Australian Foundation Investment Company Limited

Welcome, my name is Geoff Driver, General Manager of Business Spelt and Investor Relations for Australian Foundation Investment Company. I have with me today Mark Freeman, who is CEO at Breckman Eales, Portfolio Manager. Mark, we've just announced our initial results and a feature of that was the 2.5 cent special dividend and we also talked about paying another special 2.5 cent special dividend at the end of this financial year. Can you give us some background or reasoning behind the special dividends and how we approach that?

Yeah, sure. So a lot of the franking credits and dividend paying capacity that comes to us is really through the dividends from the investments we have. But along the way, we also generate some capital gains. So if we reduce a holding or exit a holding for profits, we have to pay tax. That generates franking credits. And that's available to pay out as dividends as well. And so as most people are aware, we do keep a little bit tucked away. it's important that we can sustain dividends during the tough times and we know our shareholders value that but there are points where you go well we've got that covered and we've got more than enough and there's sort of what you call excess and we feel it's important to get that out to shareholders so we've felt like we've had excess ranking credits we felt it was good to spread it across two dividends that's why we've gone the two and a half two and a half And then what we did say is that we would then re-look at it with the final result and look at the situation and then maybe make some comments about what could happen into the future as well. But that would be based on the results. But the principle is there. If we've got excess franking from capital gains, we want to get that to shareholders, which helps support a pretty good dividend yield on the stock.

Brett, it's been a very strong market over the last 6-12 months. Can you comment on AFIC's relative performance and what were the key factors behind it?

It has been a strong market, but clearly it's been a very disappointing performance period for AFIC. If you look at our 6-12 month performance, it's not where we want it to be. If we go through some of the key reasons why, some of the core large-cap holdings in the portfolio have had very disappointing share price performance over this time, particularly large-cap healthcare company CSL has been a big reason, but also building materials company James Hardy. And then some of the smaller companies that have also been core holdings in the AFIC portfolio have also had poor share price performance in the last six and 12 months. And I'm talking particularly about companies there like plumbing suppliers group, Reece, and four-wheel drive accessories group, ARB. The other factor has been the incredible rise in the gold price, where you've seen a lot of mid and large cap gold stocks in the ASX 200 index up over 100% for the year, and AFIC hasn't held gold during this period. But you touched on gold. Is AFIC now looking at potentially investing in some gold companies at this point? We've got an open mind towards it, but it's not something we're looking to do at this point in time. So we don't think chasing recent winners is the best way to generate future performance. So what we're doing with the changes to the portfolio is really focusing on what we think are the key drivers of long-term outperformance and the real key tenets of the Apex investment approach. So essentially backing high-quality companies, owning them for the long term and benefiting from the compounding returns that they deliver. So we've been concentrating our buying in recent times on some high quality blue chip companies such as Telstra and Woolworths that we've particularly bought for their fully franked income, really attractive fully franked dividend yields along with some good growth. attractive valuations but we've also selectively found some buying opportunities in some of the more smaller cap growth stocks you know particularly companies that we think have got a great long-term future like objective corporation life 360 and temple and Webster taking a good but measured and modest stake in those companies and we've added one stock to the portfolio that we've been building up which has been Sigma healthcare the owner of chemists warehouse which we think is is reasonably valued now and it offers terrific long-term growth potential. So that's where we're concentrating our buying opportunities for now. The funding for the buying came particularly from some of the trimming that we did late last year and some high quality but what we thought were very overvalued companies, stocks that mainstays of the AFIC portfolio such as Commonwealth Bank, and Wes Farmers in particular and also Small Cap Growth Stock Net Wealth. These are companies that we still own a stake in and we want to own for the long term but the prices just became extreme in our opinion and hence we wanted to trim our position there but we could look to buy back in if the prices keep falling like they have in those three stocks.

Thanks, Brett. So how do you see the portfolio and AFIC position for the next six to 12 months, and what is your view about where the market's all going to go over that period of time?

Yeah, we think the portfolio's got a good mix of income and growth, and we're always going to concentrate on the high-quality companies without chasing recent winners or fads in the market. I think the backdrop for market valuations are that we characterise the market as being moderately expensive. If we look at where the market's trading on a long-term view, it's trading close to its all-time highs as it closed the 2025 calendar year and good performance has continued into 2026. But that's despite a lot of concerns and risks in the backdrop, whether it be in the US, obviously, with policy, but also geopolitical concerns. and yet the markets tended to mostly just keep going up during this time. So I think that gives a good indicator of market levels, but also fundamental valuation metrics where the market's trading well above its long-term averages on measures like dividend yields and price to earnings ratios, which I think tend to be good, reliable indicators of long-term value. So overall, I think it makes sense to be a bit more defensively positioned at this point in time and really concentrate on what we think are high-quality companies, ones we want to own for the long term at good valuations. We think it will set the portfolio up well.

Mark, in a broader subject, a lot of the large listed investment companies such as ourselves, traditional listed investment companies, are trading hefty discounts at the moment. I guess we've seen this cycle happen before. What are your sort of view, observations around the discounts that are in the market and what's your thoughts about it?

I think the key point is that we have seen this before. I think there's a bit of a perception that this is new. Clearly there's more competition out there from ETS, but we've seen this before. and the level of discounts we've seen before and they've actually interestingly they've all occurred when there's been a hot market people were chasing hot sectors for example around 2000 and tech stocks were running and there's a whole lot of startup techs businesses and that's what people were chasing and we kind of got left behind and ended up at a similar discount to where we are now and then when The tech wreck happened. We went back to sort of a premium. And having also towards the end of the GFC, again, I think, you know, there was an element of mining boom in there too. People were chasing hot stocks. We got left behind and then you had the correction. And so, you know, we're seeing it play out again where there's a lot of hot stocks running. So we tend to get left behind. And so I guess the other fact, it was only sort of three years ago during, or four years ago during COVID, where we did what we normally do. We sustained our dividend. We were trading at a very large premium, and that wasn't that long ago, and there was ETFs out there competing against us there. So, yeah, look, you can't predict what's going to happen, but it does seem to go through these cycles. And so, you know, where do I want this discount to say, well, we're suddenly going to change what we do? It's more about understanding when it happens and why it happens. From what we're seeing at the moment, I think our view is to hold the line and just keep investing in quality businesses and hunting for value in that space. The cyclical parts of the market will sort themselves out at the end of the day. We've selectively done some buying back. You know, we've talked about the extent to which we've had DRP and, you know, there's an intent around sort of neutralising that if we see opportunities to do that. So we can do some of that activity, but we think there's bigger cycles at play, as I said, that we've seen before.

Okay. Thanks, Mark. And thanks, Greg, for your time. Thanks, Jeff. Thanks, Jeff.