Australian Foundation Investment : AFIC Half-Year Report for the period 31 December 2021

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RESULTS FOR ANNOUNCEMENT TO THE MARKET

The reporting period is the half-year ended 31 December 2021 with the previous corresponding period being the half-year ended 31 December 2020. The results have been reviewed by the Company's auditors.

Results for announcement to the market

• Revenue from operating activities was $161.8 million, up $65.6 million or 68.1% from the previous corresponding period. This excludes capital gains on investments.
• Profit after tax was $146.0 million (up 73.5% on the previous corresponding period's $84.1 million).
• Profit after tax attributable to members was $146.0 million (up 74.5% on the previous corresponding period's $83.7 million).
• The interim dividend is 10 cents per share, fully franked, the same as last year. The dividend will be paid on 25 February 2022 to ordinary shareholders on the register on 10 February 2022 and the shares are expected to commence trading on an ex-dividend basis on 9 February 2022. There is no conduit foreign income component of the dividend.
• A Dividend Reinvestment Plan (DRP) and Dividend Substitution Share Plan (DSSP) are available, the price for which will be set at a 5% discountto the Volume Weighted Average Price of the Company's shares traded on the ASX and Chi-X automated trading systems over the five trading days from when the shares trade ex-dividend. The last date for the receipt of an election notice for participation in the DRP & DSSP is 5.00 pm (Melbourne time) on 11 February 2022.
• The final dividend for the 2021 financial year was 14 cents per share (fully franked), and it was paid to shareholders on 31 August 2021.
• Net tangible assets per share before any provision for deferred tax on the unrealised gains on the long-term investment portfolio as at 31 December 2021 were $7.76, up from $6.64 at 31 December 2020 (both before allowing for any announced dividends).

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Profit Up Strongly as Income Recovers, Portfolio Outperforms

Half Year Report to 31 December 2021

• AFIC's investment focus is on a diversified portfolio of Australian equities, seeking to provide attractive income and capital growth to shareholders over the medium to long term. This is achieved at a low cost, with lower volatility than the market, and with low portfolio turnover which produces tax effective outcomes for shareholders.
• Half Year Profit was up by 73.5% to $146.0 million following on from the recovery in dividend income. In the corresponding period last year, Half Year Profit was $84.1 million.
• Investment income for the six months to 31 December 2021 was $159.4 million, up from $93.8 million in the corresponding period last year. The biggest increases came from the major banks, Macquarie Group, and BHP and Rio Tinto as a result of previous very strong iron ore prices. A number of companies in the portfolio also reinstated dividends during the half year, which included James Hardie Industries and Ramsay Health Care.
• The interim dividend for the half year is 10 cents per share fully franked, the same as the previous corresponding period.
• The six-month portfolio return including franking was 6.9% compared with the S&P/ASX 200 Index return including franking of 4.6% over the same period.
• For the 12 months to 31 December 2021, the portfolio return including franking was 22.4%. The return from the S&P/ASX 200 Accumulation Index over this period including franking was 18.7%.
• The management expense ratio for AFIC is 0.15% (annualised), with no performance fees.
• The level of economic activity has improved materially from the pandemic-induced lows of mid 2020 putting interest rate increases back on the agenda. While the timing of these increases remains uncertain US interest rates have already started to move upwards leading to increased volatility in equity markets. We remain well positioned to purchase our preferred companies should attractive opportunities present themselves in these conditions.

Portfolio performance (including the full benefit of franking) - to 31 December 2021

Per annum returns other than for six months. AFIC's performance numbers are after costs.

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Portfolio Performance

The Australian equity market continued to deliver gains in the six months to 31 December 2021 following on from the very strong rebound in markets in the first six months of the calendar year. While market valuations remained higher than historical levels, as a result of continued low interest rates, corporate earnings growth remained strong supported by improved economic activity.

The strengthening demand environment is producing supply chain challenges in many industries with rising costs leading to a meaningful increase in reported inflation. In the near term, operating costs are likely to remain elevated making it more challenging for companies to sustain recent strong earnings growth. A feature of our focus on quality businesses is identifying those companies displaying attributes of pricing power over the long term. Companies owning unique assets with a market leadership position are best able to pass through rising costs. Core portfolio holdings are represented by high-quality companies we consider relatively well positioned to pass through any cost increases.

Reflecting the quality of companies in the portfolio during these uncertain times, AFIC's portfolio was up 6.9% for the six months to 31 December 2021 compared with the S&P/ASX 200 Accumulation Index, which was up 4.6% over the same period. These figures include the benefit of franking credits, with AFIC's performance numbers after costs.

Companies in the portfolio that contributed strongly to returns through the six-month period were Macquarie Group, Sydney Airport, Mainfreight, James Hardie Industries and Goodman Group.

AFIC is an investor with a long term focus. Ten-year portfolio return figures to 31 December 2021 are 12.5% versus 12.4% for the S&P/ASX 200 Accumulation Index over the same period. These figures include the full benefit of franking, with AFIC's return after costs. This performance has been achieved with lower portfolio volatility than the market and more consistent dividend income.

Portfolio Adjustments

Short term volatility provided attractive prices to increase our holdings in Transurban, Coles Group, CSL, Goodman Group, Domino's Pizza Enterprises and BHP, where we consider long term prospects for all these companies remains strong. Transurban will be a significant beneficiary as economies gradually reopen, leading to increased traffic across its road transport network, while improved mobility will enhance plasma collection volumes for CSL.

We initiated positions in JB Hi-Fi and WiseTech Global. JB Hi-Fi is the largest consumer electronics retailer in Australia and New Zealand. While primarily providing attractive income to the portfolio, we expect the consumer electronics category to continue delivering meaningful growth. WiseTech Global is a leading developer and provider of software solutions to the global logistics industry facilitating customers to digitise their freight forwarding operations.

We exited Qube Holdings, APA Group, Lifestyle Communities, Origin Energy and Altium, considering each company's long term prospects increasingly challenged as competitive intensity increases. We also exited our holding in Milton Corporation as a result of the takeover by Washington H. Soul Pattinson.

Outlook

Our strategy of owning a diversified portfolio of quality companies that are well placed to deliver earnings growth over the medium to long term remains appropriate. While market volatility may emerge, short term periods of uncertainty often present good buying opportunities for investors focused on a company's long term prospects. The portfolio is soundly positioned despite the spectre of rising interest rates and heightened global uncertainty.

Please direct any enquiries to:
Mark Freeman	Geoff Driver
Managing Director	General Manager
[phone]	[phone]
24 January 2022

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TOP 5 TRANSACTIONS IN THE INVESTMENT PORTFOLIO

Acquisitions

Santos (as a result of the merger with Oil Search) Transurban Group (including participation in entitlement offer) JB Hi-Fi

Coles Group

CSL (participation in placement)

Disposals

Oil Search# (as a result of the merger with Santos)

Qube Holdings#

APA Group#

Milton Corporation#

Lifestyle Communities#

• Complete disposal from the portfolio.

New Companies Added to the Investment Portfolio

Santos (as a result of the merger with Oil Search)

JB Hi-Fi

WiseTech Global

Cost ($'000)

72,660

65,548

47,191

35,000

30,214

Proceeds ($'000)

72,660

68,985

57,159

50,443

36,760

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