shareholders at the 2017 AGM and so standing for reelection by shareholders today. In accordance with Rule 46 of the company's constitution, she retires from the Board of Directors and, being eligible, offers herself for reelection. I'll pass to Cathy now for her to say a few words. Cathy?

Thank you very much, John, and good morning, ladies and gentlemen. And again, very sorry not to be with you in person, which is something I greatly value through these AGMs over the years and also the shareholder meetings. As has occurred in the context of John's candidature, I too have been asked to make some comments on independence in the context of my being a longer-serving director. One of those questions was the issue of Board continuity, which I believe is essentially in the context of the long-term investment approach we have at AFIC. And I regard it as one of the privileges of my professional life to have been a beneficiary of the Bruce Teele chairmanship period. And in that context -- I'm sorry, there's class been going on in my apartment, I do apologize if the noise comes through. And in that context, the ability to have seen AFIC develop under the tutelage of Bruce as Chairman is an abiding memory for me of the duty we all have going forward to continue that approach, which is the approach so well described a moment ago by David in terms of the long-term compounding growth for shareholders and also that critical essential view of shareholders on the ongoing dividend returns from the investment. The skills I hope that I bring to the Board arise from my 20 years practice as a banking lawyer, a period as managing partner of the Melbourne office of Clayton Utz. In those sorts of roles, one learns contestability of ideas, the notion that everything in life is up for debate. And to the extent to which one guides the management team through the asking of pertinent questions, that is always something I see as an important contribution. After that 20 years or so in legal practice, I then was able to sit on a number of Boards. I was a commissioner with the city of Melbourne immediately after I left Clayton Utz and, thereafter, sat on a range of Boards, including National Australia Bank, the Australian Stock Exchange, Orica. I was Deputy Chairman of Victorian Funds Management, a Director of QIC and, back in the day, a director of Potter Warburg Asset Management, which later became Mercury Asset Management. I've always been a great believer in life-long learning. A couple of years ago, I went to Stanford business school. And was there with many persons with backward-facing baseball caps to learn about design thinking and the approach to innovation and keeping businesses alive and current. The other Boards on which I currently sit includes the Reserve Bank's Payments System Board, and I'm also Chairman of FASEA, Financial Adviser Standards & Ethics Authority, which is challenged with the task of professionalizing financial advisers and was, in fact, made more relevant by recent findings in the Hayne Royal Commission. It would be a great privilege to continue as a director of your company. And I put myself forward in the hope that, that might be the outcome. Thank you so much, John, and shareholders.

Thank you, Cathy. I'll now share the proxies on the screen. And will pass to Geoff to manage questions on this item.

So operator, do we have any questions on this particular resolution?

No telephone questions.

John, I don't have any questions on the app either.

I'll now show -- sorry. I'll now show the proxies received in respect of this resolution, which is shown on the screen. I remind shareholders and proxy holders who haven't yet lodged their votes via the app to do so now as voting is open. Ladies and gentlemen, that concludes our discussion on the items of business. After my concluding remarks, I'll close the voting system. So please ensure that you've cast your votes on all resolutions. Thank you all for your continued support and for the interest you've shown in the affairs of the company by your attendance today on a virtual system. Hopefully, next year, we are able to have an AGM that's physical, and we are able to see and talk to each other. I think we've learned quite a few things this year in terms of having electronic sessions -- presentations with our shareholders. And we would hope that we've learned some things that allow us to have greater access to all our shareholders into the future. But we'll finish the meeting now, voting's closed. And thank you very much for your attendance. The results of all the votes will be released to the ASX later today. Thank you.

Do you want to check if there's any questions on there or?

No. Okay. Operator, thank you very much.

No problem. Ladies and gentlemen, that does conclude today's conference call. Again, thank you all for participating today. You may now all begin to disconnect.