Australian Foundation Investment : Appendix 4D - For the Half Year Ended 31 December 2016

ABN. 56 004 147 120.‌‌‌‌‌‌‌‌‌

APPENDIX 4D STATEMENT‌ FOR THE HALF-YEAR ENDED 31 DECEMBER 2016

CONTENTS

• Results for announcement to the market

• Media release

• Appendix 4D Accounts

• Independent Auditors' Review Report

  This half-year report is presented under listing rule 4.2A and should be read in conjunction with the Group's 2016 Annual Report.

  RESULTS FOR ANNOUNCEMENT TO THE MARKET

  The reporting period is the half-year ended 31 December 2016 with the previous corresponding period being the half-year ended 31 December 2015. The results have been reviewed by the Company's auditors.

  Results for announcement to the market

• Revenue from operating activities was $135.5 million, down $21.1 million or 13.5% from the previous corresponding period. This excludes capital gains on investments.

• Profit after tax attributable to members was $118.0 million (down 18.9% on the previous corresponding period's $145.5 million).

• The interim dividend is 10 cents per share, fully franked, the same as last year. It will be paid on 24 February 2017 to ordinary shareholders on the register on 8 February 2017 and the shares are expected to commence trading on an ex-dividend basis on 7 February 2017. There is no conduit foreign income component of the dividend.

• A Dividend Reinvestment Plan (DRP) and Dividend Substitution Share Plan (DSSP) are available, the price for which will be set at a nil discount to the Volume Weighted Average Price of the Company's shares traded on the ASX and Chi-X automated trading systems over the five trading days from when the shares trade ex-dividend. The last date for the receipt of an election notice for participation in the DRP & DSSP is 5.00 pm (Melbourne time) on 9 February 2017.

• The final dividend for the 2016 financial year was 14 cents per share (fully franked), and it was paid to shareholders on 30 August 2016.

• Net tangible assets per share before any provision for deferred tax on the unrealised gains on the long-term investment portfolio as at 31 December 2016 were $5.83, up from $5.63 at the end of the previous corresponding period (both before allowing for interim dividends).

• The interest payment on the 6.25% Convertible Notes issued in December 2011 will be

  $3.0993 per $100 Note, payable on 28 February 2017 to note holders on the register on 20 February 2017. The notes are expected to commence trading on an ex-interest basis on 17 February 2017. The last date for the receipt of Exit Notices for the final conversion of Notes into ordinary shares is 13 February 2017. Noteholders should be aware that any Notes not converted will be redeemed for $100 per Note on 28 February 2017.

  Improved markets but uncertainty lies ahead Half Year Report to 31 December 2016

  Key Themes -

  • AFIC is an investor in a diversified portfolio of Australian equities seeking to deliver attractive income and capital growth over the medium to long term.

  • From the time of the US election there has been a marked change in sentiment as investors anticipated improved economic growth and interest rates started rising.

  • As a result, global investors have been moving out of fixed interest markets and into equities.

  • In response to the improved outlook for global growth, resource and financial stocks have benefited particularly from this shift to equities.

  • Equity markets in our view appear fully valued.

  • Uncertainty arising from the new administration in the US and ongoing geopolitical issues is likely to increase volatility in markets.

  • AFIC will look for long term value out of this volatility.

    Result Summary -

  • Half Year Profit of $118.3 million, down from $145.6 million in the corresponding period last year.

    • Investment income declined $21.1 million primarily as a result of the significant cut in dividends across a broad range of large companies.

    • Trading income was down $9.7 million, as the gains generated in the prior corresponding period were not repeated this half year.

  • Earnings per share of 10.4 cents.

  • Interim Dividend maintained at 10 cents per share fully franked.

  • Management expense ratio of 0.13%.

  • Six month portfolio return was 8.6%; including franking it was 9.7%.

Portfolio Performance

The Australian market in recent months has risen strongly with investors looking to a more positive outlook for global growth with rising commodity prices and higher interest rates. As a result, there was a recovery in resource and banking sectors, both of which had been previously out of favour for some time. This rebound pushed the resources index up 23.2% and banks increased 19.4% over the six month period.

AFIC's portfolio was up 8.6% for the 6 months to 31 December 2016 compared with S&P/ASX

200 Accumulation Index which increased 10.6%. AFIC traditionally only invests in the large resource companies such as BHP Billiton and Rio Tinto. The portfolio was not exposed to the significant rise in the more cyclical mid-sized resource companies which increased by approximately 40.2% over the period.

The best performing companies in the AFIC portfolio outside of the large resource companies and the banks were Woolworths, Wesfarmers and Computershare.

The longer term performance of the portfolio, which is more in line with the Company's investment timeframes, was 7.2% per annum for the 10 years to 31 December 2016 versus the Index return of 6.1% per annum (these returns include the full benefit of franking). AFIC's performance numbers are after expenses and tax paid.

Portfolio Adjustments

AFIC continued to diversify the portfolio with the addition of new holdings including Link Administration Services, Carsales.com, Isentia Group and AMA Group. Other major additions were in existing holdings of CSL and Cochlear, both of which we believe are soundly positioned for the growing demand for their products arising from ageing demographics globally.

Major sales were in Asciano as a result of the combined takeover offer from Brookfield and Qube Holdings, the complete disposal of the remaining position in Santos and a slight reduction in the holding in APA Group.

Profit and Dividend

Profit for the half year was $118.3 million compared to $145.6 million from the corresponding period last year. The fall was due to the decline in investment income received, primarily as a result of the significant cut in dividends across a broad range of large companies including resources, energy and supermarkets as operating conditions remained challenged in 2016. The contribution from the trading portfolio and options was also down $9.7 million, as the realised gains generated in the prior corresponding period were not repeated this half year.

The Board has maintained the fully franked interim dividend of 10 cents per share fully franked.

Going Forward

The strength in the US market following the presidential election has also helped drive an increase in the broad Australian equity index to just over 5700 by the end of the calendar year. At current market levels it is difficult to find outstanding value. We will continue to look for quality companies that can provide good long term growth, including dividends, but will only do this at appropriate prices where reasonable value is on offer. In this context we will be looking to any possible market pullback, which may arise from further interest rate rises in the US over the course of the year or heightened geopolitical tensions, as a way of adding to holdings at more reasonable prices.

Please direct any enquiries to:

Ross Barker Geoff Driver

Managing Director General Manager

[phone] (03) 9225 2102

23 January 2017