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Valuation of $6.03
Added 3 years ago
Scroll down - latest updates are at the bottom. 30 April 2019 pre-tax (before 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 suggests why Geoff Wilson was so singularly 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. Update: 6 months on, AFI's BT NTA on October 31 2019 was $6.51, being up +5.17% on their 30 April NTA of $6.19 (which is an annualised return of +10.34%), so I've updated my valuation to reflect that, which I'll try to do every 6 months as my valuations are marked as being stale. Update: Another 6 months on, AFI's BT NTA on April 30 2020 was $5.54, -14.9% lower than their October 31 NTA, but +6.9% higher than their March 31 NTA of $5.18. Over 12 months (to April 30), AFI are down -5.6% (net asset per share growth plus dividends, including franking, which assumes an investor can take full advantage of the franking credits). AFIC’s portfolio return is also calculated after management fees, income tax and capital gains tax on realised sales of investment (no tax is calculated on unrealised gains however). Their benchmark, the S&P/ASX200 Accumulation Index was down -7.8%, so AFI outperformed their index and any ETF's based on the ASX200 index (like VAS, IOZ and A200) over the past 12 months, by losing a couple of percent less. That's good. That's what a LIC is supposed to achieve, via stock and weighting selection by the manager. Unfortunately, AFI have underperformed their index (and the ETFs) by around 5% over 5 years - or by an average of around 1% p.a. AFI also underperformed the index over 10 years, but only just (7.4% pa vs 7.5% pa). So what's the attraction? I used to like AFI and ARG, always preferring AFI out of the two because while they are VERY similar, AFI seem to have the will to stray off the reservation (go outside the top 50) more than ARG. Have a look at their April 30 top 20 holdings. Firstly Argo (ARG): CSL 6.9%, Macquarie Group 5.1%, BHP 4.8%, CBA 3.9%, Westpac 3.9%, Wesfarmers 3.8%, Rio Tinto 3.7%, ANZ 3.3%, Telstra 2.7%, Ramsay Health Care 2.6%, APA 2.4%, Woolworths 2.3%, Transurban 2.3%, Aust. United Investment 2.2%, NAB 2.2%, Sonic Healthcare 2.0%, Sydney Airport 1.9%, Aristocrat Leisure 1.7%, Amcor 1.6%, Coles 1.6%, Top 20 equity investments = 60.9%, Cash and term deposits = 3.8%. Now AFI: CSL 9.9%, Commonwealth Bank of Australia 7.5%, BHP Group 6.7%, Transurban Group 4.8%, Wesfarmers 4.2%, Westpac Banking Corporation 3.9%, Macquarie Group 3.4%, National Australia Bank 3.3%, Woolworths Group 3.1%, Rio Tinto 2.6%, Amcor 2.6%, Australia and New Zealand Banking Group 2.3%, Telstra Corporation 2.3%, Sydney Airport 2.0%, Brambles 2.0%, Ramsay Health Care 1.9%, James Hardie Industries 1.8%, Mainfreight 1.7%, Sonic Healthcare 1.7%, Coles 1.7%. Not too dissimilar. AFI give their top 25, rather than their top 20, and those extra 5 positions are Woodside Petroleum 1.5%, Resmed 1.4%, Fisher & Paykel Healthcare 1.3%, Goodman Group 1.3% & the ASX 1.3%. As a percentage of AFI's total portfolio value (excluding cash) those 25 companies represented 76.2%. Cash = 1.4%. I prefer to pick my own stocks these days, and I'd agree with Argo that MQG should be a higher weighting than the big 4 banks. But I'd also side with AFI in not having another LIC (AUI) as one of my top 20 positions - if I'm a LIC myself. Today, neither AFI or ARG stand out as better than the other, and neither look particularly better than VAS, IOZ or A200. What they DO have going for them is they both have a very loyal shareholder base, so they're not going anywhere. They'll both be around forever. Too boring for me, but suitable for plenty of others, clearly. 23-Nov-2020: AFI's before-tax-NTA at October 31st, 2020 was $6.03 and they're trading at over $7, so there's a reasonable premium in the share price. If you want to know what AFIC (AFI) themselves think about that - see here: Their latest report can be found here: That was their October report - their latest NTA report and top 25 holdings - at any time - can be found on the following web-page: I am still not holding AFI shares. They look even less attractive when they are trading at more than $1/share above their NTA.
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