AUSTRALIAN FOUNDATION INVESTMENT COMPANY LIMITED 31 August 2020
The Manager
ASX Market Announcements
Australian Securities Exchange
Exchange Centre
Level 4
20 Bridge Street
Sydney NSW 2000
Electronic Lodgement
Australian Foundation Investment Company Limited
2020 Annual Reports and Annual General Meeting Materials
Dear Sir / Madam
Please find attached the 2020 Statutory Annual Report, Annual Shareholder Review and Annual General Meeting Materials being sent to shareholders.
Yours faithfully
Matthew Rowe
Company Secretary
Authorised by the Company Secretary
Annual Report
20
20
Contents
2 | DIRECTORS' | 36 | FINANCIAL | 60 DIRECTORS' | |
REPORT | STATEMENTS | DECLARATION | |||
2 | 5 Year Summary | 37 | Consolidated Income Statement | 61 INDEPENDENT | |
3 | About the Company | 38 | Consolidated Statement of | AUDIT REPORT | |
4 | Review of Operations | Comprehensive Income | |||
and Activities | 39 | Consolidated Balance Sheet | 66 OTHER | ||
10 | Top 25 Investments | 40 | Consolidated Statement | ||
INFORMATION | |||||
11 | Company Position | of Changes in Equity | |||
12 | Board Members | 42 | Consolidated Cash Flow | 66 | Information About Shareholders |
Statement | |||||
15 | Senior Executives | 66 | Major Shareholders | ||
16 | Remuneration Report | 43 | NOTES TO | 67 | Sub-underwriting |
34 | Non-audit Services | THE FINANCIAL | 67 | Substantial Shareholders | |
35 | Auditor's Independence | STATEMENTS | 67 | Transactions in Securities | |
Declaration | 68 | Major Transactions in the | |||
43 | A. Understanding AFIC's | Investment Portfolio | |||
Financial Performance | 69 | Holdings of Securities | |||
47 | B. Costs, Tax and Risk | 71 | Issues of Securities | ||
50 | C. Unrecognised Items | 72 | Company Particulars | ||
51 | D. Balance Sheet | 73 | Shareholder Meetings | ||
Reconciliations | |||||
53 | E. Income Statement | ||||
Reconciliations | |||||
54 | F. Further Information |
AUSTRALIAN FOUNDATION INVESTMENT COMPANY IS A LISTED INVESTMENT COMPANY INVESTING
IN AUSTRALIAN AND NEW ZEALAND EQUITIES.
Australian Foundation Investment Company Limited | ABN 56 004 147 120 |
Year in Summary
2020
Profit for | $240.4m |
the Year | |
$406.4m in 2019. Down 40.8%, excluding one-off items in 2019 down 12%
Fully | 14 | ¢ | 24 | ¢ | 32 cents total |
Franked | in 2019 including | ||||
Dividend | Final | Total | 8 cent special dividend | ||
Total | 2.9% | Share price plus |
Shareholder | dividend, including | |
Return | franking* | |
Total | -3.1% | S&P/ASX 200 |
Accumulation Index | ||
Portfolio | ||
including franking* | ||
Return | ||
Including franking* | -6.6% | |
Management | 0.13% | 0.13% |
Ratio | ||
Expense | in 2019 | |
$7.2b | in 2019 | |
Total | Including cash at | |
30 June $7.8 billion | ||
Portfolio | ||
* Assumes a shareholder can take full advantage of the franking credits.
Australian Foundation Investment Company Limited | 1 | Annual Report 2020 |
DIRECTORS' REPORT
5 Year Summary
Net Profit After Tax | Net Profit Per Share | Investments at Market Value | |||||||||||||||||||||
($ Million) | (Cents) | ($ Million)(e) | |||||||||||||||||||||
2020 | 240.4 | 2020 | 19.9 | 2020 | 7,122 | ||||||||||||||||||
2019 | 272.2 | 134.2(a) | 2019 | 34.0 | 2019 | 7,566 | |||||||||||||||||
2018 | 279.0 | 2018 | 23.6 | 2018 | 7,274 | ||||||||||||||||||
2017 | 245.3 | 2017 | 21.3 | 2017 | 6,790 | ||||||||||||||||||
2016 | 265.8 | 2016 | 23.8 | 2016 | 6,250 | ||||||||||||||||||
Dividends Per Share (Cents)(b)
202024
Net Asset Backing Per Share | Number of Shareholders | ||||||
($)(d) | (30 June) | ||||||
2020 | 5.96 | 2020 | 153,588 | ||||
2019 | 24 | (c)(c) | 2019 | 6.49 | 2019 | 138,671 | |||||||||||
832 | |||||||||||||||||
2018 | 24 | 2018 | 6.27 | 2018 | 129,948 | ||||||||||||
2017 | 24 | 2017 | 5.89 | 2017 | 119,463 | ||||||||||||
2016 | 24 | 2016 | 5.50 | 2016 | 113,482 | ||||||||||||
Notes
- Participation in the Rio Tinto and BHP off-market share buy backs, special dividends and the receipt of a dividend because of the Coles demerger from Wesfarmers.
- All dividends were fully franked. The LIC attributable gain attached to the dividend was 2020: 7.14 cents, 2019: 7.14 cents, 2018: 2.86 cents, 2017: nil,
2016: 2.1 cents. - 8 cents fully franked special dividend paid with the interim dividend.
- Net asset backing per share based on year-end data before the provision for the final dividend. The figures do not include a provision for capital gains tax that would apply if all securities held as non-current investments had been sold at balance date as Directors do not intend to dispose of the portfolio.
- Excludes cash.
Australian Foundation Investment Company Limited | 2 | Annual Report 2020 |
About the Company
Australian Foundation Investment Company (AFIC) is a listed investment company investing in Australian and New Zealand equities.
Investment Objectives
The Company aims to provide shareholders with attractive investment returns through access to a growing stream of fully franked dividends and growth in capital invested.
The Company's primary investment goals are:
- to pay dividends which, over time, grow faster than the rate of inflation; and
- to provide attractive total returns over the medium to long term.
How AFIC Invests - What We Look For in Companies
A portfolio that | |||||||||||
Quality First | Growth | Value | is managed to | ||||||||
achieve long term | |||||||||||
Including dividends | capital and dividend | ||||||||||
growth |
Approach to Investing
The investment philosophy is built on taking a medium to long term view on companies in a diversified portfolio with an emphasis on identifying quality companies that are likely to sustainably grow their earnings and dividends over this time frame.
Quality in this context is an outcome of our assessment of the board and management as well as some key financial metrics. These include return on capital employed, return on equity, the level of gearing in the balance sheet, margins and free cash flow. The structure of the industry and a company's competitive position in this industry is also an important indicator of quality. Linked to this assessment of quality is the ability of companies to grow earnings over time, which ultimately should produce good dividend growth.
As a long term investor, Environmental, Social and Governance (ESG) analysis is integrated into AFIC's investment framework:
- AFIC will seek to invest in companies that have strong governance and risk management processes that include environmental and social risks.
- The remuneration structures proposed and used by the Boards of the companies in which AFIC invests are assessed as we are seeking remuneration plans and outcomes that align with AFIC's (and AFIC's own investors) interests as long term shareholders.
- AFIC supports engagement with its investee companies on these issues, and will vote as shareholders accordingly.
Recognising value is also an important aspect of sound long term investing. Short term measures such as the price earnings ratio, price to book or price to sales may be of some value, but aren't necessarily strong predictors of future performance. Our assessment of value tries to capture the opportunity a business has to prosper and thrive over the medium to long term.
In building the investment portfolio in this way, we believe we can offer investors a well-diversified portfolio of high-quality companies that is intended to deliver total
returns ahead of the Australian equity market and with less volatility over the long term.
The Company also uses options written against a small proportion of its investments and a small trading portfolio to generate additional income.
From time to time, some borrowings may be used where potential investment returns justify the use of debt. This is managed within very conservative limits, as determined by the Board.
AFIC is managed for the benefit of its shareholders with fees based on the recovery of costs rather than as a fixed percentage of the portfolio. There are no performance fees. As a result, the benefit of scale over time results in a very low expense ratio for investors. For the
12 months to 30 June 2020 this was
0.13 per cent, or 13 cents for each $100 invested.
Australian Foundation Investment Company Limited | 3 | Annual Report 2020 |
Review of Operations and Activities
Profit and Dividend
The full year profit was $240.4 million. The profit for the corresponding period last year was $406.4 million. Investment income was down, as a number of one- off items were not repeated this year. This included participation in the Rio Tinto and BHP off-market share buy-backs, special dividends and the receipt of a dividend because of the Coles demerger from Wesfarmers ($134.2 million in total). In addition, several companies reduced or deferred dividends in the second half of the year, which also meant a fall in dividend income.
The trading portfolio recorded a profit of $9.7 million as some placements, where the Company was satisfied with its existing holding, were sold for a profit and there was an increased contribution from option activity. In the corresponding period, last year, this portfolio recorded a loss of $4.7 million.
Earnings per share were 19.9 cents, down from 34.0 cents (22.7 cents excluding one off items last year). AFIC, as a long-standing listed investment company, has reserves that can be used in more difficult conditions. Drawing upon these reserves, the final dividend was maintained at 14 cents per share fully franked despite the fall in income in the second half. Total fully franked dividends applicable for the year are 24 cents per share. Last financial year total dividends were 32 cents per share. This included a special interim dividend of 8 cents per share. No special dividend has been paid this year.
Five cents of the final dividend are sourced from taxable capital gains, on which the Company has paid or will pay tax. The amount of the pre-tax attributable gain on this portion of the dividend, known as an 'LIC capital gain', is therefore 7.14 cents. The enables some shareholders to claim a tax deduction in their tax return.
Market and Portfolio
Performance
Economic conditions have been extremely challenging for many businesses, as the fallout from the COVID-19 outbreak negatively impacts many Australians. Equity markets have also been very volatile following the all- time highs reached in late February, as governments and central banks try and respond to deteriorating conditions and control of the virus remains uncertain.
The Australian share market was on track for a very strong year until the world was unexpectedly hit with the COVID-19 virus in the early part of the 2020 calendar year. From the market peak in February through to the low point for the year in late March, the S&P/ASX 200 price index was down 36.5 per cent. Surprisingly, despite the significant decline in economic conditions, the S&P/ASX 200 price index increased 29.7 per cent from this
Australian Foundation Investment Company Limited | 4 | Annual Report 2020 |
low point until the end of the financial year (Figure 1), driven primarily by an expansion in market valuations.
In these volatile market conditions, the positioning of the portfolio to ensure quality companies with strong industry positions formed the core of the portfolio has lessened the impact of the negative market. Portfolio return for the year, including franking, was negative 3.1 per cent. Including franking, the S&P/ASX 200 Accumulation Index was down 6.6 per cent (Figure 2).
Companies in the portfolio that contributed strongly to relative returns through the 12-month period were CSL, Wesfarmers, Fisher & Paykel Healthcare, ResMed, James Hardie Industries, Xero, NEXTDC and Carsales.com. In contrast, the major banks and energy exposures through Oil Search and Woodside Petroleum significantly underperformed.
Figure 1: Performance of the S&P/ASX 200 Price Index for the Financial Year
7,000
6,500
6,000
5,500
5,000
4,500
Jul | 19 | Aug | 19 | Sep | 19 | Oct | 19 | Nov | 19 | Dec | 19 | Jan | 20 | Feb | 20 | Mar | 20 | Apr | 20 | May | 20 | Jun | 20 |
Australian Foundation Investment Company Limited | 5 | Annual Report 2020 |
Review of Operations and Activities
continued
Within the negative return from the market for the year, Healthcare continued to hold its ground given the strong performance of companies such as CSL, ResMed and Fisher & Paykel Healthcare. Information Technology rebounded strongly, driven largely by the uplift in the share price
of Afterpay (which AFIC does not hold), and the performance of Xero and NEXTDC. In contrast, financials were down because of the significant pressure on the major banks and energy was impacted by the large fall in the oil price (Figure 3).
The long term performance of the portfolio, which is more aligned with the Company's investment timeframes, was 9.3 per cent per annum for the 10 years to 30 June 2020. This is in line with the Index return over the same period of 9.4 per cent. Both of these figures include the benefit of franking. AFIC's performance numbers are after costs.
Figure 2: Portfolio Performance* - Per Annum Returns to 30 June 2020
3.1% | 6.7% | 7.5% | 9.3% | 9.4% |
- | ||||
-6.6% |
1 year return | 5 year return | 10 year return |
Net asset per share growth plus | S&P/ASX 200 Accumulation | |
dividends, including franking | Index, including franking |
* Assumes an investor can take full advantage of the franking credits.
Figure 3: Performance of Selected Sectors of the Market
160
140
120
100
80
60
40
Jul | 19 |
Aug | 19 | Sep | 19 | Oct | 19 | Nov | 19 | Dec | 19 | Jan | 20 | Feb | 20 | Mar | 20 | Apr | 20 | May | 20 | Jun | 20 |
Financials | Healthcare | Energy | Information Technology |
Australian Foundation Investment Company Limited | 6 | Annual Report 2020 |
Australian Foundation Investment Company Limited | 7 | Annual Report 2020 |
Review of Operations and Activities
Positioning the Portfolio
During the period, AFIC continued to adjust the portfolio and took advantage of the decline in share prices to increase holdings in companies it wanted to own more of. This included participation in the recent deeply discounted capital raisings that have occurred.
As a result, a number of purchases were undertaken during the year. This included placements in National Australia Bank,
continued
Share Price Return
The share price return, including reinvestment of dividends and franking credits, over the 12 months to 30 June 2020 was 2.9 per cent, which is ahead of the portfolio return for the year. The share price was trading at a premium of 2.2 per cent to the net asset backing (before tax on unrealised gains) at the end of June 2020, whereas at 30 June
2019 the discount was 3.7 per cent (Figure 5). During this period the net asset backing figure, including franking, fell 3.1 per cent.
Whilst the share price can often fluctuate between a premium and discount to net asset backing, over the long term the share price return normally aligns with the portfolio return.
Cochlear, Auckland International Airport, Oil Search, NEXTDC, Ramsay Health Care, Reece and Qube Holdings. Major additions included Goodman Group, Telstra (to bring some income into the portfolio), Macquarie Group, Cleanaway and Sydney Airport. While there has been a reduction in the number of holdings
in the portfolio over the year from 76 to 61, three new companies (listed below) were added, given we consider the long term opportunity for each business to be attractive:
- Altium is an American domiciled, Australian owned software company that provides PC-based electronics design software for engineers who design printed circuit boards.
- Netwealth provides independent investment platform services to institutional, corporate and retail clients.
- Ryman Health Care engages in the provision of integrated retirement villages for the elderly. It offers independent living, serviced apartment, rest home, hospital, dementia, and short term care. It operates throughout New Zealand and Australia.
Major sales included the complete disposal of holdings in Treasury Wine Estates, Suncorp Group, Scentre Group, Adelaide Brighton and Perpetual, as these funds were deployed elsewhere in the portfolio. There was also some small trimming of the position in James Hardie Industries, although it remains a major holding in the portfolio.
Figure 4 highlights the profile of AFIC's portfolio by the various sectors of the market at the end of the financial year and how it differs from the Index.
Figure 4: AFIC Investment by Sector Versus the S&P/ASX 200 Index as at 30 June 2020
20% | ||||||||||||||||
15% | ||||||||||||||||
10% | ||||||||||||||||
5% | ||||||||||||||||
0% | 17.2% | 16.6% 15.9% | 15.8% | 8.3% | 6.0% | 4.6% | 4.4% | 4.0% | 3.0% | 1.7% | 1.5% | 1.0% | ||||
Banks | Healthcare | Industrials | Materials | Other | Financials | ConsumerDiscretionary | Consumer | Staples | Communication | Services | InformationTechnology | Energy | RealEstate | Cash | Utilities | |
AFIC portfolio weight | S&P/ASX 200 Index weight |
Figure 5: Share Price Premium/Discount to Net Asset Backing
15%
10%
5%
0%
-5%
-10%
Jun | 09 | Jun | 10 | Jun | 11 | Jun | 12 | Jun | 13 | Jun | 14 | Jun | 15 | Jun | 16 | Jun | 17 | Jun | 18 | Jun | 19 | Jun | 20 |
Australian Foundation Investment Company Limited | 8 | Annual Report 2020 |
Outlook
As we move into the new financial year, the outlook remains unclear as companies face an extremely difficult operating environment. While recent fiscal and monetary support has provided some breathing space for the economy, the environment moving forward is going to be largely dictated by the progress made on suppressing COVID-19 in Australia and across the globe.
In this environment, despite very low interest rates and the significant income support provided by governments,
it is difficult to reconcile the expansion of market valuations (Figure 6) with the pressure company profits and dividends are likely to remain under. Given the strength of the market since the lows recorded in March and the further adjustments that have been made to the portfolio during this market weakness, we are content to be patient. We believe the portfolio is well positioned to withstand further volatility given the high quality of companies in the portfolio.
Figure 6: Valuation of the Market - Price Earnings Ratio of the S&P/ASX 200 Index
20 | ||||||
19 | ||||||
18 | ||||||
Times | 17 | |||||
16 | ||||||
15 | 5-year average 15.9 | |||||
14 | ||||||
13 | ||||||
2015 | 2016 | 2017 | 2018 | 2019 | 2020 |
Source: FactSet
Australian Foundation Investment Company Limited | 9 | Annual Report 2020 |
Top 25 Investments
As at 30 June 2020
Includes investments held in both the investment and trading portfolios.
Value at Closing Prices at 30 June 2020
Total Value | % of the | ||
$ Million | Portfolio | ||
1 | CSL | 608.5 | 8.5 |
2 | Commonwealth Bank of Australia | 548.4 | 7.7 |
3 | BHP Group* | 498.8 | 7.0 |
4 | Wesfarmers | 330.5 | 4.6 |
5 | Transurban Group | 326.9 | 4.6 |
6 | Westpac Banking Corporation | 286.9 | 4.0 |
7 | Macquarie Group | 257.3 | 3.6 |
8 | National Australia Bank | 235.3 | 3.3 |
9 | Woolworths Group | 211.3 | 3.0 |
10 | Rio Tinto* | 195.8 | 2.7 |
11 | Amcor | 174.6 | 2.5 |
12 | Australia and New Zealand Banking Group | 171.3 | 2.4 |
13 | Telstra Corporation* | 170.6 | 2.4 |
14 | James Hardie Industries | 142.8 | 2.0 |
15 | Ramsay Health Care | 134.4 | 1.9 |
16 | Brambles | 131.9 | 1.9 |
17 | Sonic Healthcare | 123.4 | 1.7 |
18 | Sydney Airport | 121.6 | 1.7 |
19 | Coles Group | 121.3 | 1.7 |
20 | Mainfreight | 120.4 | 1.7 |
21 | Fisher & Paykel Healthcare Corporation | 114.4 | 1.6 |
22 | ResMed | 108.4 | 1.5 |
23 | Qube Holdings | 102.7 | 1.4 |
24 | Goodman Group | 99.3 | 1.4 |
25 | Woodside Petroleum | 96.6 | 1.4 |
Total | 5,433.4 | ||
As percentage of total portfolio value (excludes cash) | 76.3% |
* Indicates that options were outstanding against part of the holding.
Australian Foundation Investment Company Limited | 10 | Annual Report 2020 |
Company Position
Capital Changes
The following changes occurred to the Company' share capital during the year:
- Under the Company's Dividend Substitution Share Plan, 622,283 new shares were issued at nil cost in August 2019 and 468,445 new shares were issued at nil cost in February 2020.
- Under the Company's Dividend Reinvestment Plan, 5,540,584 new shares were issued at a price of $6.21 in August 2019 and 3,584,713 new shares were issued at a price of $6.93 in February 2020.
The Company's buy-back facility remains open although no shares were bought back during the year.
The Company's contributed equity, net of share issue costs, rose $59.1 million to $2.9 billion. At the close of the year the Company had 1,210 million shares on issue.
Dividends
Directors have declared a fully franked final dividend of 14 cents per share, the same as last year.
The dividends paid during the year ended
30 June 2020 were as follows:
$'000 | |
Final dividend for the year | |
ended 30 June 2019 of 14 | |
cents fully franked at 30% paid | |
29 August 2019 | 164,150 |
Interim dividend for the year | |
ended 30 June 2020 of 10 | |
cents per share fully franked at | |
30%, paid 24 February 2020 | 117,377 |
281,527 |
Dividend Substitution Share Plan ('DSSP')
The Company has in place a Dividend Substitution Share Plan.
This enables shareholders to elect to receive shares in the Company instead of dividends, forgoing any franking credit & LIC gains that would otherwise be attached to the dividend but deferring any tax due on the receipt
of such shares (for Australian tax-payers) until such time as the shareholding is sold. Shareholders will need to seek their own taxation advice in determining if this Plan is suitable for them.
Further details are available on the Company's website or by request from the Company's Share Registrar.
Financial Condition
The Company's primary source of funds consists of its shareholders' funds. The Company also had agreements with Commonwealth Bank of Australia for loan facilities totalling $250 million (see Note D2). At various points during the year, some of these facilities were drawn down. The Board takes a prudent and conservative approach to the use of borrowed funds. Currently, when used, they are maintained within a limit of 10 per cent of total assets. As at 30 June 2020, the facilities are undrawn.
Listed Investment Company Capital Gains
Listed Investment Companies (LIC) which make capital gains on the sale of investments held for more than one year are able to attach to their dividends an LIC capital gains amount which some shareholders are able to use to claim a tax deduction. This is called an 'LIC capital gain attributable part'. The purpose of this is to put shareholders in Listed Investment Companies on a similar footing with holders of managed investment trusts with respect to Capital Gains Tax on the sale of underlying investments.
Tax legislation sets out the definition of a 'Listed Investment Company' which AFIC satisfies. Furthermore, from time to time the Company sells securities out of the investment portfolio held for more than one year which may result in capital gains being made and tax being paid. The Company is therefore on occasion in a position to be able to make available to shareholders a LIC capital gain attributable part with our dividends.
In respect of this year's final dividend of
14.0 cents per share for the year ended 30 June 2020, it carries with it a 7.14 cents per share LIC capital gain attributable part (2019: 7.14 cents). The amount which shareholders may be able to claim as a tax deduction depends on their individual situation. Further details are provided in the dividend statements.
Likely Developments
The Company intends to continue investing on behalf of its shareholders as it has been doing since 1928. The results of these investment activities will depend upon the performance of the companies and securities in which we invest. Their performance in turn depends on many economic factors (macro, which include economic growth rates, inflation, interest rates, exchange rates and taxation levels and micro which includes industry economics and competitive behaviour) and their approach to, and
management of, material Environmental, Social and Governance ('ESG') risks.
We do not believe it is possible or appropriate to make a prediction on the future course
of markets or the performance of our investments. Accordingly, we do not provide a forecast of the likely results of our activities. However, the Company's focus is on results over the medium to long term and its twin objectives are to grow dividends at a rate faster than inflation and to provide shareholders with attractive capital growth.
Significant Changes in the State of Affairs
Directors are not aware of any other significant changes in the operations of the Company, or the environment in which it operates, that will adversely affect the results in subsequent years.
Events Since Balance Date
The Directors are not aware of any matter or circumstance not otherwise disclosed in the financial statements or the Directors' Report which has arisen since the end of the financial year that has affected or may affect the operations, or the results of those operations, or the state of affairs of the Company in subsequent financial years.
Environmental Regulations
The Company's operations are such that they are not directly materially affected by environmental regulations.
Rounding of Amounts
The Company is of the kind referred to in the ASIC Corporations (Rounding in Financial/ Directors' Reports) Instrument 2016/191, relating to the 'rounding off' of amounts in the financial report. Amounts in the financial report have been rounded off in accordance with that Instrument, to the nearest thousand dollars, or in certain cases, to the nearest dollar.
Corporate Governance
Statement
The Company's Corporate Governance Statement for the financial year ended 30 June 2020 will be found on the Company's website at:
www.afi.com.au/corporate-governance
As an overseas listed issuer on the New Zealand Stock Exchange (NZX), the Company is generally deemed to comply with the NZX Listing Rules provided that the Company remains listed on the ASX, complies with the ASX Listing Rules and provides the NZX with all the information and notices that it provides to the ASX.
Australian Foundation Investment Company Limited | 11 | Annual Report 2020 |
Board Members
John Paterson
Chairman and
Independent
Non-Executive
Director
BCom (Hons) (Melb), CPA, F Fin
Chairman of the Investment and Nomination Committees. Member of the Remuneration and Audit Committees. Director of the Company's subsidiary, Australian Investment Company Services Limited (AICS).
Mr Paterson is a company Director who was appointed to the Board in June 2005 and Chairman in 2018. He was a former Alternate Director of the Company for Mr Campbell from April 1987 to June 2005. He is Chairman of Djerriwarrh Investments Limited. He was formerly a Director of Goldman Sachs JBWere and is a former member of the Board of Guardians of Australia's Future Fund.
Mark Freeman
Managing Director
BE, MBA, Grad Dip
App Fin (Sec Inst),
AMP (INSEAD)
Managing Director of the Company's subsidiary, Australian Investment Company Services Limited (AICS). Member of the Investment Committee.
Mr Freeman became Chief Executive Officer and Managing Director in January 2018 having been Chief Investment Officer since joining the Company in February 2007. Prior to this he was a Partner with Goldman Sachs JBWere where he spent 12 years advising the Investment Companies on their investment and dealing activities. He has a deep knowledge and experience of investments markets and the Company's approaches, policies and processes. He is also Managing Director
of Djerriwarrh Investments Limited, AMCIL Limited and Mirrabooka Investments Limited.
Ross E Barker
Non-Executive Director
BSc (Hons) (Melb), MBA (Melb), F Fin
Member of the Investment Committee. Director of the Company's subsidiary, Australian Investment Company Services Limited (AICS).
Mr Barker transitioned to a Non-Executive Director in January 2018
having been appointed Chief Executive Officer of the Company in February 2001 and Managing Director in October 2001 and prior to that he was an Alternate Director of the Company since April 1987. He is a Non-Executive Director of AMCIL Limited, Mirrabooka Investments Limited and AICS (Australian Investment Company Services Limited), Chairman of Melbourne Business School Ltd and an Advisory Board member of the Faculty of Business and Economics at the University of Melbourne.
Rebecca Dee-Bradbury
Independent
Non-Executive
Director
BBus, GAICD
Member of the Investment and Nomination Committees.
Ms Dee-Bradbury was previously Chief Executive Officer/President of Developed Markets (Asia Pacific and ANZ) for Mondelez from 2010 to 2014. Before joining Mondelez Ms Dee-Bradbury was Group CEO of the global Barbeques Galore group, and has held other senior executive roles in organisations including Maxxium, Burger King Corporation and Lion Nathan/Pepsi Cola Bottlers. Ms Dee-Bradbury is a Non-Executive Director of BlueScope Steel Limited (appointed April 2014), a Director of Energy Australia Holdings following her appointment in April 2017, an inaugural member of the Business Advisory Board at Monash Business School and a member of Chief Executive Women and of the Women Corporate Directors Foundation. Ms Dee-Bradbury was formerly a Non-Executive Director of Grain Corp Limited (from 2014 to 2020) and Tower Limited (NZ) until her resignation in 2016 and a former member of the Federal Government's Asian Century Strategic Advisory Board.
Australian Foundation Investment Company Limited | 12 | Annual Report 2020 |
Graeme R Liebelt
Independent
Non-Executive
Director
B Ec (Hons),
FAICD FTSE
Chairman of the Remuneration Committee.
Mr Liebelt was appointed to the Board in June 2012. He is Chairman of Amcor Limited, a Director of Australia and New Zealand Banking Group Limited, and a Director of Carey Baptist Grammar School. He is a Fellow of the Australian Academy of Technological Sciences and Engineering and a Fellow of the Australian Institute of Company Directors. He was formerly Chairman and Director of DuluxGroup Limited, Chairman and Director of the Global Foundation, Deputy Chairman of Melbourne Business School and Managing Director and CEO of Orica Limited.
David A Peever
Independent
Non-Executive
Director
BEc, MSC (Mineral Economics)
Member of the Audit Committee.
Mr Peever was appointed to the Board in November 2013. He was Managing Director of Rio Tinto Australia from 2009 to 2014. He is Chairman of Brisbane Airport Group Pty Ltd. Mr Peever is a member of the Foreign Investment Review Board. He chaired the Minister of Defence's First Principles Review of Defence and following the acceptance of the review by Government was Chair of the Oversight Board which helped guide implementation (with Defence) of the Review's recommendations. David is also a Non-Executive Director of Naval Group Australia and a former Director of the Stars Foundation, a not for profit body which promotes education of Indigenous girls. He was also a former Vice Chairman of the Minerals Council of Australia and was a Director of the Business Council of Australia.
Catherine M Walter AM
Independent
Non-Executive
Director
LLB (Hons), LLM, MBA (Melb), FAICD
Member of the Investment, Remuneration and Audit Committees. Chairman of the Nomination Committee.
Mrs Walter is an Australian lawyer and company Director. She was appointed to the Board in August 2002. Mrs Walter is Chair of Melbourne Genomics Health Alliance and the Financial Adviser Standards and Ethics Authority (FASEA). Mrs Walter is a Director of the RBA's Payments System Board and a Trustee of the Helen Macpherson Smith Trust. She was formerly Chair of Federation Square Pty Ltd and Australian Synchrotron Company Ltd, Deputy Chair of Victorian Funds Management Corporation and a Director of ASX, National Australia Bank Ltd, Orica Ltd and Melbourne Business School.
Peter J Williams
Independent
Non-Executive
Director
Dip.All, MAICD, FAIM
Chairman of the Audit Committee. Member of the Investment and Nomination Committees. Chairman of the Company's subsidiary, Australian Investment Company Services Limited (AICS).
Mr Williams was appointed to the Board in February 2010. He is Chairman of NAB Trustees Services Limited (NAB Subsidiary), Director of Cricket Victoria Ltd and ARUMA (formerly House with No Steps), an Advisory Board Member of TLC Aged Care Limited and Chairman MIPS Advisory Committee for Fiig Securities Limited. Mr Williams was formerly Managing Director of Equity Trustees Limited, Director and Treasurer of Foundation for Young Australians, Chairman of Olympic Park Sports Medical Centre Pty Ltd, a Director of the Trustee Corporations Association of Australia,
a Director of the Australian Baseball Federation Inc and a General Manager with AXA/National Mutual in Australia and Hong Kong.
Australian Foundation Investment Company Limited | 13 | Annual Report 2020 |
Board Members
continued
Meetings of Directors
The number of meetings of the Company's Board of Directors and of each Board Committee held during the year ended 30 June 2020 and the numbers of meetings attended by each Director were:
Board | Investment | Audit | Remuneration | Nomination | ||||||
Eligible | Eligible | Eligible | Eligible | Eligible | ||||||
to Attend | Attended | to Attend | Attended | to Attend | Attended | to Attend | Attended | to Attend | Attended | |
J Paterson | 13 | 13 | 20 | 20 | 4 | 4 | 6 | 6 | 3 | 3 |
M Freeman | 13 | 13 | 20 | 20 | - | 4# | - | 6# | - | - |
RE Barker | 13 | 13 | 20 | 19 | - | 4# | - | 1# | - | - |
R Dee-Bradbury* | 13 | 11 | 2 | 15# | - | 2# | - | - | - | 3# |
GR Liebelt | 13 | 13 | - | 17# | - | 1# | 6 | 6 | - | - |
DA Peever | 13 | 13 | - | 18# | 4 | 4 | - | - | - | - |
CM Walter | 13 | 13 | 20 | 20 | 4 | 4 | 6 | 6 | 3 | 3 |
PJ Williams | 13 | 13 | 20 | 20 | 4 | 4 | - | 4# | 3 | 3 |
# Attended meetings by invitation.
* Ms R Dee-Bradbury was appointed to Nomination and Investment Committees on 20 May 2020.
Insurance of Directors and Officers
During the financial year, the Company paid insurance premiums to insure the Directors and Officers named in this report to the extent allowable by law. The terms of the insurance contract preclude disclosure of further details.
Australian Foundation Investment Company Limited | 14 | Annual Report 2020 |
Senior Executives
Geoffrey N Driver
General Manager,
Business Development
and Investor Relations
B Ec, Grad Dip
Finance, MAICD
Mr Driver joined the Company in January 2003. Previously, he was with National Australia Bank Ltd for 18 years in various roles covering business strategy, marketing, distribution, investor relations and business operations. Mr Driver was formerly Chairman of Trust for Nature (Victoria).
Andrew JB Porter
Chief Financial Officer
MA (Hons) (St And),
FCA, MAICD
Mr Porter joined the Company in January 2005. He is a Chartered Accountant and has had over 24 years' experience in accounting and financial management both in the United Kingdom with Andersen Consulting and Credit Suisse First Boston, and in Australia where he was Regional Chief Operating Officer for the Corporate and Investment Banking Division of CSFB. He is the immediate former Chair of The Group of 100 (G100), the peak body for CFOs and remains on the Board, is a Director of the Auditing and Assurance Standards Board (AUASB) and a Director of the Anglican Foundation.
Matthew Rowe
Company Secretary
BA (Hons), MSc Corp Gov, FGIA, FCIS
Mr Rowe joined the Company in July 2016. He is a Chartered Secretary with over 15 years of experience in corporate governance with a particular focus in listed investment companies. He was previously
a corporate governance advisor at a professional services firm which included acting as Company Secretary for three ASX listed companies. Prior to that Mr Rowe was the Company Secretarial Manager for a funds management company based in the UK.
Australian Foundation Investment Company Limited | 15 | Annual Report 2020 |
Remuneration Report
Contents
The Directors present AFIC's 2020 Remuneration Report which outlines key aspects of our remuneration policy and remuneration awarded this year.
The Company's returns were impacted, as was the entire economy, by the COVID-19 virus pandemic. As has occasionally been the case in the past, whilst returns were negative losses were lower than that experienced by the market as a whole. More details can be found later on in this report and in the Directors' Report.
The Remuneration Committee regularly reviews the structure and composition of Executive Incentive Plans seeking to ensure that they continue to meet their objectives. As a result, the Committee has agreed to some minor adjustments in the metrics to be used next year and going forward. These are outlined in a separate section.
Shareholders should be aware that AFIC does not bear the total cost of remuneration alone. Due to agreements that the Group's subsidiary, Australian Investment Company Services Limited (AICS) also has with Djerriwarrh Investments Limited, Mirrabooka Investments Limited and AMCIL Limited, a substantial proportion of the total remuneration cost (usually 30 per cent to 40 per cent, depending on the individual), is borne by these other companies (collectively, the 'LICs'). AICS expenses the total amount and recovers the proportion borne by the investment companies through the fees that it charges. This report, therefore, shows the total expense that is borne by AICS and that an individual receives. From next year, each investment company will bear the cost directly of any incentive paid due to that company's outperformance of the relevant benchmarks. This will be accomplished by adjusting the amounts payable by each Company in the following year, and these adjustments will therefore show up on a lagging basis.
It is likely that the current review will result in some minor changes to the Incentive plan, particularly with regard to the allocation between the LICs, during the financial year ended 30 June 2021.
The report is structured as follows:
- Remuneration Policy and Link to Performance
- Structure of Remuneration
- Executive Remuneration Expense
- Contract Terms
- Non-ExecutiveDirector Remuneration
Appendix
- Remuneration Governance
- Annual Incentives: Details of Outcomes and Conditions
- Long Term Incentives: Details of Outcomes and Conditions
- Directors and Executives: Equity Holdings and Other Transactions
- Changes in Remuneration Metrics and Allocations With Effect From the Financial Year Ended 30 June 2021
- Detailed Performance Measures by Investment Company
1. Remuneration Policy and Link to Performance
1.1 What is Our Remuneration Policy?
AFIC is an investor in securities listed primarily in Australia and New Zealand. Our primary objectives are to grow dividends at a faster rate than inflation and provide shareholders with capital growth over the medium to long term. To achieve this, we need to attract and retain professional, competent and highly motivated Executives and staff through offering attractive remuneration arrangements which:
- reflect market conditions;
- recognise the skills, experience, roles and responsibilities of the individuals;
- align with shareholder interests; and
- align with the risk management strategies.
Generally, we seek to set total remuneration at the upper or second quartile of the sectors in which we operate.
Periodically, we review our remuneration policies and plans seeking to ensure that they continue to meet these objectives.
Australian Foundation Investment Company Limited | 16 | Annual Report 2020 |
Remuneration for the Group's Executives has two main elements:
- fixed annual remuneration (FAR), and
- performance-relatedpay, being annual incentives and long term incentives (LTI).
FAR is determined with reference to levels necessary to recruit and retain staff with the relevant skills and experience in the industry in which the Group operates. We utilise external input, seeking to ensure that the FAR meets these conditions. This includes industry data provided by the Financial Institutions Remuneration Group Inc. (FIRG) and McLagan for the financial services industry.
Through performance-related pay, the remuneration is adjusted to reflect the risks that the Company and its shareholders face and how the Company has responded to those risks. In particular:
- the key performance indicators chosen to determine performance-related pay are those that the Company considers most relevant to its objectives of improving shareholder wealth over the medium to long term, whilst also considering the relative levels of risk;
- the focus is on performance over the medium to long term, with only a small proportion of both annual incentives and LTI being dependent on a single year's performance; and
- Executives agree to invest 50 per cent of the annual cash incentive (after tax) in AFIC shares and shares of the other investment companies (AMCIL Limited, Djerriwarrh Investments Limited and Mirrabooka Investments Limited) and to hold these shares for a minimum of two years.
The Board may, at its discretion, direct that any performance rights that are yet to vest or to be tested be cancelled in the event of negative issues that may arise, including material misstatement of the Company's financial statements.
1.2 What is Our Target Remuneration Mix?
The target remuneration mix for Executives is as follows:
Managing Director's Target | Other Executives' Target |
Remuneration Mix | Remuneration Mix |
Fixed annual remuneration 59% | Fixed annual remuneration 69% |
Annual incentive 29% | Annual incentive 21% |
Long term incentive 12% | Long term incentive 10% |
1.3 How is the Remuneration Paid in 2020 Linked to Performance?
Table 1 discloses the actual remuneration outcomes received by the Company's Executives during the year and the LTI that may vest in future years. These amounts are different to the statutory remuneration expense disclosed in Table 7. The Board considers the information about remuneration outcomes in Table 1 relevant for users because the statutory remuneration expense includes accounting charges for long term incentives that may or may not be received in future years. See below for details of the differences.
Australian Foundation Investment Company Limited | 17 | Annual Report 2020 |
Remuneration Report
continued
Table 1: Actual Executive Remuneration Outcomes
Possible | |||||||
Prior | Total | Annual | Future LTI | ||||
Annual | Years' LTI | Remune- | Incentive | LTI | (To Vest Over | ||
Total FAR | Incentive | Received* | ration^ | Forfeited | Forfeited | Next 4 Years)# | |
$ | $ | $ | $ | $ | $ | $ | |
Mark Freeman - Managing Director | |||||||
2020 | 867,000 | 232,443 | 25,376 | 1,124,819 | (199,584) | (141,024) | 549,116 |
2019 | 850,000 | 230,987 | - | 1,080,987 | (194,013) | (160,000) | 533,500 |
Andrew Porter - Chief Financial Officer | |||||||
2020 | 680,000 | 108,344 | - | 788,344 | (96,492) | (112,238) | 454,773 |
2019 | 666,507 | 106,814 | - | 773,321 | (93,138) | (110,554) | 457,421 |
Geoff Driver - General Manager - Business Development and Investor Relations | |||||||
2020 | 560,000 | 87,881 | - | 647,881 | (80,808) | (92,484) | 374,684 |
2019 | 549,201 | 88,015 | - | 637,216 | (76,745) | (91,027) | 376,914 |
Matthew Rowe - Company Secretary | |||||||
2020 | 275,000 | 43,238 | - | 318,238 | (39,600) | - | 164,608 |
2019 | 252,000 | 40,310 | - | 292,310 | (35,290) | - | 120,551 |
For Mark Freeman, the amount forfeited is the difference between the target amount that would have been paid if all targets were met and the amount paid, under the investment team LTI. The amount shown for the other Executives is the amount that would have been paid to them with respect to the 2015 LTIP in the event that all targets had been achieved (2019: 2014 LTIP - note Matthew Rowe was not eligible). See Table 4.
The value of Annual Incentive forfeited is the difference between the target amount and the amount awarded. See Table 10. The differences between the amounts disclosed in Table 1 and the amounts in Table 7 are as follows:
- Prior year's LTI received in Table 1 shows the value of performance shares that vested during the year, measured at the closing price on the day that they were received. In respect of Mark Freeman, it shows the cash payment received in respect of LTIP vesting from his time as Chief Investment Officer. In contrast, Table 7 shows the accounting expense recognised in relation to the LTI plans during the year.
- The future LTI in Table 1 reflects potential future remuneration that may be received by the Executives over the next four years if the performance conditions are satisfied. This includes the estimated amounts payable under the two LTIP plans assuming the performance conditions will be satisfied at the time of vesting. For accounting purposes, these amounts are recognised as expense over the vesting period.
Ross Barker, who retired on 31 December 2017 as Managing Director, is not included in the above table or in Table 7 as he ceased to be an Executive. However, he is still entitled to ELTIP for the years in which he was employed (see Table 12). As with the other Executives, all ELTIP for the 2015-16 year was forfeited during the year, and Mr Barker thus forfeited $218,279 worth of ELTIP.
At the end of 30 June 2020, the total value of the ELTIP yet to vest for Mr Barker was $351,019.
Information about Non-Executive Director remuneration is provided in Section 5 Non-Executive Director Remuneration.
1.3.1 Fixed Remuneration
Most Executives received modest inflationary increases in their fixed annual remuneration this year. AFIC continues to operate in a highly competitive market, and salary levels are reviewed at least annually with the aim of remunerating its Executives to the extent required to attract and retain Executives who are leaders in their field.
Australian Foundation Investment Company Limited | 18 | Annual Report 2020 |
1.3.2 Performance-relatedPay This section shows:
• How annual incentive measurements are split between AFIC and the other investment companies:
% | Result | |
AFIC investment performance | 24.5 | Table 3 |
AFIC other metrics | 28.5 | Table 2 |
AFIC qualitative assessment | - | n/a |
Percentage of annual incentive determined by AFIC performance | 53 | |
Other LIC investment performance | 12.5 | Table 15 |
Other LIC other metrics | 14.5 | Table 15 |
Other LIC qualitative assessment | - | n/a |
Percentage of annual incentive determined by other LICs performance | 27 | |
Total percentage of annual incentive determined by AFIC/other LIC performance | 80 | |
Personal metrics | 20 | n/a |
100 |
See Table 5 for more details on what the measures are.
- The outcomes for the two long term incentive awards (LTI) that were tested for vesting during the year (Table 4). Refer to Sections 2.2 and 2.3 for explanations of the measures used.
AFIC's investment performance outperformed the benchmark over the short term (1 and 3 years) but remained marginally below over the longer term (8 and 10 years). In addition, as the share price moved from a discount to a small premium, the share price outperformed the Index over the 1, 3 and 8 year periods, but was still below the benchmark for the 5 and 10 year periods.
It should be noted that AFIC's returns are after taxes and expenses and represent the 'net' return to the shareholders, whereas Index returns do not include either. Furthermore, many returns quoted by managed funds exclude either tax or expenses, or both. The use of 'gross returns' mitigates the tax disparity to some extent, as it adds back franking credits to the nominal dividend that the Index pays, and also that AFIC pays.
The Management Expense Ratio (MER - see Table 11) continues to be of importance to the Board, and this continues to be better than the benchmark set. The inclusion in earnings last year of the Coles demerger dividend and the share buy-backs from BHP and Rio Tinto meant that the earnings per share figure was always likely to decline from last year. The cancellation or deferral of dividends from many companies as a result of the COVID-19 pandemic also contributed to this underperformance.
With regard to the other investment companies, Djerriwarrh did not meet any of its benchmarks with regards to investment or share performance. Mirrabooka's investment performance outperformed its relevant benchmark for all periods under review, as did AMCIL's.
The 2016 award under Executive Long Term Incentive Plan was available for vesting as of 30 June 2020. However, the calculations needed to determine how much actually vests are not performed until after the date of the Annual Report. Therefore, the full amount that may vest is shown, and the actual settlement of the 2016 award will take place in the year ended 30 June 2021. The actual amount settled will be reported in the relevant year. The 2015 award was available for vesting but was forfeited in its entirety due to the hurdles not having been met. It is this forfeiture which is reflected in Table 1 above.
For the investment team whose LTIP encompasses all of the investment companies (unlike Executives, for which only the AFIC performance is counted) the outperformance for Mirrabooka and AMCIL was reflected in the figures which are measured over 4 years for all of the investment companies, whilst AFIC and Djerriwarrh underperformed. Consequently, 15.25 per cent of the available LTIP was deemed to have vested. Detailed information about the performance of each investment company is provided in Section E of the Appendix (Table 15).
Australian Foundation Investment Company Limited | 19 | Annual Report 2020 |
Remuneration Report
continued
Table 2: Non-investment Return Performance Measures
Benchmark | AFIC | Comparison | |
Performance Measure | Result | Result | to Benchmark |
Total shareholder return (14.6 per cent) | |||
Share price return - 1 year | -7.68% | 1.22% | Favourable |
Share price return - 3 years | 5.19% | 6.07% | Favourable |
Share price return - 5 years | 5.95% | 4.25% | Unfavourable |
Share price return - 8 years | 9.28% | 9.32% | Favourable |
Share price return - 10 years | 7.80% | 7.01% | Unfavourable |
Growth in net operating result per share (8.3 per cent) | 2.2% | -41.5% | Unfavourable |
Management expense ratio compared to base of 0.19 per cent (5.6 per cent) | 0.19% | 0.13% | Favourable |
Outcome | |||
Achieved | |||
Partially achieved | |||
Not achieved | |||
Table 3: Investment Return Performance Measures | |||
Benchmark | AFIC | Comparison | |
Measure | Result | Result | to Benchmark |
Investment return - 1 year | -7.68% | -4.06% | Favourable |
Investment return - 3 years | 5.19% | 5.42% | Favourable |
Investment return - 5 years | 5.95% | 5.41% | Unfavourable |
Investment return - 8 years | 9.28% | 8.93% | Unfavourable |
Investment return - 10 years | 7.80% | 7.75% | Unfavourable |
Gross return - 1 year | -6.62% | -3.13% | Favourable |
Gross return - 3 years | 6.67% | 6.73% | Favourable |
Gross return - 5 years | 7.49% | 6.73% | Unfavourable |
Gross return - 8 years | 10.90% | 10.41% | Unfavourable |
Gross return - 10 years | 9.41% | 9.31% | Unfavourable |
Reward to risk - 1 year | 1st qtr | 2nd/qtr | Unfavourable |
Reward to risk - 3 years | 1st qtr | 2nd/qtr | Unfavourable |
Reward to risk - 5 years | 1st qtr | 3rd/qtr | Unfavourable |
Reward to risk - 8 years | 1st qtr | 2nd/qtr | Unfavourable |
Reward to risk - 10 years | 1st qtr | 2nd/qtr | Unfavourable |
Outcome
Achieved
Partially achieved
Not achieved
Australian Foundation Investment Company Limited | 20 | Annual Report 2020 |
Table 4: Vesting and Forfeiture of Long Term Incentives During The Year*
Assessment | Benchmark | |||||
Award Date | Dates | Measure Tested | Result | AFIC Result | % Vested | % Forfeited |
ELTIP - Performance rights* | ||||||
1 July 2015 | 30 June 2019 | Total gross shareholder return | 10.1% | 6.2% | 0% | 50% |
Total portfolio return | 9.01% | 7.31% | 0% | 50% | ||
Investment team LTI | ||||||
1 July 2016 | 30 June 2020 | Gross return | 8.86% | 8.42% | 15.25% | 84.75% |
- Of the rights awarded on 1 July 2015, 100 per cent were forfeited as the targets were not achieved. For the Investment Team LTI, outperformance by Mirrabooka and AMCIL mean that some vesting occurred. See Table 15.
2. Structure of Remuneration
2.1 Fixed Annual Remuneration (FAR)
The FAR component of an Executive's remuneration comprises base salary, superannuation guarantee contributions and fringe benefits. Executives can elect to receive a portion of their FAR in form of additional superannuation contributions or fringe benefits. This will not affect the gross amount payable by the Group.
2.2 Annual Incentive
Table 5 below outlines the key terms and conditions of the annual incentive plan.
Table 5: Annual Incentives - Key Terms and Conditions
Managing Director | Other Executives | |
Targeted % of FAR | 50% | 30% |
Objectives | Align remuneration with the creation of shareholder wealth over the past year and over a longer period. | |
Measures reflect the management of the Group and the other investment companies, as well as the | ||
key investment returns that reflect the creation of shareholder wealth. | ||
Performance measures | • Company performance (43 per cent) | |
• Investment performance (37 per cent): | ||
• Personal objectives (20 per cent) | ||
• See Table 11 for details | ||
Relative weightings of | AFIC: 53 per cent | |
investment companies | Djerriwarrh Investments Limited: 16 per cent | |
for investment related | AMCIL Limited: 4 per cent | |
performance | Mirrabooka Investments Limited: 7 per cent | |
Personal objectives: 20 per cent | ||
Delivery of award | Incentive is paid in cash, but 50 per cent of the after-tax amount received is used by recipients | |
to acquire shares in AFIC and the other investment companies which they agree to hold for | ||
minimum of 2 years. |
Performance measured in 2020 Some shorter term investment measures achieved but some longer term ones not. MER achieved but earnings per share down (see Tables 2 and 3 above).
Outcomes for 2020 | 54 per cent | Average 52 per cent |
(see Table 10 for details) | ||
The performance measures of each annual incentive plan are reviewed by the Remuneration Committee. The Committee may, from time to time, revise the performance conditions and weightings in order to better meet the objectives of the annual incentive policies. They may also change or suspend any part of the incentive payment arrangements. If relevant targets are not achieved but performance is close to the target, some of the incentive may be paid. This is noted as 'partially achieved' in Table 3. Where stretch levels of performance are achieved above target, then higher amounts may be paid. To date, total annual incentives paid to each Executive have never exceeded target.
For more detailed information about the annual incentive performance conditions and outcomes for 2020 please refer to Section B Annual Incentives: details of outcomes and conditions in the Appendix.
Australian Foundation Investment Company Limited | 21 | Annual Report 2020 |
Remuneration Report
continued
2.3 Long Term Incentive Plans (LTIP)
There are two LTI plans, one for the Executives (excluding the CIO) which is called the ELTIP, and one for the investment team, including the CIO. Mr Freeman continues to be eligible for awards made to him whilst he was CIO until 2021, the last grant having been made for the year ended 30 June 2018. Table 6 outlines the purpose and the key terms and conditions
of each plan.
Table 6: Long Term Incentives - Key Terms and Conditions
Executive ELTIP | ||
(Performance Rights) | Investment Team LTI Plan | |
Target | 50 per cent of targeted Annual Incentive | 20 per cent of FAR |
Objectives | Align remuneration with growth in shareholder wealth over a forward looking period of four years. | |
Reward outperformance. | ||
Performance measures | See Table 15 in the Appendix for details. | See Table 15 in the Appendix for details. |
Performance for awards | July 2015: 0 per cent vested (see Table 4). | July 2016: 15.25 per cent vested (see Table 4). |
tested in 2020 (Table 4) | ||
For more detailed information about the LTI plans and their performance conditions, including vesting schedules and outcomes for 2020, please refer to Section C Long Term Incentives: details of outcomes and conditions in the Appendix.
3. Executive Remuneration Expense
This section discloses the remuneration expense recognised under accounting standards for each executive (Table 7). These amounts are different to the remuneration outcomes disclosed in Table 1 as noted in that table.
Table 7: Remuneration Expense
Long Term | ||||||||
Post- | Share-based | |||||||
Short Term | employment | Short Term | Payments | Other | % | |||
Base | Super- | Total Fixed | Annual | LTI Cash- | Long Term | Total | Fixed/ | |
Salary | annuation | Remuneration | Incentives | settled* | Payments* | Remuneration | Performance | |
$ | $ | $ | $ | $ | $ | $ | Related | |
Mark Freeman - Managing Director | ||||||||
2020 | 842,000 | 25,000 | 867,000 | 232,443 | 117,747 | (100,800) | 1,116,390 | 78%/22% |
2019 | 825,000 | 25,000 | 850,000 | 230,987 | 75,114 | (57,025) | 1,099,076 | 77%/23% |
Andrew Porter - Chief Financial Officer | ||||||||
2020 | 655,000 | 25,000 | 680,000 | 108,344 | 3,818 | - | 792,162 | 86%/14% |
2019 | 641,507 | 25,000 | 666,507 | 106,814 | 14,168 | - | 787,489 | 85%/15% |
Geoff Driver - General Manager - Business Development and Investor Relations | ||||||||
2020 | 535,000 | 25,000 | 560,000 | 87,881 | 3,134 | - | 651,015 | 86%/14% |
2019 | 524,201 | 25,000 | 549,201 | 88,015 | 11,744 | - | 648,960 | 85%/15% |
Matthew Rowe - Company Secretary | ||||||||
2020 | 251,142 | 23,858 | 275,000 | 43,238 | 41,951 | - | 360,189 | 76%/24% |
2019 | 230,101 | 21,899 | 252,000 | 40,310 | 31,898 | - | 324,208 | 78%/22% |
* Includes amounts credited for non-vesting.
Australian Foundation Investment Company Limited | 22 | Annual Report 2020 |
4. Contract Terms
Each Executive is employed under an open-ended contract, the terms of which can be varied by mutual agreement. There are no contractual provisions for cessation of employment other than statutory requirements. Either the Company or the Executive can give notice in accordance with statutory requirements. There are no specific payments to be made as a consequence of termination beyond those required by statute. Should there be any payments, these will be at the Board's discretion.
Material breaches of the terms of employment will normally result in the termination of an Executive's employment.
5. Non-Executive Director Remuneration
Shareholders approve the maximum aggregate amount of remuneration per year available to be allocated between Non-Executive Directors (NEDs) as they see fit. In proposing the amount for consideration by shareholders, the Remuneration Committee takes into account the time demands made on Directors together with such factors as the general level of fees paid to Australian corporate directors.
For NEDs, who are charged with the responsibility of oversight of the Company's activities, a fixed annual fee is paid with no element of performance-related pay.
The amount approved at the AGM in October 2019 was $1,250,000 per annum, which is the maximum amount that may be paid in total to all NEDs. Retirement allowances for Directors were frozen at 30 June 2004.
On appointment, the Company enters into a deed of access and indemnity with each NED. There are no termination payments due at the cessation of office, and any Director may retire or resign from the Board, or be removed by a resolution of shareholders.
The amounts paid to each NED, and the figures for the corresponding period, are set out in Table 8.
Australian Foundation Investment Company Limited | 23 | Annual Report 2020 |
Remuneration Report
continued
Table 8: Non-Executive Director Remuneration
Primary | Post | ||
(Fee/Base | Employment | Total | |
Salary) | (Superannuation) | Remuneration | |
$ | $ | $ | |
J Paterson - Chairman from 9 October 2018 | |||
2020 | 178,080 | 16,920 | 195,000 |
2019 | 149,940 | 14,244 | 164,184 |
TA Campbell AO - Chairman (retired 9 October 2018) | |||
2019 | 47,679 | 4,530 | 52,209 |
RE Barker - Non-Executive Director | |||
2020 | 89,040 | 8,460 | 97,500 |
2019 | 86,758 | 8,242 | 95,000 |
RP Dee-Bradbury - Non-Executive Director (appointed 6 May 2019) | |||
2020 | 93,270 | 4,230 | 97,500 |
2019 | 13,347 | 1,268 | 14,615 |
JC Hey - Non-Executive Director (retired 18 January 2019) | |||
2019 | 47,623 | 4,524 | 52,147 |
GR Liebelt - Non-Executive Director | |||
2020 | 89,040 | 8,460 | 97,500 |
2019 | 86,758 | 8,242 | 95,000 |
DA Peever - Non-Executive Director | |||
2020 | 89,040 | 8,460 | 97,500 |
2019 | 86,758 | 8,242 | 95,000 |
CM Walter AM - Non-Executive Director | |||
2020 | 89,040 | 8,460 | 97,500 |
2019 | 86,758 | 8,242 | 95,000 |
PJ Williams- Non-Executive Director | |||
2020 | 89,040 | 8,460 | 97,500 |
2019 | 86,758 | 8,242 | 95,000 |
Total remuneration of Non-Executive Directors | |||
2020 | 716,550 | 63,450 | 780,000 |
2019 | 692,379 | 65,776 | 758,155 |
Amounts Payable on Retirement
The amounts payable to the current NEDs who were in office at 30 June 2004, which will be paid when they retire, are set out in Table 9. These amounts were expensed in prior years as the retirement allowances accrued.
Table 9: Non-Executive Director Retirement Allowance
Amount Payable on Retirement $ | |
CM Walter AM | 42,385 |
Total | 42,385 |
Australian Foundation Investment Company Limited | 24 | Annual Report 2020 |
Appendix
A. Remuneration Governance
Responsibilities of the Board and the Remuneration Committee
It is the Board's responsibility to review and approve the recommendations of the Remuneration Committee.
For more information, the Charter of the Board is available on the Company's website.
The Remuneration Committee's primary responsibilities include:
- reviewing the level of fees for NEDs and the Chairman;
- reviewing the Managing Director's remuneration arrangements;
- evaluating the Managing Director's performance;
- reviewing the remuneration arrangements for other Senior Executives;
- monitoring legislative developments with regards to Executive remuneration; and
- monitoring the Group's compliance with requirements in this area.
For more information, the Charter of the Remuneration Committee is available on the Company's website.
The Remuneration Committee is composed of three NEDs (GR Liebelt (Chairman), J Paterson and CM Walter AM) and meets at least twice per year.
Policy on Hedging
The Company provides no lending or leveraging arrangements to its Executives, who are prohibited by Company policy from entering into hedging arrangements that mitigate the possibility that 'at risk' incentive payments may not vest.
Use of Remuneration Consultants
The Remuneration Committee has appointed Ernst & Young to provide it with advice about Executive remuneration. The Remuneration Committee uses Ernst & Young from time to time, as it sees fit, to independently test management's recommendations.
Specifically, Ernst & Young would provide advice on:
- proposed remuneration levels and remuneration structure for the Managing Director;
- proposed remuneration levels and remuneration structure for the Managing Director's direct reports; and
- proposed remuneration levels of NEDs.
No reports or recommendations were requested by the Committee or the Board for the year ended 30 June 2020 other than a review of benchmarking for Non-Executive Directors, which is not considered by Ernst & Young as a remuneration recommendation under the Corporations Act. The Board is satisfied that these arrangements seek to ensure that any remuneration recommendations made by remuneration consultants are free from influence by management.
The use of the remuneration advisers by management is limited to specific areas to seek to ensure that the independent advice that the Remuneration Committee receives is not perceived as having been compromised by management.
Ernst & Young are separately engaged by management to report on the following:
- trends in remuneration for the sectors in which the Group operates (provision of market practice data);
- the relative positioning of the remuneration of the Group's employees (including Executives) within those sectors;
- proposed remuneration levels for employees other than designated Senior Executives; and
- advice on the operation of the incentive plans (e.g., tax and accounting advice).
Australian Foundation Investment Company Limited | 25 | Annual Report 2020 |
Remuneration Report
continued
The Managing Director then makes recommendations to the Remuneration Committee with regards to the remuneration levels and structure of the KMP.
Ernst & Young also reviews the calculations used in determining the vesting of awards and certifies them as being correct and in accordance with the terms and conditions of the ELTIP.
Ernst & Young were paid $14,729 (inclusive of GST) during the year ended 30 June 2020 for other general remuneration advice which consisted of a report on the benchmarking of fees for Non-Executive Directors in the Australian marketplace (2019: $0) and during the year the Group also paid $111,210 for other professional advice received which included acting as the internal auditor for AICS and general taxation and accountancy advice (2018: $183,464)(all including GST).
Ernst & Young were remunerated on an invoiced basis, based on work performed.
The Company also participates in the annual McLagan and FIRG surveys of fund managers to understand current remuneration levels and practices.
B. Annual Incentives: Details of Outcomes and Conditions
Table 10 below shows the annual incentives paid to individual Executives as a result of AFIC's and the other investment companies' performance on financial metrics and the individual's achievement of their own personal objectives. Table 11 sets out the detailed terms and conditions of the annual incentives. For a high-level summary see Section 2.2 and Table 5 of the main part of the Remuneration Report.
Table 10: Annual Incentive Outcomes
Executive | % of Target Paid | $ Paid | % of Target Forfeited | $ Forfeited |
Mark Freeman | 54% | $232,443 | 46% | $201,057 |
Andrew Porter | 53% | $108,344 | 47% | $95,656 |
Geoff Driver | 52% | $87,881 | 48% | $80,109 |
Matthew Rowe | 52% | $43,238 | 48% | $39,262 |
Table 11: Executive Annual Incentive Performance Conditions
Performance Areas | ||
and Relative Weighting | Performance Measures | Objectives These Measures Aim to Achieve |
Company performance (43 per cent) | • Relative total shareholder return (TSR): | • TSR: This is a direct measure of the |
The relevant weightings of the | TSR is the movement in share price plus the | increase in shareholder's wealth against |
investment companies are: | dividends paid by the Company assumed to | the performance of the Index. |
• AFIC: 66.25 per cent | be reinvested. TSR performance is measured | • Growth in net profit per share reflects the |
• Djerriwarrh Investments Limited: | against the S&P/ASX 200 Accumulation | ability of the Company to meet its stated |
Index over 1, 3, 5, 8 and 10 year periods | ||
aim of 'paying out dividends which, over | ||
20 per cent | ||
(Combined Mid Cap 50 and Small Ordinaries | ||
time, grow faster than the rate of inflation.' | ||
• AMCIL Limited: 5 per cent | ||
for Mirrabooka). | ||
• MER reflects the costs of running | ||
• Mirrabooka Investments Limited: | • Growth in net profit per share: measured | |
the Company. | ||
8.75 per cent | against CPI. | |
• Management expense ratio (MER): measured | ||
against prior years' results or, in the case | ||
of AFIC, measured against a base of | ||
0.19 per cent. |
Australian Foundation Investment Company Limited | 26 | Annual Report 2020 |
Performance Areas | ||
and Relative Weighting | Performance Measures | Objectives These Measures Aim to Achieve |
Investment performance (37 per cent) | • Relative investment return: measure of the | The NEDs consider that the metrics used |
The relevant weightings of the | return on the portfolio invested (including | equate, over the medium to long term, with |
cash) over the previous 1, 3, 5, 8 and | the stated objectives of the Company, namely | |
investment companies are: | ||
10 years, relative to the S&P/ASX 200 | 'to provide attractive total returns and pay | |
• AFIC: 66.25 per cent | ||
Accumulation Index (Combined Mid Cap 50 | dividends, which, over time, grow faster than | |
• Djerriwarrh Investments Limited: | and Small Ordinaries for Mirrabooka). | the rate of inflation'. |
20 per cent | • Gross return (GR): measure of the movement | • Investment return: reflects the returns |
• AMCIL Limited: 5 per cent | in the net asset backing of the Company | generated by the mix of the investments |
• Mirrabooka Investments Limited: | (per share) plus the dividends assumed to | that the Company has invested in. |
8.75 per cent | be reinvested grossed up for franking credits | These reflect the value added to |
over the previous 1, 3, 5, 8 and 10 years. | shareholders wealth by the investment | |
This return is compared to the S&P/ASX 200 | decisions of the Company. | |
Accumulation Index grossed up for franking | • Gross return (GR): reflects the movement | |
credits (Combined Mid Cap 50 and Small | ||
in the value of the underlying portfolio over | ||
Ordinaries for Mirrabooka). | ||
the period with the additional recognition | ||
• Risk/reward return: This is a measure | ||
of the importance of franking credits. | ||
over 1, 3, 5, 8 and 10 years of the past | • Risk/reward return: best reflects the | |
performance of the Company, compared to | ||
return of the portfolio against the risks | ||
the performance of the Company's peers | ||
to shareholders of investing in the | ||
(i.e. investment funds) as reported by Mercer. | ||
companies selected. | ||
(Note: this measure is used for AFIC's | ||
performance only, reflecting that Company's | Note: The Remuneration Committee has discretion | |
focus on producing stable returns over the | ||
to determine, at the time of the review, what it | ||
medium to long term). | ||
considers to be the appropriate level of return | ||
to be used. |
Personal objectives (20 per cent) | Includes: |
• advice to the Board; | |
• succession planning; | |
• management of staff; | |
• risk management; | |
• promotion of the corporate culture; and | |
• satisfaction of key internal stakeholders. | |
These measures all contribute to the efficient | |
running of the Group, and the other investment | |
companies, enhancing investment outcomes. |
Personal objectives are included in incentive calculations to encourage out-performance on non-financial metrics. These metrics can be important determinants of business success in the medium term. The Managing Director reviews the performance of each Executive with the Remuneration Committee, and the Remuneration Committee alone determines how the Managing Director
is performing against these objectives.
Australian Foundation Investment Company Limited | 27 | Annual Report 2020 |
Remuneration Report
continued
C. Long Term Incentives: Details of Outcomes and Conditions
This section shows the outstanding cash bonuses under the ELTIP and the investment team LTI schemes (Table 12). It also explains the detailed terms and conditions of the two LTIs that are currently in operation (Table 13). For a high-level overview see Section 2.3 of the main body of the Remuneration Report.
Table 12: Vesting of ELTIP and Investment Team LTI
Award Vested | Value Yet | |||||||
Value at | Number | Value Per | for the Year | to Vest | ||||
ELTIP | Vesting Date Subject to | Award Date | of Rights | Right | Number of | 30 June 2020 | ||
Award Date | Performance Hurdles | $ | Awarded | $ | Rights/% | $ | ||
Ross Barker - Managing Director (until 31 December 2017) | ||||||||
1 | July 2015 | 30 June 2019 | $182,325 | 29,459 | $6.189 | 0/0% | - | |
1 | July 2016 | 30 June 2020 | $185,975 | 33,205 | $5.601 | - | $239,350 | |
1 | July 2017 | 30 June 2021 | $92,888 | 16,153 | $5.757 | - | $111,669 | |
$351,019 | ||||||||
Mark Freeman - Managing Director (from 1 January 2018) | ||||||||
1 | Jan 2018 | 30 June 2021 | $85,000 | 14,765 | $5.757 | - | $102,077 | |
1 | July 2018 | 30 June 2022 | $170,000 | 27,974 | $6.077 | - | $185,844 | |
1 | July 2019 | 30 June 2023 | $173,400 | 28,217 | $6.145 | - | $177,995 | |
$465,916 | ||||||||
Andrew Porter - Chief Financial Officer | ||||||||
1 | July 2015 | 30 June 2019 | $93,750 | 15,148 | $6.189 | 0/0% | - | |
1 | July 2016 | 30 June 2020 | $95,625 | 17,074 | $5.601 | - | $123,069 | |
1 | July 2017 | 30 June 2021 | $98,016 | 17,026 | $5.757 | - | $117,707 | |
1 July 2018 | 30 June 2022 | $99,976 | 16,451 | $6.077 | - | $109,294 | ||
1 July 2019 | 30 June 2023 | $102,000 | 16,598 | $6.145 | - | $104,703 | ||
$454,773 | ||||||||
Geoff Driver - General Manager - Business Development and Investor Relations | ||||||||
1 July 2015 | 30 June 2019 | $77,250 | 12,482 | $6.189 | 0/0% | - | ||
1 July 2016 | 30 June 2020 | $78,795 | 14,069 | $5.601 | - | $101,409 | ||
1 July 2017 | 30 June 2021 | $80,765 | 14,030 | $5.757 | - | $96,991 | ||
1 July 2018 | 30 June 2022 | $82,380 | 13,556 | $6.077 | - | $90,058 | ||
1 July 2019 | 30 June 2023 | $84,000 | 13,669 | $6.145 | - | $86,226 | ||
$374,684 | ||||||||
Matthew Rowe - Company Secretary (joined 11 July 2016) | ||||||||
11 July 2016 | 30 June 2020 | $30,000 | 5,356 | $5.601 | - | $38,610 | ||
1 July 2017 | 30 June 2021 | $35,250 | 6,123 | $5.757 | - | $42,332 | ||
1 July 2018 | 30 June 2022 | $37,800 | 6,220 | $6.077 | - | $41,323 | ||
1 July 2019 | 30 June 2023 | $41,250 | 6,713 | $6.145 | $42,343 | |||
$164,608 | ||||||||
Value Yet | ||||||||
Target | Award Vested for the Year | to Vest | ||||||
Investment Team | Vesting Date Subject to | Amount | 30 June 2020 | |||||
LTI Award Date | Performance Hurdles | $ | $ | % | $ | |||
Mark Freeman - Chief Investment Officer (Investment team LTI) - until 31 December 2017 | ||||||||
1 | July 2016 | 30 June 2020 | $166,400 | $25,376 | 15.25% | - | ||
1 | July 2017 | 30 June 2021 | $83,200 | - | - | $83,200 | ||
$83,200 |
The total value of the two LTIP plans for Mr Freeman that are yet to vest is $549,116.
See Table 1 for actual amounts vested and Table 4 for details of vesting calculations.
Australian Foundation Investment Company Limited | 28 | Annual Report 2020 |
The value of the outstanding ELTIP performance rights as in the table above was estimated at 30 June 2020 using the Total Share Return (TSR - which includes dividends reinvested) based on a closing price on 30 June 2020 of AFI shares of $6.09 (the TSR for AFI at 30 June 2020 was 6.54 per cent p.a. for four years, 6.07 per cent p.a. for three years, 4.00 per cent for two years and 1.22 per cent for one year). The value of the investment team LTI that is yet to vest is the target amount. Actual amounts awarded may exceed this amount, depending on performance over the four-year vesting period.
No vesting of the 2019 Investment Team Long Term Incentive Plan was made during the year due to underperformance. 100 per cent was forfeited. 15.25 per cent of the 2020 LTIP will be paid in the year ended 30 June 2021.
Table 13: Long Term Incentive Plans
ELTIP (Performance Rights)
Nature of grant | Rights to receive cash that must then be used by the Executives to acquire AFIC shares on market. | |
Performance conditions | 1. Total gross shareholder return (50 per cent): the movement in the AFIC share price and the Index price, | |
grossed up to reflect the value of franking credits. This is compared to that of the market such that only | ||
outperformance is rewarded. Outperformance of this index over time should be an indicator of the value | ||
added by the Company to shareholders' wealth. Both the Company's return and the Index return are | ||
smoothed over 30 days to remove excess volatility. | ||
2. Total portfolio return (50 per cent): the movement in the net asset backing of the Company (per share) | ||
plus the dividends paid by the Company reinvested. This compares AFIC's investment performance | ||
against that of other fund managers (based on the Mercer Investment Consulting Survey of Australian | ||
Retail Fund Managers which provides the industry benchmark of funds management performance over | ||
the relevant period), so that only outperformance relative to its peers is rewarded. | ||
Vesting schedule: | Company performance relative to gross | |
total gross | accumulation index | Percentage of rights vesting |
shareholder return | Underperformance | 0 per cent |
< or = 20 per cent outperformance | Straight line between 25 per cent and 50 per cent | |
> 20 per cent outperformance | 50 per cent | |
Vesting schedule: | Company performance | Percentage of rights vesting |
total portfolio return | Less than median performance | 0 per cent |
Median to < or = 75th percentile | Straight line between 25 per cent and 50 per cent | |
> 75 per cent percentile | 50 per cent | |
Valuation of | At 1 July each year, the 30-day volume weighted average price of AFIC shares up to, but not including | |
performance rights | 1 July will be calculated. The amount of ELTIP available will then be divided by this average price to | |
determine the number of performance rights that may vest in four years' time. | ||
The value of the performance rights will be adjusted each year by the total shareholder return for the year, | ||
calculated based on the 30-day volume weighted average price of AFIC shares up to 1 July. At vesting | ||
time, the value of the performance rights that will vest is converted to cash, based on the value of the | ||
rights at that time. | ||
Accounting treatment | Under current accounting standards, the ELTIP scheme is classified as a cash-settled scheme. | |
The expected amount payable upon vesting must therefore be estimated each year and adjusted not |
only for the likelihood of vesting but also for changes in the value of the performance rights. In the first year, 25 per cent of the expected amount payable will be booked as an expense. At the end of the second year, 50 per cent of the new expected final value less the amount booked in the previous year will be booked. At the end of the third year, 75 per cent of the total, estimated final value less amounts previously expensed will be booked. At the end of the fourth year, the actual liability will be calculated and a balancing adjustment made.
Australian Foundation Investment Company Limited | 29 | Annual Report 2020 |
Remuneration Report
continued
Investment Team LTI Plan
Nature of grant | Cash or shares, at discretion of the Company. | |
Performance condition | Gross return which measures the movement in the net asset backing of the Company (per share) plus the | |
dividends assumed to be reinvested grossed up for franking credits. This return is compared to the relevant | ||
accumulating index as set out below. | ||
Indices which | Investment portfolio | Relevant accumulation index |
investment portfolios | AFIC (60 per cent) | S&P/ASX 200 Accumulation Index, |
are assessed against | grossed up for franking credits | |
Djerriwarrh Investments Limited (25 per cent) | S&P/ASX 200 Accumulation Index, | |
grossed up for franking credits |
Mirrabooka Investments Limited (10 per cent)
S&P/ASX Mid Cap 50 Accumulation Index and the S&P/ASX Small Ordinaries Accumulation Index, grossed up for franking credits
AMCIL Limited (5 per cent)
S&P/ASX 200 Accumulation Index, grossed up for franking credits
Vesting schedule: | Company performance relative to | |
Company gross return | the relevant accumulation index | Percentage of rights vesting |
< 90 per cent performance | 0 per cent | |
90 - 99 per cent performance | Board discretion | |
> 100 per cent up to 110 per cent performance | Straight line between 50 per cent and 100 per cent | |
> 110 per cent up to 120 per cent performance | Straight line between 100 per cent and 150 per cent | |
120 per cent + performance | 150 per cent |
D. Directors and Executives: Equity Holdings and Other Transactions
Tables 14 sets out reconciliations of shares and convertible notes issued by the Group and held directly, indirectly or beneficially by Non-Executive Directors and Executives of the Group, or by entities to which they were related.
Table 14: Shareholdings of Directors and Executives
Opening | Changes | Closing | |
Balance | During Year | Balance | |
J Paterson | 606,943 | 5,184 | 612,127 |
RM Freeman | 147,750 | 6,325 | 154,075 |
RE Barker | 904,862 | 3,911 | 908,773 |
RP Dee-Bradbury | 0 | 14,213 | 14,213 |
GR Liebelt | 463,463 | 64,245 | 527,708 |
DA Peever | 30,309 | 1,130 | 31,439 |
CM Walter | 341,124 | 12,724 | 353,848 |
PJ Williams | 69,422 | 17,000 | 86,422 |
GN Driver | 136,047 | 3,070 | 139,117 |
MJ Rowe | 2,240 | 1,584 | 3,824 |
AJB Porter | 182,920 | (12,164) | 170,756 |
Australian Foundation Investment Company Limited | 30 | Annual Report 2020 |
Other Arrangements with Non-Executive Directors
Non-Executive Directors Ross Barker, John Paterson and Catherine Walter have rented office space and, for Ross Barker and John Paterson, a parking space from the Group at commercial rates during the year. Sub-lease rental income (included in revenue) received or receivable, excluding GST, by the Group during the year was:
Rental Income | |
Received/Receivable | |
$ | |
RE Barker | 20,852 |
J Paterson | 26,921 |
CM Walter | 14,492 |
E. Changes to Remuneration Metrics and Allocations With Effect From the Financial Year Ended 30 June 2021
The structure of the split between fixed, annual incentive and long term will remain consistent. There will be some minor variation to the cost of the FAR charged to each LIC.
20 per cent of the annual incentive will remain based on personal objectives and will be charged to the LICs on the basis of the fixed annual remuneration.
The remaining 80 per cent of the annual incentive will be based on the performance of the LICs. Total share return will no longer be used as a metric for the annual incentive. However, the long term incentive will move from being 50 per cent grossed up TSR and 50 per cent NTA accumulation vs peer group to 100 per cent grossed up TSR.
For the annual incentive, investment return, NTA gross return and the MER will remain as key components. For AFIC and DJW only, operating EPS growth will remain as a measure, as they are more directly related to the amount of dividend that is paid, whereas the operating EPS for MIR and AMH is less reflective of their objectives. The actual growth of the dividend paid will also be considered for AFI and DJW. Reward/risk will no longer be utilised as the results of this are effectively included in the investment and NTA returns over the longer periods. Dividend yield will be a measure for the DJW portion of the annual incentive.
The proportion of annual incentive borne by MIR and AMH will increase and consequently that borne by AFI will decrease.
The proportion of annual incentive that vests due to the results of each LIC will be charged directly to that LIC in the year following the year for which the award is made - i.e. on a lagging basis. The effects of this will therefore be noted in the following year's MER.
Australian Foundation Investment Company Limited | 31 | Annual Report 2020 |
Remuneration Report
continued
F. Detailed Performance Measures by Investment Company
Table 15 shows the performance of AFIC and the other investment companies over the past five years, including details of total shareholder return (TSR), total portfolio return (TPR) and gross return (GR). These measures, which represent growth in shareholder wealth, determine the vesting of AFIC's LTI plans to Executives and the investment team.
Table 15: Detailed Performance Measures for AFIC and the Other Investment Companies
10-year | 8-year5-year | 4-year | 3-year | |||||||
Year Ending 30 June | Return | Return | Return | Return | Return | 2020 | 2019 | 2018 | 2017 | 2016 |
Comparative returns | ||||||||||
S&P/ASX 200 Accumulation | ||||||||||
Return | 7.8% | 9.3% | 6.0% | 7.4% | 5.2% | -7.7% | 11.6% | 13.0% | 14.1% | 0.6% |
Gross S&P/ASX 200 | ||||||||||
Accumulation Return | 9.4% | 10.9% | 7.5% | 8.9% | 6.7% | -6.6% | 13.4% | 14.6% | 15.7% | 2.2% |
Combined Midcap 50 | ||||||||||
and Small Ordinaries | ||||||||||
Accumulation Return | ||||||||||
(used for Mirrabooka | ||||||||||
Investments Limited) | 7.3% | 9.2% | 9.3% | 7.7% | 6.1% | -2.6% | 2.8% | 19.3% | 12.7% | 16.1% |
Gross Combined Midcap | ||||||||||
50 and Small Ordinaries | ||||||||||
Accumulation Return | ||||||||||
(used for Mirrabooka | ||||||||||
Investments Limited) | 8.3% | 10.2% | 10.4% | 8.7% | 7.1% | -1.9% | 3.8% | 20.4% | 13.8% | 17.2% |
AFIC | ||||||||||
Total shareholder return | 7.0% | 9.3% | 4.3% | 6.5% | 6.1% | 1.2% | 6.9% | 10.3% | 8.0% | -4.4% |
Total portfolio return | 7.4% | 8.5% | 4.8% | 6.5% | 4.8% | -4.7% | 9.0% | 10.8% | 11.7% | -1.6% |
Growth in net operating | ||||||||||
result per share | 0.9% | -0.1% | -6.1% | -4.4% | -2.7% | -41.5% | 44.1% | 9.6% | -9.6% | -12.4% |
Management expense ratio | n/a | n/a | n/a | n/a | n/a | 0.13% | 0.13% | 0.14% | 0.14% | 0.16% |
Risk/reward return1 | 41st/105 | 61st/119 70th/130 | 59th/130 | 46th/130 | 42nd/130 | 33rd/133 105th/156 119th/169 | n/a2 | |||
Gross return | 9.3% | 10.4% | 6.7% | 8.4% | 6.7% | -3.1% | 11.4% | 12.7% | 13.7% | 0.2% |
Investment return | 7.8% | 8.9% | 5.4% | 7.1% | 5.4% | -4.1% | 9.8% | 11.3% | 12.3% | -1.0% |
Djerriwarrh Investments Limited | ||||||||||
Total shareholder return | 1.7% | 1.1% | -6.1% | -5.7% | -6.4% | -22.0% | 8.4% | -2.8% | -3.8% | -7.7% |
Total portfolio return | 4.7% | 5.1% | 1.5% | 3.1% | 0.0% | -13.6% | 6.3% | 8.8% | 13.0% | -4.5% |
Growth in net operating | ||||||||||
profit per share | -4.9% | -4.1% | -10.2% | -10.2% | -7.2% | -26.0% | 3.7% | 5.7% | -19.9% | -10.0% |
Management expense ratio | n/a | n/a | n/a | n/a | n/a | 0.45% | 0.43% | 0.44% | 0.46% | 0.46% |
Gross return | 7.8% | 8.2% | 4.5% | 5.9% | 2.6% | -11.5% | 9.1% | 11.7% | 16.6% | -1.1% |
Investment return | 6.2% | 6.6% | 2.9% | 4.3% | 1.6% | -10.0% | 6.8% | 9.7% | 13.0% | -2.7% |
Operating earnings as a | ||||||||||
percentage of available | ||||||||||
investable assets | n/a | n/a | n/a | n/a | n/a | 6.1% | 7.0% | 7.1% | 7.1% | 8.7% |
- This represents the Company's ranking in the Mercer IDPS Australian Share Universe - i.e. 10th out of 71 funds. The period used is Year to May.
- n/a as cannot be calculated when return is negative.
Australian Foundation Investment Company Limited | 32 | Annual Report 2020 |
10-year8-year | 5-year | 4-year | 3-year | |||||||
Year Ending 30 June | Return | Return | Return | Return | Return | 2020 | 2019 | 2018 | 2017 | 2016 |
Mirrabooka Investments Limited | ||||||||||
Total shareholder return | 9.5% | 9.5% | 3.6% | 1.4% | 0.8% | -0.3% | -1.9% | 4.9% | 3.0% | 13.1% |
Total portfolio return | 10.3% | 10.5% | 8.1% | 7.1% | 7.1% | 5.3% | 1.8% | 14.7% | 7.1% | 12.0% |
Growth in net operating | ||||||||||
result per share | -2.8% | -5.3% | -4.8% | -9.5% | -6.9% | -29.2% | -14.9% | 35.7% | -17.8% | 16.6% |
Management expense ratio | n/a | n/a | n/a | n/a | n/a | 0.63% | 0.61% | 0.60% | 0.62% | 0.65% |
Gross return | 13.3% | 13.6% | 11.1% | 10.0% | 10.1% | 7.1% | 5.9% | 17.3% | 9.9% | 15.4% |
Investment return | 12.7% | 13.1% | 10.1% | 9.0% | 8.9% | 6.3% | 4.8% | 16.0% | 9.3% | 14.8% |
AMCIL Limited | ||||||||||
Total shareholder return | 9.7% | 9.1% | 5.9% | 4.5% | 6.4% | 11.2% | -0.7% | 9.1% | -1.2% | 11.8% |
Total portfolio return | 8.9% | 8.9% | 6.9% | 6.7% | 7.2% | 6.0% | 3.5% | 12.3% | 5.3% | 7.6% |
Growth in net operating | ||||||||||
result per share | -2.0% | -2.9% | -6.1% | -8.8% | 0.9% | -17.5% | 8.8% | 14.4% | -32.6% | 4.8% |
Management expense ratio | n/a | n/a | n/a | n/a | n/a | 0.66% | 0.72% | 0.69% | 0.68% | 0.65% |
Gross return | 11.2% | 11.4% | 9.1% | 8.9% | 9.6% | 7.6% | 7.0% | 13.9% | 7.0% | 9.7% |
Investment return | 11.0% | 11.1% | 8.6% | 8.5% | 8.9% | 7.2% | 5.8% | 14.0% | 7.1% | 9.3% |
Australian Foundation Investment Company Limited | 33 | Annual Report 2020 |
Non-audit Services
Details of non-audit services performed by the auditors may be found in Note F2 of the Financial Report.
The Board of Directors has considered the position and, in accordance with the advice received from the Audit Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons:
- all non-audit services have been reviewed by the Audit Committee to ensure they do not impact the impartiality and objectivity of the auditor; and
- none of the services undermine the general principles relating to auditor independence as set out in the Corporations Act 2001 including reviewing or auditing the auditor's own work, acting in a management or a decision-making capacity for the Company, acting as advocate for the Company, or jointly sharing economic risk and rewards.
A copy of the Auditor's Independence Declaration is set out on page 35.
This report is made in accordance with a resolution of the Directors.
John Paterson
Chairman
27 July 2020
Australian Foundation Investment Company Limited | 34 | Annual Report 2020 |
Auditor's Independence Declaration
Australian Foundation Investment Company Limited | 35 | Annual Report 2020 |
FINANCIAL STATEMENTS
- FINANCIAL STATEMENTS
- Consolidated Income Statement
- Consolidated Statement of
Comprehensive Income
- Consolidated Balance Sheet
- Consolidated Statement of Changes in Equity
- Consolidated Cash Flow Statement
- NOTES TO
THE FINANCIAL
STATEMENTS
43 A. Understanding AFIC's Financial Performance
43 A1. How AFIC Manages its Capital
- A2. Investments Held and How They Are Measured
- A3. Operating Income
- A4. Dividends Paid
- A5. Earnings Per Share
- B. Costs, Tax and Risk
- B1. Management Costs
- B2. Tax
- B3. Risk
- C. Unrecognised Items
- C1. Contingencies
51 D. Balance Sheet Reconciliations
- D1. Current Assets - Cash
- D2. Credit Facilities
- D3. Revaluation Reserve
- D4. Realised Capital Gains Reserve
- D5. Retained Profits
- D6. Shared Capital
- E. Income Statement Reconciliations
53 E1. Reconciliation of Net Cash Flows From Operating Activities to Profit
- E2. Tax Reconciliations
- F. Further Information
- F1. Related Parties
- F2. Remuneration of Auditors
- F3. Segment Reporting
- F4. Summary of Other Accounting Policies
57 F5. Performance Bond
- F6. Share-based Payments
- F7. Principles of Consolidation
- F8. Subsidiaries
- F9. Parent Entity Financial Information
Australian Foundation Investment Company Limited | 36 | Annual Report 2020 |
Consolidated Income Statement
For the Year Ended 30 June 2020
2020 | 2019 | ||
Note | $'000 | $'000 | |
Dividends and distributions | A3 | 257,858 | 433,009 |
Interest income from deposits | A3 | 1,554 | 3,615 |
Other revenue | A3 | 4,895 | 4,729 |
Total revenue | 264,307 | 441,353 | |
Net gains/(losses) on trading portfolio | A3 | 9,740 | (4,686) |
Income from operating activities | 274,047 | 436,667 | |
Finance costs | (1,047) | (826) | |
Administration expenses | B1 | (14,759) | (14,312) |
Profit before income tax expense | 258,241 | 421,529 | |
Income tax expense | B2, E2 | (17,846) | (15,156) |
Profit for the year | 240,395 | 406,373 | |
Profit is attributable to: | |||
Equity holders of Australian Foundation Investment Company Ltd | 239,931 | 405,932 | |
Minority interest | 464 | 441 | |
240,395 | 406,373 | ||
Cents | Cents | ||
Basic earnings per share | A5 | 19.88 | 34.00 |
This Income Statement should be read in conjunction with the accompanying notes.
Australian Foundation Investment Company Limited | 37 | Annual Report 2020 |
Consolidated Statement of Comprehensive Income
For the Year Ended 30 June 2020
Year to 30 June 2020 | Year to 30 June 2019 | |||||
Revenue1 | Capital1 | Total | Revenue | Capital | Total | |
$'000 | $'000 | $'000 | $'000 | $'000 | $'000 | |
Profit for the year | 240,395 | - | 240,395 | 406,373 | - | 406,373 |
Other comprehensive income | ||||||
Items that will not be recycled through | ||||||
the Income Statement | ||||||
Gains/(losses) for the period | - | (568,806) | (568,806) | - | 261,984 | 261,984 |
Tax on above | - | 167,602 | 167,602 | - | (86,616) | (86,616) |
Total other comprehensive income | - | (401,204) | (401,204) | - | 175,368 | 175,368 |
Total comprehensive income | 240,395 | (401,204) | (160,809) | 406,373 | 175,368 | 581,741 |
1. 'Capital' includes realised or unrealised gains or losses (and the tax on those) on securities in the investment portfolio, including non-equity investments held in the investment portfolio. Income in the form of distributions and dividends is recorded as 'revenue'. All other items, including expenses, are included in Profit for the year, which is categorised under 'revenue'.
Year to 30 June 2020 | Year to 30 June 2019 | |||||
Revenue | Capital | Total | Revenue | Capital | Total | |
$'000 | $'000 | $'000 | $'000 | $'000 | $'000 | |
Total comprehensive income | ||||||
is attributable to: | ||||||
Equity holders of Australian Foundation | ||||||
Investment Company Ltd | 239,931 | (401,204) | (161,273) | 405,932 | 175,368 | 581,300 |
Minority interests | 464 | - | 464 | 441 | - | 441 |
240,395 | (401,204) | (160,809) | 406,373 | 175,368 | 581,741 |
This Statement of Comprehensive Income should be read in conjunction with the accompanying notes.
Australian Foundation Investment Company Limited | 38 | Annual Report 2020 |
Consolidated Balance Sheet
As at 30 June 2020
2020 | 2019 | ||
Note | $'000 | $'000 | |
Current assets | |||
Cash | D1 | 111,318 | 206,429 |
Receivables | 17,347 | 40,128 | |
Trading portfolio | 4,304 | - | |
Total current assets | 132,969 | 246,557 | |
Non-current assets | |||
Investment portfolio | A2 | 7,117,970 | 7,572,640 |
Deferred tax assets | 872 | - | |
Total non-current assets | 7,118,842 | 7,572,640 | |
Total assets | 7,251,811 | 7,819,197 | |
Current liabilities | |||
Payables | 884 | 932 | |
Tax payable | 30,771 | 17,052 | |
Trading portfolio | - | 7,033 | |
Provisions | 4,765 | 4,114 | |
Total current liabilities | 36,420 | 29,131 | |
Non-current liabilities | |||
Provisions | 1,375 | 1,471 | |
Deferred tax liabilities | - | 100 | |
Deferred tax liabilities - investment portfolio | B2 | 973,499 | 1,163,749 |
Total non-current liabilities | 974,874 | 1,165,320 | |
Total liabilities | 1,011,294 | 1,194,451 | |
Net assets | 6,240,517 | 6,624,746 | |
Shareholders' equity | |||
Share capital | A1, D6 | 2,947,243 | 2,888,136 |
Revaluation reserve | A1, D3 | 2,166,030 | 2,561,314 |
Realised capital gains reserve | A1, D4 | 397,712 | 462,257 |
General reserve | A1 | 23,637 | 23,637 |
Retained profits | A1, D5 | 705,273 | 688,244 |
Parent entity interest | 6,239,895 | 6,623,588 | |
Minority interest | 622 | 1,158 | |
Total equity | 6,240,517 | 6,624,746 |
This Balance Sheet should be read in conjunction with the accompanying notes.
Australian Foundation Investment Company Limited | 39 | Annual Report 2020 |
Consolidated Statement of Changes in Equity
For the Year Ended 30 June 2020
Share | Revaluation | ||
Capital | Reserve | ||
Year Ended 30 June 2020 | Note | $'000 | $'000 |
Total equity at the beginning of the year | 2,888,136 | 2,561,314 | |
Dividends paid to shareholders | A4 | - | - |
- Dividend Reinvestment Plan | D6 | 59,249 | - |
Other share capital adjustments | (142) | - | |
Total transactions with shareholders | 59,107 | - | |
Profit for the year | - | - | |
Other comprehensive income (net of tax) | |||
Net losses for the period | - | (401,204) | |
Other comprehensive income for the year | - | (401,204) | |
Transfer to realised capital gains of cumulative losses on investments sold | - | 5,920 | |
Dividend paid to minority interests by AICS | - | - | |
Total equity at the end of the year | 2,947,243 | 2,166,030 | |
Share | Revaluation | ||
Capital | Reserve | ||
Year Ended 30 June 2019 | Note | $'000 | $'000 |
Total equity at the beginning of the year | 2,811,721 | 2,422,568 | |
Dividends paid to shareholders | A4 | - | - |
- Dividend Reinvestment Plan | D6 | 76,556 | - |
Other share capital adjustments | (141) | - | |
Total transactions with shareholders | 76,415 | - | |
Profit for the year | - | - | |
Other comprehensive income (net of tax) | |||
Net gains for the period | - | 175,368 | |
Other comprehensive income for the year | - | 175,368 | |
Transfer to realised capital gains of cumulative gains on investments sold | - | (36,622) | |
Total equity at the end of the year | 2,888,136 | 2,561,314 |
This Statement of Changes in Equity should be read in conjunction with the accompanying notes.
Australian Foundation Investment Company Limited | 40 | Annual Report 2020 |
Realised | General | Retained | Total | Minority | |
Capital Gains | Reserve | Profits | Parent Entity | Interest | Total |
$'000 | $'000 | $'000 | $'000 | $'000 | $'000 |
462,257 | 23,637 | 688,244 | 6,623,588 | 1,158 | 6,624,746 |
(58,625) | - | (222,902) | (281,527) | - | (281,527) |
- | - | - | 59,249 | - | 59,249 |
- | - | - | (142) | - | (142) |
(58,625) | - | (222,902) | (222,420) | - | (222,420) |
- | - | 239,931 | 239,931 | 464 | 240,395 |
- | - | - | (401,204) | - | (401,204) |
- | - | - | (401,204) | - | (401,204) |
(5,920) | - | - | - | - | - |
- | - | - | - | (1,000) | (1,000) |
397,712 | 23,637 | 705,273 | 6,239,895 | 622 | 6,240,517 |
Realised | General | Retained | Total | Minority | |
Capital Gains | Reserve | Profits | Parent Entity | Interest | Total |
$'000 | $'000 | $'000 | $'000 | $'000 | $'000 |
448,892 | 23,637 | 631,725 | 6,338,543 | 717 | 6,339,260 |
(23,257) | - | (349,413) | (372,670) | - | (372,670) |
- | - | - | 76,556 | - | 76,556 |
- | - | - | (141) | - | (141) |
(23,257) | - | (349,413) | (296,255) | - | (296,255) |
- | - | 405,932 | 405,932 | 441 | 406,373 |
- | - | - | 175,368 | - | 175,368 |
- | - | - | 175,368 | - | 175,368 |
36,622 | - | - | - | - | - |
462,257 | 23,637 | 688,244 | 6,623,588 | 1,158 | 6,624,746 |
Australian Foundation Investment Company Limited | 41 | Annual Report 2020 |
Consolidated Cash Flow Statement
For the Year Ended 30 June 2020
2020 | 2019 | ||
$'000 | $'000 | ||
Inflows/ | Inflows/ | ||
Note | (Outflows) | (Outflow) | |
Cash flows from operating activities | |||
Sales from trading portfolio | 39,663 | 39,599 | |
Purchases for trading portfolio | (25,160) | (28,964) | |
Interest received | 1,573 | 3,663 | |
Dividends and distributions received | 255,492 | 366,436 | |
271,568 | 380,734 | ||
Other receipts | 5,095 | 5,117 | |
Administration expenses | (14,403) | (14,875) | |
Finance costs paid | (1,047) | (826) | |
Taxes paid | (6,578) | (18,388) | |
Net cash inflow/(outflow) from operating activities | E1 | 254,635 | 351,762 |
Cash flows from investing activities | |||
Sales from investment portfolio | 589,059 | 810,462 | |
Purchases for investment portfolio | (694,841) | (752,440) | |
Taxes paid on capital gains | (20,394) | (6,406) | |
Net cash inflow/(outflow) from investing activities | (126,176) | 51,616 | |
Cash flows from financing activities | |||
Net bank borrowings | - | (100) | |
Share issue transaction costs | (142) | (141) | |
Dividends paid | (223,428) | (295,891) | |
Net cash inflow/(outflow) from financing activities | (223,570) | (296,132) | |
Net increase/(decrease) in cash held | (95,111) | 107,246 | |
Cash at the beginning of the year | 206,429 | 99,183 | |
Cash at the end of the year | D1 | 111,318 | 206,429 |
For the purpose of the Cash Flow Statement, 'cash' includes cash and deposits held at call.
This Cash Flow Statement should be read in conjunction with the accompanying notes.
Australian Foundation Investment Company Limited | 42 | Annual Report 2020 |
NOTES TO THE FINANCIAL STATEMENTS
A. Understanding AFIC's Financial Performance
A1. How AFIC Manages its Capital
AFIC's objective is to provide shareholders with attractive investment returns through access to a growing stream of fully franked dividends and enhancement of capital invested.
AFIC recognises that its capital will fluctuate with market conditions. In order to manage those fluctuations, the Board may adjust the amount of dividends paid, issue new shares, buy back the Company's shares or sell assets.
AFIC's capital consists of its shareholders' equity plus any net borrowings. A summary of the balances in equity is provided below:
2020 | 2019 | |
$'000 | $'000 | |
Share capital | 2,947,243 | 2,888,136 |
Revaluation reserve | 2,166,030 | 2,561,314 |
Realised capital gains reserve | 397,712 | 462,257 |
General reserve | 23,637 | 23,637 |
Retained profits | 705,273 | 688,244 |
6,239,895 | 6,623,588 |
Refer to Notes D3-D6 for a reconciliation of movement from period to period for each equity account (except the general reserve, which is historical, relates to past profits which can be distributed and has had no movement).
A2. Investments Held and How They Are Measured
AFIC has two portfolios of securities: the investment portfolio and the trading portfolio.
The investment portfolio holds securities which the Company intends to retain on a long term basis, and includes a small sub-component over which options may be written. The trading portfolio consist of securities that are held for short term trading only, including call option contracts written over securities that are held in the specific sub-component of the investment portfolio and on occasion put options and is relatively small in size. The Board has therefore focused the information in this section on the investment portfolio. Details of all holdings (except for the specific option holdings) as at the end of the reporting period can be found at the end of the Annual Report.
The balance and composition of the investment portfolio was: | ||
2020 | 2019 | |
$'000 | $'000 | |
Equity instruments (excluding below) at market value | 6,661,720 | 7,072,586 |
Equity instruments (over which options may be written) | 456,250 | 500,054 |
7,117,970 | 7,572,640 |
How Investments Are Shown in the Financial Statements
The accounting standards set out the following hierarchy for fair value measurement: Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices, which can be observed either directly (as prices) or indirectly (derived from prices).
Level 3: Inputs for the asset or liabilities that are not based on observable market data.
All financial instruments held by AFIC are classified as Level 1 (other than the options sold by the Company which are Level 2). Their fair values are initially measured at the costs of acquisition and then remeasured based on quoted market prices at the end of the reporting period.
Australian Foundation Investment Company Limited | 43 | Annual Report 2020 |
Notes to the Financial Statements
continued
Net Tangible Asset Backing Per Share
The Board regularly reviews the net asset backing per share both before and after provision for deferred tax on the unrealised gains in AFIC's long term investment portfolio. Deferred tax is calculated as set out in Note B2. The relevant amounts as at 30 June 2020 and 30 June 2019 were as follows:
30 June 2020 | 30 June 2019 | |
$ | $ | |
Net tangible asset backing per share | ||
Before tax | 5.96 | 6.49 |
After tax | 5.16 | 5.52 |
Equity Investments
The shares in the investment portfolio are designated under the accounting standards as financial assets measured at fair value through 'other comprehensive income' (OCI), because they are equity instruments held for long term capital growth and dividend income, rather than to make a profit from their sale. This means that changes in the value of these shares during the reporting period are included in OCI in the Consolidated Statement of Comprehensive Income. The cumulative change in value of the shares over time is then recorded in the revaluation reserve. On disposal, the amounts recorded in the revaluation reserve are transferred to the realisation reserve.
Securities Sold and How They Are Measured
Where securities are sold, any difference between the sale price and the cost is transferred from the revaluation reserve to the realisation reserve and the amounts noted in the Consolidated Statement of Changes in Equity. This means the Company is able to identify the realised gains out of which it can pay a 'Listed Investment Company' (LIC) gain as part of the dividend, which conveys certain taxation benefits to many of AFIC's shareholders.
During the period $584.6 million (2019: $782.0 million) of equity securities were sold. The cumulative loss on the sale of securities was
$5.9 million for the period after tax (2019: $36.6 million gain). This has been transferred from the revaluation reserve to the realisation reserve (see Consolidated Statement of Changes in Equity). These sales were accounted for at the date of trade.
A3. Operating Income
The total income received from AFIC's investments in 2020 is set out below. | ||
2020 | 2019 | |
Dividends and Distributions | $'000 | $'000 |
Income from securities held in investment portfolio at 30 June | 242,790 | 368,629 |
Income from investment securities sold during the year | 15,068 | 64,269 |
Income from securities held in trading portfolio at 30 June | - | - |
Income from trading securities sold during the year | - | 111 |
257,858 | 433,009 | |
Interest income | ||
Revenue from deposits and cash management trusts | 1,554 | 3,615 |
Other revenue | ||
Administration fees | 4,853 | 4,729 |
Other income | 42 | - |
4,895 | 4,729 |
Australian Foundation Investment Company Limited | 44 | Annual Report 2020 |
Dividend Income
Distributions from listed securities are recognised as income when those securities are quoted in the market on an ex-distribution basis. Capital returns on ordinary shares are treated as an adjustment to the carrying value of the shares.
Trading Income
Net gains on the trading and options portfolio are set out below. | ||
2020 | 2019 | |
$'000 | $'000 | |
Net gains | ||
Net realised gains/(losses) from trading portfolio - shares | 1,038 | 140 |
- options | 8,428 | (4,055) |
Unrealised gains/(losses) from trading portfolio - shares | 243 | - |
- options | 31 | (771) |
9,740 | (4,686) |
$108.4 million of shares are lodged with the ASX Clear Pty Ltd as collateral for sold option positions written by the Group (2019: $131.0 million). These shares are lodged with ASX Clear under the terms of ASX Clear Pty Ltd which require participants in the Exchange Traded Option market to lodge collateral, and are recorded as part of the Group's investment portfolio. If all call options were exercised, this would lead to the sale of $32.0 million worth of securities at an agreed price - the 'exposure' (2019: $218.4 million). There were no put options in the portfolio at 30 June (2019: $4.0 million exposure).
A4. Dividends Paid
The dividends paid and payable for the year ended 30 June 2020 are shown below: | ||
2020 | 2019 | |
$'000 | $'000 | |
(a) Dividends Paid During the Year | ||
Final dividend for the year ended 30 June 2019 of 14 cents fully franked at 30 per cent paid | ||
29 August 2019 (2019: 14 cents fully franked at 30 per cent paid on 31 August 2018). | 164,150 | 162,800 |
Interim dividend for the year ended 30 June 2020 of 10 cents per share fully franked | ||
at 30 per cent paid 24 February 2020 (2019: 10 cents fully franked at 30 per cent paid | ||
25 February 2019) | 117,377 | 116,594 |
Special dividend of 8 cents per share fully franked at 30 per cent paid 25 February 2019 | - | 93,276 |
281,527 | 372,670 | |
Dividends paid in cash | 222,278 | 296,114 |
Dividends reinvested in shares | 59,249 | 76,556 |
281,527 | 372,670 | |
Dividends forgone via DSSP | 7,111 | 7,946 |
(b) Franking Credits | ||
Opening balance of franking account at 1 July | 182,607 | 156,187 |
Franking credits on dividends received | 88,920 | 165,325 |
Tax paid during the year | 26,234 | 24,221 |
Franking credits paid on ordinary dividends paid | (120,654) | (159,716) |
Franking credits deducted on DSSP shares issued | (3,054) | (3,410) |
Closing balance of franking account | 174,053 | 182,607 |
Adjustments for tax payable in respect of the current year's profits and the receipt | ||
of dividends recognised as receivables | 33,803 | 25,702 |
Adjusted closing balance | 207,856 | 208,309 |
Impact on the franking account of dividends declared but not recognised as a liability | ||
at the end of the financial year: | (72,622) | (72,009) |
Net available | 135,234 | 136,300 |
These franking account balances would allow AFIC to frank additional dividend payments | ||
up to an amount of: | 315,546 | 318,033 |
AFIC's ability to continue to pay franked dividends is dependent upon the receipt of franked dividends from the trading and investment portfolios and on AFIC paying tax.
Australian Foundation Investment Company Limited | 45 | Annual Report 2020 |
Notes to the Financial Statements
continued
2020 | 2019 | |
$'000 | $'000 | |
(c) New Zealand Imputation Account | ||
(Figures in A$ at year-end exchange rate: 2020: $NZ1.071:$A1; 2019: $NZ1.045:$A1) | ||
Opening balance | 14,381 | 7,356 |
Imputation credits on dividends received | 7,187 | 7,384 |
Imputation credits on dividends paid | (13,074) | - |
Closing balance | 8,494 | 14,740 |
There will be no NZ imputation credit attached to the proposed dividend payable | ||
on 1 September 2020. | ||
(d) Dividends Declared After Balance Date | ||
Since the end of the year Directors have declared a final dividend of 14 cents per share | ||
fully franked at 30 per cent. The aggregate amount of the final dividend for the year to | ||
30 June 2020 to be paid on 1 September 2020, but not recognised as a liability at the | ||
end of the financial year is: | 169,451 | |
(e) Listed Investment Company Capital Gain Account | ||
Balance of the listed investment company (LIC) capital gain account: | 62,912 | 63,335 |
This equates to an attributable gain of: | 89,874 | 90,478 |
Distributed LIC capital gains may entitle certain shareholders to a deduction in their tax return, as set out in the dividend statement. LIC capital gains available for distribution are dependent on the disposal of investment portfolio holdings that qualify for LIC capital gains, or the receipt of LIC distributions from LIC securities held in the portfolios. $86.5 million attributable gain is attached to the final dividend to be paid on 1 September 2020.
A5. Earnings Per Share
The table below shows the earnings per share based on the profit for the year: | ||
2020 | 2019 | |
Basic Earnings Per Share | Number | Number |
Weighted average number of ordinary shares used as the denominator | 1,206,707,394 | 1,193,810,502 |
$'000 | $'000 | |
Profit for the year | 239,931 | 405,932 |
Cents | Cents | |
Basic earnings per share | 19.88 | 34.00 |
Australian Foundation Investment Company Limited | 46 | Annual Report 2020 |
B. Costs, Tax and Risk
B1. Management Costs
The total management expenses for the period are as follows: | ||
2020 | 2019 | |
$'000 | $'000 | |
Rental expense relating to non-cancellable leases | (699) | (698) |
Employee benefit expenses | (8,587) | (8,039) |
Depreciation charge | - | - |
Other administration expenses | (5,473) | (5,575) |
(14,759) | (14,312) |
Employee Benefit Expenses
A major component of employee benefit expenses is Directors' and Executives' remuneration. This has been summarised below:
Other | Post- | Share | |||
Short term | Long term | employment | Based | ||
Benefits | Benefits | Benefits | Payments | Total | |
$ | $ | $ | $ | $ | |
2020 | |||||
Non-Executive Directors | 716,550 | - | 63,450 | - | 780,000 |
Executives | 2,755,048 | (100,800) | 98,858 | 166,650 | 2,919,756 |
Total | 3,471,598 | (100,800) | 162,308 | 166,650 | 3,699,756 |
2019 | |||||
Non-Executive Directors | 692,379 | - | 65,776 | - | 758,155 |
Executives | 2,686,935 | (57,025) | 96,899 | 77,662 | 2,804,471 |
Total | 3,379,314 | (57,025) | 162,675 | 77,662 | 3,562,626 |
Detailed remuneration disclosures are provided in the Remuneration Report.
The above figures include share-based expenses incurred in respect of Ross Barker, former Managing Director, who is still eligible for vesting under these plans.
The Group (i.e. AFIC and its subsidiary, Australian Investment Company Services (AICS) - see Note F8) does not make loans to Directors or Executives.
B2. Tax
AFIC's tax position, and how it accounts for tax, is explained here. Detailed reconciliations of tax accounting to the financial statements can be found in Note E2.
The income tax expense for the period is the tax payable on this financial year's taxable income, adjusted for any changes in deferred tax assets and liabilities attributable to temporary differences and for any unused tax losses. Deferred tax assets and liabilities (except for those related to the unrealised gains or losses in the investment portfolio) are offset, as all current and deferred taxes relate to the Australian Taxation Office and can legally be settled on a net basis.
A provision has been made for taxes on any unrealised gains or losses on securities valued at fair value through the Income Statement
- i.e. the trading portfolio, puttable instruments and convertible notes that are classified as debt.
A provision also has to be made for any taxes that could arise on sale of securities in the investment portfolio, even though there is no intention to dispose of them. Where AFIC disposes of such securities, tax is calculated according to the particular parcels allocated to the sale for tax purposes, offset against any capital losses carried forward.
Australian Foundation Investment Company Limited | 47 | Annual Report 2020 |
Notes to the Financial Statements
continued
Tax Expense
The income tax expense for the period is shown below:
(a) Reconciliation of Income Tax Expense to Prima Facie Tax Payable
2020 | 2019 | |
$'000 | $'000 | |
Profit before income tax expense | 258,241 | 421,529 |
Tax at the Australian tax rate of 30 per cent (2019: 30 per cent) | 77,472 | 126,459 |
Tax offset for franked dividends received | (61,344) | (115,510) |
Off-marketbuy-back income not included in profit | - | 15,097 |
Demerger dividend non-taxable | - | (13,089) |
Sundry items whose tax treatment differs from accounting treatment | 4,171 | 4,331 |
20,299 | 17,288 | |
Over provision in prior years | (2,453) | (2,132) |
Total tax expense | 17,846 | 15,156 |
Deferred Tax Liabilities - Investment Portfolio
The accounting standards require us to recognise a deferred tax liability for the potential capital gains tax on the unrealised gain in the investment portfolio. This amount is shown in the Balance Sheet. However, the Board does not intend to sell the investment portfolio, so this tax liability is unlikely to arise at this amount. Any sale of securities would also be affected by any changes in capital gains tax legislation or tax rate applicable to such gains when they are sold.
2020 | 2019 | |
$'000 | $'000 | |
Deferred tax liabilities on unrealised gains in the investment portfolio | 973,499 | 1,163,749 |
Opening balance at 1 July | 1,163,749 | 1,097,527 |
Tax on realised gains | (22,648) | (20,394) |
Charged to OCI for ordinary securities on gains or losses for the period | (167,602) | 86,616 |
973,499 | 1,163,749 |
B3. Risk
Market Risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. As a LIC that invests in tradeable securities, AFIC can never be free of market risk as it invests its capital in securities which are not risk free - the market price of these securities will fluctuate.
A general fall in market prices of 5 per cent and 10 per cent, if spread equally over all assets in the investment portfolio, would have led to a reduction in AFIC's comprehensive income of $249.1 million and $498.3 million respectively, at a tax rate of 30 per cent (2019: $265.0 million and $530.1 million).
AFIC seeks to reduce market risk at the investment portfolio level by ensuring that it is not, in the opinion of the Investment Committee, overly exposed to one company or one particular sector of the market. The relative weightings of the individual securities and the relevant market sectors are reviewed by the Investment Committee and risk can be managed by reducing exposure where necessary. AFIC does not have a minimum or maximum amount of the portfolio that can be invested in a single company or sector.
Australian Foundation Investment Company Limited | 48 | Annual Report 2020 |
AFIC's total investment exposure by sector is as below: | ||
2020 | 2019 | |
% | % | |
Energy | 3.01 | 4.28 |
Materials | 15.76 | 17.50 |
Industrials | 15.88 | 15.17 |
Consumer Discretionary | 5.98 | 4.37 |
Consumer Staples | 4.60 | 5.06 |
Banks | 17.16 | 21.80 |
Other Financials | 8.26 | 9.73 |
Property Trusts | 1.74 | 0.71 |
Telecommunications | 4.42 | 3.61 |
Healthcare | 16.62 | 10.86 |
Information Technology | 4.00 | 3.01 |
Utilities | 1.03 | 1.25 |
Cash | 1.54 | 2.65 |
Securities representing over 5 per cent of the investment portfolio at 30 June were | ||
CSL | 8.5 | 5.8 |
Commonwealth Bank | 7.7 | 8.6 |
BHP | 7.0 | 7.3 |
AFIC is also not directly exposed to material currency risk as most of its investments are quoted in Australian dollars.
The writing of call options provides some protection against a fall in market prices as it generates income to partially compensate for a fall in capital values. Options are only written against securities that are held in the trading or the specific sub-section of the investment portfolio.
Interest Rate Risk
The Group is not currently materially exposed to interest rate risk as all its cash investments and borrowings are short term for a fixed interest rate.
Credit Risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. AFIC is exposed to credit risk from cash, receivables, securities in the trading portfolio and securities in the investment portfolio respectively. None of these assets are overdue. The risk in relation to each of these items is set out below.
Cash
All cash investments not held in a transactional account are invested in short term deposits with Australia's 'big four' commercial banks or in cash management trusts which invest predominantly in short term securities with an A1+ rating. In the unlikely event of a bank default or default on the underlying securities in the cash trust, there is a risk of losing the cash deposits and any accrued unpaid interest.
Receivables
Outstanding settlements are on the terms operating in the securities industry, which usually require settlement within two days of the date of a transaction. Receivables are non-interest bearing and unsecured. In the event of a payment default, there is a risk of losing any difference between the price of the securities sold and the price of the recovered securities from the discontinued sale. Receivables also include dividends from securities that have passed the record date for the distribution but have not paid as at the current date.
Trading and Investment Portfolios
Converting and convertible notes or other interest-bearing securities that are not equity securities carry credit risk to the extent of their carrying value. This risk will be realised in the event of a shortfall on winding-up of the issuing companies.
Australian Foundation Investment Company Limited | 49 | Annual Report 2020 |
Notes to the Financial Statements
continued
Liquidity Risk
Liquidity risk is the risk that an entity will not be able to meet its financial liabilities.
AFIC monitors its cash-flow requirements daily. The Investment Committee also monitors the level of contingent payments on a regular basis by reference to known sales and purchases of securities, dividends and distributions to be paid or received, put options that may require AFIC to purchase securities, and facilities that need to be repaid. AFIC ensures that it has either cash or access to short term borrowing facilities sufficient to meet these contingent payments.
AFIC's inward cash-flows depend upon the dividends received. Should these drop by a material amount, AFIC would amend its outward cash-flows accordingly. AFIC's major cash outflows are the purchase of securities and dividends paid to shareholders, and both of these can be adjusted by the Board and management. Furthermore, the assets of AFIC are largely in the form of readily tradeable securities which can be sold on-market if necessary.
The table below analyses AFIC's financial liabilities into relevant maturity groupings. The amounts disclosed in the table are the contractual undiscounted cash-flows. Balances due within 12 months equal their carrying amounts as the impact of discounting is not significant.
Total | |||||
Less Than | Greater | Contractual | Carrying | ||
6 Months | 6-12 Months | Than 1 Year | Cash Flows | Amount | |
30 June 2020 | $'000 | $'000 | $'000 | $'000 | $'000 |
Non-derivatives | |||||
Payables | 884 | - | - | 884 | 884 |
884 | - | - | 884 | 884 | |
Derivatives | |||||
Options in trading portfolio* | - | - | - | - | - |
- | - | - | - | - | |
Total | |||||
Less Than | Greater | Contractual | Carrying | ||
6 Months | 6-12 Months | Than 1 Year | Cash Flows | Amount | |
30 June 2019 | $'000 | $'000 | $'000 | $'000 | $'000 |
Non-derivatives | |||||
Payables | 932 | - | - | 932 | 932 |
932 | - | - | 932 | 932 | |
Derivatives | |||||
Options in trading portfolio* | 3,963 | - | - | 3,963 | 7,033 |
3,963 | - | - | 3,963 | 7,033 |
- In the case of call options, there are no contractual cash flows as if the option is exercised the contract will be settled in the securities over which the option is written. The contractual cash flows for put options written are the cash sums the Company will pay to acquire securities over which the options have been written, and it is assumed for purpose of the above disclosure that all options will be exercised (i.e. maximum cash outflow).
C. Unrecognised Items
Unrecognised items, such as contingencies, do not appear in the financial statements, usually because they don't meet the requirements for recognition. However, they have the potential to have a significant impact on the Group's financial position and performance.
C1. Contingencies
Directors are not aware of any material contingent liabilities or contingent assets other than those already disclosed elsewhere in the Financial Report.
Australian Foundation Investment Company Limited | 50 | Annual Report 2020 |
Further information that shareholder may find useful is included here. It is grouped into three sections:
- Balance Sheet Reconciliations
- Income Statement Reconciliations
- Further Information
D. Balance Sheet Reconciliations
This section provides further information about the basis of calculation of line items in the financial statements.
D1. Current Assets - Cash
2020 | 2019 | |
$'000 | $'000 | |
Cash at bank and in hand (including on-call) | 111,318 | 201,429 |
Fixed term deposits | - | 5,000 |
111,318 | 206,429 |
Cash holdings yielded an average floating interest rate of 1.02 per cent (2019: 2.07 per cent). All cash investments are held in a transactional account or an over-night 'at call' account invested in cash management trusts which invest predominantly in short term securities with an A1+ rating.
D2. Credit Facilities
2020 | 2019 | |
$'000 | $'000 | |
Commonwealth Bank of Australia - cash advance facilities | 250,000 | 140,000 |
Amount drawn down | - | - |
Undrawn facilities | 250,000 | 140,000 |
The above borrowings are unsecured. Repayment of facilities is done either through the use of cash received from distributions or the sale of securities, or by rolling existing facilities into new ones. Facilities are usually drawn down for no more than three months.
D3. Revaluation Reserve
2020 | 2019 | |
$'000 | $'000 | |
Opening balance at 1 July | 2,561,314 | 2,422,568 |
Gains/(losses) on investment portfolio | ||
- Equity instruments | (568,806) | 261,984 |
Provision for tax on above | 167,602 | (86,616) |
Cumulative taxable realised (gains)/losses (net of tax) | 5,920 | (36,622) |
2,166,030 | 2,561,314 |
This reserve is used to record increments and decrements on the revaluation of the investment portfolio as described in accounting policy Note A2.
Australian Foundation Investment Company Limited | 51 | Annual Report 2020 |
Notes to the Financial Statements
continued
D4. Realised Capital Gains Reserve
2020 | 2019 | |
$'000 | $'000 | |
Opening balance at 1 July | 462,257 | 448,892 |
Dividends paid | (58,625) | (23,257) |
Cumulative taxable realised gains/(losses) for period through OCI (net of tax) | (5,920) | 36,622 |
397,712 | 462,257 |
This reserve records gains or losses after applicable taxation arising from disposal of securities in the investment portfolio as described in A2.
D5. Retained Profits
2020 | 2019 | |
$'000 | $'000 | |
Opening balance at 1 July | 688,244 | 631,725 |
Dividends paid | (222,902) | (349,413) |
Profit for the year | 239,931 | 405,932 |
705,273 | 688,244 | |
This reserve relates to past profits. |
D6. Share Capital
Movements in Share Capital
Number | Paid-up | ||||
of Shares | Issue Price | Capital | |||
Date | Details | Notes | '000 | $ | $'000 |
1/07/2018 | Balance | 1,186,147 | 2,811,721 | ||
31/08/2018 | Dividend Reinvestment Plan | i | 5,356 | 6.18 | 33,100 |
31/08/2018 | Dividend Substitution Share Plan | ii | 526 | 6.18 | n/a |
25/02/2019 | Dividend Reinvestment Plan | i | 7,328 | 5.93 | 43,456 |
25/02/2019 | Dividend Substitution Share Plan | ii | 791 | 5.93 | n/a |
Various | Costs of issue | - | - | (141) | |
30/06/2019 | Balance | 1,200,148 | 2,888,136 | ||
29/08/2019 | Dividend Reinvestment Plan | i | 5,541 | 6.21 | 34,407 |
29/08/2019 | Dividend Substitution Share Plan | ii | 622 | 6.21 | n/a |
24/02/2020 | Dividend Reinvestment Plan | i | 3,585 | 6.93 | 24,842 |
24/02/2020 | Dividend Substitution Share Plan | ii | 468 | 6.93 | n/a |
Various | Costs of issue | - | - | (142) | |
30/06/2020 | Balance | 1,210,364 | 2,947,243 |
- Shareholders elect to have all or part of their dividend payment reinvested in new ordinary shares under the Dividend Reinvestment Plan (DRP). The price of the new DRP shares is based on the average selling price of shares traded on the Australian Securities Exchange and Chi-X in the five days after the shares begin trading on an ex-dividend basis.
- The Group has a Dividend Substitution Share Plan (DSSP) whereby shareholders may elect to forgo a dividend and receive shares instead. Pricing for the DSSP shares is done as per the DRP shares.
- The Group has an on-market share buy-back program. During the financial year, no shares were bought back (2019: Nil).
All shares have been fully paid, rank pari passu and have no par value.
Australian Foundation Investment Company Limited | 52 | Annual Report 2020 |
E. Income Statement Reconciliations
E1. Reconciliation of Net Cash Flows From Operating Activities to Profit
2020 | 2019 | |
$'000 | $'000 | |
Profit for the year | 240,395 | 406,373 |
Net decrease/(increase) in trading portfolio | (11,337) | 276 |
Dividends received as securities under DRP investments | (8,355) | (16,848) |
Coles demerger dividend - non-cash item | - | (43,629) |
Decrease/(increase) in current receivables | 22,781 | 37,106 |
- Less increase/(decrease) in receivables for investment portfolio | - | (27,495) |
Increase/(decrease) in deferred tax liabilities | (191,222) | 67,579 |
- Less (increase)/decrease in deferred tax liability on investment portfolio | 190,250 | (66,222) |
Increase/(decrease) in current payables | (48) | 220 |
- Less increase/(decrease) in dividends payable | 151 | (223) |
Increase/(decrease) in provision for tax payable | 13,719 | 8,807 |
Capital gains tax charge taken through equity | (22,648) | (20,394) |
Prior year taxes paid relating to capital gains | 20,394 | 6,406 |
Increase/(decrease) in other provisions/non-cash items | 555 | (194) |
Net cash flows from operating activities | 254,635 | 351,762 |
E2. Tax Reconciliations
Tax Expense Composition
2020 | 2019 | |
$'000 | $'000 | |
Charge for tax payable relating to the current year | 21,271 | 15,931 |
Over provision in prior years | (2,453) | (2,132) |
(Increase)/Decrease in deferred tax assets | (972) | 1,357 |
17,846 | 15,156 | |
Amounts Recognised Directly Through Other Comprehensive Income | ||
Net movement in deferred tax liabilities relating to capital gains tax on the movement | ||
in gains in the investment portfolio | (167,602) | 86,616 |
(167,602) | 86,616 | |
Deferred Tax Assets and Liabilities | ||
The deferred tax balances are attributable to: | ||
2020 | 2019 | |
$'000 | $'000 | |
(a) Tax on unrealised gains or losses in the trading portfolio | (82) | 231 |
(b) Provisions and expenses charged to the accounting profit which are not yet tax deductible | 1,849 | 1,680 |
(c) Interest and dividend income receivable which is not assessable for tax until receipt | (895) | (2,011) |
872 | (100) | |
Movements: | ||
Opening balance at 1 July | (100) | 1,257 |
Credited/(charged) to Income Statement | 972 | (1,357) |
872 | (100) |
Deferred tax assets arise when provisions and expenses have been charged but are not yet tax deductible. These assets are realised when the relevant items become tax deductible, as long as enough taxable income has been generated to claim the assets against, and as long as there are no changes to the tax legislation that affect AFIC's ability to claim the deduction.
Australian Foundation Investment Company Limited | 53 | Annual Report 2020 |
Notes to the Financial Statements
continued
F. Further Information
This section covers information that is not directly related to specific line items in the financial statements, including information about related party transactions, share-based payments, assets pledged as security and other statutory information.
F1. Related Parties
All transactions with deemed related parties were made on normal commercial terms and conditions and approved by independent Directors.
(a) Arrangements With Non-Executive Directors
Non-Executive Directors R Barker, J Paterson and C Walter have rented office space and, for R Barker and J Paterson, a parking space from the Group at commercial rates during the year. Sub-lease rental income (included in revenue) received or receivable by the Group, excluding GST, during the year was $62,265 (2019: $61,275).
(b) AICS Transactions With Minority Interests
The below transactions were with Djerriwarrh Investments Ltd as a minority interest holder in the Company's subsidiary.
2020 | 2019 | ||
$'000 | $'000 | ||
Administration expenses charged for the year | 2,634 | 2,515 | |
(c) AICS Transactions With Other Listed Investment Companies | |||
AICS had the following transactions with other listed investment companies to which it provides services: | |||
2020 | 2019 | ||
$'000 | $'000 | ||
Administration expenses charged for the year to Mirrabooka Investments Ltd | 1,454 | 1,382 | |
Administration expenses charged for the year to AMCIL Ltd | 839 | 906 |
F2. Remuneration of Auditors
For the year the auditor earned or will earn the following remuneration:
2020 | 2019 | |
$ | $ | |
PricewaterhouseCoopers | ||
Audit services | ||
Audit or review of Financial Reports | 202,815 | 195,987 |
Audit related services | ||
AFSL compliance audit and review | 8,168 | 7,998 |
Non-audit services | ||
Taxation compliance services | 32,293 | 30,670 |
Total remuneration | 243,276 | 234,655 |
F3. Segment Reporting
Operating segments are reported in a manner consistent with the internal reporting used by the chief operating decision-maker. The Board, through its sub-committees, has been identified as the chief operating decision-maker, as it is responsible for allocating resources and assessing performance of the operating segments.
Description of Segments
The Board makes the strategic resource allocations for AFIC. AFIC has therefore determined the operating segments based on the reports reviewed by the Board, which are used to make strategic decisions.
The Board is responsible for AFIC's entire portfolio of investments and considers the business to have a single operating segment. The Board's asset allocation decisions are based on a single, integrated investment strategy, and AFIC's performance is evaluated on an overall basis.
Australian Foundation Investment Company Limited | 54 | Annual Report 2020 |
Segment Information Provided to the Board
The internal reporting provided to the Board for AFIC's assets, liabilities and performance is prepared on a consistent basis with the measurement and recognition principles of Australian Accounting Standards, except that net assets are reviewed both before and after the effects of capital gains tax on investments (as reported in AFIC's Net Tangible Asset announcements to the ASX).
Other Segment Information
Revenues from external parties are derived from the receipt of dividend, distribution and interest income, and income arising on the trading portfolio and realised income from the options portfolio.
AFIC is domiciled in Australia and most of AFIC's income is derived from Australian entities or entities that maintain a listing in Australia. AFIC has a diversified portfolio of investments, with only two investments comprising more than 10 per cent of AFIC's income, including realised income from the trading and options written portfolios - Commonwealth Bank (12.4 per cent) and BHP (10.5 per cent) (2019: as a consequence of buy-backs and demerger dividends three investments: Wesfarmers (14.9 per cent), Rio Tinto (13.1 per cent) and BHP (11.9 per cent)).
F4. Summary of Other Accounting Policies
This general purpose Financial Report has been prepared in accordance with Australian Accounting Standards, Interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. This Financial Report has been authorised for issue on 27 July 2020 in accordance with a resolution of the Board and is presented in the Australian currency. The Directors of the Company have the power to amend and reissue the Financial Report.
AFIC has attempted to improve the transparency of its reporting by adopting 'plain English' where possible. Key 'plain English' phrases and their equivalent AASB terminology are as follows:
Phrase | AASB Terminology |
Market Value | Fair value for actively traded securities |
Cash | Cash and cash equivalents |
Share Capital | Contributed equity |
Options | Derivatives written over equity instruments that are valued at fair value through profit or loss |
Hybrids | Equity instruments that have some of the characteristics of debt |
AFIC complies with International Financial Reporting Standards (IFRS). AFIC is a 'for profit' entity.
AFIC has not applied any Australian Accounting Standards or AASB Interpretations that have been issued as at balance date but are not yet operative for the year ended 30 June 2020 ('the inoperative standards'). The impact of the inoperative standards has been assessed and the impact has been identified as not being material. AFIC only intends to adopt other inoperative standards at the date at which their adoption becomes mandatory.
Basis of Accounting
The financial statements are prepared using the valuation methods described in A2. All other items have been treated in accordance with the historical cost convention.
Fair Value of Financial Assets and Liabilities
The fair value of cash and non-interest bearing monetary financial assets and liabilities of AFIC approximates their carrying value.
Convertible Notes
On the issue of convertible notes, the Group estimates the fair value of the liability component of the convertible notes, being the obligation to make future payments of principal and interest to holders, using a market interest rate for a non-convertible note of similar terms and conditions. The residual amount is included in equity as other equity securities with no recognition of any change in the value of the option in subsequent periods. The liability component is then included in borrowings. Expenses incurred in connection with the issue of the notes are deducted from the total face value and the expense is then incurred over the life of the notes.
The total liability is subsequently carried on an amortised cost basis with interest on the notes recognised as finance costs on an effective yield basis until the liability is extinguished on conversion or maturity of the notes.
Australian Foundation Investment Company Limited | 55 | Annual Report 2020 |
Notes to the Financial Statements
continued
Employee Benefits
(i) Wages, Salaries and Annual Leave
Liabilities for wages and salaries, including annual leave, expected to be settled within 12 months of balance date are recognised as current provisions in respect of employees' services up to balance date and are measured at the amounts expected to be paid when the liabilities are settled.
(ii) Long Service Leave
In calculating the value of long service leave, consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at balance date on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows.
(iii) Cash Incentives
Cash incentives are provided under the Executive Annual Incentive Plan and are dependent upon the performance of the Group. A provision is made for the cost of unsettled cash incentives at balance date. The Investment Team Annual Incentive Plans are also settled on a cash basis.
(iv) Share Incentives
Share incentives are provided under the Executive Annual Incentive Plan, Executive Long Term Incentive Plan, Investment Team Long Term Incentive Plan and the Employee Share Acquisition Scheme.
For the Employee Share Acquisition Scheme and the Executive Annual Incentive Plan, the incentives are based on the performance of the individual, the Group and investment companies to which the Group provides administration services, for the financial year. For the Employee Share Acquisition Scheme and a portion of the Executive Annual Incentive, the recipient agrees to purchase
(or have purchased for them) shares on-market, but receives a cash amount. A provision for the amount payable under the Annual Incentive Plans is recognised on the Balance Sheet.
For the Investment Team Long Term Incentive Plan, the incentives are based on the performance of the Group and investment companies to which the group provides administration services over a four-year period. The incentives may be settled in shares (but based on a cash amount) or cash. Historically, all awards have been cash. Expenses are recognised over the four year assessment period based on the amount expected to be payable under this plan, resulting in a provision for incentive payable being built up on the Balance Sheet over the assessment period.
Under the Executive Long Term Incentive Plan which was introduced for the year ended 30 June 2013, the amount awarded is represented by performance shares. The 30-day Volume Weighted Average Price (VWAP) of AFIC shares up to but not including 1 July is calculated. The amount of ELTIP available is then divided by this 30-day VWAP price to determine the number of performance shares that may vest at the vesting point in four years' time. The value of each performance shares will be adjusted by the accumulation return on the AFI share price (being the movement in the share price assuming the reinvestment of any dividends) up to vesting date, based on a final share price calculated on the 30-day VWAP price up to 30 June. No shares vested during the year ended 30 June 2020.
The expense will be charged directly through the Income Statement in the following manner - 25 per cent of the total estimated cost in Year 1, 50 per cent of the total estimated cost in Year 2 less the expense charged in Year 1, 75 per cent of the total estimated cost in Year 3 less the expense charged in Years 1 and 2 and 100 per cent of the total estimated cost in Year 4 less the expense charged in Years 1, 2 and 3.
Directors' Retirement Allowances
The Group recognises as 'amounts payable' Directors' retirement allowances that have been crystallised. No further amounts will be expensed as retirement allowances.
Administration Fees
The Group currently provides administrative services to other listed investment companies. The associated fees are recognised on an accruals basis as income throughout the year. Any amounts outstanding at balance date are recognised as receivable, subject to the assessment of recoverability by the Directors.
Operating Leases
The Group currently has an operating lease in respect of its premises. Payments made under operating leases are charged to the Income Statement on a straight-line basis over the period of the lease.
Rounding of Amounts
AFIC is a company of the kind referred to in the ASIC Corporations (Rounding in Financial/Directors' Reports) Instrument 2016/191, relating to the 'rounding off' of amounts in the Financial Report. Amounts in the Financial Report have been rounded off in accordance with that Instrument, to the nearest thousand dollars, or in certain cases, to the nearest dollar.
Australian Foundation Investment Company Limited | 56 | Annual Report 2020 |
F5. Performance Bond
The Group's subsidiary, AICS, has under the terms of its Australian Financial Services Licence in place a performance bond to the sum of $20,000 underwritten by the Commonwealth Bank of Australia in favour of the Australian Securities and Investments Commission (ASIC), payable on demand to ASIC.
F6. Share-based Payments
Share-based Payments
The Group has a number of share incentive arrangements. These are accounted for in accordance with Note F4. Where shares are issued to employees of AICS, AICS compensates AFIC for the fair value of the shares.
(a) Executive Incentive Plans
The Executives' remuneration arrangements incorporate an 'at risk' component as set out in the Remuneration Report. Part of this 'at risk' component is paid in shares in the Group.
(i) Executive Annual Incentive Plan
Each financial year, the Remuneration Committee sets the target (cash) amount of remuneration that could be paid should all performance targets and measures be achieved. If all are achieved, 100 per cent of the remuneration will be awarded. If stretch levels of performance are achieved above target, then higher amounts may be paid. On the other hand there is no set minimum that will be paid regardless of performance.
The performance measures are a combination of the performance of the Group, the investment companies to which the Group provides administration services, and personal objectives.
All of the incentive remuneration awarded is paid in cash, with 50 per cent of the after-tax amount being used by the Executive to purchase shares. All remuneration under the plan, is paid in the financial year following the year of assessment.
The Executive agrees to the shares being subject to being held for two years (holding term), during which they cannot be sold. Dividends are paid to Executives on these shares prior to the expiry of the holding term. Should an Executive leave the Group before the holding term expires, the restriction will be lifted.
9,609 shares (2019: 13,619 shares) were purchased by Executives in the year (in relation to the prior year) with a fair value
(being the acquisition price) of $81,835 (2019: $84,147).
(ii) Executive Long Term Incentive Plan
Under the Executive Long Term Incentive Plan, the amount awarded will be represented by Performance Rights. The 30-day Volume Weighted Average Price (VWAP) of AFIC shares up to but not including 1 July will be calculated. The amount of ELTIP available will then be divided by this 30-day VWAP price to determine the number of Performance Rights that may vest at the vesting point in four years' time. The value of each Performance Right will be adjusted by the accumulation return on the AFI share price (being the movement in the share price assuming the reinvestment of any dividends) up to vesting date, based on a final share price calculated on the 30-day VWAP price up to 30 June.
The estimated fair value of the award will be calculated in accordance with AASB 2 - Share Based Payments at the end of each year until the final year of vesting. The liability shown after the final year of vesting will represent the actual amount being paid to eligible employees as a cash-settledshare-based payment.
65,198 rights were awarded under the plan during the year ended 30 June 2020 (2019: 64,201). An expense of $462,267 (2019: $494,042) was incurred for the 2016/17, 2017/18, 2018/19 and 2019/20 plans. 57,089 rights under the 2015/16 plan were forfeited during the year (100 per cent).
(iii) Investment Team Long Term Incentive Plan
Similar to the Annual Incentive Plans, a target cash amount of long term incentive is set each year in respect of that year, which will vest in four years' time. The percentage of this target that ultimately vests four years after the award depends on the gross return of the Group and the investment companies it provides administration services to.
The amount that vests will be paid in cash or shares (purchased on-market at that time, based on the cash amount that vests) at the discretion of the Group.
No LTIP vested in the period (2019 $Nil).
Australian Foundation Investment Company Limited | 57 | Annual Report 2020 |
Notes to the Financial Statements
continued
(b) Employee Share Acquisition Scheme
Under the current Employee Share Acquisition Scheme, each employee who is not a participant in the Executive or Investment Team Incentive Plans is awarded $5,000 per annum. After PAYG is deducted, $2,500 is used to buy shares in the Company which need to be held for three years. After three years, or the departure of the employee from employment with the Group, the shares come out of the holding lock.
In addition, each employee is eligible for an additional award of up to $5,000. 50 per cent of the amount awarded is used to buy shares in one of the other LICs that AICS provides services to. The amount that is awarded is dependent on the metrics used for the vesting of the Investment Team's Short Term Incentive (excluding personal measures). During the year, 28 per cent of the possible maximum was awarded, and 50 per cent of this was used to buy shares in Mirrabooka Investments Limited.
(c) Expenses Arising from Share Based Payment Transactions
Total expenses arising from share based payment transactions recognised during the period as part of the employee benefit expense (excluding any reversals and the Investment Team Long Term Incentive Plan) were as follows:
2020 | 2019 | |
$'000 | $'000 | |
Share-based payment expense | 507 | 542 |
(d) Liability
The total liability arising from share based payment transactions is included in the current and non-current liabilities for 'provisions'.
F7. Principles of Consolidation
AFIC's consolidated financial statements consist of the financial statements of AFIC, the parent, and its subsidiary, Australian Investment Company Services Ltd (AICS). 25 per cent of AICS is owned by Djerriwarrh Investments Ltd, another investment company for which AICS performs operational and investment administration services, and for which it is paid monthly.
No subsidiaries were acquired or disposed of during the year. Intercompany transactions and balances between AFIC and AICS are eliminated on consolidation.
The financial information for the parent entity, disclosed in F9 on the following page, has been prepared on the same basis as the consolidated financial statements. All notes are for the consolidated Group unless specifically noted otherwise.
F8. Subsidiaries
The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries:
Country of | Equity Holding | |||
Name of Entity | Incorporation | Class of shares | 2020 | 2019 |
Australian Investment Company Services Ltd | Australia | Ordinary | 75% | 75% |
The investment in AICS is accounted for at cost in the individual financial statements of AFIC.
Australian Foundation Investment Company Limited | 58 | Annual Report 2020 |
F9. Parent Entity Financial Information
Summary Financial Information
The individual financial statements for the parent entity show the following aggregate amounts:
2020 | 2019 | |
$'000 | $'000 | |
Balance Sheet | ||
Current assets | 125,705 | 230,698 |
Total assets | 7,243,674 | 7,803,337 |
Current liabilities | 30,965 | 17,487 |
Total liabilities | 1,005,486 | 1,183,065 |
Shareholders' equity | ||
Issued capital | 2,947,243 | 2,888,136 |
Reserves | ||
Revaluation reserve | 2,166,030 | 2,561,314 |
Realised capital gains reserve | 397,712 | 462,257 |
General reserve | 23,637 | 23,637 |
Retained earnings | 703,566 | 684,928 |
3,290,945 | 3,732,136 | |
Total shareholders' equity | 6,238,188 | 6,620,272 |
Profit or loss for the year | 238,539 | 404,609 |
Total comprehensive income | (162,665) | 579,977 |
Australian Foundation Investment Company Limited | 59 | Annual Report 2020 |
DIRECTORS' DECLARATION
In the Directors' opinion:
- the financial statements and notes set out on pages 37 to 59 are in accordance with the Corporations Act 2001 including:
- complying with the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and
- giving a true and fair view of the entity's financial position as at 30 June 2020 and of its performance for the financial year ended on that date; and
- there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.
Note F4 to the financial statements confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board.
This declaration is made in accordance with a resolution of the Directors.
This declaration has been made after receiving the declarations required to be made to the Directors by the Managing Director and the Chief Financial Officer regarding the financial statements in accordance with Section 295A of the Corporations Act 2001 for the financial year ended 30 June 2020. The declarations received were that, in the opinion of the Managing Director and the Chief Financial Officer to the best of their knowledge, the financial records of the Company have been properly maintained, that the financial statements comply with accounting standards and that they give a true and fair view.
John Paterson
Chairman
Melbourne
27 July 2020
Australian Foundation Investment Company Limited | 60 | Annual Report 2020 |
INDEPENDENT AUDIT REPORT
Australian Foundation Investment Company Limited | 61 | Annual Report 2020 |
INDEPENDENT AUDIT REPORT
continued
Australian Foundation Investment Company Limited | 62 | Annual Report 2020 |
Australian Foundation Investment Company Limited | 63 | Annual Report 2020 |
INDEPENDENT AUDIT REPORT
continued
Australian Foundation Investment Company Limited | 64 | Annual Report 2020 |
Australian Foundation Investment Company Limited | 65 | Annual Report 2020 |
OTHER INFORMATION
Information About Shareholders
At 21 July 2020 there were 153,966 holdings of ordinary shares. These holdings were distributed in the following categories:
Size of Holding | Shareholdings | Percentage |
1 to 1,000 | 57,001 | 1.97% |
1,001 to 5,000 | 49,731 | 10.57% |
5,001 to 10,000 | 20,680 | 12.41% |
10,001 to 100,000 | 25,514 | 51.97% |
100,000 and over | 1,040 | 23.07% |
Total | 153,966 | 100% |
Percentage held by the 20 largest holders | 6.40% | |
Average shareholding | 7,861 |
There were 3,900 shareholdings of less than a marketable parcel of $500 (82 shares).
Voting Rights of Ordinary Shares
The Constitution provides for votes to be cast:
(i) on a show of hands, one vote for each shareholder; and (ii) on a poll, one vote for each fully paid ordinary share.
Major Shareholders
The 20 largest registered holdings of ordinary shares as at 21 July 2020 are listed below:
Ordinary Shares
Rank | Name | Units | % Units |
1 | HSBC Custody Nominees (Australia) Limited | 22,132,243 | 1.83 |
2 | Citicorp Nominees Pty Limited | 7,950,822 | 0.66 |
3 | Nulis Nominees (Australia) Limited | 5,530,270 | 0.46 |
4 | Australian Executor Trustees Limited | 5,415,405 | 0.45 |
5 | Bougainville Copper Limited | 4,541,000 | 0.38 |
6 | Netwealth Investments Limited | 4,301,220 | 0.36 |
7 | Navigator Australia Ltd | 3,980,421 | 0.33 |
8 | Custodial Services Limited | 2,629,275 | 0.22 |
9 | Bushways Pty Ltd | 2,570,592 | 0.21 |
10 | Investment Custodial Services Limited | 2,485,945 | 0.21 |
11 | Investment Custodial Services Limited | 2,271,562 | 0.19 |
12 | Netwealth Investments Limited | 2,028,795 | 0.17 |
13 | Kalymna Pty Ltd | 1,835,886 | 0.15 |
14 | Australian Executor Trustees Limited | 1,669,828 | 0.14 |
15 | Australian Executor Trustees Limited | 1,454,845 | 0.12 |
16 | Twibill Pty Ltd | 1,443,216 | 0.12 |
17 | HSBC Custody Nominees (Australia) Limited | 1,395,417 | 0.12 |
18 | BNP Paribas Nominees Pty Ltd | 1,334,141 | 0.11 |
19 | Mr Bruce Teele | 1,248,290 | 0.10 |
20 | Resthaven Incorporated | 1,197,231 | 0.10 |
Australian Foundation Investment Company Limited | 66 | Annual Report 2020 |
Sub-underwriting
During the year the Company participated as a sub-underwriter in the following issues of securities:
Amount | |||
Company | Underwritten by | Description | Underwritten |
Qube Holdings Limited | UBS AG/Merrill Lynch Equities | 1 for 6.35 pro-rata accelerated entitlement | $2,824,425 |
offer for c. $500 million | |||
Substantial Shareholders
The Company has not been notified of any substantial shareholders.
Transactions in Securities
During the year ended 30 June 2020, the Company recorded 925 transactions in securities (including derivatives). $3,202,652 in brokerage (including GST) was paid or accrued for the year.
Australian Foundation Investment Company Limited | 67 | Annual Report 2020 |
Major Transactions in the Investment Portfolio
Cost | |
Acquisitions | ($'000) |
Goodman Group | 54,073 |
Telstra | 48,867 |
Sydney Airport | 35,890 |
Cochlear (includes participation in placement at $140 per share) | 31,822 |
Cleanaway Waste Management | 29,343 |
Macquarie Group | 26,588 |
Proceeds | |
Disposals | ($'000) |
Treasury Wine Estates# | 53,677 |
Suncorp Group# | 42,046 |
DuluxGroup (Taken over by Nippon Paint)# | 29,683 |
Scentre Group# | 26,855 |
Adelaide Brighton# | 23,689 |
Perpetual# | 23,212 |
# Complete disposal from the portfolio.
New Companies Added to the Portfolio
Altium
Netwealth
Ryman Health Care
Australian Foundation Investment Company Limited | 68 | Annual Report 2020 |
Holdings of Securities
At 30 June 2020
Individual investments for the combined investment and trading portfolios as at 30 June 2020 are listed below. The list should not, however, be used to evaluate portfolio performance or to determine the net asset backing per share at other dates. Net asset backing is advised to the Australian Securities Exchange each month and is recorded on the toll free telephone service at 1800 780 784 and posted to AFIC's website (afi.com.au).
Individual holdings in the portfolios may change during the course of the year. In addition, holdings which are part of the trading portfolio may be subject to call options or sale commitments by which they may be sold at a price significantly different from the market price prevailing at the time of the exercise or sale.
Number | Number | Market | ||
Held | Held | Value | ||
2019 | 2020 | 2020 | ||
Code | Ordinary Shares, Trust Units or Stapled Securities | '000 | '000 | $'000 |
AIA | Auckland International Airport | 1,770 | 6,073 | 37,412 |
ALQ | ALS | 7,542 | 7,542 | 49,477 |
ALU | Altium | 0 | 308 | 9,988 |
AMC | Amcor | 12,527 | 12,060 | 174,629 |
ANN | Ansell | 1,284 | 1,079 | 39,594 |
ANZ | Australia and New Zealand Banking Group | 9,188 | 9,188 | 171,259 |
APA | APA Group | 6,540 | 6,665 | 74,181 |
APE | AP Eagers | 1,157 | 1,157 | 7,807 |
ARB | ARB Corporation | 3,081 | 3,503 | 62,874 |
ASX | ASX | 709 | 1,054 | 89,993 |
AUB | AUB Group | 2,026 | 2,526 | 37,130 |
AWC | Alumina | 20,923 | 19,158 | 31,132 |
BHP* | BHP Group | 13,482 | 13,935 | 498,770 |
BKW | Brickworks | 1,854 | 1,629 | 25,781 |
BXB | Brambles | 12,139 | 12,139 | 131,947 |
CAR | Carsales.com | 4,191 | 5,033 | 89,286 |
CBA | Commonwealth Bank of Australia | 7,900 | 7,900 | 548,418 |
COH | Cochlear | 147 | 334 | 63,049 |
COL | Coles Group | 7,293 | 7,068 | 121,349 |
CPU | Computershare | 4,660 | 4,380 | 58,035 |
CSL | CSL | 2,048 | 2,120 | 608,530 |
CWY | Cleanaway Waste Management | 11,276 | 25,516 | 56,135 |
DJW | Djerriwarrh Investments | 7,505 | 7,505 | 19,139 |
DUI | Diversified United Investment | 12,030 | 12,030 | 50,888 |
EQT | EQT Holdings | 1,322 | 1,322 | 32,710 |
FPH | Fisher & Paykel Healthcare Corporation | 3,800 | 3,485 | 114,447 |
GMG | Goodman Group | 2,800 | 6,685 | 99,272 |
IAG* | Insurance Australia Group | 5,457 | 6,955 | 39,984 |
IRE | IRESS | 5,000 | 5,929 | 64,925 |
IVC | InvoCare | 1,325 | 2,984 | 31,273 |
JHX | James Hardie Industries | 6,065 | 5,188 | 142,784 |
LIC | Lifestyle Communities | 5,228 | 2,776 | 26,265 |
MFT | Mainfreight (NZX listed) | 3,209 | 3,268 | 120,385 |
MIR | Mirrabooka Investments | 8,728 | 8,728 | 20,336 |
MLT | Milton Corporation | 10,841 | 9,776 | 39,984 |
MQG | Macquarie Group | 1,963 | 2,170 | 257,307 |
NAB | National Australia Bank | 12,885 | 12,917 | 235,347 |
NWL | Netwealth Group | 0 | 1,100 | 9,867 |
NXT | NEXTDC | 4,325 | 7,864 | 77,701 |
Australian Foundation Investment Company Limited | 69 | Annual Report 2020 |
Holdings of Securities
At 30 June 2020 continued
Number | Number | Market | ||
Held | Held | Value | ||
2019 | 2020 | 2020 | ||
Code | Ordinary Shares, Trust Units or Stapled Securities | '000 | '000 | $'000 |
ORG | Origin Energy | 6,500 | 6,500 | 37,960 |
ORI | Orica | 1,970 | 2,226 | 37,037 |
OSH | Oil Search | 18,033 | 26,244 | 83,195 |
QUB | Qube Holdings | 34,962 | 35,302 | 102,729 |
REA | REA Group | 384 | 553 | 59,637 |
REH | Reece | 5,950 | 7,951 | 73,073 |
RHC | Ramsay Health Care | 1,585 | 2,020 | 134,370 |
RIO* | Rio Tinto | 1,946 | 2,001 | 195,793 |
RMD | ResMed | 3,935 | 3,935 | 108,370 |
RWC | Reliance Worldwide Corporation | 16,902 | 13,134 | 38,615 |
RYM | Ryman Health Care (NZX listed) | 0 | 880 | 10,763 |
S32 | South32 | 16,741 | 16,741 | 34,152 |
SEK | Seek | 4,270 | 4,160 | 91,054 |
SHL | Sonic Healthcare | 3,704 | 4,054 | 123,370 |
SYD | Sydney Airport | 17,924 | 21,443 | 121,580 |
TCL | Transurban Group | 22,599 | 23,137 | 326,922 |
TLS* | Telstra Corporation | 40,175 | 54,510 | 170,602 |
WBC | Westpac Banking Corporation | 15,545 | 15,985 | 286,931 |
WES | Wesfarmers | 6,723 | 7,372 | 330,487 |
WOW | Woolworths Group | 5,667 | 5,667 | 211,255 |
WPL | Woodside Petroleum | 4,360 | 4,460 | 96,551 |
XRO | Xero | 741 | 871 | 78,441 |
Total | 7,122,274 |
* Part of the security was subject to call options written by the Company.
Australian Foundation Investment Company Limited | 70 | Annual Report 2020 |
Issues of Securities
Date of Issue | Type | Price | Remarks | |
24 February 2020 | DRP/DSSP | $6.93 | 2.5 per cent discount | |
29 August 2019 | DRP/DSSP | $6.21 | ||
25 | February 2019 | DRP/DSSP | $5.93 | 2.5 per cent discount |
31 August 2018 | DRP/DSSP | $6.18 | ||
23 | February 2018 | DRP/DSSP | $6.11 | |
30 August 2017 | DRP/DSSP* | $5.92 | ||
24 | February 2017 | DRP/DSSP* | $5.84 | |
30 | August 2016 | DRP/DSSP* | $5.58 | 2.5 per cent discount |
19 | February 2016 | DRP/DSSP* | $5.43 | 2.5 per cent discount |
25 | November 2015 | SPP | $5.51 | 5.0 per cent discount |
28 | August 2015 | DRP/DSSP* | $6.03 | 2.5 per cent discount |
20 | February 2015 | DRP/DSSP* | $5.97 | 2.5 per cent discount |
6 October 2014 | SPP | $5.88 | 2.5 per cent discount | |
29 | August 2014 | DRP/DSSP* | $5.93 | 2.5 per cent discount |
21 | February 2014 | DRP/DSSP* | $5.86 | 2.5 per cent discount |
30 | August 2013 | DRP/DSSP* | $5.64 | 2.5 per cent discount |
DSSP: Dividend Substitution Share Plan | ||||
22 | February 2013 | DRP | $5.37 | |
31 | August 2012 | DRP | $4.36 | |
24 | February 2012 | DRP | $4.26 | |
19 | December 2011 | Convertible notes | $100 face value | Mature 28 February 2017. Interest rate 6.25 per cent |
per annum. Conversion price: $5.0864 | ||||
31 | August 2011 | DRP | $4.18 | |
25 | February 2011 | DRP | $4.72 | 2.5 per cent discount |
1 September 2010 | DRP | $4.65 | 2.5 per cent discount | |
2 June 2010 | SPP | $4.62 | 2.5 per cent discount | |
SPP=Share Purchase Plan | ||||
26 | February 2010 | DRP | $4.82 | 5 per cent discount |
1 September 2009 | DRP | $4.69 | 5 per cent discount | |
2 March 2009 | DRP | $3.72 | 5 per cent discount | |
25 | August 2008 | DRP | $4.98 | |
11 | April 2008 | SAP | $5.26 | |
27 | February 2008 | DRP | $5.26 | 5 per cent discount |
22 | August 2007 | DRP | $5.78 | |
8 March 2007 | DRP | $5.60 | ||
22 December 2006 | SAP | $4.90 | ||
23 | August 2006 | DRP | $4.70 | |
7 March 2006 | DRP | $4.55 | ||
4 November 2005 | SAP | $3.96 | ||
23 | August 2005 | DRP | $3.90 | |
18 March 2005 | DRP | $3.68 | ||
19 | August 2004 | DRP | $3.29 | |
12 March 2004 | DRP | $3.29 | ||
22 | October 2003 | 1 for 8 rights issue | $3.00 | |
15 | August 2003 | DRP | $3.47 | |
16 | April 2003 | SAP | $3.04 | |
7 March 2003 | DRP | $3.11 | ||
14 | August 2002 | DRP | $3.11 | |
5 April 2002 | SAP | $3.16 | ||
7 March 2002 | DRP | $3.24 | ||
15 | August 2001 | DRP | $3.08 | |
29 June 2001 | DRP | $2.87 | ||
7 March 2001 | DRP | $2.56 | ||
16 August 2000 | DRP | $2.47 | ||
7 March 2000 | DRP | $2.64 | ||
11 August 1999 | DRP | $2.95 | ||
12 April 1999 | SAP | $2.54 | SAP = Share Acquisition Plan | |
15 March 1998 | DRP | $2.79 | ||
4 September 1998 | DRP | $2.43 | DRP = Dividend Reinvestment Plan |
Note for issues of securities in earlier years please consult the Company's website, afi.com.au or via telephone (03) 9650 9911.
- Note that for the shares issued under the DSSP, the price shown is the indicative price used to determine the number of shares issued to participants. Shares issued under the DSSP are issued at nil cost. Shareholders who sell shares issued under the DSSP should consult their tax adviser as to the correct treatment of such sales for taxation purposes.
Australian Foundation Investment Company Limited | 71 | Annual Report 2020 |
Company Particulars
Australian Foundation Investment
Company Limited (AFIC)
ABN 56 004 147 120
Directors
John Paterson, Chairman
Robert M Freeman, Managing Director
Ross E Barker
Rebecca P Dee-Bradbury
Graeme R Liebelt
David A Peever
Catherine M Walter AM
Peter J Williams
Company Secretaries
Matthew J Rowe
Andrew JB Porter
Auditor
PricewaterhouseCoopers
Chartered Accountants
Country of Incorporation
Australia
Registered Office and Mailing Address
Level 21, 101 Collins Street
Melbourne, Victoria, 3000
Contact Details
Telephone | (03) 9650 9911 |
Facsimile | (03) 9650 9100 |
Website | afi.com.au |
invest@afi.com.au |
For enquiries regarding net asset backing (as advised each month to the Australian Securities Exchange):
Telephone 1800 780 784 (toll free)
Australian Foundation Investment Company Limited | 72 | Annual Report 2020 |
Shareholder Information
Share Registrar
Computershare Investor Services Pty Ltd
Yarra Falls
452 Johnston Street
Abbotsford Victoria 3067
New Zealand
Computershare Investor Services Limited
159 Hurstmere Road
Takapuna Auckland 0622
Shareholder
Enquiry Line 1300 662 270 (Australia) 0800 333 501 (New Zealand) +61 3 9415 4373 (from overseas)
Facsimile (03) 9473 2500
Website investorcentre.com/contact
Share Registrar
For all inquiries relating to shareholdings, dividends and related matters, please contact the share registrar as above.
Securities Exchange Codes
AFI Ordinary shares (ASX and NZX)
Annual General Meeting
Date | Wednesday 14 October 2020 |
Time | 10.00am |
Note the AGM will be a virtual meeting conducted online and via telephone. The subsequent interstate investor meetings will not be held this year. The recorded webinar of the AGM will be available on the Company's website following the presentation.
Australian Foundation Investment Company Limited | 73 | Annual Report 2020 |
Design: MDM Investorcom
Printed on environmentally friendly paper
Annual Review
20
20
Contents
2 | 5 Year Summary | 19 | Summarised Statement |
4 | About the Company | of Changes in Equity | |
6 | Review of Operations | 20 | Holdings of Securities |
and Activities | 23 | Major Transactions in the | |
16 | Top 25 Investments | Investment Portfolio | |
17 | Income Statement | 24 | Company Particulars |
18 | Balance Sheet | 25 | Shareholder Information |
AUSTRALIAN FOUNDATION INVESTMENT COMPANY IS A LISTED INVESTMENT COMPANY INVESTING
IN AUSTRALIAN AND NEW ZEALAND EQUITIES.
Australian Foundation Investment Company Limited | ABN 56 004 147 120 |
Year in Summary
2020
Profit for | $240.4m |
the Year | |
$406.4m in 2019. Down 40.8%, excluding one-off items in 2019 down 12%
Fully | 14 | ¢ | 24 | ¢ | 32 cents total | ||
Franked | in 2019 including | ||||||
Dividend | Final | Total | 8 cent special dividend | ||||
Total | 2.9% | Share price plus | |||||
Shareholder | dividend, including | ||||||
Return | franking* | ||||||
Total | -3.1% | S&P/ASX 200 | |||||
Accumulation Index | |||||||
Portfolio | |||||||
including franking* | |||||||
Return | Including franking* | -6.6% | |||||
Management | 0.13% | 0.13% | |||||
Ratio | |||||||
Expense | in 2019 | ||||||
$7.2b | in 2019 | ||||||
Total | Including cash at | ||||||
30 June $7.8 billion | |||||||
Portfolio | |||||||
* Assumes a shareholder can take full advantage of the franking credits.
Australian Foundation Investment Company Limited | 1 | Annual Review 2020 |
5 Year Summary
Net Profit After Tax | Net Profit Per Share | ||||||||||||||
($ Million) | (Cents) | ||||||||||||||
2020 | 240.4 | 2020 | 19.9 | ||||||||||||
2019 | 272.2 | 134.2(a) | 2019 | 34.0 | |||||||||||
2018 | 279.0 | 2018 | 23.6 | ||||||||||||
2017 | 245.3 | 2017 | 21.3 | ||||||||||||
2016 | 265.8 | 2016 | 23.8 | ||||||||||||
Dividends Per Share (Cents)(b)
202024
2019 | 24 | 832 | |
(c)(c) | |||
201824
201724
201624
Net Asset Backing Per Share ($)(d)
2020 | 5.96 | ||||
2019 | 6.49 | ||||
2018 | 6.27 | ||||
2017 | 5.89 | ||||
2016 | 5.50 | ||||
Australian Foundation Investment Company Limited | 2 | Annual Review 2020 |
Investments at Market Value
($ Million)(e)
20207,122
20197,566
20187,274
20176,790
20166,250
Number of Shareholders (30 June)
2020153,588
2019138,671
2018129,948
2017119,463
2016113,482
Notes
- Participation in the Rio Tinto and BHP off-market share buy backs, special dividends and the receipt of a dividend because of the Coles demerger from Wesfarmers.
- All dividends were fully franked. The LIC attributable gain attached to the dividend was 2020: 7.14 cents, 2019: 7.14 cents, 2018:
2.86 cents, 2017: nil, 2016: 2.1 cents. - 8 cents fully franked special dividend paid with the interim dividend.
-
Net asset backing per share based on year-end data before the provision for the final dividend. The figures do not include a provision for capital gains tax that would apply if all securities held as non-current investments had been sold at balance date as Directors do not intend to dispose of
the portfolio. - Excludes cash.
Australian Foundation Investment Company Limited | 3 | Annual Review 2020 |
About the Company
Australian Foundation Investment Company (AFIC) is a listed investment company investing in Australian and New Zealand equities.
Investment Objectives
The Company aims to provide shareholders with attractive investment returns through access to a growing stream of fully franked dividends and growth in capital invested.
The Company's primary investment goals are:
- to pay dividends which, over time, grow faster than the rate of inflation; and
- to provide attractive total returns over the medium to long term.
How AFIC Invests - What We Look For in Companies
A portfolio that | |||||||||||
Quality First | Growth | Value | is managed to | ||||||||
achieve long term | |||||||||||
Including dividends | capital and dividend | ||||||||||
growth |
Australian Foundation Investment Company Limited | 4 | Annual Review 2020 |
Approach to Investing
The investment philosophy is built
on taking a medium to long term view on companies in a diversified portfolio with an emphasis on identifying quality companies that are likely to sustainably grow their earnings and dividends over this time frame.
Quality in this context is an outcome of our assessment of the board and management as well as some key financial metrics. These include return on capital employed, return on equity, the level of gearing in the balance sheet, margins and free cash flow. The structure of the industry and a company's competitive position in this industry is also an important indicator of quality. Linked to this assessment of quality is the ability of companies to grow earnings over time, which ultimately should produce good dividend growth.
As a long term investor, Environmental, Social and Governance (ESG) analysis is integrated into AFIC's investment framework:
- AFIC will seek to invest in companies that have strong governance and risk management processes that include environmental and social risks.
-
The remuneration structures proposed and used by the Boards of the companies in which AFIC invests are assessed
as we are seeking remuneration plans and outcomes that align with AFIC's (and AFIC's own investors) interests as long term shareholders. - AFIC supports engagement with its investee companies on these issues, and will vote as shareholders accordingly.
Recognising value is also an important aspect of sound long term investing. Short term measures such as the price earnings ratio, price to book or price to sales may be of some value, but aren't necessarily strong predictors of future performance. Our assessment of value tries to capture the opportunity a business has to prosper and thrive over the medium to long term.
In building the investment portfolio in this way, we believe we can offer investors a well- diversified portfolio of high-quality companies that is intended to deliver total returns ahead of the Australian equity market and with less volatility over the long term.
The Company also uses options written against a small proportion of its investments and a small trading portfolio to generate additional income.
From time to time, some borrowings may be used where potential investment returns justify the use of debt. This is managed within very conservative limits, as determined by the Board.
AFIC is managed for the benefit of its shareholders with fees based on the recovery of costs rather than as a fixed percentage of the portfolio. There are no performance fees. As a result, the benefit of scale over time results in a very low expense ratio for investors. For the
12 months to 30 June 2020 this was
0.13 per cent, or 13 cents for each $100 invested.
Australian Foundation Investment Company Limited | 5 | Annual Review 2020 |
Review of Operations and Activities
Profit and Dividend
The full year profit was $240.4 million. The profit for the corresponding period last year was $406.4 million. Investment income was down, as a number of one-off items were not repeated this year. This included participation in the Rio Tinto and BHP off-market share buy-backs, special dividends and the receipt of a dividend because of the Coles demerger from Wesfarmers ($134.2 million in total).
In addition, several companies reduced or deferred dividends in the second half of the year, which also meant a fall in dividend income.
The trading portfolio recorded a profit of $9.7 million as some placements, where the Company was satisfied with its existing holding, were sold for a profit and there was an increased contribution from option activity. In the corresponding period, last year, this portfolio recorded a loss of $4.7 million. Earnings per share were 19.9 cents, down from 34.0 cents (22.7 cents excluding one off items last year). AFIC, as a long-standing listed investment company, has reserves that can be used in more difficult conditions. Drawing upon these reserves, the final dividend was maintained at 14 cents per share fully franked despite the fall in income in the second half. Total fully franked dividends applicable for the year are 24 cents per share. Last financial year total dividends were 32 cents per share. This included a special interim dividend of 8 cents per share. No special dividend has been paid this year.
Five cents of the final dividend are sourced from taxable capital gains, on which the Company has paid or will pay tax. The amount of the pre-tax attributable gain on this portion of the dividend, known as an 'LIC capital gain', is therefore 7.14 cents. The enables some shareholders to claim a tax deduction in their tax return.
Market and Portfolio Performance
Economic conditions have been extremely challenging for many businesses, as the fallout from the COVID-19 outbreak negatively impacts many Australians. Equity markets have also been very volatile following the all-time highs reached in late February,
as governments and central banks try and respond to deteriorating conditions and control of the virus remains uncertain.
The Australian share market was on track for a very strong year until the world was unexpectedly hit with the COVID-19 virus in the early part of the 2020 calendar year. From the market peak in February through to the low point for the year in late March, the S&P/ ASX 200 price index was down 36.5 per cent. Surprisingly, despite the significant decline in economic conditions, the S&P/ASX 200 price index increased 29.7 per cent from this low point until the end of the financial year (Figure 1), driven primarily by an expansion in market valuations. In these volatile market conditions, the positioning of the portfolio to ensure quality companies with strong industry positions formed the core of the portfolio has lessened the impact of the negative market.
Australian Foundation Investment Company Limited | 6 | Annual Review 2020 |
Figure 1: Performance of the S&P/ASX 200 Price Index for the Financial Year
7,000
6,500
6,000
5,500
5,000
4,500
Jul | 19 |
Aug | 19 |
Sep | 19 |
Oct | 19 |
Nov | 19 | Dec | 19 | Jan | 20 | Feb | 20 | Mar | 20 |
Apr | 20 |
20 20
May Jun
Portfolio return for the year, including franking, was negative 3.1 per cent. Including franking, the S&P/ASX 200 Accumulation Index was down 6.6 per cent (Figure 2).
Companies in the portfolio that contributed strongly to relative returns through the
12-month period were CSL, Wesfarmers, Fisher & Paykel Healthcare, ResMed, James Hardie Industries, Xero, NEXTDC and Carsales.com. In contrast, the major banks and energy exposures through Oil Search and Woodside Petroleum significantly underperformed.
Within the negative return from the market for the year, Healthcare continued to hold its ground given the strong performance of
companies such as CSL, ResMed and Fisher
- Paykel Healthcare. Information Technology rebounded strongly, driven largely by the uplift in the share price of Afterpay (which AFIC does not hold), and the performance of Xero and NEXTDC. In contrast, financials were down because of the significant pressure on the major banks and energy was impacted by the large fall in the oil price (Figure 3).
The long term performance of the portfolio, which is more aligned with the Company's investment timeframes, was 9.3 per cent per annum for the 10 years to 30 June 2020. This is in line with the Index return over the same period of 9.4 per cent. Both of these figures include the benefit of franking. AFIC's performance numbers are after costs.
Australian Foundation Investment Company Limited | 7 | Annual Review 2020 |
Review of Operations and Activities
continued
Figure 2: Portfolio Performance* - Per Annum Returns to 30 June 2020
3.1% | 6.7% | 7.5% | 9.3% | 9.4% |
- | ||||
-6.6% |
1 year return | 5 year return | 10 year return |
Net asset per share growth plus | S&P/ASX 200 Accumulation | |
dividends, including franking | Index, including franking |
* Assumes an investor can take full advantage of the franking credits.
Figure 3: Performance of Selected Sectors of the Market
160
140
120
100
80
60
40
Jul | 19 |
Aug | 19 | Sep | 19 | Oct | 19 | Nov | 19 | Dec | 19 | Jan | 20 | Feb | 20 | Mar | 20 | Apr | 20 | May | 20 | Jun | 20 |
Financials | Healthcare | Energy | Information Technology |
Australian Foundation Investment Company Limited | 8 | Annual Review 2020 |
Positioning the Portfolio
During the period, AFIC continued to adjust the portfolio and took advantage of the decline in share prices to increase holdings in companies it wanted to own more of. This included participation in the recent deeply discounted capital raisings that have occurred.
As a result, a number of purchases were undertaken during the year. This included placements in National Australia Bank, Cochlear, Auckland International Airport, Oil Search, NEXTDC, Ramsay Health Care, Reece and Qube Holdings. Major additions included Goodman Group, Telstra (to bring some income into the portfolio), Macquarie Group, Cleanaway and Sydney Airport. While there has been a reduction in the number of
holdings in the portfolio over the year from
76 to 61, three new companies (listed below) were added, given we consider the long term opportunity for each business to be attractive:
- Altium is an American domiciled, Australian owned software company that provides PC-based electronics design software for engineers who design printed circuit boards.
- Netwealth provides independent investment platform services to institutional, corporate and retail clients.
- Ryman Health Care engages in the provision of integrated retirement villages for the elderly. It offers independent living, serviced apartment, rest home, hospital, dementia, and short term care. It operates throughout New Zealand and Australia.
Australian Foundation Investment Company Limited | 9 | Annual Review 2020 |
Review of Operations and Activities
continued
Major sales included the complete disposal of holdings in Treasury Wine Estates, Suncorp Group, Scentre Group, Adelaide Brighton and Perpetual, as these funds were deployed elsewhere in the portfolio. There was also some small trimming of the position in James Hardie Industries, although it remains a major holding in the portfolio.
Figure 4 highlights the profile of AFIC's portfolio by the various sectors of the market at the end of the financial year and how it differs from the Index.
Figure 4: AFIC Investment by Sector Versus the S&P/ASX 200 Index as at 30 June 2020
20% | ||||||||||||||||
15% | ||||||||||||||||
10% | ||||||||||||||||
5% | ||||||||||||||||
0% | 17.2% | 16.6% 15.9% | 15.8% | 8.3% | 6.0% | 4.6% | 4.4% | 4.0% | 3.0% | 1.7% | 1.5% | 1.0% | ||||
Banks | Healthcare | Industrials | Materials | Other | Financials | ConsumerDiscretionary | Consumer | Staples | Communication | Services | InformationTechnology | Energy | RealEstate | Cash | Utilities | |
AFIC portfolio weight | S&P/ASX 200 Index weight |
Australian Foundation Investment Company Limited | 10 | Annual Review 2020 |
Australian Foundation Investment Company Limited | 11 | Annual Review 2020 |
Review of Operations and Activities
continued
Australian Foundation Investment Company Limited | 12 | Annual Review 2020 |
Share Price Return
The share price return, including reinvestment of dividends and franking credits, over the
12 months to 30 June 2020 was 2.9 per cent, which is ahead of the portfolio return for the year. The share price was trading at a premium of 2.2 per cent to the net asset backing (before tax on unrealised gains) at the end of June 2020, whereas at 30 June 2019 the discount was
3.7 per cent (Figure 5). During this period the net asset backing figure, including franking, fell 3.1 per cent.
Whilst the share price can often fluctuate between a premium and discount to net asset backing, over the long term the share price return normally aligns with the portfolio return.
Figure 5: Share Price Premium/Discount to Net Asset Backing
15%
10%
5%
0%
-5%
-10%
Jun | 09 | Jun | 10 | Jun | 11 | Jun | 12 | Jun | 13 | Jun | 14 | Jun | 15 | Jun | 16 | Jun | 17 | Jun | 18 | Jun | 19 | Jun | 20 |
Australian Foundation Investment Company Limited | 13 | Annual Review 2020 |
Review of Operations and Activities
continued
Outlook
As we move into the new financial year, the outlook remains unclear as companies face an extremely difficult operating environment. While recent fiscal and monetary support has provided some breathing space for the economy, the environment moving forward is going to be largely dictated by the progress made on suppressing COVID-19 in Australia and across the globe.
In this environment, despite very low interest rates and the significant income support provided by governments, it is difficult to reconcile the expansion of market valuations (Figure 6) with the pressure company profits and dividends are likely to remain under. Given the strength of the market since the lows recorded in March and the further adjustments that have been made to the portfolio during this market weakness, we are content to be patient. We believe the portfolio is well positioned to withstand further volatility given the high quality of companies in the portfolio.
Australian Foundation Investment Company Limited | 14 | Annual Review 2020 |
Figure 6: Valuation of the Market - Price Earnings Ratio of the S&P/ASX 200 Index
Times
20 | |
19 | |
18 | |
17 | |
16 | |
15 | 5-year average 15.9 |
14 | |
13 |
2015 | 2016 | 2017 | 2018 | 2019 | 2020 |
Source: FactSet
Australian Foundation Investment Company Limited | 15 | Annual Review 2020 |
Top 25 Investments
As at 30 June 2020
Includes investments held in both the investment and trading portfolios.
Value at Closing Prices at 30 June 2020
Total Value | % of the | ||
$ Million | Portfolio | ||
1 | CSL | 608.5 | 8.5 |
2 | Commonwealth Bank of Australia | 548.4 | 7.7 |
3 | BHP Group* | 498.8 | 7.0 |
4 | Wesfarmers | 330.5 | 4.6 |
5 | Transurban Group | 326.9 | 4.6 |
6 | Westpac Banking Corporation | 286.9 | 4.0 |
7 | Macquarie Group | 257.3 | 3.6 |
8 | National Australia Bank | 235.3 | 3.3 |
9 | Woolworths Group | 211.3 | 3.0 |
10 | Rio Tinto* | 195.8 | 2.7 |
11 | Amcor | 174.6 | 2.5 |
12 | Australia and New Zealand Banking Group | 171.3 | 2.4 |
13 | Telstra Corporation* | 170.6 | 2.4 |
14 | James Hardie Industries | 142.8 | 2.0 |
15 | Ramsay Health Care | 134.4 | 1.9 |
16 | Brambles | 131.9 | 1.9 |
17 | Sonic Healthcare | 123.4 | 1.7 |
18 | Sydney Airport | 121.6 | 1.7 |
19 | Coles Group | 121.3 | 1.7 |
20 | Mainfreight | 120.4 | 1.7 |
21 | Fisher & Paykel Healthcare Corporation | 114.4 | 1.6 |
22 | ResMed | 108.4 | 1.5 |
23 | Qube Holdings | 102.7 | 1.4 |
24 | Goodman Group | 99.3 | 1.4 |
25 | Woodside Petroleum | 96.6 | 1.4 |
Total | 5,433.4 | ||
As percentage of total portfolio value (excludes cash) | 76.3% |
* Indicates that options were outstanding against part of the holding.
Australian Foundation Investment Company Limited | 16 | Annual Review 2020 |
Income Statement
For The Year Ended 30 June 2020
2020 | 2019 | |
$'000 | $'000 | |
Dividends and distributions | 257,858 | 433,009 |
Revenue from deposits and bank bills | 1,554 | 3,615 |
Other revenue | 42 | - |
Net gains/(losses) on trading portfolio (including | ||
unrealised gains or losses) | 9,740 | (4,686) |
Total income | 269,194 | 431,938 |
Finance costs | (1,047) | (826) |
Administration expenses (net of recoveries) | (9,906) | (9,583) |
Profit before income tax | 258,241 | 421,529 |
Income tax | (17,846) | (15,156) |
Net profit | 240,395 | 406,373 |
Cents | Cents | |
Net profit per share | 19.88 | 34.00 |
Australian Foundation Investment Company Limited | 17 | Annual Review 2020 |
Balance Sheet
As at 30 June 2020
2020 | 2019 | |
$'000 | $'000 | |
Current assets | ||
Cash | 111,318 | 206,429 |
Receivables | 17,347 | 40,128 |
Trading portfolio | 4,304 | - |
Total current assets | 132,969 | 246,557 |
Non-current assets | ||
Investment portfolio | 7,117,970 | 7,572,640 |
Deferred tax assets | 872 | - |
Total non-current assets | 7,118,842 | 7,572,640 |
Total assets | 7,251,811 | 7,819,197 |
Current liabilities | ||
Payables | 884 | 932 |
Tax payable | 30,771 | 17,052 |
Trading portfolio | - | 7,033 |
Provisions | 4,765 | 4,114 |
Total current liabilities | 36,420 | 29,131 |
Non-current liabilities | ||
Provisions | 1,375 | 1,471 |
Deferred tax liabilities | - | 100 |
Deferred tax liabilities - investment portfolio | 973,499 | 1,163,749 |
Total non-current liabilities | 974,874 | 1,165,320 |
Total liabilities | 1,011,294 | 1,194,451 |
Net assets | 6,240,517 | 6,624,746 |
Shareholders' equity | ||
Share capital | 2,947,293 | 2,888,186 |
Revaluation reserve | 2,166,030 | 2,561,314 |
Realised capital gains reserve | 397,712 | 462,257 |
General reserve | 23,637 | 23,637 |
Retained profits | 705,845 | 689,352 |
Total shareholders' equity (including minority interests) | 6,240,517 | 6,624,746 |
Australian Foundation Investment Company Limited | 18 | Annual Review 2020 |
Summarised Statement of Changes in Equity
For the Year Ended 30 June 2020
2020 | 2019 | |
$'000 | $'000 | |
Total equity at the beginning of the year | 6,624,746 | 6,339,260 |
Dividends paid | (281,527) | (372,670) |
Shares issued - Dividend Reinvestment Plan | 59,249 | 76,556 |
Other Share Capital Adjustments | (142) | (141) |
Total transactions with shareholders | (222,420) | (296,255) |
Profit for the year | 240,395 | 406,373 |
Revaluation of investment portfolio | (568,806) | 261,984 |
Provision for tax on revaluation | 167,602 | (86,616) |
Revaluation of investment portfolio (after tax) | (401,204) | 175,368 |
Total comprehensive income for the year | (160,809) | 581,741 |
Realised gains on securities sold | 16,728 | 57,016 |
Tax expense on realised gains on securities sold | (22,648) | (20,394) |
Net realised gains/(losses) on securities sold | (5,920) | 36,622 |
Transfer from revaluation reserve to realised gains reserve | 5,920 | (36,622) |
Dividend paid to minority interests | (1,000) | - |
Total equity at the end of the year | 6,240,517 | 6,624,746 |
A full set of AFIC's final accounts are available on the Company's website.
Australian Foundation Investment Company Limited | 19 | Annual Review 2020 |
Holdings of Securities
At 30 June 2020
Individual investments for the combined investment and trading portfolios as at 30 June 2020 are listed below. The list should not, however, be used to evaluate portfolio performance or to determine the net asset backing per share at other dates. Net asset backing is advised to the Australian Securities Exchange each month and is recorded on the toll free telephone service at 1800 780 784 and posted to AFIC's website afi.com.au.
Individual holdings in the portfolios may change during the course of the year. In addition, holdings which are part of the trading portfolio may be subject to call options or sale commitments by which they may be sold at a price significantly different from the market price prevailing at the time of the exercise or sale.
Number | Number | Market | ||
Held | Held | Value | ||
Ordinary Shares, Trust Units | 2019 | 2020 | 2020 | |
Code | or Stapled Securities | '000 | '000 | $'000 |
AIA | Auckland International Airport | 1,770 | 6,073 | 37,412 |
ALQ | ALS | 7,542 | 7,542 | 49,477 |
ALU | Altium | 0 | 308 | 9,988 |
AMC | Amcor | 12,527 | 12,060 | 174,629 |
ANN | Ansell | 1,284 | 1,079 | 39,594 |
ANZ | Australia and New Zealand | 9,188 | 9,188 | 171,259 |
Banking Group | ||||
APA | APA Group | 6,540 | 6,665 | 74,181 |
APE | AP Eagers | 1,157 | 1,157 | 7,807 |
ARB | ARB Corporation | 3,081 | 3,503 | 62,874 |
ASX | ASX | 709 | 1,054 | 89,993 |
AUB | AUB Group | 2,026 | 2,526 | 37,130 |
AWC | Alumina | 20,923 | 19,158 | 31,132 |
BHP* | BHP Group | 13,482 | 13,935 | 498,770 |
BKW | Brickworks | 1,854 | 1,629 | 25,781 |
BXB | Brambles | 12,139 | 12,139 | 131,947 |
CAR | Carsales.com | 4,191 | 5,033 | 89,286 |
CBA | Commonwealth Bank of Australia | 7,900 | 7,900 | 548,418 |
COH | Cochlear | 147 | 334 | 63,049 |
COL | Coles Group | 7,293 | 7,068 | 121,349 |
CPU | Computershare | 4,660 | 4,380 | 58,035 |
Australian Foundation Investment Company Limited | 20 | Annual Review 2020 |
Number | Number | Market | ||
Held | Held | Value | ||
Ordinary Shares, Trust Units | 2019 | 2020 | 2020 | |
Code | or Stapled Securities | '000 | '000 | $'000 |
CSL | CSL | 2,048 | 2,120 | 608,530 |
CWY | Cleanaway Waste Management | 11,276 | 25,516 | 56,135 |
DJW | Djerriwarrh Investments | 7,505 | 7,505 | 19,139 |
DUI | Diversified United Investment | 12,030 | 12,030 | 50,888 |
EQT | EQT Holdings | 1,322 | 1,322 | 32,710 |
FPH | Fisher & Paykel Healthcare Corporation | 3,800 | 3,485 | 114,447 |
GMG | Goodman Group | 2,800 | 6,685 | 99,272 |
IAG* | Insurance Australia Group | 5,457 | 6,955 | 39,984 |
IRE | IRESS | 5,000 | 5,929 | 64,925 |
IVC | InvoCare | 1,325 | 2,984 | 31,273 |
JHX | James Hardie Industries | 6,065 | 5,188 | 142,784 |
LIC | Lifestyle Communities | 5,228 | 2,776 | 26,265 |
MFT | Mainfreight (NZX listed) | 3,209 | 3,268 | 120,385 |
MIR | Mirrabooka Investments | 8,728 | 8,728 | 20,336 |
MLT | Milton Corporation | 10,841 | 9,776 | 39,984 |
MQG | Macquarie Group | 1,963 | 2,170 | 257,307 |
NAB | National Australia Bank | 12,885 | 12,917 | 235,347 |
NWL | Netwealth Group | 0 | 1,100 | 9,867 |
NXT | NEXTDC | 4,325 | 7,864 | 77,701 |
ORG | Origin Energy | 6,500 | 6,500 | 37,960 |
ORI | Orica | 1,970 | 2,226 | 37,037 |
OSH | Oil Search | 18,033 | 26,244 | 83,195 |
QUB | Qube Holdings | 34,962 | 35,302 | 102,729 |
REA | REA Group | 384 | 553 | 59,637 |
REH | Reece | 5,950 | 7,951 | 73,073 |
RHC | Ramsay Health Care | 1,585 | 2,020 | 134,370 |
RIO* | Rio Tinto | 1,946 | 2,001 | 195,793 |
RMD | ResMed | 3,935 | 3,935 | 108,370 |
RWC | Reliance Worldwide Corporation | 16,902 | 13,134 | 38,615 |
RYM | Ryman Health Care (NZX listed) | 0 | 880 | 10,763 |
Australian Foundation Investment Company Limited | 21 | Annual Review 2020 |
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Australian Foundation Investment Company Limited published this content on 31 August 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 31 August 2020 07:49:00 UTC
