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

Hello, and welcome to the Australian Foundation Investment Company full year financial results briefing. [Operator Instructions] I would now like to hand the presentation over to Mr. Mark Freeman, Managing Director of AFIC. Thank you. Please go ahead.

All right. So thank you, and welcome to this full year result briefing. I'd like to begin by acknowledging the traditional owners and custodians from the lands we are gathered on today and pay my respects to the elders past, present and emerging. I have joining me today on the webinar David Grace, Portfolio Manager; Andrew Porter, our CFO; Matthew Rowe, our Company Secretary; and Geoff Driver, our General Manager of Business Development. Before we start the presentation, just a bit of housekeeping on this webinar. This briefing is based on the material available on the company's website. If you're using your computer to access the presentation via the webcast, the slides will change automatically. Finally, please note following the presentation there will be time for questions and answers. [Operator Instructions] I'll now move to the slides, starting on Slide 2, which is the disclaimer, just to say we're here to talk about what the company is doing, and we're not giving any advice as such. So just moving now to Slide 4, just our usual background on AFIC. So we primarily invest in Australia and New Zealand companies. But obviously, we now have a portfolio of international stocks, and we can perhaps discuss it a bit more at the end of the presentation. We are the largest listed investment company on the ASX, over 160,000 shareholders, independent Board of Directors, and importantly, you, the shareholders own the management rights to the company. The management expense ratio for the year at 0.15% with no performance fees, so that's the cost to you, the owners of the company. We are a long-term investor. The portfolio turnover is low by industry standards, and we do that deliberately because we want to be tax-effective and enjoy the compounding performance of great companies. Traditionally, the portfolio and the share price returns have been less volatile than the index, and we've got a long history of stable and growing fully franked dividends. The investment team also manages 3 other LICs being Djerriwarrh Investment, which is a more income-focused LIC; Mirrabooka, which focuses more on small- to mid-cap stocks; and AMCIL, which is the high-conviction fund. And just moving on to Slide 5, just to reiterate investment objectives, is to pay stable and growing dividends over time and to provide attractive total returns over the medium to longer term. And just picking up on that second point, if we move to the next slide, we just highlight the returns of investing $10,000 in AFIC, but that would have -- the returns to shareholders from that compared to the gray line, which is what $10,000 in the index would have achieved over that same period. And then moving on to the next slide, just a bit about our dividend. An important part of AFIC over many, many years is the ability to have stable and growing dividends. So we gave the example here during the last 5 years or so. Obviously, there's a downturn during this period due to COVID. You can see our earnings per share fell away. So that essentially means the dividends on the stocks we invested in fell. So the market -- stocks that made up the market were cutting their dividends. It's during those tough times that we can call in our franking reserves to sustain the dividend during those tough periods. Before -- a period before this would be the GFC, where the same thing happened. The dividends on our investments were cut, but we used our franking reserves to sustain the dividend, so an important feature of being an investor in AFIC. So with that, I'll pass over to Andrew Porter, our CFO, to talk through the financial results.

Thank you, Mark, and good afternoon, ladies and gentlemen. So moving on to Slide 9, you can see that profit for the year, $296 million, down from $310 million. For those of you who have had the opportunity to look at the results that was announced [ yesterday ], it was made clear in that, that was a result of the fall in the dividends that we had received, particularly from the resources sector. So for instance, we received this year $19 million less from BHP alone than we received in the previous year, and Woodside just under $8 million. So when you take those factors out, overall, the rest of the portfolio dividends were slightly up. So the dividend for the year that we paid to shareholders, $0.26. You'll have seen there's a 0.5% increase announced with this final result. That's on top of 0.5% was paid out the interim dividend. So that's a 4% increase in dividends this year, and that's on top of the 4% increase in dividend that were paid last year. The Board had previously noted that it was their intention where they were able to look to even up the 2 interim and final dividends by concentrating increases in the interim, but they thought it's appropriate, nonetheless, to increase the final dividend this time around. In terms of -- I'll go next to the management expense ratio of 0.15%. That's $0.15 for every $100. The increase is largely due to factors that were talked about last year from what -- we had an accounting treatment of an incentive plan that's been discontinued. That led to a large write-back of costs last year, which artificially lowered the MER. We still think that, that 0.15% is at the very low end of actively managed funds. And as Mark said, where you're looking at the real low-cost index ETFs, the returns you get from them, particularly at distribution, very different from those you'll get from an LIC like AFIC. And we've made that point several times at previous AGMs. The portfolio return, 15.1%, including franking for the year, just a strong result when compared to the index of 13.5%, and we'll have a look at the longer-term returns later. If we move to Slide 10, I'm sure most shareholders will be aware that the share price return has not kept up with the portfolio return. And we moved to a discount of about 9% previous discount at the end of June last year was a touch under 2%. Most LICs or a lot of LICs certainly, and I'd say most have been trading at a discount recently. That's a factor of the market. There are a number of different explanations, as to why that could be the case, particularly when coupled with strong outperformance and as I say, a fully franked dividend. A lot of it simply maybe as Bruce Teele used to say, "There are more sellers than buyers out there." There are cost-of-living increases. We had a lot of people coming in to buy shares. And I suspect a lot of those have had to sell to meet the increase in cost of living, but that's purely speculation on my part. But certainly, the Board are well aware of it, and we are looking at ways to increase the recognition of AFIC as a valuable financial investment. And with that, I'll pass over to the Portfolio Manager, David Grace.

Thank you, Andrew, and good afternoon, everybody. So moving on to Slide 12. So the last 12 months have been a pretty strong period in markets. And pleasingly, the portfolio has outperformed over that period, returning 15.1% with the ASX 300 returning 13.5%, and both of those numbers include franking. The largest contributors to the 12-month outperformance were meaningful holdings in CAR Group, Goodman Group, Wesfarmers, Reece, Netwealth and ARB, and we still remain confident in the long-term prospects for all these companies. Additionally, portfolio performance benefited from being underweight the resources sector, with the resources sector having a particularly challenging year as demand for commodities from China slowed. We're pleased with the 5-year performance being ahead of the market with an annualized portfolio return of 9.3% against the ASX 200 return of 8.7%. This reflects the benefit of long-term ownership of quality companies, allowing returns to compound over many years. The chart on the right-hand side splits market performance by sector over the last 12 months. These numbers do not include franking and show the ASX 200 was up 12.1% during the year against the 13.5% shown on the left-hand side. The best-performing sectors were financials up 29% and information technology, which rose 28.4%. Drivers of the market performance were very narrow during the year with banks particularly having a strong year, up almost 35%. While earnings growth for the banks has been subdued, we've seen a large rerating in earnings multiples as operating conditions have been better than expected. Going forward, we are looking for the drivers of the market to broaden it from the concentration of these 2 sectors, and we'll show you on a later slide, where we have been adding to holdings recently. So on to Slide 13, in managing the portfolio, we're long-term investors in quality companies. We're not traders of short-term share price movements. We want to capture the benefits of compounding returns to deliver shareholders over extended holding periods. We recognize that over our period of ownership, companies will need to navigate multiple business cycles and likely multiple changes of management teams and business strategies. Ultimately, our investment is in the underlying asset base of each company that we hold within the portfolio. In that regard, we want to own companies with a defined competitive advantage that generate free cash flow, maintain strong balance sheets and that are run by capable Boards and management. As we're not traders, we want to be diversified by company, industry, and more importantly, by the attributes that each investment brings to the portfolio, specifically the purpose for each holding. So be it growth, income, stalwarts that own unique assets or cyclicals with low-cost operations and strong balance sheets, it's this diversification of quality companies that we feel positions the portfolio well to meet our investment objectives over the medium to long term, namely to deliver attractive total returns while paying a stable to growing dividend. On the next slide, so we showed earlier the outperformance of the portfolio against the ASX 200 over the 5 years ended June 2024. The chart on this slide shows our performance against both the ASX 200 and against peer fund managers who manage to a similar broad-cap Australian equity portfolio that's against the ASX 200 or 300. So the data here is taken from a Mercer survey with a sample size of 104 funds, showing risk and return data over the 5-year survey period. The green lines represent the median manager of the sample set, AFIC is represented by the blue circle, and the ASX 200 is the purple circle. Returns are shown on the vertical axis and show an annualized return for the ASX 200 of 7.26% per annum; the median manager, 7.36%; and AFIC at 7.71% per annum. Volatility is represented by standard deviation as shown on the horizontal axis. Annualized standard deviation for the median manager was 16.6%; the ASX 200, 16.4%; and for AFIC, 15.7%. So the key takeaway of this slide is that AFIC has delivered superior returns against both the market and peer managers at lower volatility. We believe this chart reflects the superior performance that comes from owning quality companies, particularly when returns are allowed to compound over the medium to long term. So moving on to Slide 15. We've shown a couple of charts here just to give you an indication of the valuation of the ASX 200 index as it stands today. We know the performance of the market has been strong. However, as we outlined, the drivers of the recent strength have been very narrow. Both charts show the ASX 200 over the last 20 years. We've shown the price-to-earnings ratio on the left-hand side and the dividend yield on the right-hand side. So starting with the PE ratio. The current level is around 17x against the 20-year historic average of 14.6x or today, roughly 15% above the long-term average. While both of these charts don't tell the full story, they're helpful to get a picture of investor sentiment towards equity markets as it stands today. Our conclusion is that market valuation is at the top of fair value range and the operating environment is highly variable, requiring us to be particularly discerning on buying at attractive valuations. So Slide 16 shows larger transactions that we completed during the year. To best position the portfolio to meet our investment objectives, we look to maintain an appropriate mix of income and growth attributes. So starting on the left-hand side, we show holdings that we've added to in recent times. In all cases, we were able to use periods of short-term share price weakness to make these holdings larger. For all these companies, we remain confident that the long-term opportunity remains significant and that these companies are well positioned to capture it. Primarily for future earnings growth, we added to holdings in Goodman Group, James Hardie, CSL, WiseTech and ResMed. We added the BHP and Woodside after meaningful share price falls. Both companies are low-cost producers and maintain excellent balance sheets. And we added to Telstra at a price that reflects an attractive dividend yield and consider the company is well positioned to grow earnings and cash flow over the medium term. Towards the bottom on the left-hand side, we show 4 new stocks we added to the portfolio. We added Ampol and Region Group for their attractive income profile. And additionally, we purchased Macquarie Technology and Mineral Resources. Both are owner-driver businesses, where management and Board members maintain significant shareholdings, offering strong alignment with shareholders. On the right-hand side, we show stocks we have trimmed or exited during the period. We trimmed positions in CAR Group, Reece, Woolworths, Wesfarmers, Mainfreight, NAB and Westpac, all following strong share price runs at extreme valuations in our minds. Additionally, we exited holdings in IRESS and Ansell towards the bottom of the right-hand side, both operating industries where we're observing structural changes, leading to a material increase in competitive intensity. On the next 2 slides, I'll just talk through 2 companies in a little more detail. Both have long been held within the portfolio, both have seen recent share price weakness, providing the opportunity to add to our holdings. So the first of these is CSL. CSL is a specialist biotech company that develops and manufactures products to treat serious human medical conditions. The company has a strong management team and Board and has a market leadership position in its core plasma fractionation business. CSL has a proven long-term track record of delivering higher returns than competitors. The company is in the early stages of a margin recovery story stemming from recent capital investment set to drive increased capacity, operating efficiencies and higher returns. The company continues to invest more than 10% of revenue in R&D, which is a key driver of new business growth. We maintain high confidence that CSL has many years of strong earnings growth, delivering attractive returns to long-term shareholders. And the second one on the following slide is James Hardie. So James Hardie is a market leader in the manufacturing of fiber cement cladding, where it currently holds around 90% market share in its core U.S. market. As the chart on the left-hand side shows, since 2005, fiber cement has more than doubled its market share of U.S. homes with all alternate materials either stable or declining. Fiber cement has a number of superior attributes compared to other cladding materials in the market. It competes with other wood-look alternatives being vinyl and wood and offers superior fire resistance, waterproofing and pest protection. The company has a strong track record of successful capital allocation, generating a high return on invested capital while maintaining a strong balance sheet. We believe the growth outlook for James Hardie remains strong despite short-term cyclical headwinds around the U.S. housing market. And finally, turning to Slide 20 for some outlook comments. So domestic economic growth has moderated, providing a more challenging backdrop for companies to deliver earnings growth, while slowing consumer spending reflects the challenges of the rising cost of living. Positively, interest rates appear to be closer to the end of the recent rising cycle. And while the equity market is near the top of a fair-trading range, selectively, we are finding opportunities to invest in companies at attractive prices. We expect the drivers of market returns to broaden moving forward, and we continue to focus on those companies best positioned to deliver meaningful earnings growth over the long term. In this regard, we feel the portfolio remains invested in well-managed companies, owning strategic assets and maintaining strong balance sheets. So at this point, I'll hand back to Geoff.

Thanks, David, for that. So I'll just open up to, obviously, questions-and-answers. And just to remind you, you can ask questions via the webinar itself. So I'll start with this question first. There's quite a few questions about international here, Mark. So I might throw these to the international portfolio, I should say. So the question is regarding international. Sort of what is the timing around this? And also, are you waiting for it to return -- for the NTA -- sorry, the share price to return closer to NTA before listing it? They're probably the 2 main questions, so really just to give a sense of what's going on there.

Yes. Sure. I mean, we always said we take our time and be patient, which is our approach to these sort of things. So obviously, in the release, we have the performance numbers from the portfolio, which is just over 3 years. So we're very pleased with those numbers. We continue to talk about the prospect of another LIC. But as you probably appreciate, there's a bit of work that goes on behind the scenes, particularly with accountants and some lawyers, et cetera, when we're looking to put the structure in place. So we're working on that at the moment, but that's probably taking a little bit more time than we'd anticipated. So in the meantime, we continue to manage the portfolio and work towards a potential structure. But with that, we always said there's no guarantees in these things. So we'll continue to look. I think it's importantly -- or it's important to note that the value of the portfolio, the international portfolio is around $147 million at the moment with a cost base of $103 million. So it's made $44 million for the portfolio. So that in alone, even if nothing else happens, having in the international stocks has added significant value to the portfolio, if nothing else happens. Obviously, our intent though is to continue to work towards a listed investment company, but as I said, there's a fair bit that goes behind the scenes. I think probably this year might be difficult in the next 5 months, 4 months, but we'll see how we go. But maybe into early next year, we'll get closer to that point.

So just an ancillary question to that, Mark, is where is the international portfolio held?

It's -- we hold the shares directly in the investment portfolio. So we are a direct shareholder in all those companies. It's not in another structure. But obviously, if we did move to a separate LIC, there'd be a bit of restructuring that would be required, not complex, but we'd have to do something. But as I said, at this point, we directly hold shares in around -- we're just over 40 international companies...

In the AFIC portfolio, so...

Yes, within the AFIC portfolio.

That's right, yes. Okay. A question here about dividends. Do we look -- do we intend to increase our dividends in the next 12 months? And just again a question that's related to this, what's the current level of franking in terms of balance? And what's the outlook for the franking balance? Andrew, I'll pass it to you.

Thank you. Well, with regard to the balance, we -- after we have allowed for the declared final dividend, we retain a franking, but it's equivalent to about just over $0.40 per share. So we consider that to be a healthy balance to allow us to continue to maintain that stable, the growing dividend profile that we discussed. As for what can happen in the next 12 months, it's in the lap of the gods or the Board, I should say. We'll be able to take a view one of each, each time. But at the moment, we are, I'd say, comfortably reserved.

Yes. So the Board takes a view on the dividend with -- at the completion of the results. And obviously, the dividends we receive on our investments over the year forms a big part of that. So we can have a sense of what dividends may look like going forward. But at the end of the day, we don't know because we don't know what's going to happen with the economy and any other conditions. So as I said, a big part of what happens depends on what the companies sent to us in the form of dividends, and we'll have to see how that plays out.

A question for you, David. 26% of the AFICs portfolio is held in just 3 stocks: CBA, BHP and CSL. Are you thinking about reweighing the portfolio to reduce reliance on these particular stocks?

Thanks for the question. So in terms of the last 12 months, we have actually reduced a small amount of our CBA holding, albeit it still remains a significant holding in the portfolio. I think in relation to the 3 stocks, the way that we think about this is really as a long-term investor, we're just trying to find companies that have a market leadership position, maintain really strong balance sheets, and they're able to weather through the ups and downs of market cycles. And in that regard, CBA, BHP and CSL all fit that bill really, really well and have been able to deliver really attractive returns. So BHP, for example, being a low-cost producer, still generates meaningful cash flow at the bottom of the cycle. And with a greater percentage of earnings coming from copper over the medium term, we've actually been increasing our exposure to BHP. And the same for CSL, which I spoke about in the presentation, is we've been through the COVID period, where there was really a shortage of supply of plasma, it was difficult for donors to be able to donate, and that led to a period of higher costs for CSL. They're now coming out of the other side of that. And we see a meaningful growth profile for this company and particularly margins returning back to pre-COVID levels. We'd expect that to happen over the course of the next 3 years to 4 years, and that will deliver good earnings growth and good returns for shareholders.

Thanks, David. Just a reminder, you can ask questions via the webinar. So please pass them through. A couple of questions here relating to the share price relative to NTA. So what measures are in place to manage the current discount of the share price to NTA? Is this a long-term buy opportunity or indication of future demand for the shares? I'll pass it to you, Mark.

Okay. Thanks. So yes, I mean it is surprising to me the level of discount. I mean we have seen over a very long period of time that the share price across all 4 of our LICs, we've had extreme periods where the share prices have been way above NTA. And we seem to be a bit of a period where 3 of our LICs are trading at quite a big discount. We see reasons and understanding on that, but it hasn't become I guess, crystal clear to me as to why that's the case, why a dollars' worth of assets should trade at sort of $0.90. It's a mystery, particularly given how transparent these LICs are. You can see the stocks we hold. You can see how it's managed. You can see the dividend flows, the exceptionally low-cost relating to other products. It's all there for everyone to see, but there seems to be a persistent discount at this point in the cycle. So it's really up to the market to decide where value is. But we'll just continue to manage the portfolio the way we do it. We do have an approved buyback in place, but we're sort of allowed to do that. We're not sure that really has a great impact at the end of the day, but that facility is available to us. If we think the discount gets too wide, we make that decision. So it's something we continue to talk about very, very regularly, but we just haven't done it at this point. But I think we'll just continue to talk about it in the market, talk about what the fund is doing. And hopefully, the market picks up on the value that the charts say there is, and it starts to close the gap at some point.

Yes. I think that's right, Mark. And the other thing, we are -- it does provide an opportunity to actually go and sell the AFIC a bit more to financial advisers and brokers and other people in the market. And that's certainly what we've been focusing on in the last few months and will continue to focus on over the next 12 months as well.

I think the other thing is we often talk about the dividend yield on our portfolio. So we talk about if you take the dividends and divide by the NTA, but of course, if the share price is trading 10% below that, the dividend you get is actually much higher than what we would see it by looking at the portfolio. So certainly, when you're buying a quality portfolio at a discount yield, it will actually be higher than what it would be at NTA.

Thanks, Mark. Question here about Ramsay Health Care, David. What -- it was obviously a great stock before COVID. What are your sort of thoughts now? Is it a structural change? And will it recover given the share price has gone down, obviously, quite a lot?

Yes. Thanks for the questions. So just to talk through what we have done with Ramsay, when the company was under offer from private equity, it actually reduced our holding quite meaningfully. And in hindsight, we should have sold more given where the share price has fallen to. So there's been a couple of challenging -- well, a couple of things that the business has been facing in terms of the cost side. So labor cost is inflated, and we also saw the consumables increase during the COVID period. Both of those is just causing a period of indigestion where the company has to wash through that. And the second thing is just that the return to hospital for elective surgery has been slower than what the market had expected. So both of those have been weighing on the earnings profile for this company. So where it's fallen at the moment, we feel it's probably around fair value. We are waiting to hear from the company in terms of what their intentions are for their offshore assets. There has been some talk that there is a review being undertaken and just to discuss the long-term ownership of those assets and the fit that they see within the portfolio. So expecting to hear more news in that regard at the upcoming August results. And from there, so we continue to have a small holding, but we feel that the asset base and the structural growth of people requiring private hospitals going forward have caused us to hold on to the small amount that we do hold currently.

Question about AFIC versus, I guess, ETF, a couple of questions here. Given the competitiveness of ETFs, and they focus on the same universe of stocks with similar performance that AFIC has, have we thought about introducing additional differentiating features such as monthly dividends? I'll pass it to you, Andrew, if you like.

Thank you. We've been asked this question before, and the response we gave then, I think, is still accurate. It's very expensive to pay monthly dividends. We don't know until the end of the year, as Mark was saying, when the Board decide on what the full year dividend is going to be anyway. But we don't believe that the additional costs that we would incur for paying a monthly dividend would be in the interest of shareholders. And secondly, just to iterate the point I made earlier, an LIC, and the point you made, Geoff, with its franking reserves, et cetera, is able to maintain a stable dividend. An ETF cannot do that. If you had an ETF with exactly the same stocks as AFIC has had in, you would have had a reduction in your income from year to year. With AFIC, you actually had a dividend that's gone up for the year. So I do think it's important to continue to push that difference between an ETF -- what people describe as an ETF, and they normally mean an index ETF and AFIC. And obviously, that was exacerbated during COVID as well when we were able to maintain the dividend when there was a drastic fall in the income, as Mark talked about.

The question here about why has the share price lagged the return from VAS, which is the Vanguard index fund, I mean, I think we've answered that question in terms of the share price moving to a larger discount. And we would hope that, that -- in fact, those actually reverse itself over a period of time. And I think the other comment I've got here as well is that, yes, when interest rates were low, the share price is trading at a premium. Clearly, what's happening is interest rates going up and people have alternative other things to invest in, like term deposits and fixed income products. There has been less demand for equity shares from LIC such as AFIC. And we have certainly seen the number of shareholders go down a little bit, whereas prior to that was going up quite substantially. So there is a relationship.

Yes. No, I think there is a -- that is a point that we've been talking about is that fixed interest-type products have created a bit of interest. So at the margin, there might be a little bit less buying in traditional LIC. So yes, there's a number of factors that -- at play that perhaps have come together to create this period of weakness in the traditional LICs. And the other point, I guess, we make there, Mark, is sometimes we do actually lag in very strong markets, where the markets have been very strong overall.

Yes. I think that's another good point. When markets are hot, sometimes people want to chase the hot ideas and we can -- that's been our experience in the past and it has been a very strong market, and it would gravitate. But then when things turn down a bit and it gets a bit tough, we tend to get a lot more interest back in something like AFIC.

So a question here, obviously some of our terminology, what do we mean by AFIC shareholders own and the management rights to the portfolio?

Yes. If you go to what we call a managed fund, there'll be a fund manager that essentially takes a fee, an annual fee out of the product. And you will simply be a unitholder in a trust, and the manager will manage the portfolio but then take that fee. In our case, because we're a company, you don't put units -- you're not buying units in a trust. You're actually buying shares in the company. And therefore, you, as a shareholder, actually as a part owner in a business. And we are staff members of the business, so we get paid a salary, but there's no fee going to an external fund manager. And that's why the management expense ratio at 0.15% is very, very low. That's effectively just the cost of running the company. Once again, if you put money with a managed fund, they would charge you an annual fee, which could be anything really, but most likely substantially above what the MER is on AFIC.

Thanks, Mark. Question for you, David. Just can you perhaps provide more details on why -- well, the structural issues that you saw in terms of selling IRESS and Ansell from the portfolio?

Thanks, Geoff. So really, what we're referring to is just that the competitive intensity for both of those companies has increased within recent years. When we look at that and reflect on what's really driven earnings growth for both of these companies over the past, pricing power has been a meaningful driver of that, so the ability to be able to put through annual price increases to their customers. As that competitive intensity has picked up, we think that's going to become more difficult. And then when we go through a period like the last 12 months, where the market's pretty volatile and opportunities are presenting to be able to add to our preferred holdings over the next 5 to 10 years, we need to be able to reduce some holdings. That was really where we felt on a relative sense that the challenges that are presented for both Ansell and IRESS are more pronounced than those who are able to put capital into. And there's some of the logos that we showed you on Slide 16.

Thanks, David. Look, I'll ask these questions, sort of a couple here, but it's related to buybacks. I mean, at what point do we actually start to consider buyback for AFIC shares? And are we planning one?

There's probably a couple of things to think about. One is the size of discount to make sure it's worthwhile. So look, we -- that can vary, but my personal view, it's something above 10%. But you've also got to consider where the market is as well because if the market's extremely high, you could be buying back shares -- say, you bought back shares at a 5% discount that feels good at the time. But if it's a high point in the market and the market were to fall 15%, 20%, then you've actually bought -- ended up buying above fair value, say, not below. So I guess for us to be -- well, those are the 2 things we think about: the size of discount and where we think we are in terms of that market cycle.

Thanks, Mark. A question here, David, are we still holding PEXA? And are we satisfied with their performance?

Yes. We are holding PEXA. Fair to say we've been disappointed. There's sort of 2 parts to the story. So the Australian asset base is a near monopoly in digital conveyancing just as more and more of the conveyancing or the sale and purchases of homes goes to online. So PEXA have effectively a monopoly in that space. So that's really is a highly strategic asset that we think they'll be able to monetize at some point down the future. The challenge for the company has just been their expansion strategy into the U.K. So it's been lots of stops and starts. And it feels like they're gaining traction, and then we hear that they're not. So that's really been a challenging entry for them into that market. The opportunity remains significant if they're able to finally crack it. But at this stage, that's been highly uncertain, and they're carrying the costs of that expansion strategy. So that's really -- it remains uncertain as to how that plays out. But that's the opportunity if it does actually play through over the long term.

I got a question on WiseTech as well. Note that we've been adding it. Is there a future earnings growth strategy there -- here? And what's the projection?

Yes. So WiseTech is -- provides the software to the global logistics industry, and they've started Australian business around 25 years ago and been able to develop really quickly into a market leadership position. So out of the 25 global freight forwarders, WiseTech now counts 13 of them as customers. And it's really at a point now where they have significantly more scale than all of their competitors. And the legacy systems have really been old, antiquated, XL-type systems, and WiseTech has really been able to centralize the data and been able to be attractive to all major players in that industry. So look, we see a significant opportunity from here to continue to capture the industry, and really the starting position today is much greater than where they've ever been. And this is a business that was founded by Richard White, who remains the CEO today. He maintains a significant shareholder in the company. And it's an example of that alignment of interest that we spoke about earlier. We've really been able to invest alongside the founder of the business. And it's a company that really has a large opportunity in front of it but equally generates significant cash flow, enabling them to be able to capture that opportunity.

Thanks, David. Just returning back to international. Are we able to discuss any thoughts, discussions on managing the other LICs and also the potential future international LIC? And apart from the income fee generated to do, do you see them as potential workload focus distraction away from the core AFIC? Is the management fee neutralization of the team worth the while or effort?

Yes. So just a couple of points I'd make on that. First of all is that we actually have now 3 full-time staff members managing that international portfolio. So David and the team simply look at the Australia/New Zealand stocks. And so there's an investment team of 8 that are just looking at Australian stocks. So I would say no, absolutely no distraction. But just noting that one of the things we thought about with the international LIC that a big part of AFIC's portfolio, even though they are companies that are listed in Australia and New Zealand, are really international stock. And so as we go through time, we think that in 10 years' time, we will be seeing here, even a greater part of our portfolio will be deemed international companies, companies like Hardie's, Reece, Macquarie, CSL, ResMed, Fisher & Paykel, Brambles, Amcor, the list goes on and on. These are international companies. However, we do have separate people that are focusing on those stocks. And just note that if we're all about cost recovery, there's no sort of fee. The other point I'll make is that, that 0.15% MER, that has the cost of those staff already embedded in that number. So despite taking on those resourcing, the MER continues to be extremely low. And as I pointed out, the investment we've made of $103 million is now worth $147 million. So it's made $44 million of return to the AFIC portfolio. So again, I think the effort even so far, I believe it's added to the portfolio, it's added to the team. That's our long-term view. So we will endeavor to keep working towards an LIC. And what -- our belief in doing it is that we think there is a gap in the market for actively -- an actively managed international fund that essentially is lower cost. So we're targeting, relative to other products, a very low cost with no performance fees, and we think that would be an attractive product for the market.

Thanks, Mark. So just whilst we're on that theme, we've got a couple of other questions here, and then we'll move on to small domestic ones. But the question is if we did create and launch an LIC, would existing AFIC shareholders get an in-specie allocation of shares in that flow as it's demerged from AFIC? And I guess, the ancillary question there is that in some ways, if we did sell the international shares out of the holdings that actually would produce some franking credits as well. I mean these are interesting observations, but I guess, we have a number of options in front of us.

Yes. And I mean they were accurate comments. If we did sell the stocks out of AFIC, there would be, at this point in time, a capital gain, would generate franking credits, which would be available in -- for distribution at some point. Would we do an in-specie distribution? Well, that's one of the options. We're looking through a number of options at this point. And so -- but we've just got to work through those and say we're having lots of discussions with accountants and lawyers and the like. So there's nothing to report at this point in time, but we should continue to work through an option we think is a good one.

No, I think that's right, Mark. We made -- specifically made the comment within the profit announcement that we are looking a bit more seriously at how this might work, but it will take a bit of work to actually get through some of those issues.

A question here, David, about our assessment of lifestyle communities.

Yes. Sure. Thanks, Geoff. So look, lifestyle communities we're used to having in the portfolio, but we no longer do. And we think they're providing a necessary service to the community, that's the land lease community and the ability to be able to house the elderly in a cheap accommodation. The concern that we've had, and I guess, the reason why we did reduce or sell our holding was just around the cash flow that's generated from the model that they offer. And so the deferred management fee means that most of the cash flow actually comes towards the back end of a person's occupation of the house. And so we felt that the market was overvaluing the timing of that cash flow, and that caused us some concern. So we felt that the share price had run too hard in that regard, and we're able to sell that a couple of years ago. We continue to look at the space. But at the moment, we don't have any exposure to any land lease community operators.

A question here, David, for you. Interested in our views on the current written call option positions on the holdings. And are you looking to reduce call option exposure?

Thanks, Geoff. At the moment, we've got about 4% to 5% of the portfolio with call options written against them, and we tend to use these sparingly. So it's just where we see that the share prices run really hard to a level we feel that it's temporarily overvalued. And rather than sell the whole, and if we believe it's still a good long-term investment, but in the short term, it's become overpriced, we'll write a call option against it so that we can maximize the income that we can get. And they're typically done over a 3-month period. So we can boost the income during that period of overvaluation. And then once that normalizes, then we continue to hold on to that holding for the 5- to 10-year period. So it's not done a lot within the portfolio, but we've probably stepped that up over the last 12 months. Really, it's a reflection of just the strength in the market has caused us to do that. So in higher price points for the market, you'll tend to see slightly more call option coverage rather than less.

Thanks, David. And I guess, the ancillary question here is, what percentage of capital is currently held as cash within the portfolio? I guess, what is your approach to holding cash within the portfolio as well?

Yes. So the aim is to be fully invested. We're not making the asset allocation decision around cash. Having said that, it does move around a little bit. So I think through the cycle, you typically see FX cash running between sort of 1% to 2%. And the idea being to be invested in the market gives us the ability to be able to earn dividend income of the investments that we've made. Just in the last 3 months to 6 months, as we've seen the market really quite strongly, we've actually realized more cash than what we'd typically see. So at the moment, the cash balance is just under 3%. And I guess it goes back to those outlook comments, where we just feel that the markets towards the top end of a fair value range, we're expecting some volatility in terms of the outlook, just a reflection of the economic environment that companies are facing. And so, we feel comfortable that cash is at a higher level than normal, ready to deploy that over the course of the next 4 weeks to 5 weeks as reporting season starts for most companies.

Thanks, David. I've got a comment here and then a sort of question, which perhaps follows it. So if dividends are paid -- if we pay dividends that are consistent, I can buy AFIC at a discount, what is the concern with the discount to NTA? It's only consumer sentiment, so I suspect is part of that, but I guess, people, who paid it closer to NTA is still not likely to see -- not liking to see it trade at a discount. But as we said before, it might be a buy opportunity for people. And the other question here is, and I'll read it through. "I'm a retiree, and the reason for choosing to invest in the largest LIC is for dividend certainly and hence not investing in ETF. LIC does not have to distribute all profits like an ETF. AFIC has paid an annual dividend of around $0.24 for the last few years. My take is that as a conservative, well-managed AFIC has the ability to forecast the future dividend without major changes to the portfolio. What I find difficult to comprehend is why not pay a quarterly dividend to -- that's comparable to ETF. I'd like to know what the extra cost is and paying quarterly dividends, so a question out of curiosity."

Again, it's something we looked at. We -- the additional costs would be substantial. I can't give the exact figures now. That's subject to negotiation each time with the share registry. We think it's the -- which is something we have discussed before, we'll continue to discuss. Shareholders -- and obviously, there are exceptions, including for the person who has raised the question. Shareholders seem to be content with and used to having an interim and a final dividend. It's what the market generally pays. It's in line with what we receive from our shareholders. I'd love to be able to forecast the dividends that we are going to get, but I cannot do that with any great certainty. And similarly, there's also the issue of a takeover. When a takeover happens, that can have a drastic impact on our franking credits. So all of those are things that we've got to bear in mind.

Yes. So just to repeat, so what we have a share registry that provides all those services. And every time we pay dividend, it costs -- not us, it costs the shareholders money to pay dividend. So I understand the thinking about more regular dividends, but it does come at a cost. So we think this time -- at this point in time, the balance is right to do half yearly dividends.

Yes. We have 160,000 shareholders plus. So it's something substantial in terms of the cost of getting it out to shareholders.

David, a comment -- a question for you, I should say. Please comment on the expected impact of AI to the portfolio? And will this impact all holdings or just some?

Thanks, Geoff. So look, really early days in relation to AI. And it's -- we're doing a lot of work in this regard across the whole investment team just to get a view of really how this is going to impact all companies within the portfolio. So I guess, the near-term obvious benefit will be within data center operators. So that's the likes of NEXTDC and Macquarie Technology; then also to Goodman Group, who are developing data centers on a global scale, and they've got a number of sites that are now permitted to develop data centers. So we see a real benefit for those companies. So they're sort of the early-stage beneficiaries, if you like. And then just as we get into more industrial companies, it's too early to understand, yes, what the cost is going to be and what the benefit will be to companies. But fair to say that will impact quite a number of companies, in our view. We will determine that over the course of the next sort of 6 months to 12 months to get a better understanding.

Thanks, Dave. I have a question here about what the returns are based on the NAV and the comparatives, basically, the net asset back against the indexed.

With the [indiscernible] reinvested in those net assets.

Yes. That's correct.

Yes. [indiscernible] franking. And we've made an estimate on the franking percentage of the ASX 200. [ That's 70%, ] yes.

Look, a couple of more questions on international. I'll ask them very briefly. With international, are we intending to pay fully franked dividends if we do have it as a separate entity? And on the other side, the other question, I guess, with international is, will we consider having 5% to 10% weighting for AFIC -- within AFIC versus a new LIC, which is similar to the perpetual versus invest...

Yes. So I'll just take that first piece. Again, that's something we're considering in terms of if we do an LIC, should I continue to have a holding. I think the history there of our group is when -- if you go back many, many years, there was just AFIC, and then AFIC did provide support to Djerriwarrh then AMCIL and Mirrabooka in establishing those LICs. So there is form in that area. But again, we'll have to go through the process. But that has been the track record of supply and support. But when you actually look at -- but when you actually invest in international companies, they don't pay franked dividends. And so -- and they tend to be low-yielding companies. The trend, particularly over the U.S., is fund managers, they don't actually -- not big fans of companies actually paying dividends. So I suppose if you don't have a franking system, you can understand that, and they really want companies to reinvest for growth. So they tend to be low-yielding, non-franked dividend payers. So in that regard, any sort of portfolio that's -- I mean not just ours, but any portfolio product that's international-based is going to have a very low yield. However, over time, if you sell stocks and make capital gains within Australia, those capital gains will require tax to be paid. And therefore, there's a franking credit attached to that. And so, you do see some -- particularly, there are some listed investment companies that focus internationally. And most of the dividends or the franking comes from the capital gains they make. And then you can use some of those capital gains to pay some or, in some case, a lot of dividends. So you have to understand that franked dividends out of an international product will primarily come from realized capital gains. So over time, if we do start an LIC, I guess, we'd have a similar situation, where if we end up making a lot of gains and paying tax, we could pay franked dividends from that.

So coming to -- pretty closer to the hour, which we will sort of wind down the questions, but we have here -- so if you have any other further questions, please put them in now. But I have a question here about CBA. Why do you think the share price keeps going up despite lots of sell recommendations from analysts and elsewhere, really?

Yes. Great question. It's a question that we ask ourselves every day at the moment. So really, the starting point of the bank, say, 12 months ago was from an inexpensive point of view. But then when you see the value they've had over the last 12 months be up 35% in a market that's up 12%, we really struggle to justify the valuations of where they are. And CBA in particular, while we still think it's the best franchise amongst the big 4 banks, is now trading at 3.3x book and offering a dividend yield of around 3.5%. So really had an incredible run. But as I mentioned earlier, we have actually been reducing our exposure to the banks just really in regards to that extreme valuation, where we feel they're now trading.

Thanks, Dave, and I'll make this the final question given we are on the hour. Reece is shown in the slide as -- oh, Ramsay Health Care, sorry, is shown in the slide as stalwarts. I recall hearing that the holding has been reduced. Is it part of the top 20? Is it not a good idea to add more on the current price you believe in the tailwinds in that industry and potentially performing -- Ramsay Health Care management will improve performance and profitability? Any views?

Yes. Sure. So it's not one of the top 20. However, we do have an ownership of it. So as I said earlier, it's a small holding within the portfolio. So I guess the way we think about it, if we look over the long term, we can see that there's going to be increased demand from people requiring public hospitals. However, in the short term, there's been increased wages and there's been less visitation of hospitals, and it started with COVID and has been really slow to recover. And there's a whole range of reasons as to why the recovery has been slower than what the market expects. And so, the challenges of the profitability are really what management need to work through. And as I mentioned, they're now undertaking a review just to assess, well, use the opportunity just to see what part of their portfolio they do want to hold on to for the long term and which areas of the portfolio they think they can actually look to downsize or sell and just to be more match-fit for the change in circumstances. And I think the increased costs now, even though they started as a result of COVID, were sort of 4 years beyond that. And so the question is out whether that is something that's more structural or whether that is something that's more temporary. And really until we get the answer to that, we're happy to have a small holding within the portfolio, but we're really not sure how that plays out as to whether we'd look to add at current prices.

All right. Thanks, David. Well, Mark, we'll wrap it up there, and I'll pass it back to you.

Yes. So thank you, everyone, for joining the call. It's really an important part of our process. As we touched on earlier, the shareholders own the company, so it's important that we make ourselves available to talk about the company and to, importantly, give everyone a chance to ask questions. So hopefully, next time, we meet the gap or the discount starts to close. We certainly think that we've sort of delivered on the expectations of shareholders. It's a good total return, an increase in dividend, low cost. We're being transparent to the market. And so, hopefully, at some point, that gets reflected in the share price. The next time we meet will be for the AGM in October, and just remember that will be webcast. So everyone has a chance to get another update on what's happening with the portfolio. Thank you.

That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.