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.