The Australian Foundation Investment Company (AFIC, ASX:AFI) is Australia's largest LIC (listed investment company), with a market capitalisation of over $7 billion. The next largest LIC is Argo Investments (ARG, $5.6 billion). The third largest is Milton Corporation (MLT, $3 b). Together, AFI, ARG & MLT are known as the big 3, in terms of LICs - and manage almost $16 billion between them.
AFIC (AFI) was established in 1928 and aims to provide shareholders with attractive investment returns through access to a growing stream of fully franked dividends and enhancement of capital invested over the medium to long term.
Benchmark: S&P/ASX 200 Accumulation Index.
Size of portfolio: $7.2 billion at May 20 2019.
Management cost: 0.14 per cent, no performance fees.
Investment style: Active, fundamental, bottom-up, value.
Suggested investment period: Five years to 10 years or longer.
Net asset backing: released every month with top 25 investments.
As you can see above, they have very low management fees, which is a reasonable expectation for a manager that is mostly passive - they don't do a lot of trading and their portfolio is usually quite stable. They're not as low as some ETFs - who are entirely passive - but they're still pretty low.
Most recently published NTA:
30 April 2019 pre-tax NTA = $6.19. Post-tax NTA=$5.30. With these long term buy-and-hold LICs like AFI, ARG & MLT, it's the pre-tax NTA that matters most. The post-tax NTA includes tax paid on all unrealised capital gains, and that would really only apply if the LIC was to be wound up and everything had to sold. They exist primarily to provide a reliable income stream to their shareholders, and so they are very unlikely to start liquidating their long-term holdings which they rely on themselves for their own income (via dividends and distributions).
When looking at a LIC with a high portfolio turnover, such as most of the Wilson LICs (WAA, WAX, WAM, WMI, even WLE to some extent) it pays to also keep an eye on the post-tax (or "after tax") NTA, but in the case of AFI (and ARG & MLT) it is pretty irrelevant. It's the pre-tax NTA that matters here.
A good way of looking at it is that if you wanted to replicate their portfolio, the pre-tax NTA is what it would cost you to do it. The pre-tax NTA is the market value of their portfolio. For that reason, it usually makes little sense to pay above NTA for shares in a LIC such as AFI because buying AFI at a 5% premium is like saying I'll buy that portfolio of shares for what I could buy them on the market for, plus I'll pay you an extra 5% for the convenience.
However, convenience isn't the only reason people are prepared to pay premiums for LIC shares. Other possible reasons include the manager's track record of outperforming the market (either in bad times, good times, or both), above-market dividend yields (income), income stream reliability (LICs have the ability to smooth dividends via their use of a profit reserve where they don't have to pay all of their profits out in dividends or distributions like a trust structure usually has to - and so LICs can hold some back to allow them to maintain dividend levels during years when they earn less income themselves), and another reason why you might be prepared to pay a premium to NTA is because you think that premium is just going to increase, not decrease, for a variety of reasons.
WAM & WAX for instance have come back to single digit premiums now, rather than the huge 20%+ premiums they were trading at 18 months ago, because of underperformance and the negativity surrounding Labor's proposed changes to franking credit refunds (which is now clearly off the table since Labor have lost the election).
AFI themselves have more recently been trading at a discount to NTA because of the same concerns. There are a lot of factors that go into why LICs trade at premiums or discounts to NTA, but it mostly comes down to (1) the performance of the manager, and (2) the perception of their ability to provide an increasing stream of fully franked dividends (and of those franking credits being of real value to the shareholders receiving them). This might help explain why Geoff Wilson was so focussed over the past year in mobilising support to help defeat Labor's proposed changes to the refundability of franking credits - as he runs six LICs himself.
You can read AFIC's April 30th NTA & Top 25 Holdings Report here.
They also have a useful facts (profile for planners) page on their website which can be reached here. [includes most recent NTA and Top 25 holdings list.]
As you would expect with a large cap LIC that mostly hugs the index, they are big on banks and materials (miners) and those two sectors represent 21% and 18% of their portfolio respectively. That's 39% of their portfolio in just two sectors. However, they also are occasionally prepared to stray outside of the ASX50 and take reasonable positions in smaller companies like Mainfreight (NSX: MFT) and Qube (ASX: QUB).
