AFIC shareholder questions answered

Our shareholders touched on a wide variety of topics at recent the Annual General Meeting. Here we recap some of the questions that were put to us including details about dividends, the international portfolio, ESG, and our approach to smaller companies.

What is the outlook for AFIC dividends and what is the impact of LIC gains on the dividend?

One of the advantages of an LIC such as AFIC is the ability to create reserves to pay dividends when times are tough. Over the last five years, underlying earnings were below the dividend paid - we used reserves to fund those dividends. In comparison, if you had been invested in a trust with the same sort of holdings as AFIC, you would have seen a fall in your dividend income from 2018 to 2021.

Unlike many companies we invest in and other LICs that cut their dividends in 2020 and 2021, we maintained our dividend throughout this period.

As these other companies start to increase their dividends, it's important to remember they are starting from a lower base due to these prior cuts. AFIC did not cut its dividend even when the going was tough, because we know how important dividends and franking credits are to our shareholders.

With regards to any increase in dividends, we understand inflation is rising. The Board will look at upcoming and forecast results and decide at the appropriate time. The Board is also conscious of the desire to bring the interim dividend payment closer to the amount of the final dividend payment.

A part of the dividend can be sourced from taxable capital gains. Listed investment company (LIC) gains are paid out when we can do so. They arise when we make realised capital gains on selling investments or when we have them sold for us.

As a reminder, these aren't assets and, as such, don't appear on the balance sheet. They are only useful to taxpaying shareholders, which is why we like to distribute them when we can. Because they only arise when we make those capital gains, it will go up and down, but the intent is when we have more capital gains, we'll pay out more as an LIC gain and less when we don't.

What's happening with AFIC's international portfolio?

We've put a very small amount of AFIC's funds - currently 1.2 per cent - into a portfolio of international stocks as a potential precursor to another LIC.

If we were to move in that direction, the new fund would be low-cost, involve no performance fee, be consistent with our investment style as a long-term investor, meaning low portfolio turnover so that it is tax effective.

As in AFIC, our approach is to seek and invest in companies with strong management teams, strong balance sheets, and competitive advantages that are sustainable and underpinned by long-term growth trends.

It's worth noting that outside of this international portfolio, we already hold Australian and New Zealand-based companies that are operating overseas and provide us with valuable insights into what's happening from a global perspective. These companies include James Hardie, ResMed, CSL, Sonic, Macquarie Group, and many others.

So far, the performance of the international portfolio has been encouraging and pleasing. It's slightly ahead of its benchmark in what has been a tricky market and that gives us confidence to carry on with the project during this phase of testing.

How deeply does AFIC consider ESG in the companies in which it invests?

ESG considerations are a very important part of our investment process, and we apply them to all the companies in which we invest, whether they're Australian or international stocks. We want to invest in companies that are doing the right thing.

However, should something occur that we don't agree with, we don't just sell the shares. At the end of the day, we as a shareholder are one of the owners of that company's assets, and we'd prefer to remain that way. Therefore, we'd rather see the company's management change if we don't think they're running the company appropriately and, when historical or new issues arise, we expect the company to address it in an appropriate manner.

We also consider how the companies in which we invest treat their employees. A company that treats its staff well is a great indicator of a good company. For example, logistics provider Mainfreight has a very strong culture of looking after its people - the company employs owner-drivers to drive its trucks and talks about staff being family members. We're very much aligned with that sort of culture. It's critical to making a great investment.

When will we see the benefits of the smaller companies in the portfolio?

The smaller companies in our portfolio include Auckland Airport, FINEOS, Nanosonics, PEXA, and Xero. Nanosonics and FINEOS are in the AFIC "nursery" which make up less than two per cent of the portfolio while PEXA and Xero are more established growth stocks.

Early-stage, high-growth businesses, given their need for investment to grow, are unlikely to pay dividends in the near term. However, we invest in these businesses in the expectation that when they mature, they will be dividend payers and contribute to AFIC's dividend over the long term.

Importantly we remain comfortable with the long-term growth opportunities of our holdings.

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