Independent Investment Research has given Australian Foundation Investment Co an upgrade, shifting its rating to ‘highly recommended’ on the back of its consistent long-term performance.
AFIC is Australia’s biggest listed investment company, with a market capitalisation of $6.6 billion. It invests mainly in stocks in the S&P/ASX 50 Index.
Its focus is on providing growing, fully franked dividends to its mostly retail shareholder base.
One of the fund’s plusses is that its size gives it economies of scale, which allows it to charge a competitive management expense ratio of 16 basis points.
The fund is a contrarian investor at times, having the latitude to buy stocks that may be out of favour.
On the negative side, the significant FUM limits its ability to respond to changing circumstances and “wrong calls”.
The portfolio has about 99 holdings. However, the top 10 holdings make up close to half of the portfolio, and most of those are big stocks. Stocks in the S&P/ASX 50 constitute about 80 per cent of the portfolio.
The fund has returned 9.8 per cent a year over the five years to the end of April, compared with a return of 11 per cent a year from the A&P/ASX 200 Index over the same period.
Over the past three years, the fund has produced an average annual return of 5.1 per cent, compared with 7.3 per cent a year for the index.
IIR says: “AFIC’s relative performance has been adversely impacted by underweight positions in REITs and the resources sector. Both positions were very much intentional and we believe the manager decision to do so was well founded and, just as important, true to label.
“From a ratings perspective, our focus is on the longer term, specifically 10 years. AFIC has been the standout performer over the longer term.”
AFIC’s return over 10 years was 4.8 per cent a year, compared with 4.1 per cent a year for the index.