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

[Operator Instructions] Good morning, ladies and gentlemen. Welcome to the 93rd Annual General Meeting of Australian Foundation Investment Company Limited. My name is John Paterson. I'm Chairman of your company. The company secretary has confirmed that a quorum is present and online. 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. Due to the ongoing coronavirus pandemic, my fellow nonexecutive directors Rebecca Dee-Bradbury, Craig Drummond, Julie Fahey, Graeme Liebelt, David Peever, Catherine Walter and Peter Williams are joining via video. I'm joined here by our Managing Director, Mark Freeman; our Company Secretary, Matthew Rowe; our Chief Financial Officer, Andrew Porter; and our General Manager of Business Development and Investor Relations, Geoff Driver; and Portfolio Manager, David Grace; and Investment Analyst, Nga Lucas, from the investment team. I'll also take this opportunity to introduce Nadia Carlin, partner of the company's auditors, PricewaterhouseCoopers, who is attending via video and available to answer questions today on the audit and the preparation and content of the auditor's report at the end of this presentation. Today's meeting is being held online via the Lumi platform and via teleconference. Today's presentation has been released to the ASX and made available on the website. Those of you who have joined the meeting just prior to the start would have seen a short video on how to vote and ask questions via the Lumi site. [Operator Instructions] I remind shareholders that whilst questions can be submitted at any time, I will 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 one topic, amalgamated together. Voting today will be conducted by way of a poll on all items of business. I now declare voting open on all items of business, and I will 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 would like to provide some additional comments. I'd like to make a few comments about Board changes in the last 12 months. At June 30 this year, Ross Barker retired from the Board. Ross had originally been appointed as an alternate director in 1987 and subsequently held the roles of Managing Director and then Nonexecutive Director at AFIC. Ross was integrally involved in the transition to AFIC being a fully independent entity in the late 1990s and 2000s. This year, we have appointed 2 new directors, Julie Fahey in April and Craig Drummond in July. You'll hear from them both when they come up for election later in this meeting. Julie has had a career both as a senior executive and subsequently as a Nonexecutive Director and consultant deeply involved in technology areas. This is a very important enhancement of the skill set of our Board. Craig comes to our Board with deep investment skills and having held senior executive roles in the finance sector and as Managing Director of Medibank. We're very pleased to welcome them both to the Board. I will briefly comment on the company's performance that was delivered to shareholders of recent times. In 2020, '21, the portfolio returned 33.5%, including franking credits, versus 29.5% for the ASX 200 index, which is a very creditable result. I'll refer you, however, to a slide which you'll see later in our presentation, which takes a snapshot of each of the last 4 6-monthly periods. The outperformance ranges from 1.02% to 1.87% over a range of 6-monthly down and up markets. The consistency of outcomes is very encouraging and I believe reflects the underlying quality of the portfolio. We're also very happy to have been able to sustain our $0.24 annual dividend in a year when earnings were under considerable pressure from COVID-related dividend cuts. A policy of retaining a pool of franking credits for such an eventuality is an integral part of our historical dividend policy. Before I pass to Mark Freeman and his team for the presentation, I'd like to finally acknowledge the excellent result, which all our staff have contributed to. I believe it reflects a high degree of professionalism and dedication and has been achieved in a very difficult work environment over the last 20 months. Moving on to the business of the meeting. I'll take the Notice of Meeting as read. The first agenda item is consideration of the financial statements and reports for the year ended June 2021. We'll do this via a presentation, after which I'll ask shareholders to comment or to raise any questions either about the presentation or the auditors if they have any questions about the audit. I'll now pass you to our Managing Director, Mark Freeman.

Okay. Thanks, John, and good morning, everyone, and welcome to this AGM. Once again, it's disappointing that we're not able to do this in person. Interacting with our shareholders has been a very important part of our process for many years. It's something we really enjoy doing. So hopefully, next year, we will be able to do that, which includes the shareholder information meetings that we normally do around the country. So let's hope for next year. So just moving on to the presentation. The slide on the disclaimer, just to say we're here to talk about the company. We're not here to give any advice. So move to the next slide, which is Slide 5. Just to talk through the background, the company, what AFIC means. AFIC primarily invests in Australian and New Zealand companies, and we're looking to invest in quality companies for the long term. So we're a long-term investor. We're the largest listed investment company on the ASX at over $9 billion, over 160,000 shareholders. Shareholders enjoy the benefits of the transparency that being a listed company brings, and we have an independent Board of Directors that provide strong governance. Shareholders own the management rights to the company. So there is no external fund manager deriving any income from the portfolio, and that sets us apart from most of the fund managed products in the market. As a result, the management expense ratio is extremely low at 0.14% with no performance fees. As I stated, we're a long-term investor, and this means we have low turnover. We understand that tax can have quite a negative impact on shareholders' returns. So being low turnover means we're very tax efficient. We have a long history of growing/stable fully franked dividends, and John has touched on the fact that we've drawn on reserves over the last few years to sustain an attractive yield for our investors. And finally, the investment team managed 3 other funds, Djerriwarrh, Mirrabooka and AMCIL. And this adds significantly to the effectiveness of the investment process and idea generation for the portfolios. Just moving on to the next slide, #6. We thought we'd include a bit of a snapshot of the investment team. We've got some pictures here. I won't go into all the individuals. Just to point out there, you can see David Grace and Nga Lucas on the top left, who will be talking further during this presentation. Just moving to Slide 7. I just thought I'd touch on a bit of a snapshot of how we're seeing markets at the moment. This is 2 charts. The one on the left is what we call price to book of the market. The chart on the right is price to sales. These give a really rough guide of where we're seeing the market sitting in terms of fair value. I just thought I'd highlight this because we showed it in March of last year, right after the market had fallen over 30%. And at the presentation we gave at that point to shareholders, we were saying we didn't know where the future was taking us. We were unsure about where the economies were going. But what we did know is that every time we'd seen these sort of pullbacks in the market, they have inevitably been buying opportunities, and you can see that to the right of each chart, the spike down. The markets, what a turnaround it's been since then, an incredible rise to such a point now where these indicators are completely reversed. Price to book and price to sales are now quite high by historical standards. Once again, we don't try and predict where markets are going. All we can say is that markets are looking pretty full to us. So we're happy with the stocks primarily that we own, but we're not rushing in to buy a lot more at this point. But we do understand also this chart goes back over 20 years. And certainly, interest rates being significantly lower now than what they used to be can drive higher valuations in the market. But still, at this point, we're fairly cautious. And with that, I'll be available for questions at the end. I will touch on a slide on international also towards the end. But I'll pass over to Andrew Porter, our CFO, to talk through the result.

Thank you, Mark, and good morning, ladies and gentlemen. So firstly, looking at the profit figure at the top left of Slide 9, the headline profit figure was down only 2.2%. Now this disguises the large fall in dividends that were received from the companies that we invest in. The dividend that we received from CBA, for instance, was down 42% from the previous year. Sydney Airport paid us nearly $4 million in the prior year and none in 2021, and Oil Search's dividend dropped by over 90%. These are just some examples. What muddies the picture on this figure is the demerger dividend that we needed to record for accounting purposes as a result of the Endeavour Group demerger from Woolworths. This was $36.5 million. Now this is an accounting entry only. It is not cash and has no franking credits. Happy to take questions on that if people want to later on. But if we exclude this, the profit for the year would have been just under $199 million, as we noted at the time of the results, a fall in profit of 17%. In earnings per share terms, this would have been just over $0.16 per share. Interest income was also down, as those of you with cash on deposit will have known, and as was the contribution from the trading portfolio. 2020 has seen a strong contribution from options trading, which wasn't repeated. So the extra $0.08 to keep the $0.24 total dividend, therefore, had to come, as the Chairman has noted, from prior year reserves. This is one of the strengths of the LIC structure, unlike the trust structures normally used by ETFs, who have to distribute all of their earnings each year. By having reserves, we are able on occasion to maintain dividends when times are tough, as we did in this last year. By the way, because I know that it is usually a question, the annual report stated that at the end of the year, after the payment of the final dividend and allowing for the tax that we needed to pay, et cetera, we would have had effectively enough franking credits to enable us to pay an additional $0.20 worth of dividend. So we still have some fuel in the tank. I'll come on to the share price return in a moment, which is the figure on the top right-hand corner. And we will have a look later at some updated portfolio return figures. But I will note that the outperformance for the financial year of nearly 3% when the market had run so strongly was, we believe, an excellent result. Mark has mentioned the management expense ratio, which is the cost of running the company. It's the total amount of costs divided by the portfolio. So that meant that for every $100 that was invested by shareholders, it cost just $0.14 to run AFIC. As has been mentioned, there are no outperformance fees paid to an external management company, just the cost of running AFIC, which includes listing fees, shareholder communications, et cetera, as well as salaries. Total portfolio at the end of June was $9.1 billion. This was just under $9.5 billion at the end of August. So turning to Slide 10. The share price return was actually stronger than the portfolio return, which, as you can see here, meant that the premium was 5% at the end of June compared to 2% at the end of June 2020. This has obviously moved around since and was 9% at the end of August. But with that, David, I'll hand over to you.

Thank you, Andrew. So starting there on Slide 12, which outlines our investment objectives being to provide attractive total returns over the medium to long term; and secondly, to pay dividends, which over time, grow faster than the rate of inflation. As long-term investors, we are low turnover and look to hold a diversified portfolio of quality companies that are able to perform under a range of market scenarios. We want to limit downside risk when markets are falling, and we aim to capture a share of the benefit when macro conditions are more supportive. Being low turnover not only reduces our tax liability but, more importantly, keeps capital invested in the portfolio, enabling us to deliver returns of a higher capital base in the future. Moving on to Slide 13. Finding quality companies and holding them for the long term is the basis of our investment process. This slide outlines the key attributes we look for in defining a quality company. Ideally, we want companies that have a strong industry position, holding unique assets with a definable competitive advantage. These companies are best positioned to generate meaningful cash flow through the full investment cycle and are more independent from outside influences and can typically still grow earnings when the macro environment is less favorable. We want our companies to be run by strong management teams and boards, have recurring predictable cash flows and to maintain strong balance sheets. We undertake detailed analysis of the future growth prospects for all our investments, how well the company is positioned to capture this growth and ensuring they have a supportive balance sheet able to fund the opportunity in front of them. Moving on to Slide 14, which provides a recap of our investment process. We invest over the long term. We're not short-term traders of the hottest stock or sector but seek to benefit from consistent compounding returns that quality businesses deliver. Our research effort aims to firstly identify quality companies but also to ensure we pay a reasonable price, as overpaying for any investment will severely hamper future returns even over the long term. Moving on to Slide 15 to understand what this means in practice. This slide shows the benefit that compounding returns can provide to shareholders over the long term. We've shown the example of 2 large holdings in the portfolio being ARB and ResMed, reflecting total shareholder returns during our period of ownership, having first bought ARB in 2010 and ResMed in 2013. Both companies have shown steady growth in return on invested capital and have proven excellent allocators of shareholders' funds. Both have the attributes we look for: being unique assets delivering strong returns with relatively low influence from external macro factors; high barriers to entry, providing long-term sustainability of the business model; strong management teams and boards with stable cash flows and excellent balance sheets. And both companies invest heavily in R&D, producing market-leading products while expanding their addressable markets. Despite periods where both companies have traded at excessive valuations, the charts show the benefit of long-term ownership of quality companies, where compounding returns deliver strong results for shareholders. Moving on to Slide 16, which outlines our approach to ESG, which has long been part of our investment process. Companies are increasingly focused on environmental, social and governance factors. As we look to hold investments over the long term, the sustainability of any business model over this period is critical to our definition of quality and the returns we can expect to receive as shareholders. We review a company's alignment with our investment process and look to engage with company's boards and management where we have concerns. ESG matters are not the complete picture but are one of the inputs that form part of our investment considerations. So to talk through our approach in practice, we recently exited our position in Origin Energy, the primary reason being that as Australia's electricity generation shifts from being powered by hydrocarbons to renewable energy, the competitive position of Origin's asset base will be diminished. The market for electricity generation is becoming increasingly fragmented as renewable energy, solar, wind and hydro make up a larger part of the energy mix. We consider the long-term returns the company is likely to generate will be lower as a result. We were able to take these proceeds and invest into companies with better prospects, operating what we consider to be more sustainable business models over the long term. At this point, I'll hand over to Nga to talk about recent market performance.

Thanks, Dave. Just on Slide 18, the chart on the left-hand side suggests the last 12 months have been uneventful in equity markets. The macro environment has been very supportive with interest rates remaining very low. Government fiscal policy has been particularly supportive of the consumer, and we've had an environment where revenue growth has rebounded faster than market expectations out of the COVID lows of early 2020. The chart on the right-hand side shows sector performance over the last 12 months, led by the banks, which have rallied 55%. The impact from COVID proved to be less severe than originally expected. The result is that all banks now have excess capital. All 4 of the major banks have spoken about potential capital management with buybacks already announced by ANZ, NAB and CBA. We expect Westpac to pay increased dividends from the last -- from last year's levels. Our holdings in the banks have remained largely unchanged. And while we feel valuations for the banks are more in line with long-term averages, the dividends they pay remain an important part of the AFIC dividend. The other notable point is the underperformance of resources. The sector had been performing well but has fallen sharply in the last few months, particularly in iron ore, given the drop in steel demand in China, which we'll talk a bit more about later in the outlook comments. Over to Slide 19. This slide shows the relative performance of the portfolio against the ASX 200. Including franking over the last 12 months, the market rose 29.5%, delivering consistent performance with 11 of the 12 months delivering positive returns. Also including franking, the portfolio delivered a return of 33.5%, being 4% ahead of the ASX 200. The strong performance reflects the benefit of holding a diversified portfolio with a mix of high-quality companies, together with a number of businesses benefiting from economies reopening. It's pleasing to see longer-term performance exceeding market returns with both the 5-year and 10-year performance now above the ASX 200. The chart on the right-hand side reflects data from a Mercer survey of 115 large-cap Australian equity fund managers, displaying their risk and return metrics over the last 4 years. The green line represents the median manager who has delivered a return of 10.5% per annum with a standard deviation of 16.2%. The standard deviation is a measure of risk or volatility of a portfolio. The AFIC portfolio is represented by the blue dot and has returned 12.1% per annum, while the ASX 200 is represented by the purple dot, returning 11.2% per annum over that period. Notably, AFIC's standard deviation of 14.2% is well below the risk of the market and the median fund manager. In simple words, the chart indicates the AFIC portfolio has delivered a higher return with less volatility. We believe these metrics reflect the higher quality of the holdings in the AFIC portfolio while maintaining a diversified exposure across the market segments. I'll now hand back to Dave to run through recent performance and portfolio transactions.

Thanks, Nga. So the chart on Slide 20 brings together what we're trying to achieve in actively managing a portfolio that can perform in a range of market scenarios. We have the consistency of returns. We're not trying to time the market but looking to hold a portfolio of quality companies that have different complementary attributes, buying a mix of income stocks delivering some level of earnings growth, stalwart companies with highly defendable business models, growth companies and cyclical companies where we recognize the operating environment is favorable. Where we observe a company is facing long-term structural issues, we will look to exit. The chart shows the performance of the ASX 200 over the last 2 years. Over the period, the level of the market is little changed. But as we know, equity markets have been very eventful over this period. Firstly, the sharp sell-off in second half '20, followed by a period of strong recovery as government financial stimulus and low interest rates supported the underlying economy. Across the 4 half years highlighted, the AFIC portfolio was able to outperform all time periods, as shown at the top of the slide. We consider quality is the one feature that will endure over our long-term investment horizon. Business cycles will come and go, and company management may change several times over the journey. We actively manage the portfolio, focusing our research on understanding not only a company's attributes but a detailed understanding of the industry within which they operate. Moving on to Slide 21, which outlines recent portfolio changes. The companies listed on the left-hand side show businesses we have exited. This decision reflects 1 of 2 views: Where they consider the competitive environment is set to become significantly more intense or there is a structural shift occurring in the industry, where the company is set to be at a competitive disadvantage. In the trimmed column, we continue to own all 4 companies. However, we've reduced our holdings, reflecting either recent company asset sales or strategy updates. Moving to the right-hand side of the slide. All new purchases, being PEXA, FINEOS, Domino's Pizza, IDP Education and Temple & Webster, are of companies with strong industry positions in their core markets. For the earlier-stage companies, FINEOS and Temple & Webster, where the market opportunity is significant, the range of potential outcomes is wider than for more mature companies. For these earlier-stage companies, we invest a small initial holding and look to increase our weighting as confidence levels increase. And finally, short-term share price weakness gave us the opportunity to add to our holdings in the company shown on the far right-hand side, being Transurban, CSL, ResMed, BHP, Carsales and Coles. We consider all to be high-quality companies and all are core holdings within the portfolio. At this point, I'll hand back to Nga to talk through some company examples.

Thanks, Dave. We want to take the opportunity in the following slides to talk about a few of the core growth holdings in your portfolio. These are high-quality stocks where we still see huge opportunity for multiyear growth and attractive return on capital. Starting on Slide 23 with Xero. Xero is a small business cloud accounting software company with strong market positions in Australia, New Zealand and the U.K. with a growing presence in other geographies, including North America, Asia and Europe. Xero has an attractive subscription-based revenue model and a sticky customer base. This means that revenues are repeatable and predictable. Xero has leading SaaS strong software economics, which gives us confidence that money that they spend in acquiring new customers will deliver very good returns to shareholders in the long run. Governments around the world are increasingly digitizing tax and other reporting requirements from businesses. These initiatives helped to drive the penetration of cloud accounting and adoption of Xero further. New customers often come from traditional desktop software or no software at all. New -- Just moving on further. To maintain their competitive advantage and sustain their fast growth in subscriber numbers and average revenue per user, Xero invests 30% of their sales each year into research and development to drive product innovation. This high level of investment is key to maintaining their competitive advantage. With their strong balance sheet, Xero has also made a number of acquisitions in recent years to supplement this product innovation. We expect Xero to keep spending on both fronts to drive their global expansion for many years to come. Over the next slide, on to Carsales. Most people will already be familiar with the Carsales website. Carsales is Australia's leading used car online classifieds business with 4.4 million average monthly unique users. Carsales is a high-quality business that generates a very good return on capital. What you might be less familiar with is their international business, which includes 100% ownership of Encar in South Korea, a 49% stake of Trader Interactive in the U.S. and a 30% stake in WebMotors in Brazil. The international business will contribute about 35% of group profit on a look-through basis. The management team at Carsales has demonstrated a very patient and disciplined acquisition strategy to date. They generally take a minority stake initially, lending their expertise to the business whilst using local management teams. We expect all 3 international businesses to continue to drive meaningful profit growth for Carsales on top of their domestic business. The company has also recently announced the trial of carsales SELECT with dealer customers. As we are well aware, e-commerce is growing in acceptance by consumers for everyday purchases. Although still early days, buying used cars will be no different in the future. Online car retailing is a growing trend we are observing overseas. Carsales has built a platform which will allow consumers and dealers to conduct the entire used car transaction online. We believe this will open up a larger addressable market for Carsales in both their domestic and international businesses in the long term. At this point, I'd like to hand back to Dave to talk about ResMed and James Hardie.

Thanks, Nga. So on to Slide 25, ResMed is the market leader in the treatment of obstructive sleep apnea or OSA. OSA occurs while sleeping when the muscle supporting the tissues in your throat relax, resulting in a temporary narrowing or closing of the airway. The company has evolved from a small industry player 15 years ago to currently having more than 50% market share. Generating consistent and strong free cash flow, ResMed maintains heavy investment in developing market-leading products and raising consumer awareness of the condition. ResMed estimate that OSA remains more than 80% undiagnosed. Most common cause of OSA is excess weight and obesity. In the U.S., the company's largest market, the U.S. Center of Disease Control and Prevention has stated that adult obesity has increased from around 30% in the year 2000 to over 42% today. Forecast for this trend is to continue. While reducing weight will reduce the severity of OSA, it won't cure it. Long-term industry growth rates are forecast at around 7% to 8% per annum, and the opportunity for ResMed as a market leader remains significant. We rate the management team highly, who developed a long and successful track record of capital allocation, driving return on invested capital higher. Moving on to Slide 26. James Hardie is the market leader in manufacturing fiber cement cladding, where it currently holds around 90% market share. The core market is U.S. residential homes, particularly renovations as the housing stock ages. Since 2005, fiber cement has doubled its wallet share of U.S. homes with all alternative materials either stable or declining. The product is lightweight, has a wood look and feel and has historically competed with both wood and vinyl. The superior performance of fiber cement has led to consistent market share gains over the period. Longer term, the company is well positioned to benefit from the shift to lightweight materials, which are less carbon intensive to manufacture than brick or stucco. James Hardie has recently launched more environmentally friendly products in an effort to capture share from these categories. Capital allocation has historically been strong, with the company generating a return on invested capital well above its cost while maintaining a strong balance sheet. So moving on to Slide 27. So the next 3 slides outline the top 30 holdings in the portfolio. We provided this list before and included for shareholders' reference. Should there be any questions in relation to any of the portfolio holdings, the team is only too happy to answer during the Q&A session. Moving on to Slide 31 for some outlook comments. Markets are always presented with challenges from the macro environment. Today's challenges are no more pronounced, with the slide highlighting 3 areas currently consuming the market's thinking: Firstly, the slowing growth in China, particularly the implications of future demand for commodities; secondly, the inflationary environment and whether we're nearing the end of the rate easing cycle; and thirdly, while not expected to recover to pre-COVID levels this year, market expectations are for an improvement in dividends from what we saw last year. Economic conditions always present opportunities and challenges for companies and share markets with their impact hard to predict. In setting the portfolio, we look to identify quality companies, hold them in a meaningful way and look to own over the long term to benefit from the power that compounding returns can deliver to shareholders. We feel comfortable that the core of the portfolio is invested in high-quality companies with attractive long-term growth prospects. At this point, I'll hand to Mark for an update on our investment in international companies.

Okay. Thanks, David and Nga, for that presentation. So we'll move on to Slide 32. We know our shareholders are very interested in how our investments in international are going. So just to remind shareholders that we have allocated a small amount of the fund. We invested $47 million, which is about 0.5%. So indeed, very small. In a portfolio of international companies, we're currently holding 39 stocks, and we did that back in May. So far, the performance has been very encouraging, but it's still very early days. And the whole basis for the model is to apply the AFIC way of investing to the international markets. What we're seeking to do is build out our consistent track record. We do get lots of questions around what does this mean for a potential product. It's obviously something we think about. What we would like to do is to keep running this small amount of funds within the portfolio, continue to establish a track record. And if we were to try and build out another listed investment company, the whole basis of it would be to do a product that has a very low cost and no performance fees and low turnover. So a very similar model to what we're applying in AFIC. But as I said, it's still early days, and we need to build out that track record. So with that, I'll pass back to John, I think, to continue on with the AGM.

Thank you, Mark, Andrew, David and Nga. We'll now deal with any questions on the financial statements and reports for the year ended June 30, 2021. I'll get Geoff Driver to manage the process of handling the questions.

Thank you, John. We do have a few questions on remuneration, but I'll hold those over until that particular resolution. So the first one is -- we have quite a number of questions, Andrew, about the current level of franking credits, which I think you covered in the presentation. But also, why AFIC does not do an off-market buyback to distribute current level of franking credits?

Thank you, Geoff. And yes, we covered and as we said at the end of the year, per the annual report, we had about $0.20. So still fuel in the tank as far as the franking credits are concerned. With regard to the off-market buyback, the Board of AFIC have always recognized that dividends are an important part of the overall return to shareholders and franked dividends even -- perhaps even more so. As a result, they would argue, and we would support, the idea that franking credits belong to all shareholders. An off-market buyback only favors some shareholders who can make particular use of those franking credits. Therefore, the Board have taken the decision that an off-market buyback wouldn't be in the best interest of all shareholders because of that targeting and, some would say, streaming of franking credits.

Thank you, Andrew. Whilst I'm with you, I have a question from [ Emmanuel Ferrera ]. Does AFIC make political donations? The MER rose from 0.1% in 2019 to 0.14% in 2020. Why?

So to take the first question first, no, AFIC does not make political donations. We certainly -- the executives and the Board do meet and interact with politicians all the time, but we do not make political donations nor indeed do we make charitable donations. The Board does not think it is our job as a company to make those sorts of decisions on behalf of shareholders. We would rather make -- increase their worth, their savings so that they can make those decisions themselves. With regard to the MER, the MER in 2019 was actually 0.13%, not 0.10%, and yes, did go up slightly to 0.14% in 2020. And that was discussed in the remuneration report in the annual report. What happened there was, as, in fact, we foresaw and had stated publicly earlier on in the year, the growth in the international team and the resources required to drive that, as Mark has stated, did require that we had to take on some additional staff. And that's led to a small increase in expenses. As we noted in the report, I would expect those expenses to continue to increase next year. But the main component of what happens with the MER will actually be the change in value of the portfolio.

Thank you, Andrew. Mark, a question for you from Mr. [ Kenneth Rose ]. Do you expect dividends to remain at the same level and for how long? Do you expect growth in capital value, i.e., market share price, to rise above current levels? And do you expect the current investment strategy to continue and for how long?

Okay. Thanks for those questions. I mean, in terms of the dividends, obviously, last year, there was quite a significant cut in the dividends we received from our investments. Most market participants are expecting dividends to rise into this year going forward. So therefore, we expect our income to increase certainly over the next 12 months. So we have that expectation. In terms of ongoing capital growth, we're a long-term investor, and markets historically have gone up over the long term. We don't expect that to change, but there can be lots of volatility in between. Although as Andrew pointed out on one slide, we do note, though, that the share price is now trading well ahead of our stated NTA. That might mean the share price perhaps needs to -- or potentially could come back closer to fair value, so a little bit of a headwind on the share price in the short term because of that. And the NTA, though, over the long term, we don't try and predict markets. But history says it will go up, but it can be very volatile in between. And then just the last question regarding our investment process. Now we expect to maintain the same process. We believe our approach to investing is something that stands the test of time, which is essentially basically trying to find good companies at attractive prices and holding them for the long term. So that's been the core of our approach for the 27 years I've been involved with the company. My understanding was -- that was the approach preceding that. So we expect that to continue going forward, although there's always things you learn about investing going forward. And I guess one of the big changes we've seen over the last few years is the increasing amount of technology companies coming into the market. And they do require a slightly different way of looking at them. But still, the core approach to investing can be applied to technology companies as well.

Can I just quickly add to Mark's comments that, yes, although market participants are expecting the dividends that we receive to continue, I would stress the point that -- we've all made is that, obviously, in prior years, including last year, we've been using our reserves to make the dividend -- to make up the current dividend. So although dividends that we receive will come up, there is, of course -- we still have some way to go before we can match our $0.24.

And that's a very good point is that we need to -- that income that we receive has to be made up first before we can start to see our own dividends start to rise again.

Thank you. I have a question from [ Marc Beer ] for you, Mark. How will AFIC counter the competition of exchange traded funds in Australia?

Yes. So I mean, ETFs are very prevalent in the market. One of the attractions has been they're fairly low cost, but so are we. Our expectation, though, is that we want to outperform the index over the medium to long term, and we had a slide indicating that's the case. ETFs, they will perform below the market because they also have costs. And so if you go back to the slide that showed our performance and it had the index, and ETF would be below the index, and we have been above. I guess a couple of other attributes we've talked about throughout the presentation is the transparency we have to our shareholders being a public company; I guess the comfort our shareholders have in seeing our independent Board of Directors; and then Dave touched on the fact that the volatility of our returns have been much lower than the index and, therefore, lower than ETFs; and the more consistent dividend flows that we've produced. So we think there's a number of features that AFIC -- sets it apart from the ETFs in the market.

One other point. Mark mentioned the consistency of dividends, but the other aspect of that is that we provide fully franked dividends. The index certainly doesn't.

Thank you, John. So a question for you, John, in fact, from [ John Baldock ]. "There's many years since we've been able to participate in a rights issue or a share purchase plan. As a long-term holder in AFIC, would be beneficial primarily for shareholders to be able in the growth of the company. Is the company keeping this option under review?"

Yes. Thank you for that question. Yes, certainly, we look at this on a regular basis as to whether we should have a SPP or a rights issue. Certainly, with the size of AFIC, there is no inherent advantage in terms of growing it to reduce the MER. Our management expense ratio is low. So we don't get a benefit from growing the company for that purpose. The other aspect is always that you need a circumstance where you can raise the money and invest it particularly productively for the investors. And quite often, you don't get all those elements in line. But certainly, yes, we will look at it regularly. It is something we consider. Thank you.

We've had a number of questions, just -- sorry, before we go further, just to remind you, you can submit questions through the Lumi app or provide a question through the phone. So we had a number of questions relating to our approach to ESG. So I've put a number of these together, in particular, are the issue of the impact of climate change and the transition away from fossil fuels; our approach to investing in oil and gas sector and the investment opportunities in sectors which supply raw materials to the renewable energy markets such as lithium; and finally, opportunities to invest in companies that are producers of renewable energy. Also, are we looking to have a portfolio net 0 in terms of carbon emissions? So David and Mark, do you want to comment on that particular collective of questions?

Sure. So thanks for the question, Geoff. Just in relation to the oil and gas sector, so we have less than 2% of the portfolio invested across 2 companies, being Woodside and Oil Search, both less than 1%. So the majority of their production comes from LNG as opposed to the more heavy carbon-intensive liquids or oil. So we really see LNG as being the transition fuel away from hydrocarbons to renewables at some point in time. Our view of that is demand remains reasonably healthy over the next 2 years. It will take time before we are able to run electricity grids fully from renewable energy. So that's kind of how we're viewing -- and I guess 2 of the other points I would make is just in terms of where the environment we are at the moment. We've seen a recovery coming through in terms of mobility, demand for energy. So at this point in the cycle, we wouldn't be looking to exit what we feel are close to bottom of the cycle prices.

I'll just add to that. Just to reiterate, though, David's point, the ESG piece is embedded into our investment process because we want to be in companies that have longevity to their business models. And if there are structural headwinds on the business, that comes into our analysis. But when that occurs, we don't want to give away a stock that perhaps might be appearing as a business that does have issues long term. Certainly, the oil price has been very strong over the last few months, and we have still some exposure to that. But we will keep assessing that. But just to remind everyone that ESG is fundamental to the way we assess companies.

Just to further that, just to pick up the point, I guess, the opportunities in lithium and other sort of minerals is one of the questions that also -- was the theme that came through in some of the questions.

Yes. Thanks, Geoff. So that's a sector that we do look at constantly. And for a variety of reasons, it just doesn't pass our quality filter. So just to recap, our exposure in the resources space is in BHP and Rio Tinto. So both operate Tier 1 long-life mines. They're low cost, and they're diversified by commodities. Within the lithium space, particularly, there are a number of opportunities to invest in that market. The main reason that they are failing on a quality basis is really just around the short mine life. Most of the processing that needs to happen for the resource doesn't exist today. So that's ramping up over the next 12 to 24 months, in the case of Independence Group. And the third reason is just around lack of price transparency, so really difficult to know where prices are heading in that sector. So that creates a lot of volatility and a lot of risk. So for the risk factors I highlighted, they're not passing the quality filter compared with, say, Rio Tinto and BHP.

I think another factor, Geoff, to talk about is that to see the ongoing growth of cleaner energy, the sector does need capital. And we are seeing some traditional hydrocarbon businesses around the world investing quite significantly in renewable energy sources. So it's important that, that capital is still available to invest in those sectors. So it can be very easy to sort of throw out those companies, but that does need an investment. And we understand that even the likes of Woodside have sort of looked at areas like hydrogen, for example. And they can provide capital to try and grow those sectors, which is really important. Another area I wanted to touch on is that one company that is very involved in renewable energy is Macquarie Group. It's one of the biggest stocks in our portfolio. And they're doing it through, I guess, the traditional approach in financial markets is to be involved with early-stage projects, giving advice, allocating capital, being a coinvestor, being a manager. And so we think if you look forward 5 to 10 years, this area of clean or renewable energy is going to be a big part of Macquarie Group's business.

Whilst we're on this subject, a few questions also came through in terms of the -- our views on the proposed merger of BHP and Woodside oil and gas assets and also the ESG considerations around that particular merger.

Yes. Thanks, Geoff. So we see the strategic merit of the transaction for both sets of shareholders. So from a BHP perspective, they have opportunities or they've deemed they've got opportunities to invest that growth capital into potash. So they've recently commissioned Stage 1 of the Jansen Potash Project in Canada. And from a Woodside perspective, we see merit in LNG producers gaining more scale in that end market. And I think most importantly, the scale provides optionality just around the asset base of when they time in their investment into growth projects; but secondly, in our discussions or Woodside's public disclosures, just around looking at their investment into potentially into hydrogen and ammonia as new energy opportunities for the company. So having a better balance sheet as a result of this transaction gives them further optionality around that. Woodside have made a commitment to reduce emissions from their own operations by 30% by 2030. They have an aspiration to be net neutral by 2050. And we see this transaction, the better balance sheet and the scale that it provides, gives them greater opportunity to be able to achieve those targets.

Thank you, David. We have a question pertaining to supply chains and our voting and remuneration reports from [ Peter Statham ]. AFIC votes yes to the remuneration report in a very high number of cases. Does this put short-term profit over the long-term stable growth bonus as sustainability? Supply chains of Australian businesses have been impacted by Evergrande, COVID-19 and the policies of China. Will AFIC be looking closely at how Australian businesses we invest in manage their supply chains?

With the supply chain, there's a lot of companies that are struggling with supply chain issues at this point in time across a whole range of industries. But certainly, the way we look at companies and vote, we see ourselves is a long-term investor. So we want the companies we're investing to be run appropriately, and we constantly speak to management. We often speak to the chairs of companies. And running the businesses appropriately is really, really important to us. And if we see issues with the company, we certainly feed that -- those views into management and the Board. And so issues further down the supply chain, if we think there are reasons for concern and worry, we will continue, as we have done in the past, make those views very clear to the companies that we invest in is that we want their businesses to be run ethically and appropriately.

Thank you, Mark. Also, I guess, potentially a related question, more to do with the international portfolio. In fact, I have a question from [ Terrence and Christine Stanton ]. "Will you please dump all Amazon shares because of the company's repeatedly bad treatment of workers?"

Yes. Well, look, it probably goes back to the same point I was just making is that we do want the companies we invest in to be run well. And it's just poor business anyway to a company to have poor business practices. And it doesn't -- it's not going to result in a great outcome for shareholders. So -- and as I said in the previous answer, we feed back into the companies when we think there are areas of concern. We want our companies to be run properly.

Thank you, Mark. We've had a couple of questions about why we're not investing in Fortescue Mining Group and why the preference for BHP and Rio. And we had a couple of, I guess, subsequent questions come through online as well on this. Are we comfortable with our holding in BHP? And did we, in fact, arbitrage the difference in share price between the London Stock Exchange and the Australian Stock Exchange when the announcement was made in terms of the delisting from the London Stock Exchange?

So just on the second part first, if you like, Geoff. So we haven't arbitraged that gap between the London Stock Exchange and Australia. And the reason, if we sell Australian-listed stock, we'll be paying 30% tax on that. So we'll have less proceeds to be able to take advantage of that 5% to 6% arbitrage that currently exists on the U.K. market. In relation to Fortescue, we have preferred to have that exposure through BHP and Rio really as a result of the diversified nature of the commodity asset base from those 2 companies. And if you look historically, Fortescue has been a really strong performer, and there were periods along the journey where perhaps we should have owned that company. As we look at it today, we have seen the pullback in iron ore in the last few months. You've seen that single focus iron ore commodity that the company does have, where you're really exposed to just movements in the iron ore price. The Fortescue share price is down around 50% in the last few months, BHP and Rio around 30%, just as a result of the diversified nature of the asset base. The second point would be as Fortescue looks to invest in the FFI or Fortescue Future Industries, they're taking 10% of the profit of the business, looking to invest in hydrogen and ammonia projects. There's been limited information to date on this. So we're monitoring this quite closely just to see about the returns that shareholders can expect at some point in time. So we haven't ruled it out. But at this point in time, we're happy with our exposures through BHP and Rio.

And that's the one I can certainly sort of say, I didn't get that one right. In the early days with the company, they did have quite a bit of debt. We've always had some concern that it was lower-quality iron ore than BHP and Rio. But probably, the piece that we probably missed a bit was it does really pass a lot of our processes in terms of that type of owner/driver company, where the CEO was the big owner and the driver of the business, and the outcome of that was a series of iron ore mines with incredibly low cost basis and a very efficient business and operations. So in that regard, the company has been a great success, and we missed that piece of it. But as Dave pointed out, where it sits at the moment, though, it is obviously very leveraged to iron ore prices, which has been very volatile. But we'll keep watching it. We still think it's an incredibly well-run company, and it's something that's always going to be on our radar because of that.

We have a question from Borg Acquisitions Pty Limited. Xero is obviously a fabulously earnings compound machine. But by virtue of any valuation measure, the company is very expensive. How have you managed to get comfortable with the valuation?

Thanks, Geoff. You're absolutely right. If you look at the tech sector at the moment, valuations are very stretched. And I think it's something we're very conscious of. And just to put it into context, we have about 7% of the portfolio in technology stocks. And specifically with Xero, we just see a very long growth runway with all the geographies they have as well as the opportunity to increase subs within that geography into new segments and also ARPU growth from their platform strategy. So whilst we acknowledge there's a huge long growth runway for Xero, in the near term, we find with this rising interest rate environment, valuation is a little bit challenging. But we prefer to take a long-term approach to investing in technology and have biased our holdings towards the higher-quality, higher return on capital businesses.

I think, Geoff, it goes back to our process. We bought this stock incredibly well, and we have made huge gains. If we were to sell it because of a short-term valuation metric, we'd pay an incredible amount of tax, which would get sent to Canberra. We're not keen on that. We sort of accept that any company we buy, once you're selling a business at an attractive price, the share price after that, it can be all over the place. It can have periods where it's undervalued or overvalued. But if we believe that the business still has long-term growth and good prospects, we want to be in the business and just accept that the share price might come off. But trying to sort of capture a short period of overvaluation, sell it, pay a lot of tax, then try and look to get back in, you're then becoming a trader of share prices. And it's just not what we do. We've bought it well. We still think it's good, and the plan at this point is just to hold on to it.

Thanks, Mark. Just a couple of questions on the international fund. So from [ Bruce and Valerie Sterling ] again, "Are you still looking to introduce a fund to invest in international shares?"

Yes. And I just touched on that. Yes, look, that's the end game we're looking at. But as I said, that's still a bit of -- that's a little bit in the distance at this point. But so far, so good, it's going well. The team is performing exceptionally well. The performance is good. But as is our approach in AFIC, we want to make sure that everything is working well before we think about bringing or turning this into a product for investors.

And just on this, I guess, in terms of the size of the portfolio, a question from [ John Sablic and Ana Sablic -- Sabjek ], I should say. Does the Board have a target percentage of the entire portfolio allocated to the international's component of the portfolio?

Well, the Board have agreed up to 1% to 1.5% and just noting it's about 0.5%, so there's still more money we can put in. So that would still be a very small part of the portfolio. I think the other thing to touch on with this that I skipped over before is we still -- when we buy into our stocks, we wanted to add value to the actual AFIC portfolio and the AFIC shareholders. It's not just about trialing a new product. It's actually adding value to the portfolio. And so far, the investments we made in May, it's performed exceptionally well. So it's added to the performance of AFIC. And so we've got money now we can track our performance. In terms of putting that extra sort of roughly 1% in or up to 1%, the team are now sort of being quite patient. As I touched on earlier, we think markets are looking a bit full. If we get any sort of pullback or, indeed, the team is looking at new stocks to add to the portfolio, we just added one new company recently, which will take us close to 40 stocks. We did talk about potentially getting to 50 stocks. So opportunities might then -- or new opportunities might be one of the determinants that shows or indicates when we put more money in. And we'll look to build that over time.

I have a question from [ John Lansell ]. "In line with the Warren Buffett annual reporting, he discusses his 5 duds for the year. So do you have any comments on the context of our investment process?"

Dave? I was just trying to think about what they were.

Well, I think in this environment, it's been such a strong period in markets with the ASX 200 up nearly 30% on the back of a weak prior period related to COVID. So there haven't been too many duds across the whole market. I think one of the key learnings for us really over the last 12 months and having sold Origin only recently is really the impacts that, that business faces with energy transition. We were aware of the issues earlier than when we ultimately sold the stock, and that certainly cost us by holding on to that longer than what we should have. So being alert to the issues is one thing, and then acting on that information is another thing. So that would be the key learning certainly for me over the course of the last 12 months.

Yes. And there's always a few stocks that have been disappointing that have shorter-term issues that we're hoping they'll overcome. But as Dave said, over the past 12 months, the market coming off such a low point, most things have gone up. But look, there's been -- Orica has had a few issues at the moment. They've got a strong market position, but they're trying to solve that. We've got a relatively small position in that one, but that one has been a bit tough for us. I think APA has been pretty flat during the period. They're trying to make a takeover at this point, which is always something that we get -- have some concern about. So we're looking at -- we're relooking at that one. And Brambles has still been -- had some challenges, particularly with an update they gave recently about their long-term prospects. Again, it's still got a very strong market position, but I think they've just struggled with earnings growth. So there's a couple that have probably performed lower than the rest of the stocks in the market.

Thanks, Mark. And a follow-up question from John Lansell. "Could you see us doing a takeover or amalgamation with another listed investment company or -- yes, with a listed investment company or even something like Soul Patts?"

No. No is the short answer. We're just not -- for us anyway, we find it difficult to understand how that actually adds value to the AFIC shareholders. It's clear that there are some other LICs in the market that are trading at a discount, but you'll never get to buy them or take them over at a discount. To actually take them over, you have to pay a premium. And therefore, you have to ask yourself, how does that add value? Some of those portfolios then may have stocks or holdings that you don't want, and it's expensive to be involved with an acquisition. You'd have to have accountants and lawyers, and they're not cheap and the amount of time and distraction. So we're just sort of lacking in understanding of how it would actually create value for our shareholders. I think we're better off focusing on us finding the good quality companies in the market and focus our energy and resources on that.

Thanks, Mark. I'll throw these questions to you, Andrew. What about paying dividends on a quarterly basis, the rationale for not doing this? And whilst we're on the sort of similar subject, what is your attitude to partaking in the other company off-market with share buybacks?

Thank you, Geoff. With regard to the quarterly, there is a cost in terms of paying quarterly dividends that all shareholders have to bear. So at the moment, it's not something that the Board are keen on, but we'll continue to keep the subject under review. Certainly, even though AFIC pays a stable dividend, you won't know until right at the end of the year what that final dividend will be. But having said that, we will keep it under review. With regard to off-market share buybacks, yes, we do go into them on occasion when -- particularly when we believe that the company perhaps has not been distributing the franking credits to the extent that we would like. That's been the case in the past. So yes, we do go into them but not as a matter of course, not dirigo. We look at each case on its merits.

Thank you, Andrew. There's a question here from [ MS Nominees Pty Ltd ]. Do we believe that the AFIC share price is currently trading at too high a premium to NTA? I'll throw this to you, John, if you like.

Thank you. Unfortunately, this is something we have no influence over. We've been involved, obviously, for 93 years, as a listed investment company, and we've fluctuated from significant discounts to significant premiums. So we can't influence it. Ideally, we like trading near NTA. We like shareholders when they either buy or sell to be able to get the proper value of the underlying assets. And -- but it's not something we can influence.

Thank you, John. A question here from [ Marcos Nino-Ruiz ]. Does the new AUKUS or AUKUS impact the portfolio in terms of exposure to China? Are there potential sanctions on key Australian section -- sectors, I should say?

Well, I'll make a start. I mean, obviously, in terms of exposure to China in the portfolio, I mean, the 2 biggest stocks would be Rio and BHP through the iron ore sales. China is obviously critical to that. But I guess that's -- the reason we're in BHP is the strategic position of the assets is incredible from a global basis, and it's very hard to dislodge them or not use them, given that it's high-quality iron ore, very close to those markets. So that's one area of concern. I think when you look through the rest of the portfolio, and Dave might jump in, it's not as obvious to me in terms of direct exposure, although certainly, the Chinese economy -- Australia is linked. It's inevitably linked to the whole of the Chinese economy, and we can't get around that. So any weakness in our overall economy will ultimately impact a broad range of our domestic businesses. What I would point out, though, when we look at our portfolio over time, there has been certainly a growing exposure to companies with more global markets and, therefore, I guess, less directly related either to Australia or indeed China, if you think of stocks like Hardies and our exposure to the U.S. market, a lot of the health care stocks like CSL and, as Dave pointed out, ResMed. And as you go through our list or even stocks like ARB, as you pointed out, that these are becoming more global business. So that's one way we reduce our risk. Any other stocks you can think of?

No. I think it's something that we're absolutely mindful of. Clearly, it's not going to do any favors for the relationship between Australia and China. But at this stage, it's really too early to have any firm views. But as Mark said, operating a diversified portfolio with growth coming from many other regions, the largest direct exposure is in the resources space. And outside of that, there's some of the health care companies, particularly Cochlear and ResMed and even CSL, that have a small part of their business exposed to China. So we're watching that with great interest.

Thank you, David. I have a question here about, what is the benefit of having separate listed investment companies that we run? Why not merge them all together in one listed investment company? John?

Right. Thank you, Geoff. Look, we find our shareholders appreciate having different strategies. For example, you might have a big cap exposure through AFIC. You might have a small cap exposure through Mirrabooka. And I think our shareholders appreciate that there's some overlap of share registers, but there are different people on the registers. The other aspect that is evident when you look at the AFIC portfolio, we have a group of what we would call mid-cap or nursery stocks. A lot of them are very similar to Mirrabooka, and they've actually been very rewarding to us. But look, I think the different strategies provide different options for the shareholders of each of the groups.

Yes. And indeed, different risk returns, risk reward and different levels of volatility and different levels of dividend consistency. So they're all servicing, I guess, the needs of different parts of a broad investor base that we have in the market.

I might just add one other bit. AFIC benefits from having executives in the investment team who are dedicated to the small cap markets. So we have that specialist expertise that we can draw on for our nursery stocks. And in the cases where we do options transactions, we have the benefit of specialist people who are attached to Djerriwarrh, who are in those markets all the time. So there are some real benefits in terms of specialization for us that flow from those other groups.

Thank you, John. A couple of questions about location of road shows and AGMs. I mean, I'll answer the first one about -- from [ Graham Farlow ]. Will the usual road shows be coming to Brisbane? It's certainly our intention to get back to have physical road shows hopefully March next year, and we'll look to do all of the state capital cities in that time frame. And John, one for you from [ Anne Nankivell ] about holding -- potentially holding the AGM in different states each year and what will we think about that.

We've had one occasion in our 93 years when we have had an out-of-state AGM, which was in Sydney quite some time ago.

No. Adelaide.

Adelaide. Sorry, Adelaide, quite some time ago. It's something we would think about. Traditionally, the reason for Melbourne was that our largest part of our share register was in Melbourne. That's gradually changing over time. But look, it's something we'll consider. We don't have any plans at the moment to have the AGM elsewhere. But certainly, we -- as Geoff says, we're very, very keen to visit in terms of our information meetings.

Thank you, John. Just a question from Mrs. [ Janet Sommerville ], David, about how you go purchasing stocks within the portfolio. Do you buy parcels stocks in, say, 20, 50 or even lesser amounts in one life when you take a stake in the stock? And do you use a broker or do we use a broker?

Sure, yes. So all -- thanks, Geoff. So all transactions are facilitated through brokers. And really, there's no set formula about the pace of that. It needs to just take regard for liquidity within a particular stock. So less liquidity means it will take a longer time period before we get to the position that we ideally want to get to.

I had a follow-up question from [ Allister Polkinghorne and Allison Polkinghorne ]. And the question is, "With Australia contributing only 1.3% to CO2 production in Australia, how can the Board regard coal, oil and gas as a lesser investment in Australia than the heavily subsidized unreliable renewables? Further, how are we factoring in the renewable energy cost of energy through inefficient renewables?

Okay. Some complex questions there. I mean, we don't hold any direct exposure to coal companies, pure-play coal companies. And again, that goes back to our process where we do think about sustainability of our business model long term. So I guess that covers that area. Across a broad base, there is just increasingly amount of focus from the companies we invest in to provide information and for them to continually strive to reduce their -- I guess, their carbon footprint. And Nga and Dave might be able to comment on that. And so this is a trend that's occurring. So there's no question that our portfolio of companies, as time goes on, will be putting more and more resources into this area. And the overall impact on our portfolio due to carbon footprint hopefully will reduce. We did touch on oil and gas. The fact that gas is required as a bit of a transitionary resource, we can't just flip straight into renewables. We touched on our investments in Macquarie that are part of the growth in renewables. Is there any other observations you wanted to -- I mean, we're obviously spending a lot more time on it internally. We did quite a big piece a few months ago with one of our analysts, Olga, looking at the oil and gas industry. And it's an area of focus for us. Anything else you want to add?

Only to say on the environmental, we're really looking for an action plan just to see companies reduce their carbon footprint and short-, medium- and long-term goals that us as shareholders and the broader market can follow just as companies look to reduce that carbon intensity. And in some instances, some of the companies that we own today can very much be part of the solution. So we know both BHP and Rio Tinto are investing lots of capital in trying to find the technology advances that will enable the production of commodities and the lower carbon intensity. So refer to the ELYSIS joint venture that Rio Tinto has in the aluminum space with Alcoa, where they believe they can produce aluminum with no greenhouse gas emissions. They're still several years away from being able to commercialize that. But in some instances, these companies are best positioned to be able to be the solution rather than the problem. So we're encouraged when we see that action plan with the goals that we can follow with shareholders to see how that evolves over time.

Yes. So as I sort of made the point, it is often easy just to say, "Well, you just dump every stock that has any exposure to, I guess, poor environmental issues." I mean, we don't want to hold companies that have really poor businesses in that regard. But what you want is these companies to actually be taking this sort of stuff on board and actually allocating some of that capital to improve these areas. And it's an approach that we take to all our companies is rather than just dumping stocks, if something goes wrong, we try and work with management to say, well, you need to fix this, you need to improve it, you need to allocate some capital and run the business more appropriately. And then you actually still get -- then you actually get real outcomes that benefit shareholders and society.

Thanks, Mark. I'm just checking, there's no questions on the phone. There don't appear to have any questions on the phone at this point of time. And whilst we're waiting, I'll just ask this one final question. Would AFIC consider an ASX-listed trust structure for the international equities portfolio? I haven't finished. Other leading global equity managers have been able to produce a listed trust to the advantage of the investor. Is this something AFIC will consider in the terms of the structure?

Yes. Look, it's something we would consider. It's still very early days yet, but we are aware that there's multiple -- the trust structure is one we could look at. A traditional listed investment company is another. There are other sort of ways of doing it. So they will all be under consideration, and we will have to try and come up with the one that we think is best for our shareholders. So we haven't ruled out any or ruled in any alternative. They will be looked at.

The issue with trust, of course, is that, as we discussed earlier, is there won't be reserves. And the ability, of course, because it's offshore, to have franking credits attached to any dividends will be severely curtailed. So those are all elements that we'll need to look at when, as Mark says, we make that decision. But nothing is finalized yet.

Okay. We'll make this definitely the last question. We have a question about -- from [ Caroline Rentz ]. AFIC and Mirrabooka are enthusiastic investors in PEXA. Could you please comment?

Yes. Thanks very much for the question. So our interest in PEXA is that PEXA is a property transaction online platform. It has very dominant market share in Australia, and we're very interested and encouraged by the early progress they're making in the U.K. They are able to rely on the IP that they've gained in the Australian market to get a head start in developing a position over there. So we're watching that keenly. And it will take some time. And it is really sort of a longer-term option, and we'll probably get some insights into how they're going there early in the first half of '22.

Thank you, Nga. John, I don't have any further questions, which we have spoken about both in terms of the presentation or the questions we have answered directly. So I'll hand back to you.

Thank you, 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 2021 annual report. It's a very detailed report covering the remuneration of directors, executives and the investment team. [Operator Instructions] I will now show the proxies received in respect of this resolution, and these are on the screen now. I remind shareholders and proxyholders who have yet to lodge their votes via the app to do so now as the voting is open. We've received several questions regarding Board and executive remuneration asked prior to the meeting. [ Jason Cole ], representing the Australian Shareholders' Association, has asked, "The ASA has some concern with the LTIP, the long-term incentive plan, from 2020 to 2024 ongoing, believing that the vesting schedule will be too rewarding when essentially matching benchmark performance. And conversely, the achievement of 100% vesting appears very difficult given the requirement for 20% outperformance. Will the Board consider a review of the LTIP so that the vesting schedule may be more reflective of historical performance and thus, incentives are better aligned with the shareholder experience?" The Board keeps all the remuneration policies under constant review. With regards to the new LTIP, the manner with which the thresholds have reached has not changed from the old plan. Whilst there was an award this year, for example, nothing at all was awarded under the 2019, '18 or '17 plans. We don't believe that the outperforming the benchmark is actually too easy, particularly for a listed investment company like AFIC, where the share price does not necessarily move in exact correlation to the market or that the plan is inconsistent with shareholder experience. We'll take your comments on board. We do, however, think that the current plan is consistent with sound policy in accordance with market practice. We'll continue to monitor and review to ensure that all of our remuneration arrangements meet their objectives and work for the benefit of shareholders. We'll now deal with any other questions. Geoff?

Thanks, John. So we have some presubmitted questions, which I'll go through. So we have a question from [ Hill ], who self-manages superfund accounts. "Why are there bonuses paid when all employees are paid at commercial wage? The more bonuses paid, the less available to the owners, the shareholders, and give the shareholders a fair go.

Right. We have a remuneration structure, which is actually very similar to most listed companies, that we look at the total package that the executives and staff can earn. And it's split partly into a fixed component and partly into the performance component. The performance component really is very strongly aligned to shareholders' interests. That's only paid when the shareholders are getting benefits. So the model we've got is very consistent with common practice, and we think it's tailored well to align with the shareholders' interest.

Thank you, John. Another follow-up question, I guess, along the same lines from Mrs. [ Hazel Ansetter ], "I'm against the Board awarding shares in the company to itself and senior executives of the company. Why is this considered necessary? Why are the bonuses so large?"

The first item, issuing shares to executives or Board, the company actually doesn't issue any shares to executives or Board outside things like our share purchase plan or rights issue, which are the same rights that shareholders have. In regard to the executives receiving shares as part of their incentive, they're actually provided with a cash amount, which the incentive defines, and they invest in the market itself, buying them on market rather than having them issued to -- from the share account of AFIC. In terms of the size of the remuneration, we clearly benchmark ourselves, and we do use outside consultants from time to time, to make sure that we are doing 2 things: One, that we are not paying excessive returns to the employees or returns that drive bad behavior. But equally, we want to be paying them appropriate returns that reward them for good practice, good performance and that we can retain good employees for the long term.

Thank you, John. From Nicholas Evans, "Our expenses are rising. Profits are down, and dividends are stagnant. Directors need to explain why we should get a -- why they should get a pay rise when shareholders are not benefiting. What is happening in our community?"

Well, the dividend situation actually is a function of -- partly of what's going on in the general markets, that there was a phase prior to COVID where the banks reduced their payout ratios. There's a lot of companies that are expanding offshore that -- particularly if they can't fully franked dividends, have lower payout ratios. And to some degree, as we've reduced our exposure to banks and resources and put it into fast-growing companies, that does have an impact on the degree of dividend income we receive. But the other side of that equation is, we've provided with -- the shareholders with greater capital returns, particularly as you can see this year and even in the chart we had earlier where we had returns above 12% against the market at 10% over the longer term. So there is a balance between dividends and capital growth. And certainly, in recent times, capital growth has been pretty rewarding.

Thank you, John. A question from [ Meyers Proprietary Limited ]. "Why are 8 directors needed to run an index fund and in comparison to some other -- sort of other listed investment companies in the market?"

Well, there's probably 2 aspects to this. We regard ourselves as an active investor. For example, we only hold about 1/3 of the number of stocks that are in the ASX 200 index. And we diverge from those index weightings quite significantly. The fact that we have low turnover doesn't mean that we are not an active investor. The other aspect is we have probably a fairly unique structure, where our Board members largely are part of the investment committee. And so we need 8 directors or that sort of order to make sure that we capture a whole range of different experience and knowledge and contacts that the directors have built up during their executive career and their current position as nonexecutive directors. So we think it's a model that works really well for us, and it provides a lot of value and knowledge resource to our own investment team.

Thank you, John. A suggestion, I think, from [ Anthea Hill ] about providing the age profile of the directors and their bios in the annual report.

Interesting question. We haven't done it for probably quite a long time. If you look at ASX companies, there's 2 different positions. A lot of companies don't disclose, some do. I think our view is we don't regard age as one of the criteria for Board membership. We certainly want to be refreshed with new younger members, and you can see that in this year's recruitment. But we monitor each of the Board members each year as to their effectiveness and their contribution and how they work with the Board and the executive. And we think that's really one of the most important things.

Thank you, John. A question from [ Andrew Craig ]. "Are directors confident that the complexity of the managing the other LICs at the same time as AFIC itself is in the best interest of AFIC shareholders?" And there was a subsequent question, I think, we got about the need to replace Ross Barker as CEO.

Right. The first question, we do have -- well, the individual Board, like the AFIC Board, is really only dealing with one of those companies. And the other 3 companies all have their own independent boards. So at a Board level, we are focused on AFIC. In terms of the executives, they do range over servicing the 4 companies. That's not unusual in the investment management world. Most investment managers have a number of different products and funds. So that's not unusual. I think we'd argue that our low turnover, long-term investing structure and particularly LIC structures are actually very simple. So it doesn't create a lot of complexity. But as I mentioned earlier, there are significant benefits. AFIC gets that benefit of the specialization on small caps, specialization on options and other things like that, that flow to us from having that structure. So we think it's very useful. In terms of the CEO, the -- and Ross Barker, Ross was effectively our first full-time CEO appointed, I think, in 2003. And he retired from that role, I think, in 2016 -- 2017. Mark is our second CEO full-time. Clearly, we believe it's important -- even though we have a simple business, and we only have 23 employees, that it's important to have a CEO at the head of that structure and clearly coordinating the operations of the 4 groups. Certainly, Ross had a long stint there and done a very good job. Mark's taken the reins for the last few years.

Thank you, John. And the last presubmitted question that I have, from [ Damer Proprietary Limited ]. "How well was the company prepared for COVID-19? Are the company's internal controls strong?" I'll pass this through to you, Andrew, if you like.

Thank you. Was any company prepared for COVID-19 is perhaps the immediate answer. And obviously, this was something that we had to look at last year as well as this year. And as John has alluded to -- and I'd like to pay tribute to the entire staff who found working from home doable and have managed to adjust procedures accordingly so that we've had very good feedback and reports from the internal audit reports that we do, which look at those internal controls, which said that we were proceeding as well as we would do in the office without any findings. So that was encouraging. So yes, in answer to the internal controls, I believe, and we -- the audit committees of all 4 LICs plus AICS, I think, would echo that our internal controls have maintained their strength throughout that period. And as I said, as to the preparedness, well, 2 years in, we're probably used to it. Now let's hope it doesn't go on for too much longer.

Thank you, Andrew. John, that's all the questions I have either by phone or via the Lumi app.

Thank you, Geoff. But before we move to the third agenda item, I'll just remind people that you need to put your votes in on that resolution but the other ones. So the third agenda item is the resolution to elect Craig Drummond. Craig was appointed to the Board on the 1st of July 2021 and so standing for election 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 election. Craig, would you care to make a few words before I put the motion?

Thank you, Mr. Chairman. Good morning, ladies and gentlemen. I was fortunate to have been appointed to the Board of AFIC on July 1, 2021. This followed my recent retirement as Chief Executive Officer of Medibank Private. Today, I offer myself for election to the Board of AFIC. I do so on the basis that I have the time available to work diligently for shareholders in a thoughtful and collaborative way. Furthermore, I believe my experience and skill set will be highly relevant to AFIC. Specifically, this includes 30 years of working in financial markets, many of which were in equity research, and 8 years as a public company executive across 2 large listed organizations. This career path culminated in becoming Chief Executive Officer of the Australian operations of 2 large global investment banks, the Chief Financial Officer of National Australia Bank and, finally, the Chief Executive Officer of Medibank Private. The latter 2 roles gave me considerable insight into large public company management and governance. Should I be fortunate to be elected today to the Board of AFIC, the specific areas of expertise that I will bring to the company will include financial, customer and risk management insight along with extensive regulatory and capital markets knowledge and connectivity. Thank you for considering my appointment to the AFIC Board, and I look forward to your support. Thanks, John.

Thank you, Craig. I'll now show the proxies received in respect of this resolution, and these are now shown on the screen. We'll now deal with any questions. Geoff?

No questions have come through, John.

Thank you. We'll now move to the fourth agenda item, which is the resolution to elect Julie Fahey. Julie was appointed to the Board on 22nd of April '21 and so is standing for election by shareholders today. In accordance with Rule 45 of the company's constitution, she retires from the Board of Directors and, being eligible, offers herself for election. Julie, would you care to say a few words?

Thank you, John. Good morning. I very much appreciate the opportunity to address shareholders today and to stand for election to the AFIC Board. I want to thank my fellow directors for their warm welcome earlier in the year. Although face-to-face interaction has been difficult in the continuing COVID scenario, I found the Board to be highly focused, effective and professional with regards to its oversight of the AFIC business. All directors generously share their industry knowledge and strategic market insights with the AFIC executive and investment team on a regular basis. I also want to acknowledge Mark and his team for their outstanding commitment and continued passion for our shareholders and ongoing engagement with and deep analysis of the market and the entities in which we invest. It has been the second most difficult COVID year for us all. AFIC's fundamental investment principles have certainly weathered the storm with the resilience of high-quality companies underpinning our solid performance. AFIC has also found innovative ways to assist our employees to deal with the challenges of our extended lockdowns, clearly demonstrating the strong underlying culture and values of the organization. I come to the AFIC Board with over 35 years' experience in technology, through an executive career spanning IT consulting, IT software and services business and as an IT executive leading strategic development and operational delivery of IT services. Since retiring from my executive life, I have built a portfolio of directorships over the past 7 years spanning public and private companies in the technology and telecommunications industry, government and the not-for-profit sector. My Board roles, coupled with my active engagement across the market with regards to technology, innovation and challenges, is a skill set and a knowledge base I bring to AFIC. It allows me to contribute to the assessment of investment opportunities in this space as well as provide insights with regards to a growing number of large digital transformation initiatives underway across AFIC's portfolio. If elected, I look forward to continue to support, challenge and contribute to the organization and deliver on the significant opportunity for our shareholders. Once again, thank you for considering me for a position on your Board. Thank you, John.

Thank you, Julie. I'll now show the proxies received in respect of this resolution, and these are now on the screen. We'll now deal with any questions. Geoff?

John, yes, we have received one question on Julie's election from the Australian Shareholders' Association who have asked or made the statement. The ASA is supportive of Julie's election to the Board but does have some concerns with the level of her workload given her directorships with other ASX companies and for not-for-profit organizations. Could you please outline to shareholders how you plan to manage this workload and ensure that AFIC receives the appropriate level of attention?

Thanks, Geoff. The Board has considered Julie's directorships as part of the appointment process. And I note that Julie currently has 2 listed directorships apart from AFIC and neither are chair roles. We are happy to have been able to attract a director of such high caliber and broad experience. And probably to add there, it's very important in the technology space with the way it changes so quickly that Julie is still embedded in 2 companies that are very actively enrolled in that. So we're comfortable she's got the time, commitment, and we think that will bring real benefits to the company. Geoff, are there any other questions?

Thank you, John. No, there's no other questions on this particular item, John.

Thank you. The fifth agenda item is the resolution to reelect Graeme Liebelt. Graeme was reelected by shareholders at the 2018 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. Graeme, would you care to say a few words?

Thanks, John. Good morning, ladies and gentlemen. It's a pleasure to stand for reelection at this morning's meeting, and thanks for the opportunity to say a few words. These last couple of years have been extremely difficult for a great many people and have certainly been very challenging for business. Fortunately, capital markets have been surprisingly robust supported by highly accommodative monetary policy and expansionary fiscal policies. During this period, AFIC too has faced some challenges, but has responded very well. Mark and his team have been strengthening investment processes with a particular focus on tightening the criteria by which we judge the quality of companies and looking for those with future growth potential. We think that approach is now being reflected in the performance of the portfolio. The Board too has been in the process of renewal under John's leadership, and it's a particular pleasure to see Julie and Craig standing for election today. This Board is very collegiate and highly focused on providing attractive total returns to shareholders over the medium to long term. As far as my personal contribution to the Board is concerned, I think there are several areas in which my experience is useful. I've been the CEO of a large listed Australian company, so I have a good understanding of what it takes to lead large organizations and the various challenges facing CEOs. Secondly, I've worked at a global level for many years and lived and worked overseas. Of course, one is always learning, but I have experience of what it takes to develop successful international businesses. And over the years, I've worked in many business sectors, including manufacturing, consumer goods and finance, and I've been a consultant and an academic. And finally, I have extensive Board experience having been on Australian listed Boards for going on 25 years, so plenty of governance experience. But more than that, I believe that the opportunity to participate in other Boards adds considerably to the contribution I can make to AFIC. So thank you for the opportunity to speak. And with your support, I would be honored to continue to serve as a member of your Board. Thanks, John.

Thank you, Graeme. I'll now show the proxies on the screen. There were no questions asked prior to the meeting concerning this resolution, and we'll now deal with any questions. Geoff?

John, there's no questions related to this resolution.

Good. Thank you. The final formal resolution is the proposal to renew the proportional takeover approval rules in the constitution. Rules 79 and 80 of the company's constitution allow a majority of the company's shareholders the opportunity to consider and either accept or reject a proposed proportional takeover offer for the company. The Corporations Act requires that shareholders renew these provisions every 3 years by special resolution, which requires the approval of 75% of votes cast. These provisions were last approved by shareholders at the 2018 AGM. They therefore need to be renewed today for a further 3 years. The directors consider that it's in the interest of shareholders to have the proportional takeover approval provisions in the company's constitution. The provisions do not apply to full takeover bids. I move that the constitution be amended by adopting Rules 79 and 80 as set out in the Notice of Meeting. There is no change to the existing wording in the company's constitution. I'll now show the proxies on the screen. There were no questions asked prior to the meeting concerning this resolution, and we will deal with any questions.

Thanks, John. There's actually no questions relating to this particular resolution either.

Thank you, Geoff. Ladies and gentlemen, that concludes our discussion on the items of business. In a couple of minutes, I'll close the voting system. Please ensure that you've cast your vote on all resolutions. I'd like to thank you all for your continued support and interest you've shown in the affairs of the company by attending virtually today. We hope next year that we'll be able to meet you in person. We always enjoy that opportunity whenever we can take it. I'll now close voting. And the results of these votes will be released to the ASX later today. Thank you very much for your attendance and interest in the company.