AFIC refreshes its portfolio

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Australia’s biggest listed investment company and noted long-term stock holder, Australian Foundation Investment Co, added several new companies to its portfolio during the 2016/17 financial year. Its biggest addition was the finance industry service provider Link Group.

AFIC spent $26.8 million on Link stock, which was not enough for the company to make it into the $6.7 billion fund’s top 25 investments.

Other additions to the portfolio during the year were, the business intelligence company Isentia and the design software company Altium.

Top-ups of existing holdings included CSL, Brambles and CYBG (Clydesdale Bank).

Major sales included reductions in energy company AGL and energy infrastructure company APA Group, and the complete disposal of a position in Santos. A position in telecommunications company Vocus Group, which was added to during the year, was subsequently sold following a marked downturn in its outlook.

AFIC’s return over the 12 months to the end of June was 11.7 per cent. Taking franking into account it was 13.7 per cent. The S&P/ASX 200 Accumulation Index was up 14.1 per cent over the same period.

Over the five years to the end of June, AFIC has produced an average return of 10.7 per cent a year, compared with an index return of 11.8 per cent a year.

The management expense ratio was 14 basis points.

AFIC’s big stock buy, Link, was recently rated ‘outperform’ by Macquarie Securities, which says there will be increasing demand for its administration services from small superannuation funds, as they come under pressure to reduce their costs.

Link began life as a share registry business and has expended into the provision of superannuation fund administration services. It is the biggest player in that market in Australia.

The company was in the news in June when it committed $1.5 billion to buy Capita Asset Service, a UK financial administration services business.

Earlier this year, AFIC was upgraded to ‘highly recommended’ by Independent Investment Research, which cited its long-term above-average performance, consistency and low fees.

IIR says AFIC’s focus is on providing growing, fully franked dividends to its mostly retail shareholder base.

One of the fund’s plusses is that its size gives it economies of scale, which allows it to charge a competitive management expense ratio.

On the negative side, the significant fund size limits its ability to respond to changing circumstances and “wrong calls”.

The portfolio has about 99 holdings. However, the top 10 holdings make up close to half of the portfolio, and most of those are big-cap stocks. Stocks in the S&P/ASX 50 constitute about 80 per cent of the portfolio.

“From a ratings perspective, our focus is on the longer term, specifically 10 years. AFIC has been the standout performer over the longer term,” IIR says.

AFIC’s return over 10 years was 4.8 per cent a year, compared with 4.1 per cent a year for the index.

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