Australia’s largest listed investment company (LIC) has gone mid-market over the last three years expanding its holdings by about 30 per cent in the process, according to Geoff Driver, general manager of the Australian Foundation Investment Company (AFIC).
Driver, in NZ earlier this month presenting to AFIC local shareholders, said the A$6.5 billion Australian equities fund now owned about 100 stocks compared to just 75 three years ago.
“We’ve gone towards more mid-sized companies – like CSL, James Hardie, Mainfreight and Fisher&Paykel Healthcare – to diversify and pick up where growth will be over the next 10 years,” he said.
As at the end of September this year, AFIC reported its holdings in the ASX mid-cap 50 sector had jumped to 11 per cent compared to 7 per cent in 2015 while its top 50 stock proportion fell from 83 per cent to 78 per cent over the same period.
In dollar terms, the AFIC mid-cap holdings have increased from A$170 million three years ago to over A$1 billion in the current portfolio.
Launched in 1928, AFIC has traditionally played at the large cap end of the market but Driver said some of Australia’s biggest companies faced significant “growth headwinds”.
He said the well-documented decline of the resources sector, competitive threats to the supermarket duopoly (Coles and Woolworths) from foreign operators such as Aldi and potentially Amazon, as well as uncertainty about the sustainability of bank profits posed questions for the big end of the ASX.
“Australian credit growth has outstripped nominal GDP, showing households are gearing up at levels that won’t be sustainable,” Driver said. “There’s also a potential increase in bad debts – we haven’t seen that yet but it may happen.”
AFIC has pared back its bank holdings to about 24-25 per cent of its portfolio versus the index weight 28 per cent.
“We felt we didn’t want to be fully exposed to those risks but it’s a balancing act because Australian banks do still pay high dividends,” he said. “But I think there will be headwinds for bank dividends too.”
AFIC has also cut back exposure to some energy stocks and interest-rate sensitive utilities, Driver said.
Despite the changes, the AFIC portfolio underperformed the benchmark S&P/ASX 200 Accumulation index by 3 per cent in the year to end September but was about on par over five years and ahead on a 10-year basis.
Driver said the portfolio was hit in the short-term by its underweight exposures to three sectors – gold, property trusts and gambling – that had done well over the previous 12 months.
However, he said property trusts might struggle as interest rates start to rise while gold remains a “speculative” play.
“We don’t hold gambling stocks as an ethical overlay – our investors are generally comfortable about that,” Driver said.
About 9,000 NZ shareholders feature on the 115,000-strong AFIC share register. The LIC, currently trading at a small premium, boasts an annual management fee of 0.16 per cent.
The Australian LIC market has experienced a late growth spurt over the previous year or two with about 60 funds now available via the ASX.
Driver said the splurge of LIC launches – including global equities, long/short and small-to-mid cap offerings – was underpinned by the buoyant self-managed superannuation fund (SMSF) market in Australia.
“Lots of fund managers are trying to tap into that direct SMSF market,” he said.
The SMSF market count for about a third – or about A$640 billion – of the more than $2.1 trillion Australian superannuation market, according to the latest regulatory statistics.