Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Is AFIC offering value today?
Could the Australian Foundation Investment Co.Ltd. (ASX: AFI) (AFIC) share price be a buy for the long-term?
The listed investment company (LIC), which has the job of investing in other shares for shareholders, is one of the oldest LICs. It has been investing since 1928.
Why is the AFIC share price worth considering?
One of the most effective ways to invest is to invest for the long-term, while building a diversified portfolio. Lots of investors choose to build their own portfolio. But it’s also possible to invest in something on the ASX which itself represents a diversified portfolio.
Essentially, it’s like choosing all the fruit and veg yourself for your shopping basket, or you can just buy a pre-made basket that already has all the fruit and veg in it – a lot simpler! This is what LICs and exchange-traded funds (ETFs) do – they represent already-made portfolios of shares/assets.
Costs
But there are also costs to the LICs/ETFs. Plenty of ETFs have lower costs than active fund managers. The question is – are you paying someone a lot of money to pick your fruit and veg? Or are the fees very reasonable? The one argument that fund managers can make to justify charging more is that they may be able to choose the best fruit and veg over a long period of time. In other words, they could be able to outperform the returns of the broader share market. But many fund managers don’t outperform, and charge more for it.
The great thing about AFIC is that it has very low costs, even though there are investors that are doing the picking. Its management cost is 0.14% per year, with no performance fees. That’s very close to the costs of Vanguard Australian Shares Index ETF (ASX: VAS).
Low costs are a key part of why AFIC is an effective way to invest in ASX shares.
Diversified portfolio
AFIC owns a portfolio of many of the ASX’s biggest companies including Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP), CSL Limited (ASX: CSL), Macquarie Group Ltd (ASX: MQG), Wesfarmers Ltd (ASX: WES) and Transurban Group (ASX: TCL).
It’s a reasonably diverse portfolio, though the banks and materials make up a pretty large portion of the portfolio.
AFIC has also started investing in global shares, which has the benefit of increasing diversification and potentially offers more growth.
Dividends
AFIC has been remarkably consistent with its dividends to shareholders over the years. This is good for income security. The annual dividend is currently 24 cents a share. At the current price that’s a dividend yield of 4% including franking credits.
Why the AFIC share price may not be a great idea
For people in retirement, I think consistent income and a decent yield could be worth owning AFIC for. However, lots of the biggest positions in AFIC’s portfolio don’t offer compelling compound growth, in my opinion. Banks and miners provide a lot of the return in the form of dividends.
The underlying earnings from the business holdings are predominantly from Australia, so there’s less earnings diversification. If you think about businesses like Microsoft and Apple, those earnings come from across the world.
Finally, AFIC may not be great value.
At the end of January 2022, the before tax net tangible assets (NTA) per share was $7.16 (that’s the underlying value of the basket of shares) and the current AFIC share price is $8.55. While prices are always changing, it appears the AFIC price is trading at least a double-digit premium to its underlying value. It could be better value to buy an ETF, or another LIC at a discount to its NTA.
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