Australian Foundation Investment : 2020 Half Year Review

Contents

• 1 Half-Year in Summary

  • 15 Summarised Statement of Changes in Equity

• 2 About the Company

  • 16 Holdings of Securities

• 4 Review of Operations and Activities

  • 19 Major Transactions in the Investment Portfolio

• 12 Top 25 Investments

  • 20 Company Particulars

• 13 Income Statement

  • 21 Shareholder Information

• 14 Balance Sheet

AUSTRALIAN FOUNDATION INVESTMENT COMPANY IS A LISTED INVESTMENT COMPANY INVESTING

IN AUSTRALIAN AND NEW ZEALAND EQUITIES.

ABN 56 004 147 120

Half-Year in Summary

2020

Profit for the Half-Year

$84.1m

Down 42.4% from 2019

Fully Franked Interim Dividend

10¢

10 cents in 2019

6 Month

Total Portfolio Return

15.2%

Including franking*

S&P/ASX 200 Accumulation Index including franking* 13.7%

6 Month Total Shareholder ReturnManagement Expense Ratio (Annualised)Total Portfolio

22.5% 0.10% $8.1b

Including cash at 31 December $8.0 billion in 2019

* Assumes an investor can take full advantage of the franking credits.

Share price plus dividend

0.10% in 2019

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

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 timeframe.

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 six months to 31 December 2020, this was 0.10 per cent (annualised), or 10 cents for each $100 invested.

Review of Operations and Activities

Profit and Dividend

Half-year profit was $84.1 million, down from $146.1 million in the corresponding period last year.

Difficult operating conditions arising from the COVID-19 pandemic meant investment income for the six months to 31 December 2020 was $95.2 million, down from $164.1 million in the corresponding period last year. The biggest reductions came from the major banks, BHP, Macquarie Group and Transurban, while a number of companies in the portfolio did not pay a dividend during the half.

Despite the fall in the half-year earnings per share to 6.9 cents, the interim dividend for the half-year is 10 cents per share, fully franked, the same as the previous corresponding period. Part of the interim dividend this year has been funded from reserves.

The management expense ratio for AFIC is 0.10 per cent (annualised), with no performance fees.

Portfolio Returns and Positioning

The Australian equity market was pushed higher in the first half of the financial year (Figure 1) as global markets rallied on the back of very low interest rates, significant government stimulus and increased confidence about effective vaccines for the COVID-19 pandemic. This is despite the negative impact the pandemic is having on corporate earnings and renewed outbreaks of the virus in key global economies.

The increase in the Australian market has been driven by the information technology sector (Figure 2), driven largely by the ongoing momentum of Afterpay (which AFIC does

not hold), and the performance of Xero and NEXTDC, and the materials sector (with BHP and Rio Tinto very strong on the back of a very high iron ore price). Industrials and banks underperformed over the 12-month period. However, banks have been strong over the six months to 31 December 2020, as economic conditions improved and there appeared to be a better outlook for a reduced level of bad debts arising from deferred loans in housing.

Through this period, AFIC has continued to focus the portfolio on quality businesses with a competitive advantage, strong returns on invested capital and resilient balance sheets. This has delivered a satisfactory portfolio performance despite not being in some of the more cyclical sectors of the market which have rebounded more recently as investors look for value in previously underperforming sectors, such as travel.

AFIC's portfolio was up 15.2 per cent for the six months to 31 December 2020 compared with the S&P/ASX 200 Accumulation Index, which was up 13.7 per cent 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 Commonwealth Bank, BHP, Mainfreight, Xero, Wesfarmers, James Hardie Industries, ARB Corporation and Reece.

For the 12 months to 31 December 2020, the portfolio return, including franking, was 5.8 per cent. The return from the S&P/ASX 200 Accumulation Index over this period, including franking, was 2.4 per cent (Figure 3 on page 6).

Figure 1: S&P/ASX 200 Index - 12 Months to 31 December 2020

7,200

6,800 6,400 6,000 5,600 5,200 4,800 4,400

Source FactSet

Figure 2: Selected Sectors Total Return - 12 Months to 31 December 2020

180

Jun 20

Jul20

Aug 20

Sep 20

Oct20

Nov 20

Dec 20

Jan 20

Feb 20

Mar20

S&P/ASX 200 Industrials

S&P/ASX 200 Information TechnologyS&P/ASX 200 BanksS&P/ASX 200 Resources

Source FactSet

Review of Operations and Activities continued

Portfolio Adjustments

Portfolio turnover was lower during the past six months than in previous periods. Repositioning of the portfolio in prior years has produced an increased weighting toward our preferred companies with little need for extensive adjustments. At 31 December 2020, there were 61 companies in the portfolio.

Having taken advantage of the large market falls in March and April 2020 to participate in selected capital raisings, further volatility during the past six months has provided opportunities to add to holdings in Woolworths, CSL and ASX. The purchase of Sydney Airport stock was through the participation in their entitlement issue. Two new companies werealso added: Fineos, a software business for insurance, and Nanosonics, a medical device company.

Major sales included the complete disposal of South32, reduction of the holding in Alumina and a trimming of the holdings in Oil Search and Cleanaway Waste Management. Other sales included a reduction in James Hardie Industries, as the share price ran up very strongly through the period, and National Australia Bank, as the share price made strong gains following its capital raising in May 2020.

Figure 4 highlights the profile of AFIC's portfolio by the various sectors of the market at the end of the calendar year and how it differs from the Index.

Figure 3: Portfolio Performance (Including the Full Benefit of Franking) − to 31 December 2020

15.2% 13.7%

9.8% 10.2%

2.4%

9.5% 9.4%

5.8%

6 month return

1 year returnNet asset per share growth plus dividends, including franking

5 year return

10 year returnS&P/ASX 200 Accumulation Index including franking

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

Figure 4: AFIC Investment by Sector Versus the S&P/ASX 200 Index as at 31 December 2020

20%

15%

10%

5%

0%

17.5% 16.9% 15.4% 15.0% 8.5%

6.4%

4.8%

4.7%

4.3%

2.4%

2.0%

1.3%

0.8%

B a n k s

In d u s tr ia ls

M a t e r ia ls

H e a lt h c a r e

O th e r

F in a n c ia ls

C o n s u m e r

D is c r e t io n a r y

In fo r m a tio n

T e c h n o lo g y

C o n s u m e r

S ta p le s

C o m m u n ic a tio n

S e r v ic e s

E n e r g y

R e a l

E s ta te

C a s h

U tilitie s

AFIC portfolio weightS&P/ASX 200 Index weight

Source: FactSet

Review of Operations and Activities continued

Share Price and Returns

Figure 5 highlights where AFIC's share price was trading relative to the net asset backing at 31 December 2020. Over the six-month period the share price has moved from a 2 per cent premium at 30 June 2020 to a premium of 10 per cent to net asset backing by 31 December 2020.

This change in the premium is reflected in the recent strong share price return relative to the S&P/ASX 200 Accumulation Index for the six-month period to 31 December 2020 (Figure 6). Importantly, the long term 10-year return is 8.4 per cent for the share price in comparison to 7.8 per cent for the Index. The figures for the Index and share price do not include any benefit a shareholder can derive from the franking credits attached to the dividends paid.

International Portfolio

At the AGM held in October 2020, we highlighted that AFIC was considering investing a small part of its funds (1.5 per cent) in a diversified global equities portfolio of high-quality listed companies. As highlighted at the time, we believe it will add to the growth prospects and diversification of our existing Australian-based portfolio. We are expecting funds to be invested in the coming months. In the future, when the performance of this portfolio has been assessed, we will consider whether it represents an opportunity for our shareholders and other investors to invest in this global portfolio directly.

Figure 5: Share Price Relative to Net Asset Backing Per Share

15%

10%

5%

0%

-5%

-10%

Dec14

Dec15

Dec16

Dec17

Dec18

Dec19

Source: FactSet

Figure 6: Share Price Return − to 31 December 2020

22.5%

13.2%

6.6%

1.4%

8.7% 8.7%

8.4% 7.8%

6 month return

1 year return

5 year return

10 year returnShare price growth plus dividends

S&P/ASX 200 Accumulation Index

Per annum returns other than for six months.

Review of Operations and Activities continued

Outlook

The immediate course of the pandemic remains uncertain as does the outlook for corporate earnings and dividends.

The longevity and effectiveness of monetary policy and fiscal stimulus appear to remain key to underlying economic conditions, as does the potential effectiveness of COVID-19 vaccines moving into the new calendar year. In addition, the change in administration in the United States and the nature of geopolitical relationships with China across the globe may

Figure 7: S&P/ASX 200 Price Earnings Ratio

20

19

18

17

16

15

Times

14

13

12

11

10

9

8

Jan 11

Jul11

Jan 12

Jul12

further impact international equity markets.

While equity markets are continuing to be heavily influenced by low interest rates, and with valuations for many companies at a high point (Figure 7), any negative sentiment could produce significant volatility. We believe the portfolio is well positioned for the long term should this occur. AFIC has sufficient funds available should good buying opportunities arise in the second half of the financial year during any market weakness.

Jan 13

Jul13

Jan 14

Jul14

Source: FactSet

Top 25 Investments

As at 31 December 2020

Includes investments held in both the investment and trading portfolios.

Value at Closing Prices at 31 December 2020

Total Value	% of the
$ Million	Portfolio
1	Commonwealth Bank of Australia	648.7	8.1
2	CSL	615.7	7.7
3	BHP Group*	590.6	7.4
4	Wesfarmers	371.5	4.7
5	Transurban Group	322.9	4.1
6	Westpac Banking Corporation	301.1	3.8
7	Macquarie Group	300.4	3.8
8	National Australia Bank*	271.5	3.4
9	Woolworths Group	249.2	3.1
10	Rio Tinto*	227.3	2.9
11	Mainfreight	211.9	2.7
12	Australia and New Zealand Banking Group	192.7	2.4
13	Amcor	177.9	2.2
14	James Hardie Industries*	175.4	2.2
15	Sydney Airport*	163.9	2.1
16	Telstra Corporation	162.4	2.0
17	Brambles	128.7	1.6
18	Coles Group	128.2	1.6
19	Xero	127.8	1.6
20	Goodman Group	126.4	1.6
21	Sonic Healthcare	119.1	1.5
22	Ramsay Health Care	119.1	1.5
23	Seek	118.7	1.5
24	Reece	117.7	1.5
25	ResMed	110.3	1.4
Total	6,079.1
76.3%

As percentage of total portfolio value (excludes cash)

* Indicates that options were outstanding against part of the holding.

Income Statement
For the Half-Year Ended 31 December 2020
Half-Year	Half-Year
2020	2019
$'000	$'000

Dividends and distributions	93,837	153,929
Revenue from deposits and bank bills	95	1,109
Net gains/(losses) on trading portfolio	(1,009)	6,628
Other revenue	-	21
Total income	92,923	161,687
Finance costs	(1,122)	(462)
Administration expenses	(3,680)	(3,874)
Profit before income tax	88,121	157,351
Income tax	(3,987)	(11,250)
Profit for the half-year	84,134	146,101
Cents	Cents
Earnings per share	6.89	12.10
Australian Foundation Investment Company Limited

Balance Sheet

As at 31 December 2020

31 Dec	30 June
2020	2020
$'000	$'000
Current assets
Cash	103,222	111,318
Receivables	6,545	17,347
Trading portfolio	2,157	4,304
Tax refund due	3,802	-
Total current assets	115,726	132,969
Non-current assets
Investment portfolio	7,969,157	7,117,970
Deferred tax assets	4,119	872
Total non-current assets	7,973,276	7,118,842
Total assets	8,089,002	7,251,811
Current liabilities
Payables	1,427	884
Tax payable	-	30,771
Provisions	3,402	4,765
Total current liabilities	4,829	36,420
Non-current liabilities
Provisions	667	1,375
Deferred tax liabilities - investment portfolio	1,253,986	973,499
Total non-current liabilities	1,254,653	974,874
Total liabilities	1,259,482	1,011,294
Net assets	6,829,520	6,240,517
Shareholders' equity
Share capital	2,982,378	2,947,293
Revaluation reserve	2,795,749	2,166,030
Realised capital gains reserve	343,563	397,712
General reserve	23,637	23,637
Retained profits	684,193	705,845
Total shareholders' equity (including minority interests)	6,829,520	6,240,517

Summarised Statement of Changes in Equity

For the Half-Year Ended 31 December 2020

Half-Year	Half-Year
2020	2019
$'000	$'000
Total equity at the beginning of the half-year	6,240,517	6,624,746
Dividends paid	(164,556)	(164,150)
Dividend Reinvestment Plan	35,165	34,407
Other share capital adjustments	(80)	(76)
Total transactions with shareholders	(129,471)	(129,819)
Profit for the half-year	84,134	146,101
Revaluation of investment portfolio	908,353	219,411
Provision for tax on revaluation	(274,013)	(68,366)
Revaluation of investment portfolio (after tax)	634,340	151,045
Total comprehensive income for the half-year	718,474	297,146
Realised gains/(losses) on securities sold	(1,854)	16,857
Tax on realised gains/(losses) on securities sold	6,475	(22,045)
Net realised gains/(losses) on securities sold	4,621	(5,188)
Transfer from revaluation reserve to realised gains reserve	(4,621)	5,188
Total equity at the end of the half-year	6,829,520	6,792,073

A full set of AFIC's interim accounts are available on the Company's website.

Holdings of Securities

As at 31 December 2020

Individual investments for the combined investment and trading portfolios as at 31 December 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	Market
Ordinary Shares, Trust Units	Held	Value
Code	or Stapled Securities	'000	$'000
AIA	Auckland International Airport	6,073	43,546
ALQ	ALS	7,012	67,387
ALU	Altium	396	13,443
AMC	Amcor	11,600	177,945
ANN	Ansell	1,079	37,523
ANZ	Australia and New Zealand Banking Group	8,488	192,671
APA	APA Group	6,665	64,317
ARB	ARB Corporation	3,503	107,884
ASX	ASX	1,243	89,462
AUB	AUB Group	2,526	40,893
AWC	Alumina	6,413	11,768
BHP*	BHP Group	13,935	590,570
BKW	Brickworks	1,369	26,277
BXB	Brambles	12,139	128,670
CAR	Carsales.com	5,033	100,711
CBA	Commonwealth Bank of Australia	7,900	648,669
COH	Cochlear	334	63,072

Number	Market
Ordinary Shares, Trust Units	Held	Value
Code	or Stapled Securities	'000	$'000
COL	Coles Group	7,068	128,204
CPU	Computershare	4,380	63,904
CSL	CSL	2,174	615,722
CWY	Cleanaway Waste Management	17,014	39,983
DJW	Djerriwarrh Investments	7,505	23,267
DUI	Diversified United Investment	12,030	57,865
EQT	EQT Holdings	1,322	34,996
FCL	Fineos Corporation	4,707	17,417
FPH	Fisher & Paykel Healthcare Corporation	3,485	107,861
GMG	Goodman Group	6,685	126,413
IAG*	Insurance Australia Group	9,527	44,670
IRE	IRESS	6,591	69,933
IVC	InvoCare	3,512	40,217
JHX*	James Hardie Industries	4,590	175,424
LIC	Lifestyle Communities	2,776	35,510
MFT	Mainfreight (NZX listed)	3,268	211,916
MIR	Mirrabooka Investments	8,728	28,365
MLT	Milton Corporation	9,776	46,631
MQG	Macquarie Group	2,170	300,437
NAB*	National Australia Bank	12,055	271,525
NAN	Nanosonics	3,011	24,175
NWL	Netwealth Group	1,445	23,033
NXT	NEXTDC	7,864	96,183
ORG	Origin Energy	6,500	30,940
ORI	Orica	2,226	33,720

Holdings of Securities
As at 31 December 2020 continued
Number	Market
Ordinary Shares, Trust Units	Held	Value
Code	or Stapled Securities	'000	$'000
OSH	Oil Search	19,185	71,177
QUB	Qube Holdings	35,302	103,788
REA	REA Group	553	82,291
REH	Reece	7,951	117,679
RHC	Ramsay Health Care	1,915	119,075
RIO*	Rio Tinto	2,001	227,302
RMD	ResMed	4,050	110,282
RWC	Reliance Worldwide Corporation	11,463	46,426
RYM	Ryman Healthcare (NZX listed)	880	12,470
SEK	Seek	4,160	118,674
SHL	Sonic Healthcare	3,704	119,090
SYD*	Sydney Airport	25,606	163,922
TCL	Transurban Group	23,637	322,878
TLS	Telstra Corporation	54,510	162,440
WBC	Westpac Banking Corporation	15,545	301,107
WES	Wesfarmers	7,372	371,549
WOW	Woolworths Group	6,339	249,175
WPL*	Woodside Petroleum	4,020	91,058
XRO	Xero	871	127,807
Total	7,971,314

* Indicates that options were outstanding against part of the holding.

Major Transactions in the Investment Portfolio

Cost

Acquisitions	($'000)
Woolworths Group	25,158
Fineos Corporation	20,998
Sydney Airport (1 for 5. 15 entitlement offer)	18,986
Nanosonics	18,518
CSL	15,071
ASX	14,808
Proceeds
Disposals	($'000)
South32#	35,848
Alumina	22,869
Oil Search	21,471
James Hardie Industries	18,949
Cleanaway Waste Management	17,961
National Australia Bank	15,456
# Complete disposal from the portfolio.
New Companies Added to the Investment Portfolio
Fineos Corporation
Nanosonics

Company Particulars

Australian Foundation Investment Company Limited (AFIC)

ABN 56 004 147 120

Registered Office and Mailing Address Level 21, 101 Collins Street

Melbourne Victoria 3000

AFIC is a listed investment company. As such it is an investor in equities and similar securities on the stock market primarily in Australia.

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 PorterAuditor PricewaterhouseCoopers Chartered Accountants

Country of Incorporation Australia

Contact Details

Telephone	[phone]
Facsimile	[phone]
Website	afi.com.au
Email	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)

Shareholder Information

Securities Registrar

Computershare Investor Services Limited Yarra Falls, 452 Johnston Street Abbotsford Victoria 3067

AFIC Shareholder

Enquiry Lines 1300 662 270 (Australia)

0800 333 501 (New Zealand) [phone]

(from overseas)

Facsimile [phone]

Website investorcentre.com.au/contact

Share Registrar

For all enquiries relating to shareholdings, dividends and related matters, please contact the share registrar in your country.

Securities Exchange Codes

AFI Ordinary shares (ASX and NZX)

Shareholder Meeting

Note the shareholder meetings which are usually held in March in various capital cities have been replaced by a webinar/telephone briefing to be held on 16 March 2021 at 10.00am.

Registration details for the webinar and dial-in phone number for teleconference participants have been provided in a separate invitation letter/email to shareholders.

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