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experience income growth annual report 2013

Australian Foundation Investment Company

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experience+income+growth

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experience income growth annual report 2013

Australian Foundation Investment Company

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Contents Directors’ Report About the Company Year in Summary Review of Operations and Activities Top 25 Investments Board and Management Remuneration Report Non-Audit Services Auditor’s Independence Declaration Corporate Governance Statement 1

1

3 1

4 1 9 3 10 4 13 9 42 10 43 13 44 42 53 43 53 44 55 53 56 53 58

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1

3

4

9

10

13

42

43

44

53

53 1 55 3 56 4 58 9 59 10 87 13 88 42 90 43 90 44 92 53 94 53 95 55 96 56 97

Independent Audit Report Directors’ Declaration Notes to the Financial Statements Consolidated Cash Flow Statement Consolidated Statement of Changes in Equity Consolidated Balance Sheet Consolidated Statement of Comprehensive Income Consolidated Income Statement Financial Statements


Other Information IInformation about Shareholders and Noteholders Holdings of Securities Major Transactions in the Investment Portfolio Major Transactions in the Trading Portfolio

8 55 59 56 87 58 88 59 90 87 90

8892 90 94 90 95 92 96 94 97 95 98 96 99 97 100 98 101 99

100

101

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1:00 :: 002:00 :: 003:00 :: 004:00 :: 005:00 :: 001:00 :: 002:00 :: 003:00 :: 004:00 :: 005:00 :: 001:00 :: 002:00 :: 003:00 :: 004:00 :: 005:00 :: 001:00 :: 002:00 :: 003:00 :: 004:00 :: 005:00 001:00 :: 002:00 :: 003:00

7 58 98 59 99 87 100 88 101 90

90

92

94

Sub-Underwriting Substantial Shareholders Transactions in Securities Issues of Securities Key Statistics Company Particulars

95

96

97

98

99

100

101


Company’s Profile 08

Company’s Profile Approach to Investing The Company’s investment philosophy is built on taking a medium to longer term view of value which means that the aim is to buy and hold individual stocks for the long term based on selection criteria which, in summary, include: • formulation and execution of the business strategy of the Company and its underlying business value; • key financial indicators, including cash flow, prospective price earnings relative to projected growth, sustainability of earnings and dividend yield; and • corporate governance practices. The Company has access to lines of credit of up to $250 million which allows it to borrow money when appropriate investment returns are available. During the year, the Company also issued $223 million of convertible notes.The Company also uses options written against its trading portfolio to generate additional income. However, for risk management purposes, at any one time the trading portfolio does not comprise more than 10 per cent of the total investment portfolio.


Investing in the Company

The Company has a ‘closed end’ structure which means that the number of shares on issue is fixed and set by the Board. As a result, the Company does not issue new shares or cancel them as investors enter and leave the Company. This allows management to concentrate on the performance of the funds invested over the longer term without having to deal with continuous inflows or outflows of monies.

By investing in the Company, shareholders have immediate access to a diversified portfolio numbering around 75 of Australia’s major companies and to a Board and Investment Committee with extensive investment skills and practical business experience. The Company’s shares can be bought or sold through the Australian Securities Exchange and New Zealand Securities Exchange (ASX Code: AFI, NZX Code: AFI). The Company’s convertible notes can be bought or sold through the Australian Securities Exchange (ASX Code: AFIG).

Fees The management expense ratio to 30 June 2012 was 0.19 per cent. The Company does not charge entry or exit fees when shareholders acquire or dispose of their holdings, although transaction costs will be borne when buying or selling through a stockbroker. There are no trailing commissions or portfolio performance fees.

Transparency We take an active approach to keeping shareholders informed about the Company’s activities and performance including yearly and half-yearly profit announcements, regular shareholder briefings and access to all Company announcements, including monthly net tangible asset announcements, through the Australian Securities Exchange and the Company’s website www.afi.com.au

experience+income+growth

Our Structure


Chairman’s comments 10

Chairman’s Comments In some ways the performance of the Australian equity market for the 12 months to 30 June 2012 was very much a repeat of last financial year with the market showing some positive momentum during the first half of the year, only for these gains to be erased by year end. A number of factors are influencing market conditions with the ongoing economic, financial and political issues in Europe dominating year end sentiment. Further, the issue of high debt levels is not confined to Europe, With a number of other developed economies also having to make necessary adjustments. To date the policy responses have been more focused on short term solutions which rely on very accommodative monetary settings and the issuance of further debt to alleviate the problem, rather than seeking to implement policies and reforms that are effective in dealing with these unsustainable fiscal positions.

“For a long term investor like AFIC market conditions whilst disappointing have provided some attractive opportunities..” In this environment, the S&P/ASX 200 Accumulation Index return was down 6.7 per cent for the year. AFIC’s portfolio return was down 4.8 per cent over this period. The 10 year return on the portfolio to 30 June 2012, which is better aligned to AFIC’s investment objectives, was 7.7 per cent per annum versus 7.0 per cent per annum for the Index. AFIC’s performance is after tax paid and expenses whereas the Index return does not have these costs. In addition, many managed fund returns are quoted before tax paid which can overstate performance in the hands of the investor, particularly if there is high turnover in a portfolio where significant tax is generated.

Given the generation of fully franked income is one of the key aspects of AFIC’s investment approach, Figure 3 highlights the additional benefits franking credits can make to portfolio returns. Figure 3 assumes an investor can fully utilise the distributed franking credits and these have been added to the AFIC portfolio and Index returns. This adds approximately another 0.5 per cent per annum to investor returns when compared with the overall market. From a long term perspective the market is currently trading slightly below its long term average. Figure 4 measures the share price return of the Australian market since 1936. The long term return over the period is a compound average return of approximately 6.7 per cent per annum in price terms (that is excluding dividends). As advised to shareholders in the HalfYear Review AFIC issued convertible notes. in December 2011 which raised funds of $223 million. For a long term investor like AFIC market conditions whilst disappointing have provided some attractive opportunities as value emerged at different stages.


experience+income+growth

“AFIC’s approach of looking for companies that are well managed, in attractive industries and importantly that have strong balance sheets with appropriate levels of debt. “


profit & Loss 12

Profit and Loss The performance of equity markets has been negatively hit by the ongoing economic, financial and political issues in Europe and the nervousness about expected growth in the United States and China. As a result, The S&P/ASX 200 Accumulation Index was down 6.7 per cent for the year. AFIC’s portfolio was down 4.8 per cent over this period. The 10 year return on the portfolio to 30 June 2012, which is better aligned to AFIC’s investment time frame, was 7.7 per cent per annum versus 7.0 per cent per annum for the Index. AFIC’s performance is after tax paid and costs.

Net profit after tax declined to $219.9 million from $233.3 million. The net operating result, which measures the underlying income generated by the portfolio, was $204.8 million, also down from the previous year’s result of $228.4 million. Last year’s figures included a contribution of $17.7 million from participation in the BHP Billiton off-market buy-back. In addition, with the fall in the market the value of the trading portfolio declined this year, producing a negative contribution.

The final dividend has been maintained at 13 cents per share fully franked, bringing total dividends for the year to 21 cents per share, the same as last year.


$219.19m

Operating Earnings per share Down 5.8% from 2011

20.0c

Total Portfolio Return S&P/ASX 200-6.7%

-4.8%

Total Portfolio @ 30/06/2012

$4.7b

13c

21c

-1.1%

Including Cash of $152.9m

Net Operating Result Down 10.3% from 2011

$204.8 m

Fully-Franked Dividend Same as 2011

Total Shareholder Return Share price plus dividends

Management Expense Ratio

0.19%

experience+income+growth

Reported Profit Down 5.8% from 2011


Board of

management 14

Board & Management Board of Directors Bruce B Teele BSc BCom (Melb). Chairman and Non-Executive Director. Chairman of the Investment Committee. Member of the Nomination Committee and the Remuneration Committee. Mr Teele is a company Director and has been a Director of the Company since 1966 and Chairman since 1984. He is also Chairman of Djerriwarrh Investments Limited and AMCIL Limited. He was formerly the Executive Chairman of the JBWere Group.

Graeme R Liebelt B Ec (Hons). Independent Non-Executive Director. Mr Liebelt was appointed to the Board on 13 June 2012. He is a Director of Amcor Limited, the Business Council of Australia, the Melbourne Business School, Carey Baptist Grammar School and the Global Foundation.

Ross E Barker BSc (Hons) (Melb) MBA (Melb) F Fin. Managing Director. Member of the Investment Committee. Managing Director of the Company’s subsidiary, Australian Investment Company Services Limited (AICS). Mr Barker became Chief Executive Officer in February 2001 having been an Alternate Director of the Company since April 1987. He was appointed Managing Director in October 2001. John Paterson BCom (Hons) (Melb) CPA F Fin. Independent Non-Executive Director. Chairman of the Nomination Committee. Member of the Remuneration Committee and Investment Committee. Chairman of the Company’s associated entity, AICS. Mr Paterson is a company Director who was appointed to the Board in June 2005. He was a former Alternate Director of the Company for Mr Campbell from April 1987 to June 2005. He is Deputy Chairman of Djerriwarrh Investments Limited.

Peter J Williams Dip.All, MAICD, FAIM. Independent NonExecutive Director. Member of the Investment Committee, Nomination Committee and Audit Committee. Mr Williams was appointed a Director of the Company in February 2010. He is Chairman of Olympic Park Sports Medical Centre Pty Ltd and a Director of the Australian Baseball Federation, National Australia Trustees Limited, Foundation for Young Australians and the E.W. Tipping Foundation.

Donald R Argus AC FCPA SF Fin. Independent Non-Executive Director. Chairman of the Remuneration Committee. Member of the Audit Committee and the Investment Committee. Mr Argus has been a Director of the Company since May 1999. Mr Argus is Chairman of the Advisory Board of Bank of America Merrill Lynch Australia. He is a former Chairman of BHP Billiton and Brambles Ltd and a former Director of Southcorp Ltd. Terrence A Campbell AO BCom (Melb). Deputy Chairman and Independent Non-Executive Director. Member of the Investment Committee. Mr Campbell has been a Director of the Company since September 1984 and was appointed Deputy Chairman in September 2008. He is Senior Chairman of Goldman Sachs Australia and New Zealand (formerly Goldman Sachs JBWere) and Advisory Director of Goldman Sachs.

Fergus D Ryan AO FCA. Independent Non-Executive Director. Chairman of the Audit Committee. Member of the Investment Committee and the Nomination Committee. Director of the Company’s subsidiary, AICS. Mr Ryan is a company Director and Chartered Accountant. He was appointed a Director of the Company in August 2001. He is also a Director of the Commonwealth Bank of Australia Limited, Chairman of the Advisory Council of the Global Foundation, a Director of the Centre for Social Impact and a Councillor of The Committee for Melbourne.


Directors’ Holdings of Securities Issued by the Company

Insurance of DIrectors and Officers

TA Campbell and FD Ryan, having last been re-elected by shareholders at the 2009 AGM, will retire and, being eligible, will offer themselves for re-election at the forthcoming AGM. GR Liebelt, having been appointed as a Director on 13 June 2012, will retire and, being eligible, will offer himself for election at the forthcoming AGM.

As at the date of this report, Directors who hold shares or convertible notes issued by the Company for their own benefit, or who have an interest in holdings in the name of another party, and the total number of such securities, are as follows:

During the financial year, the Company paid insurance premiums to insure the Directors and Officers named in this report to the extent allowable by law. The terms of the insurance contract preclude disclosure of further details.

Convertible Notes

Shares

BB Teele 2,000 2,444,439 DR Argus - 521,369 RE Barker 250 847,473 TA Campbell - 342,374 GR Liebelt - 25,000 J Paterson - 383,410 FD Ryan - 86,767 CM Walter 4,262 144,226 PJ Williams - 4,422 In accordance with the Company’s policy, no AFIC shares held by Directors are held subject to margin loans.

experience+income+growth

Retirement, Election and Continuation in Office of Directors


FINANCIAL STATEMENT 16

Financial Statements Consolidated Income Statement For the year Ended 30 June 2013

Consolidated

Dividends and distributions Revenue from deposits and bank bills Other revenue

2012

2011

$’000

$’000

236,157

242,982

6,495

2,630

4,099

3,766

Total revenue

246,751

249,378

Net gains/(losses) on trading portfolio

(15,407)

1,932

Income from operating activities

231,344

251,310

Finance costs

(14,453)

(4,268)

Administration expenses

(12,589)

(12,119)

Operating result before income tax expense

204,302

234,923

Income tax credit/(expense)* Net operating result

528

(6,566)

204,830

228,357

Net gains/(losses) on investments Net gains/(losses) on puttable instruments and non-equity investments

21,503

7,111

Tax expense on net gains on puttable instruments and

(6,451)

(2,133)

15,052

4,978 


Profit is attributable to: Equity holders of Australian Foundation Investment Company Ltd Minority interest

Basic earnings per share Diluted earnings per share Information on earnings per share, including net operating result per share, can be found in Note 26. * Total tax expense/(credit) for the year

Tax expense on net gains on puttable instruments and non-equity investments*

219,882

233,335

219,774 108

233,234 101

219,882

233,335

Cents

Cents

21.46

23.02

21.51

23.02

Consolidated

2012

2011

$’000

$’000

5,923

8,699

experience+income+growth

Profit for the year


FINANCIAL STATEMENT 18

Financial Statements Consolidated Income Statement of Comprehensive Inccome For the year Ended 30 June 2013

Year to 30 June 2012

Revenue

Capital

Total

$’000

$’000

$’000

204,830

15,052

219,882

in the portfolio at 30 June

-

(464,989)

(464,989)

Deferred tax (expense)/credit on above

-

139,368

139,368

Plus gains/(losses) for the period on securities realised

-

(10,665)

(10,665)

Tax (expense)/credit on above

-

3,196

3,196

Gross movement in fair value for interest rate swap

-

(2,139)

(2,139)

Tax (expense)/credit on above

- 642 642

Total other comprehensive income^1.3

-

(334,587)

(334,587)

Total comprehensive income^2

204,830

(319,535)

(114,705)

Profit for the year Other comprehensive income Unrealised gains/(losses) for the period on securities

1. Net capital gains/(losses) not recorded through the Income Statement. 2. This is the Company’s net return for the year, which includes the net operating result plus the net realised and unrealised gains or losses on the Company’s investment portfolio. 3. Total tax movement in other comprehensive income: 2012: $143.2 million; 2011: $(86.8) million. This Statement of Comprehensive Income should be read in conjunction with the accompanying notes.


For the year Ended 30 June 2013

Consolidated 2012

2011

$’000

$’000

Inflows/(Outflows)

Inflows/ (Outflows)

Cash flows from operating activities Sales from trading portfolio Purchases for trading portfolio Interest received Dividends and distributions received

Other receipts/(payments): Administration expenses Finance costs paid

35,909

32,481

(12,990)

(72,939)

5,881

3,372

172,738

188,278

201,538

151,192

4,104

3,772

(11,843)

(12,097)

(9,830)

(4,473)

Taxes paid

(10,645)

(4,526)

Net cash inflow/(outflow) from operating activities

173,324

133,868

117,244

64,553

(244,537)

(141,643)

(473)

(475)

(127,766)

(77,565)

Proceeds from borrowings

468,649

259,000

Repayment of borrowings

(200,000)

(259,000)

-

-

Cash flows from investing activities: Sales from investment portfolio Purchases for investment portfolio Taxes paid on capital gains Net cash inflow/(outflow) from investing activities Cash flows from financing activities:

Share issues Share issues transaction costs Dividends paid Net cash inflow/(outflow) from financing activities Net increase/(decrease) in cash held Cash at the beginning of year Cash at the end of year

(53)

(241)

(168,605)

(163,944)

99,991

(164,185)

145,549

(107,882)

7,344

115,226

152,893

7,344

experience+income+growth

Consolidated Cash Flow Statement


Fig. 1. S&P/ASX 200 Price Index 5,000

4,800

4,400

4,200

4,000

12 l Ju

12 r Ap

12 n Ja

11 t Oc

11 l Ju

11 r Ap

11 n Ja

10 t Oc

l

10

3,800

Ju

performance

market

20

Market Performance


Fig. 2. Ended 30/06/2012 7.1 %

-4.8%

-1.1%

2.9%

-6.7%

1 yr return

5.7%

7.7%

-2.0% .1.7% 3 yr return

7.2%

7.0%

-4.0%

5 yr return

10 yr return

Net asset per share growth plus dividends S&P/ASX 200 Accumulation Index Share price growth plus dividends

experience+income+growth

Portfolio & Share Price % per year


portfolio performance 22

Portfolio Performance % per year Fig. 3. Ended 30/06/2012 Including Benefint of Franking Credits

9.1 %

-2.9%

-5.2%

1 yr return

7.2%

8.4%

9.6%

-0.2% -2.6 %

3 yr return

5 yr return

10 yr return

Net asset per share growth plus dividends including benefits of franking credits S&P/ASX 200 Accumulation Index including benefits of franking credits


Fig. 4. Long Term Performance 5,000

4,800

4,400

4,200

08

12 l Ju

Oc t

04 n

02

Ja

l Ju

00 Oc t

96 n

92

Ja

l

88

Ju

84

t Oc

n

76

72

80

Ja

l Ju

Oc t

n

68

Ja

l

68

Ju

Oc t

64 n

56

60

Ja

l Ju

Oc t

52 n

48

Ja

l

44

Ju

Oc

t

40 n

Ja

Ju

l

36

4,000

Note: A semi log scale has been used to better show a comparison of the relative size of the percentage changes over the period.

experience+income+growth

All Ordinaries Price Index


0 :: 002:00 :: 003:00 :: 004:00 :: 005:00 :: 001:00 :: 002:00 :: 003:00 :: 004:00 :: 005:00 :: 001:00 :: 002:00 :: 003:00 :: 004:00 :: 005:00 :: 001:00 :: 002:00 :: 003:00 :: 004:00 :: 005:00 :: 001:


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:00 :: 002:00 :: 003:00 :: 004:00 :: 005:00 :: 001:00 :: 002:00 :: 003:00 :: 004:00 :: 005:00 :: 001:00 :: 002:00 :: 003:00 :: 004:00 :: 005:00 :: 001:00 :: 002:00 :: 003:00 :: 004:00 :: 005:00 :: 00


0 :: 004:0026 :: 005:00 :: 001:00 :: 002:00 :: 003:00 :: 004:00 :: 005:00 :: 001:00 :: 002:00 :: 003:00 :: 004:00 :: 005:00 :: 001:00 :: 002:00 :: 003:00 :: 004:00 :: 005:00 :: 001:00 :: 002:00 :: 003

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