Good morning, ladies and gentlemen. I'd like to welcome you to the 95th annual general meeting of Australian Foundation Investment Company. My name is John Paterson, and I'm chairman of your company. The Company Secretary has confirmed that a quorum is present, and I'll now open the meeting. As we have a hybrid meeting with people attending all over Australia, I'd like to begin by acknowledging the traditional owners and custodians from all the lands that we're gathered on today and pay my respects to the elders, past, present, and emerging. May I introduce the people on the stage with me? On my immediate left is Geoff Driver, our Manager of Investor Relations and Strategy. Then Matthew Rowe, our Company Secretary.
Good morning.
Mark Freeman, our CEO.
Good morning, everyone.
Craig Drummond, and a director.
Morning.
Rebecca Dee-Bradbury, a director.
Morning, everyone.
Julie Fahey, a director. Graeme Liebelt.
Good morning, everybody.
David Peever.
Morning.
Cathy Walter.
Good morning, all.
Finally, Andrew Porter, our Chief Financial Officer.
Good morning.
In due course, we'll be hearing from our portfolio manager, David Grace, and investment analyst, Nga Lucas. We are also joined by other members of the investment team in the front row of the audience. I will also take this opportunity to introduce Kate Logan, partner of our auditors, PricewaterhouseCoopers. She's available to answer questions today on the audit and the preparation and content of the auditor's report at the end of the presentation. Before we get to the formal proceedings, I'd like to say a few comments about Cathy Walter, who retires as a director at the conclusion of this AGM, having served on the board since August 2002. Cathy has been Chairman of the Nomination Committee and a member of the Remuneration, Investment, and Audit Committees.
She's brought her deep knowledge of the law and governance, along with experience gained in a number of large ASX companies, to our discussions. Her contribution to the board and Investment Committee deliberations will be missed. We thank her for her years of valued service to shareholders and wish her well for the future. Thank you, Cathy. I would also like to note that I'll be retiring from my roles of Director and Chairman of AFIC at the conclusion of this annual meeting. As previously announced to the market, Craig Drummond has been appointed Chairman to succeed me. For its 95 years existence, AFIC has always had a chairman with deep investment experience. Craig strongly meets that criteria. He also has valuable senior executive experience, having been Chief Financial Officer at the National Australia Bank and Chief Executive at Medibank.
The board is delighted that Craig will be taking on the role of chairman. There's been considerable adverse publicity regarding PwC of recent times, and we've already had several questions passed to us about PwC. Just prior to the opportunity for questions following our presentation, I'll make some comments about the relationship so they're fresh in your minds at that time. Today's meeting is being held as a hybrid meeting. Today's presentation has been released to the ASX and made available on the company's website. I remind shareholders using the online platform that whilst questions can be submitted at any time, I'll not address them until the relevant time in the meeting. To ask a question, select the Q&A item, icon, type your question into the text box, and once you've finished typing, please hit the send button.
Please also note that your questions may be moderated or if we receive multiple questions on one topic, amalgamated together. To cast your vote, simply select one of the options. There is no need to hit a submit or enter button, as the vote is automatically recorded. You'll see a vote confirmation notification on your screen. I now declare voting open on all items of business. I'll give you a warning before I move to close voting. Before we move to the business of the meeting, I'd like to provide some additional comments. Last year at the AGM, I highlighted our concerns that global central banks were too complacent, assuming that inflation would get back to their target ranges of 2% or 3% quickly. Our premise has proved correct.
Inflation peaked, but in many economies, has declined to 4% or 5%, where it seems to be stuck, and recent oil price rises will tend to reinforce that trend. What we didn't expect was the degree of resilience in global economies, in particular the U.S., and the fact that this led to good gains in global stocks. Markets have recently become uncertain again in light of the weakness of the Chinese economy and rising bond yields. The latter will affect the pricing of a lot of assets. The recent profit reporting season reinforced the fact that high-quality stocks continued to perform despite considerable uncertainties. Our team will highlight some of these in their presentation soon. Moving on to the business of the meeting, I'll take the notice of meeting as read.
With regards to the minutes of the 94th annual general meeting, they've been signed as a correct record and are available to shareholders for inspection today. The first agenda item is the consideration of the financial statements and reports for the year ended June 30th, 2023. We will do this via a presentation, after which I'll ask shareholders to comment or raise any questions, either about the presentation or of the auditors if they have questions about the audit. I will now pass you to our Managing Director, Mark Freeman.
Thanks, John, and good morning, everyone. It's good to see a decent turnout. A bit of rain will probably keep a few people away. And just to point out, too, we are also getting good responses to the other sources of information shareholders have throughout the year in terms of what AFIC is doing. We're doing webinars now in January and July, so many of you may have listened to that. We're getting good response to that. We do a shareholder information meeting around March, and obviously, this AGM is also being webcast. So there's lots of opportunities to hear what AFIC is doing throughout the year. I just want to start first by also thanking Cathy and then John, also from the team's perspective and shareholders, but also my personal perspective.
They've really been stalwarts of the AFIC board for many, many years, and it's their passion for the shareholder that I think has really stood out, because the key cultural element of our company, or it's your company, is that passion for shareholders. We understand deeply that we've got a real sense of responsibility to look after your hard-earned money, and certainly, Cathy and John, have been a backbone in building out and sustaining that culture of being here for the shareholders. So thank you, Cathy and John. And then obviously, welcome, Craig, into the role, and look forward to working with you as well. So just moving on to the presentation. Disclaimer, we always start with this to say we're here to talk about the company. We're not giving any advice.
Just the agenda. I'll just make a couple of opening remarks, then Andrew Porter, our CFO, will give an overview of the financial results. As John pointed out, David and Nga will then give a thorough presentation on what's been happening to the portfolio and markets in general. Just an overview on the investment objectives again. AFIC primarily invests in Australian, New Zealand companies, but we do have a small amount of international stocks at the moment, which account for about 1% of the portfolio, and I might touch on that again in question time. AFIC still is the largest listed investment company on the ASX, with over 160,000 shareholders. A very Independent Board of Directors, and importantly, the shareholders own the management rights to the company, so there's no external manager taking fees as such.
As a result of that, the management expense ratio or the MER, is 0.14%. There's no performance fees going to an external manager. Once again, we are a long-term investor. We want to be a part of the success of great businesses. An outcome of that is being low turnover, which has the added benefit of being tax effective. We know that ultimately, selling stocks, high turnover, you end up paying a lot of tax, and that's a significant drain on total returns. That element doesn't come through when you invest in managed funds. They all look at their performance pre-tax. Us, being a company, we see the impact on tax and how it can drain on performance. We want to have a portfolio of stocks that's stable, that's less volatile than the index.
We've got a long history of growing dividends over the time, but importantly, the stability of fully franked dividends. Once again, COVID demonstrated the importance of having reserves and being able to support the dividend through the tough times. Then when you go back before that, it was the GFC, we were able to sustain the dividends. Where we stand today, we are very well reserved for another downturn when it eventuates. There are always downturns in markets. We can't stop that. And then we've got an investment team. They're all here today, a couple here, the rest along there, that manage the other three investment companies, Djerriwarrh, Mirrabooka, and AMCIL. Please approach them after this. Ask them questions. They're all here to give you, the owners of the company, feedback on what's been happening.
So please introduce yourself and ask any questions you want. So just quickly then on the objectives. So we aim to provide shareholders with attractive investment returns. We want to see growing dividends over the long term, and we want to see growth in capital as well. So we think about in terms of growing dividends faster than inflation over the long term. Difficult to do when you have one year inflation spike so much. And again, attractive total returns over a longer term period. Just a quick comment before I pass over to David and Nga. Just broadly, to follow John's comments on markets, the Australian market sort of looks reasonable value to me, but there's a lot of uncertainty out there, and I'm not sure the markets have really adjusted to where interest rates are set at the moment.
So there's pressures there, and it's a very uncertain world out there at the moment. So that's causing a lot of issues globally, and so it does feel a bit more like it's a time that we just have to be a bit cautious. And as always, I reflect by going through the portfolio consistently and saying: Are we holding good companies? And the answer to that is yes, we've got good businesses in the portfolio, and whatever happens, they will ride the ups and downs. Are they run by great people, and do they have strong balance sheets? And if we can go to the portfolio and answer those questions, we'll generally be in pretty good shape. So with that, I'll pass over to Andrew first, actually, to go through the financial results.
Thank you, Mark, and yes, apologies to those of you who are waiting for David and Nga, but they will be here very shortly. So good morning again, ladies and gentlemen, and thank you for joining us, both here in Melbourne and online. So if we go to the next slide, please. I've been through some of these figures before at the results briefing that we did back in July, but I am also conscious that many here may not have attended that. I shall therefore be relatively brief, but I am, of course, very happy to take any questions afterwards or indeed over a cup of coffee after the presentation for those of you that are here. The statutory profit was down to just over AUD 310 million from last year.
However, last year's figures included AUD 75 million non-cash dividend as a result of the BHP Petroleum Woodside merger. Excluding this, the profit for the year was up 8.6%. Dividends received, excluding the demerger dividend, were up just under 7%, with increases from the banks, Wesfarmers, Transurban, and Macquarie being among the most significant. There was also an increased contribution from the trading portfolio, particularly from the options that are written over a small part of that portfolio. The interim dividend was increased by AUD 0.01, in line with previous remarks from the board about looking over time to bring the interim dividend into line with the final dividend and bringing the total dividends for the year to AUD 0.25 per share.
The board is very conscious of the need for reserves in order to be able to maintain the dividend, as it is appreciated how important this is to shareholders. Just a reminder, as Mark has already commented, AFIC did not cut the dividend during the GFC or during COVID. Now, this is not to say that the dividend could never be cut. Even apart from the one-off special dividend that AFIC paid out some years ago, when the effective abolition of franking credit refunds was being proposed by the then opposition, AFIC has had to cut its dividends in the past.
The last time that I'm aware of this being done, and shareholders can please feel free to correct me, was in 1942, when I quote from the annual report, "The year under review has been one of difficulty for investors, especially since the entry of Japan into the war." So moving to today, after the final dividend was paid out, the company had sufficient franking reserves to pay out just over AUD 0.40 franked dividend. So in that regard, the company is prudently reserved. The total portfolio return for the year, which is after expenses and is a key measure of how the portfolio has done, was 13.9% for the year against the ASX 200 return of 16.6%, and the team will provide more updated figures later on in the presentation.
Turning finally on this slide to the management expense ratio or MER. It is a measure of the costs of running the company and is equivalent here to AUD 0.14 for every AUD 100 invested in AFIC. It is the actual expenses as a percentage of the average portfolio over the year, and therefore both elements, the expenses and the average portfolio size, have an impact. So for this year, i.e., the year ended June 2023, whilst the average portfolio value was lower than the previous year, the effect of this was actually outweighed by a fall in the net expenses.
This fall was caused by a number of things: a small reallocation of costs among the LICs to better recognize the work effort involved, which benefited AFIC, and the non-vesting of incentives for last year, which reduces the overall expenses for the year, and finally, the write back of the expense of the long-term investment plan, which was folded into the new annual incentive plan. I wanted to highlight this for two things. A, there will be a quiz on it afterwards, but also because it's a one-off. Effectively, the cost of this, should they vest, will be borne over the next three years. Therefore, all other things being equal, the MER would rise in future years. However, the really big component of the MER is the average portfolio value, and this, I'm afraid, none of us can predict.
So if I move on to the next slide, this is one that we like to highlight to shareholders and potential shareholders, and we release it every month with the NTA, and it is on the website. This graph shows how the portfolio return can be up before franking, 8.1% for the year, while the share price can be down 7%. At the end of August this year, the shares were trading at a discount, i.e., the share price to the value of the underlying assets, of nearly 4%. In August last year, they were at a premium of 12%, i.e., you were paying more in the share price than you were for the assets underlying. In August 2021, that premium was 9%.
This move from a premium to a discount has not been unique to AFIC and has happened broadly across the LIC space. What appears to have been the main driver is the increase in interest rates. Shareholders who could not get a yield on term deposits or fixed interest investments previously had had to go overweight equities to get any yield at all. This led to the very large premiums that we saw between 2020 and 2022. Now, these shareholders can switch today some of that back into fixed interest, and I have seen it myself on charities that I've been involved with, and get back closer to what their target allocations between asset classes, i.e., equities and fixed interest, should be.
This has meant an increase in sellers and a fall in interest in LICs, which is reflected in the disparity between the portfolio and the share return. We've been getting feedback from brokers and fund managers that actually there's been a lack of flows into the equity markets generally as a result of this... So this is why we urge shareholders and potential shareholders, where they can, to look at the price of the shares compared to the NTA, and whether they are buying or selling at a premium or a discount. This can and does move around fairly sharply. But I echo Mark's comments from earlier, we're not here to give you personal financial advice. That's a general comment. So if I can move to the next slide, this illustrates what I was talking about earlier about dividends.
One of the benefits of an LIC like AFIC is that we can create reserves when times are good to release when needed, a bit like Joseph in biblical Egypt. Here you can see that our ordinary earnings have been up and down over the last five years, but we've been able to use one-offs and realized gains to maintain the dividend and replenish reserves. If you invest in an ETF, an exchange traded fund, that is a trust, they have to pay out what they receive, so your earnings, if you'd only received the income shown on the graph, would have been very inconsistent. This does have a small impact on the performance of the portfolio because we have to pay tax on these earnings that does not show up as a benefit to shareholders until it is paid out. However, we think this is a price worth paying.
With that, I will finish up. We'll move on to the main course, and as I said, I'm happy to take any questions at the end of the presentation or afterwards over a coffee. David, over to you.
Thank you very much, Andrew. Good morning, everybody. I'll talk to you today about current portfolio positioning, how we've got a mix of income and growth attributes within the portfolio. We'll look at current market conditions very much through the lens of the companies we've been catching up with on the back of the recent reporting season, how they're navigating through a pretty uncertain environment. And then Nga will come up to talk through recent activity in the portfolio in terms of buying and selling. Just to recap our investment process, so we're long-term investors in companies. We're not trading short-term share price movements around macroeconomic events. We believe the quality of a business is the one thing that can be sustained over the long term, and that fits in with our long-term investment horizon.
We focus all of our research effort in developing a deep understanding of the growth drivers of all the companies that we invest into, and assessing how they're placed within their industry versus their competitors, et cetera. So we want companies that have strong industry positions. They're run by strong management teams and boards. They have sustainable business models over the long term. They hold difficult-to-replicate, unique assets, have a definable competitive advantage, and importantly, have strong balance sheets, able to self-fund their growth drivers, as well as pay a dividend to shareholders along the way. So we want to identify these companies and buy them when they represent value, and seek to benefit from the value that compounding returns provide to long-term shareholders.
So this slide shows the performance of the portfolio against the ASX 200 over various time periods, where low turnover, and accordingly, there'll be periods where we underperform the market. However, over the long term, the core of the portfolio will remain invested in quality businesses with good long-term prospects. So second from the left, including franking over the last 12 months, the portfolio delivered a return of 9.6%. That compares to the ASX 200, which delivered a return of 11.4%. So returns for the portfolio were shown after tax and expenses, and tax and expenses over the last five years have been a drag on portfolio performance for around about 0.5% per annum. And that largely reflects capital gains tax from sales that we've undertaken.
But as Andrew pointed out, we now have a significant balance of franking credits able to be distributed in future periods. So a couple of things to point out on the 12-month performance is firstly, the underperformance of a couple of high-quality companies that are owned within the portfolio. So that includes Transurban, ASX, and Mainfreight. And for context, all of those companies had a really strong two years prior to that, and over the course of the last three years, have delivered positive returns for the portfolio, and we've actually recently added to our holding in ASX. We feel the company remains well positioned to deliver strong long-term earnings growth. Secondly, and then as the chart on the right-hand side shows, was the strong performance of the information technology sector, which was up 22% over the course of the last 12 months.
Then below that, the performance of utilities, materials, and energy, which all materially outperformed the ASX 200 return. So both materials or resources and the energy sector benefited from the reopening of China post-COVID lockdown in November last year. And the strength in the resources sector was really driven by small and mid-cap companies. Now, we wouldn't expect to have a large weighting in the portfolio to small and mid-cap resource companies for two reasons. So the first of those is they're typically inconsistent in the dividend that they pay to shareholders. So that's one of the core investment objectives. We're trying to deliver a growing dividend yield. And secondly, small resource companies have got a poor track record in deploying capital as they look to replace their finite resources.
So over the last 12 months, you can see the bottom of the chart, healthcare has been a material underperformer. Large portfolio holdings, CSL and ResMed, have dragged on performance, and Nga will talk later about our confidence in the long-term opportunity remains sound for CSL, and we've actually recently been adding to our holding. So in relation to ResMed, the share price has softened recently, as the market assesses the potential impact of weight loss drugs on ResMed's business. So just to recap, ResMed develops products to treat obstructive sleep apnea or OSA. OSA is a chronic disease where your airways or your muscles in your necks, neck relax during sleep, blocking your airways, causing choking events during your sleep, and severe sufferers of this disease can have up to 50 episodes per hour.
So there's a proven link between the incidence of OSA and obesity, and the market fear is that weight loss drugs may materially reduce the addressable market for ResMed and the number of patients that they can ultimately serve. So our thoughts around this, and why we feel that the ResMed share price has been oversold following the near 30% fall in the last two months, is studies have shown there's over 1 billion people globally who suffer from OSA, and for context, ResMed only treated 2 million new patients last year, so the condition remains materially under-penetrated. We know the incidence of obesity is increasing, and even though these drugs have been available, we've seen an increase in obesity in the U.S. particularly.
Funding challenges are likely to restrict the widespread adoption of weight loss drugs, given that the drugs cost materially more than ResMed's CPAP therapy. So all in all, we feel the short-term share price weakness has provided an opportunity, and we've recently added to our holding. So we earlier briefly touched on market conditions, and as we highlighted, it's a period of uncertainty for all companies that we're talking to. We've highlighted both the positive and negative of how companies are seeing the current operating environment. So on the positive side, solid economic growth has reduced the risk of a potential recession. Chinese policy initiatives provide stimulus to their economy, while not out of the woods, is certainly showing signs of stabilizing Chinese economic growth. Immigration is forecast to deliver strong population growth here in Australia.
On the negative side, we know inflation remains elevated, and that proves challenging as companies try to pass through rising costs. Consumer spending is starting to slow, and that's at the global, we've seen that in all developed economies, that the consumer is starting to slow on the back of a couple of years of strong handouts from government related to COVID. And our view that earnings growth for many companies is set for a period of stabilization following two years of really strong earnings growth. So we know markets are always forward-looking and trying to price what's next, and while we don't know how all of these issues ultimately get resolved, we remain committed that holding a diversified portfolio of quality companies over the long term remains appropriate. And we know periods of uncertainty typically provide the best buying opportunities in equity markets.
However, in times like these, with so much uncertainty around the future of earnings growth, requires extra diligence on the valuation that you're prepared to pay of any investment at this point in time. So now we'll talk shortly about our recent buying activity, where we feel short-term uncertainties provided attractive prices to add to a number of our investments. So I've shown a chart here just to put the current valuation of the market in a long-term context. So firstly, on the left-hand side is the total return of the ASX 200 over the last 25 years, and the general trend clearly is that markets go up over extended periods. Pullbacks, while they're not uncommon, when they do occur, represent buying opportunities, and markets have a habit of quickly recovering.
The chart on the right-hand side over the same time period just shows the current valuation of the ASX 200. There are a number of different metrics we can use. None of themselves are particularly perfect, but this is one metric where we've shown price to earnings. The point is the volatility of valuation of the market, and that's the nature of equity markets. But as it stands today, the market is in line or slightly more expensive than its 20-year average. We thought these charts just provide greater context around the dispersion of current valuations in the market, and this is some research that's been put together by Goldman Sachs. While we want to be invested in quality companies, the price you pay plays a large part in terms of the total return that we receive as shareholders.
Overpaying, even for a quality company, can deliver poor returns even over the long term. Just to put some context, the chart on the left-hand side is the valuation of the 40 most highly valued companies on the ASX 200. The list is reset monthly and currently includes quite a number of technology companies, as we highlighted earlier, just the strength in the technology sector in recent times. While the value of the basket has pulled back from its all-time highs, it's currently sitting about 30% above its 20-year average, and many of these companies are high quality. They're of interest to us, but we're looking for more attractive entry points where we feel the risk-reward is better balanced. This is particularly in light of our sense that earnings growth for a number of these companies is set for a period of stabilization.
On the right-hand side, it's a similar valuation chart, this time for the 40 cheapest companies trading on the ASX 200, and some of these companies are facing severe structural challenges. So at a headline level, they can appear cheap, but digging into the fundamentals tells us that there's still some challenges and they may not be good value at all. But interestingly, that basket of stocks is trading 10% below its 20-year average.... So the point of these charts is just to highlight the need to be diligent in allocating capital, as the market is yet to fully determine the impact of rapid interest rate moves and the stubborn inflation remaining for longer than people initially expected. So in managing the portfolio, we look to own a diversified portfolio of quality companies that can perform in a variety of economic settings.
We're not predicting economic outcomes. We seek to own quality companies that provide appropriate diversification. So to move around the pie chart, in the top left-hand corner, we want a mix of growth companies that are the market leaders. They're well-positioned to be able to continue to deliver earnings growth outside of the economic cycle, and that includes companies like realestate.com.au and CSL. Over the right-hand side, stalwart companies that own difficult to replicate highly strategic assets. So that includes Transurban, Wesfarmers, Auckland Airport, and Woolworths. Income stocks, companies that pay an attractive dividend yield, as we recognize income plays an important part in the total return that shareholders receive. And cyclical stocks down the bottom left-hand side, and these are companies that are exposed to favorable long-term economic trends. And within that sector, we include our energy holdings, which is in Santos and Woodside.
So just to give some context to both of those companies, the majority of their production is from LNG, and we see LNG as really critical transition fuel as the world's energy needs move from fossil fuels to renewable, and LNG is gonna be critical in that transition for many years to come. So both Santos and Woodside are responsible owners. They're operating in highly regulated jurisdictions, and they've both clearly stated their intended goals around improving their ESG metrics. So we feel positive that they're good corporate citizens. They've been able to manage their balance sheets to be able to invest in these initiatives, to be able to deliver better ESG outcomes over time. So at this point, I'll hand over to Nga to talk through recent activity.
Good morning, ladies and gentlemen. On the far right-hand side, we show existing holdings that we've added to in the last six months. We use share price weakness to buy quality companies when we see value presenting. Short-term share price weakness gave us the opportunity to add to our holdings in Goodman Group, CSL, BHP, NAB, ASX, Telstra, and IDP. I'll talk in more detail about CSL, Telstra, and Goodman Group later in the presentation. We added to our NAB position, as we believe the Australian banks are well-regulated and well-provisioned, even in a tougher economic environment. The mortgage market is holding up better than expected, given the strength in our labor markets. Banks are a key source of fully franked income for our shareholders and are becoming increasingly important as resources stocks, the other group of major dividend payers, are experiencing earnings pressure and dividend cuts.
We added to our ASX position as we believe the core exchange business remains a high-quality monopoly, and we believe the negativity around the CHESS re-platforming is now factored into the share price. We added to our position in IDP as we believe the negativity around the loss of the Canadian monopoly in English language testing is overplayed versus the long-term opportunity for the business. We also added to our position in BHP in share price weakness. We like the growing copper business, which includes some of the highest quality, lowest cost assets in the world. In the new purchases column, we added one new stock after a recent share price weakness. Mineral Resources is an Australian mining services company and an iron ore and lithium producer. We like the lithium thematic, given the strong demand from electrification.
We believe the company now has a clear and sound strategy of engaging with EV manufacturers directly to secure long-term demand for their lithium. The CEO and founder, Chris Ellison, has proven to be an excellent strategic thinker and capital allocator. He owns 12% of the shares in the company. The companies listed on the left-hand side show stocks we've trimmed or exited during the period. We trimmed our position in Carsales, Transurban, Mainfreight, NEXTDC, Woolworths, Brambles, and REA as valuations started to become more extreme or to manage the size of those positions. Carsales.com shares have had a strong run following excellent execution by management of both overseas acquisitions of Trader Interactive and Webmotors. We trimmed Brambles, as we think the share price was fully reflecting the strong COVID-induced operating environment, which we think will prove to be temporary.
We trimmed REA following the sharp bounce in the share price, reflecting the expectations of a short-term recovery in property listings and strong yield growth. We trimmed NEXTDC as the company benefited from strong contract wins and optimism around the demand for data centers driven by AI. While we are positive on the supply and demand dynamics in the industry, we are cognizant of the high capital intensity in developing data centers. The decision to exit InvoCare, Ansell, and IRESS reflects our view that the long-term prospects and returns for these businesses are challenged. During this time, InvoCare received a takeover bid, assisting our exit price. In the following slides, we'll focus on a few portfolio companies in more detail, highlighting why we consider them to be good long-term investments for the AFIC portfolio. Starting with CSL.
CSL is a specialist biotech company that develops and manufactures products to treat serious human medical conditions. We've seen a decent pullback in the share price recently, largely over fears around a new competing product. The results of this competing product are now known. While we expect CSL to lose some market share, we believe this will be manageable and only very small in the context of the broader growth opportunity for the company. We've used the sell-off to add to our holding, as we think the share price reflects good long-term value, and the company has attributes we like, including a very strong management team and board. The company has market leadership positions in its core plasma fractionating business and has a proven track record of delivering higher returns than competitors. Recent capital investment should again drive increased capacity, efficiencies, and higher returns.
CSL invests more than 10% of revenue in R&D, which is a key driver of new business growth. We continue to have high confidence that CSL has many years of strong earnings growth, delivering attractive returns to long-term shareholders. Over onto Telstra. Telstra is a leading telecommunications company in Australia with dominant market shares in, and extensive infrastructure assets in fixed broadband internet and mobile. The mobile business is a key driver of the company's profits. Telstra's key competitive advantage lies in its network superiority, with 99.5% population coverage and leading 5G coverage at 85%. Telecommunications, and in particular, mobile service, is seen as critical for business and is a non-discretionary item for consumers.
As you can see from the market share on the slide, most people choose Telstra for its superior network, with Telstra now holding 50% market share. Following years of aggressive mobile competition, we believe the industry needs to be rational to repair balance sheets and industry returns. Both Optus and TPG have signaled their intentions to drive returns higher as they are currently below their cost of capital. We think Telstra offers shareholders a defensive investment in more challenging economic conditions, while paying a growing, fully franked dividend yield. Over the slide to Goodman Group. Goodman Group is an industrial property specialist. They own, develop, and manage logistics and distribution centers, warehouses, business parks, and data centers in major global cities. Their customers are the likes of Amazon and Woolworths.
They operate in 14 countries and have built a leadership position in its key global markets by building high-quality properties that are close to consumers, providing essential infrastructure for the digital economy. The company recently flagged a large opportunity in the data center market. 30% of their current work in progress is from data center developments, and they have ample access to power and land for future developments. Goodman's has over AUD 80 billion in assets under management and is led by founder and shareholder, Greg Goodman. He remains highly motivated and disciplined in his investing. The very experienced management team are in a great position with their balance sheet to take advantage of any opportunities should they present in the current industrial property market. At this point, I'll hand back to Dave for some outlook comments.
So thanks, Nga. So just to recap, as we earlier discussed, there are a number of threats and opportunities for companies that are occupying our mind currently. We're maintaining regular contact with the companies that we're invested in, as well as their competitors, just to get a sense of what's happening within each of the industries. So some observations, those businesses with market leadership, which is the core of our investment portfolio, are best positioned to be able to pass through rising costs to their customers. And then strong balance sheets are critical in this environment, as we've seen rising interest costs for many companies. So we feel our approach to maintain a diversified portfolio remains appropriate. We feel the portfolio is well positioned, invested with an appropriate mix of income and growth attributes to be able to meet our investment objectives. So that concludes the presentation.
I'll now hand over to Geoff. Oh, John, sorry.
Thank you, David, and Nga, very good presentation. I'll now make some comments about AFIC's relationship with PricewaterhouseCoopers that I earlier foreshadowed. The discussions in the public arena about PwC focus foremost on the tax advisory practice and the reputation of PwC in its entirety. Firstly, PwC are our auditors and are not our tax advisors. Secondly, as is mandated, our audit partner of PwC changes every five years, and alongside that, there are changes in the underlying team conducting the audit over time. The change in audit partner last occurred in May 2022. At that time, the board interviewed three potential audit partners suggested by PwC, and we made the most appropriate choice based on skills and experience....
As regards to putting our audit out to tender, we last did this in 2017, requesting proposals from all major accounting firms, with PwC being selected. At the time of the change of audit partner in 2022, we did not go to tender, but did ask PwC to refresh the proposition for us. We believe our PwC audit team has met our requirements and all our expectations. We also gained some assurance and comfort from the comment where Dr. Switkowski states that PwC's assurance, that is audit business, appears to be substantially model best practice. We will continue to follow the issues that have been reported. We've discussed them internally, and we've discussed it with PwC. We've sought and received assurances from them about how they are dealing with the situation, and at this stage, we're satisfied with that.
I'd now like to invite questions from shareholders. For those in the room, we have microphones available, and if shareholders could please state their name when addressing the meeting and ask all questions through the chair, that would be appreciated. Before I start with questions in the room, I might ask Geoff, there's a couple of questions that have come through on the Internet that we'd like to address first.
Give some people some time to have a bit of a think, but I've got a question for the auditor. So there's two questions here, or three questions, in fact. What are the audit fees to PwC? Do PwC perform any other actions for AFIC? And is the auditor happier, happy with the internal controls within AFIC? So we've got Kate Logan, partner, as John introduced earlier on, to answer this particular question.
Thank you, Geoff. So if we turn to note F2 in the financial report, that's where the auditor remuneration is laid out, and within that, you'll see that there is audit services, the review of the financial statements and the audit of the financial statements, and there's other audit-related services. In addition, there are some non-audit services in there that relate to tax compliance and are non-judgmental in nature. In respect of the non-audit services, I can confirm that we have formally assessed whether or not they are permissible, and they do not impair our independence. And so the second question was in relation to controls, Geoff?
Yes.
Yes. Happy with the controls.
Yeah.
So our opinion covers the financial report as a whole, and in forming our opinion, we do consider the control environment. The company's internal auditors also issue an independent assurance report on the control environment of the company. So as part of our consideration of the control environment, we do obtain that report, and I can note that that report was unqualified.
Thank you, Kate. No further questions for you. So, John, we have a question from the ASA, Steve van Emmerik, who unfortunately couldn't make it today. ASA is supportive of low-cost LICs like AFIC, however, notes that many of these have moved from trading at a premium to NTA to discount, to the detriment of shareholders, as ETFs have become more popular. What actions will AFIC take to ensure the negative trend does not continue?
Well, one of the things, if you have a look at that chart that we had earlier of the premium or discount to NTA, we've been in the current position a few times before, where it's been somewhere between -10 and zero. So I think we feel this is sort of one of the normal trends that goes on in markets. It generally goes on when there is a lower level of interest in the market, and I think we've tended to find that in periods where the market's under stress and people are concerned, we often trade at a premium. So we're not concerned with the current position. We don't see it as likely to keep on widening as a discount, and probably in the medium term, it'll as usual close up.
No particular actions on our front. But it's, you know, it's one of the things, as we say, shareholders should look at that when they're considering buying or selling our shares.
And there's no doubt, John, we've increased our communication with the market as well to ensure people understand what we're doing, how we're performing, and, and where that share price sits to NTA. Another question from the ASA, John, before we move to perhaps questions from the floor. PwC has been AFIC's auditor for the past 95 years. The Australian Shareholder's Association recommends tendering the audit every 12 years. Given the recent well-publicized events regarding PwC, will AFIC put the audit out to tender?
It's a question that will probably come up at AFIC, when the five-year audit partner rotation comes to an end. I don't think I can preempt what the decision will be at that time. Clearly, we want the best outcome for our shareholders in terms of the quality of the audit. We do always, because we want a low MER, we're also conscious of the cost of the audit. But I think at the moment, we'd say we're comfortable with the way the audit is being performed, and we're watching where PwC ends up in terms of the transformations that'll need to occur in the coming years. But it's probably a question that will come up in 2027
Any questions from the floor?
Right, well, now we'll open it up to questions from the floor. So we've got some microphones if anyone would like to ask a question. We've got one down here. I think we've got a shareholder here who might have been around almost as long as me at these AFIC meetings.
In actual fact, we both did a report on franking credits back in 2000-something or other, and our- mine and yours was about the same.
Right.
Anyway, on PricewaterhouseCoopers and the other three, shall remain nameless, but I think the Senate is doing a good job on that. But I don't think the changing of the partner is good enough. Why not the whole firm every three years or five years, whatever it may be, and perhaps not in, not one of the Big Four? There's Pitcher Partners and a few others floating around.
I think I take your point about other accounting firms. I think we would regard the Big Four as giving a degree of confidence for our shareholders that we would like to have. So I think we're probably likely to remain in the space of the Big Four, but obviously it's something that would be reviewed at the time of a tender. Certainly, we had an open mind when we went to tender in 2017, and in that case, it comes back to what we see as the best proposition going forward. I understand the history and your point about the history of... but I think it's a case of when we go to tender, we need to be sure what the forward-looking position is.
There's one down here.
It's over here.
Questions.
Hello, Gordon Glenn here. About five years ago, I asked Mark Freeman, after the meeting, why there were no investments in agriculture in Australia. Given the importance of it to our economy, it is somewhat surprising. I think his answer at that time was: "Well, you tell me one we should be investing in," and I probably couldn't. But it is quite an interesting question in terms of the balance of our economy and the portfolio.
Yeah, we're, we're always open for suggestions, so happy to have a chat at the end of it if you've got any ideas since then. You know, agriculture is a big part of the Australian economy, but obviously we're trying to find companies that give returns and ultimately returns that can beat, beat the market. So, you know, we look at any business. We don't have anything against agriculture. But again, the difficulty. I'm just looking to Dave, is there any that jump out? I mean, we still, from a distance, well, not distance, we actually still follow Nufarm pretty closely, but we just struggle to find, I guess, the quality in that, in terms of, is that gonna give us great investment returns over the long term? Any others, Dave?
No, we've followed GrainCorp as well, but I think the challenge for us is when we're looking over the five to 10-year investment horizon, is when you've got businesses that are so susceptible to the operating environment, whether it rains or not, it's hard to see that as a demand for capital over other potential investments that we can make, where we feel we've got more sustainable opportunity to grow earnings. So we look at them closely, but against the opportunity set we're investing in, it's just hard to see many of them stacking up unless we can see real value emerging, which doesn't often happen.
There's been a couple. We've been in Incitec Pivot in the past, too, but they're just very, very challenging industries to make a sustainable long-term return. And we talk about being in quality companies, so these are businesses with more consistent earning streams, strong balance sheets, businesses that we think have a great prospects of growing earnings better than the market over time. And it's unfortunate, but some of these businesses just, it's difficult for them to achieve that. But we'll continue to look, and again, we're always open to suggestions.
I might throw to-
Yep, just got a number of questions here, John. So I guess one of the questions is, first to you, Andrew: How well is the company protected from cyber attacks?
Cybersecurity, obviously a big issue at the moment. I think, Geoff, I'd divide the question, and bear with me for a moment, please, into two parts. First of all, there are the assets that are being protected, and secondly, there's the operations of the company. In terms of the assets being protected, shareholders should be aware, we don't hold any of their information. That's held by Computershare, and the board get Computershare in once a year to discuss cybersecurity with them, and we get an audited report. The banks hold our cash, the brokers hold our shares. We don't actually have any data, I think, that a cyber criminal would be interested in trying to steal, to hack, or to use as blackmail. In terms of the operations of the company, we don't have a supply chain. We deal with brokers to buy and sell shares.
So we take these responsibilities, of course, as an overview, very seriously. Just because you have no assets in the house, doesn't mean that there's not an expense if somebody breaks into it. So we need to make sure that the doors and windows are locked and that the alarm is on. So we have a third-party computer company, IT services company, that maintain our machines, make sure we're regularly patched, review things, maintain our backups, all of the stuff that you'd expect. And this year, we've actually introduced another third party who reviews all the data that comes in and out of our systems, ensures there's no malicious activity going on, and performs a 24/7 review of what's going on. So I- ... Never say never, but I would say that, we believe that we are adequately and well protected against cybersecurity.
Thanks, Andrew. Got a question, Mark, on the international portfolio. As we've talked about before, potentially being a precursor to establishing a separate low-cost listed investment company in the future. Has management considered retaining and growing the international portfolio internally with AFIC? And also, I guess, just in a more general sense, how's the portfolio performing, and what do you see the outcome for the international portfolio at this point in time?
Yeah. So just to reiterate, at the moment, it's around 1%-1.5% of the portfolio. So that's how much we have allocated into this portfolio, over 40-50 international stocks. So it's a very small part of the overall AFIC portfolio, but it actually has added value to it. We always said that we would be patient with this. It's applying the AFIC way of investing to international stocks. We're in no rush. We've been around a very long period of time, and we were not going to rush into, I guess, a new product unless we felt we were really comfortable with it and the timing was right. And so we will just continue on that path.
We did say we would explore an opportunity to develop another LIC, but we do talk internally about, do we keep running with some stocks in the portfolio regardless of that, or not? So there's lots of permutations and combinations about how this could develop, but, I certainly think it's been a good skill set to have within our team. If you look through the AFIC portfolio of Australian and New Zealand companies, increasingly they are international stocks. If you think about the likes of... We were talking earlier about CSL and then ResMed, but James Hardie, Macquarie Group, Fisher & Paykel Healthcare, James Hardie, Brambles, Amcor, the list goes on and on. These are international companies, so it's not like we're doing something that's new.
And so we see if we cover other global stocks, it should be additive to the investment process and the learnings and understandings we're getting on our core stocks and what's happening in the world. But, I'll just reiterate that we'll be patient with this, and we'll just develop it as time goes on. But I think the team are working very hard. We've got two of the members here today, Gilbert and Andrew Sutherland. Rosie's not down here today, but she was at the shareholder information meeting in Sydney. Yeah, they're working very hard on this product, and I would encourage you to ask them questions about how they're seeing it.
Thanks, Mark. So a question here or comment we got prior to the AGM. For the second year in a row, AFIC is underperforming the ASX benchmark. Should you look at changing your managers managing the portfolio?
Right. One of the things when I look at AFIC and its performance, I think the really important thing to look at is the five-year or 10-year performance figures. The annual figures or two-year figures swing around a lot. The last couple of years, we've been slightly behind the index. That's been a function of strength in resources, particularly smaller resources. Whereas the previous two years prior to that, we'd outperformed pretty strongly. So if I go to the five-year figure, we're broadly in line with the index, and that includes us having to bear the cost of our costs and tax. So quite a satisfactory performance. 10-year figure, we're a little bit behind. We had a learning experience there. We've had a very good period of winning in terms of oil explorers.
We'd been in Coal Seam Methane, PNG, North West Shelf. What we've learned is that when you do that with commodity companies, you should cash in some of the winnings. The other thing is we had a completely different sort of portfolio. We had 100 stocks, and one of the things with 100 stocks is it doesn't impose a discipline to get rid of stocks that are disappointing, and it doesn't give you the scope to have bigger bites of things that we think are good. We've reduced that to about 60 now. You'll find that the stocks between number 10 and number 30 in our lists are, we have much stronger bets on those now, and we are getting the benefit of it. So I wouldn't read too much into the last two years.
I think if you keep on looking at our five-year figures, that's, that's the real test.
And I'll just add to that, to reiterate the point and again, around that tax. So the last couple of years, the capital gains tax has been quite considerable, and that doesn't come through in our performance numbers because we haven't yet paid that out as a franked dividend. So, you know, you can play around and, and if you add that back in, the performance has been sound, and particularly when you think about the lower volatility of earnings and the more consistent dividends, so supporting dividends through things like the GFC and then COVID, we think they are also an important part of the shareholder returns.
We might come back to the shareholders in the room and see if there's any more questions. Yes, we've put one over at the back, I think. Yes.
Good morning, and thank you for the presentation and, for your chairmanship as well, John. Much appreciated. All the best for the future. There's been a lot of talk about Pricewaterhouse today, but I want to raise another issue in terms of the share registry. As one who operates, and does a lot of things on my own, I've found that the share registry that we operate with is far more difficult than, for instance, Link. And I was wondering if I don't know whether I would like, through the chair, to address this to the board as to whether they use these two, registries. But, the question I wanted to ask is: When will you review the share registry, and on what basis would you use it?
Because my point that I want is ease of use, and I found that this particular one that we have at the moment is not the most friendly compared to other registries. So I'd just like to pass that on to the board, and thank you for your opportunity.
Right. So I'll make one or two comments there, Mark, through to Andrew. We did do a tender a while ago.
Matthew's got the details, actually.
We assessed at that time that we felt Computershare gave us, as a company, holding our holdings, a better proposition, and in terms of price and likely performance. We clearly like them to look after our shareholders well, and written into our contract with Computershare are certain benchmarks that they have to meet. They're tested on that, I think, monthly or quarterly. Monthly? They pay penalties if there are significant breaches there. But I can understand that probably doesn't capture all the interactions shareholders have with a registry, but we really have to look at it in terms of our holdings to some degree. Did Andrew or-
No, I think what Matthew was just saying was five years ago that-
The last one was five years ago.
Five years ago, we did do an open tender, but... And we probably-
Thank you for your feedback. I'll come have a chat later, but, yeah.
We'll keep it under review. I know from my team's point of view, interestingly enough, we find Computershare easier to deal with Link for the holdings that we own, but, that is interesting feedback. Thank you. Yeah.
Yes. Well, I've tried to do certain things on that side and hadn't.
Yeah. No, I take your point. So that's, yeah, that is interesting. Thank you.
Yes, yes. Well, if you give consideration, because-
Yeah, sure.
That's my experience. Maybe it's nobody else's here, and I'm just a Luddite. But anyhow, I'll leave it with you.
I know the shareholder experience is really important to us, so we'll take that away and look again.
We've got another one down the front here.
John Lansell. I didn't say it before. I've personally given up with all the four share registry officers completely, and I write to gentlemen like Mark. An email to... Oh, it's not just Mark. It could be the CEO, CFO, whatever it is, and I get a positive response. And I just tell them this share registry officer is too slow and bureaucratic and go out of their way to upset shareholders. And the Mark Freeman of the world help out a lot, but I didn't say that.
That's good to hear.
Thanks, John.
We may go back to the internet questions after this one.
Barry Jenner, thank you for your presentation this morning. A difficult question. Woodside have just suffered a setback in developing the Scarborough Project. I just wonder if the board has any insights as to the ability of Woodside to deal with this serious setback and how the Woodside's Scarborough Project might proceed as planned.
Right.
Yeah. Thanks for the question. So Woodside's view around that is it's a setback at this stage, but it's an ongoing thing that they need to work through to be able to develop that project. But I think more broadly, it just shines a lens on how difficult it is to be able to develop new LNG projects. And we see LNG as a really critical fuel to be able to enable the transition from fossil fuels to renewable energy sources. So our view is that Woodside and Santos, for that matter, are set to deliver meaningful production growth, generate meaningful cash flow. And both those companies now have gone through a merger, so the balance sheets are in really good shape to be able to fund their future CapEx.
Regulatory challenges aside, we think the businesses are in really good shape, and hopefully, they get through that regulatory issue.
So I've got a question, probably somewhat related, David, on... We've received a number of questions about how we deal with environmental, social, and governance issues when looking at companies in the portfolio. In particular, a number of related questions, how we deal with investments in fossil fuels such as Santos and Woodside, and the relationship with the necessary climate actions. Also, noting that we don't have a holding in AGL and Origin Energy. And I guess as an adjunct to that particular question, in this context, do we vote on remuneration, election of directors on companies with high emissions such as BHP, Santos, Woodside? What is our approach?
Yeah. Thanks, Geoff. So as long-term shareholders, we have regard for any issue that can interrupt a company's ability to be able to deliver attractive returns over that timeframe, and ESG matters are certainly part of our thinking in that regard. As I touched on a minute ago, so LNG, that is the primary production of both of these companies, is critical to what we're doing on the renewable side. And I think for Woodside and Santos, they've both set out clear targets about how they're trying to improve their ESG footprint. We feel these assets are better in the hands of responsible owners in jurisdictions where they're required to do such, and simply by selling these assets doesn't make the problem go away.
So we feel that the measures that both of these companies have got in place, they're visible, and we're able to then track their progress against those measures. And I think the other key point, just around the mergers that they've done and the balance sheets being in better shape, is that both companies are now well-positioned with strong balance sheets to be able to fund the initiatives that they need to, to reduce their ESG footprint, as well as fund the growth projects as they come up. And even through that transition, then to be able to maintain a positive free cash flow yield and pay dividends to shareholders. So we would say both companies are in much better shape, and it's clear to us as what they're trying to do on the ESG side of things. So in relation to Origin and AGL, so Origin, we don't own.
The company was in receipt of a takeover offer from Brookfield. The approvals are set to come through this month. We'd expect that transaction to conclude. Just on AGL, the stock's had a really strong run recently. It's gone from AUD 7 around about a year ago, up to AUD 12, and has settled back to around AUD 10 currently. There's two things you need to believe to generate a good return over the long term in AGL at the moment, and is both of those we're a little skeptical versus market expectations. The first of those is they've had really strong spike in wholesale electricity prices, which has enabled them to earn higher margins. We've seen through the bill shock and the issues that the government is trying to contain, the inflation that's coming through on electricity prices.
We think the sustainability of that will prove to be temporary, and this is all related to closing down of coal-fired electricity generation as we move to renewable. And the second piece, which ties into that, is you need to be able to believe that AGL, as they invest in their own renewable projects, will be able to generate strong returns. And that's really early days on that. And we've seen globally a lot of companies that have gone down this path, absent any government subsidies, have really struggled to generate strong returns and strong cash flow. So we look at both of those and say, the risk isn't justifying the reward, and so we're sitting on the sidelines for now on those two. And the last question was just on the voting. Yeah, absolutely.
We catch up with typically the chairman, but board members of all the investee companies talk through the resolutions that companies are putting up to their AGM, and we'll take external advice from proxy advisors, but we do our own independent voting. And in relation to ESGs, that tied into the question, was we're encouraged to see that increasingly companies are putting ESG measures into the remuneration structure for their executives.
Thanks, David. So, we've got another question related to, I guess, a similar topic. Given that AFIC is heavily invested in banks and financials, does the board consider that these banks, who are heavily lending to residential commercial properties, may be to customers who may be affected by the impacts of climate change, particularly, I guess, rising sea levels? And, particularly as Australian banks have stated they believe in the impacts of climate change.
Yeah. Thanks, Geoff. So we see through all the banks, they'll report their sustainability measures, and they're absolutely aware of the risks as it applies to climate change. I think more broadly, we think the lending standards or the risk mitigation from the banks has improved quite materially on the back of the inquiries that we had several years ago leading to the Royal Commissions. As it stands today, even though it's an intensely competitive market, we see that the lending standards have improved over the last few years. And then more broadly, as it applies to the banks, I think Nga touched on this in the presentation, is we see that they're, they're well capitalized, they're well provisioned as it applies to the housing cycle. Touch wood, things aren't worse than their own expectations, but the banks are paying attractive dividend yields.
We're not expecting rapid growth in earnings from the banks, but we see that the level of income is sustainable, and we see that they'll contribute a meaningful part to AFIC's dividend over the long term.
Thank you, David. John, a question for you, I guess, in terms of the board: Had the board made any public support for the yes vote in the coming referendum? Also, what is their attitude to companies supporting the yes vote without consulting shareholders? And I guess an allied question, does AFIC make any political donations?
AFIC definitely does not make any political donations. We regard that as the prerogative of our shareholders if they want to do so. In terms of the yes vote, AFIC's had a long history... When you've got 165,000 shareholders, we're going to have the whole gamut of views on political issues. So we've tended not to make a decision, a recommendation on political issues, unless they specifically relate to the potential returns that shareholders may get from the shares. In other words, things like capital gains tax. We were very active in the exercise that eventually got us LIC gain relief, and we've obviously been very active on dividend imputation. But we are not taking a view on the yes vote.
In terms of the companies we invest in, I think we would say we have to have confidence in the companies that they've talked through the issues and how they're relevant to their position, their shareholders, of which we're one. And so we don't take a stance on telling them what they can or can't do. We let them run with their company as they see fit.
Thanks, John. Mark, this one's for you. The share price has fallen from AUD 8-AUD 7, which we talked about in terms of the premium discount equation. Where do you see the value of the shares in 12 months' time?
... Thanks, Geoff, for the question. The look, the answer is I have no idea. And we've been saying this all the way through. We do this every year, and I follow the one of our former chairs, Bruce Teele, who used to say that, "Now, when you've been in this game, like I have been now, you know the truth to it." I have no idea where markets are going over the next 12 months, and we're not even gonna try and predict that. All we can do is make an assessment of the quality of the companies. We can't even predict where their earnings are going. But we can observe characteristics about businesses that our experience tells us should lead to good investment experiences over the long term.
In between that, markets could go up or could go down, and we have no idea. But just on that, that share price in particular, look, it is something that we constantly reiterate, that we encourage investors to look at the stated NTAs that we put out every month. So that's the net tangible asset backing. So that's the fair value of the portfolio. We state that every month, and so if investors are looking to buy or sell, you know where fair value is. And we had a period, probably 18 months to two years ago, where for some reason the share price was trading at a premium. It was around 15%. I think it even got to 20% at one point, and the stock was, at that point, around AUD 8 and above.
It probably felt good at the time, but I think our NTAs during those periods were probably around mid-7, something like that. So, it was trading well above fair value. So we have that situation now where the share price is trading at a small discount. So for those that were buying or saw the share price around AUD 8 are saying, "Well, why is my stock fallen so much?" Well, it's simply because that large premium has now come out of the share price, and it's now trading at a fairer value. So, that applies to all LICs. When you're looking at them, you do need to look at what the NTA is each month and work out whether you think it's fair value or not. So, that's what's happened there.
Thanks, Mark. So, John, a question about it was pleasing to see the increase in dividends this year. How do we go about setting our dividends?
Well, probably the main thing we look at is the level of earnings and how sustainable we think that will be going forward, whether it's likely to be a rising trend. As we've seen in recent years, if you took out the very big resource dividends, I think the market has probably put slightly, companies have put lower emphasis on dividends. The bank payout ratios came back. We have a number of companies like James Hardie that, because their earnings aren't franked, tend to take the view of not paying a dividend, but buying back stock. So we, we've had a period where. In effect, that means our earnings have broadly gone sideways. But we certainly want to pay out everything we earn.
There will be occasions when we look at other things like we did, a few years ago, 2019, where we felt it was appropriate to pay a special dividend. But it's, it's a year-to-year thing. We don't want to get too far ahead of what we earn, because that tends to have a bad effect of getting the share price trading above NTA, and I don't think medium term, that's not a good thing for anyone.
Thanks, John. A question here, again, was submitted prior to the meeting about what effect, if any, a super tax would have if it was put on companies and shareholders. I'm not exactly sure which tax they're talking about, but, have you any thoughts, John?
Well, the company's one is what specifically it is. We've been very against some of the special taxes. There were some bank levies and things that didn't actually provide franking credits. So it was a tax that didn't give any flow-through benefits to shareholders. We don't like taxes that do that, but I think it's going to be a case of looking at the specifics of every individual proposition that comes up. I think the one thing we know is, we have governments around the world that clearly are wanting to get more in tax, and we saw this in one of the infrastructure stocks, Atlas Arteria last week, where the French government decided to take 4.5% of their revenue on certain roads.
So I think it's a, it's a stock-by-stock thing. I think the trend is gonna be that there will be more special taxes around the world. In terms of individuals, that's sort of something we can't do anything about. We're clearly heading towards legislation for the increase in super tax from 15%-30%, on larger superannuation funds. I think those are the things that shareholders themselves have to position themselves. We can only provide you with a good flow of franking credits and hopefully reasonable capital gains.
Thanks, John. Question for you, Mark: where do we see our competitive advantage against the other older, larger LICs like Argo, AUI, and DUI?
Yeah, well, we would actually see them more as sort of peers, I guess. We've got a little group involving those companies where we look at particular issues, and some of those are franking credits and tax and other issues. So, I mean, the advantage of all those funds is the low MER or the low cost to shareholders. So, they're all similar in nature. They're very low, so they all generally take longer-term views on investing, so they tend to be tax efficient. We know the people that run them, and we respect them. So, in that regard... Those two or three are, the DUI, AUI and us.
I would actually say that as a group, we are very different to most other investment products, of which there are hundreds and hundreds or even thousands out there, that generally charge higher fees, higher turnover, higher tax, and probably don't have the level of transparency and, you know, the experience of a board of directors that we have. So I think that's the way I would view it, Geoff.
Thanks, Mark. Just a question here about concern, dilution at someone shareholding by issuing new shares under the DRP. So we might talk, John, about how we approach the pricing of DRPs and the issue of DRP shares.
We try to get DRP pricing, so it is, has as neutral an effect as we can. So, we don't want to be issuing shares significantly below NTA, because clearly someone who doesn't participate is disadvantaged. Equally, we are a bit reluctant to encourage people to pay, or to buy through the DRP when there's a very high premium to NTA. So we do move the discount around a bit to try and get that outcome where it is in the most neutral position for all shareholders.
Thanks, John. So this is a question relating, I guess, to the upcoming resolutions. And it's more a comment. "AFIC continues to resist best practice by not disclosing how it votes at AGMs at the 80 listed companies which you invest in. Given that most industry funds now publicly disclose their voting records, why don't you also move to adopt best practice? In broad terms, roughly how many directors are we expecting to vote against in calendar 2023, and how many remuneration items will be opposing? Are both categories under 10%?"
I might just talk to the principal. We have a lot of discussions with chairmen of companies, and quite often they bring along another director if there's a particular issue where that director is relevant to it. We find we get a very good hearing. We're regarded as sensible investors, who, if we make a serious complaint, it should be listened to. And so I think we feel we have the greatest impact if we can have a discussion with the company, and be critical of them behind closed doors, rather than us disclosing what we've done and AFIC becoming the headline story on the paper and becoming a political football.
But we've seen in a number of cases where we have had an influence with companies in them, you know, sort of thinking about problems that we think are real. But we do disclose the aggregate figures, and we do vote against a number of resolutions. We do sometimes, we will say to a company, "We don't like this. We're not going to vote for it this year, but we won't vote against it this year. We'll abstain this year, but if you haven't fixed it by next year, we may be voting against it." So sometimes it's a warning signal with a 12-month time period for companies to fix their house.
Thanks, John. I really haven't got any other questions relating to this particular part of the AGM, so we can move to the other sections.
Right. We might move to the formal resolution, so there'll be plenty of opportunity to talk to the directors and the investment and executive team after this meeting. So we now move to the formal resolutions of the meeting. Your directors' recommendations are set out in the notice of meeting. I can confirm that where undirected proxies have been given to me as chairman, I'll vote them in line with the board's recommendations on each agenda item. Voting today will be conducted by way of a poll on all items of business. Representatives of Computershare will oversee the conduct of the poll. Firstly, if there's anyone present in the room who believes they're entitled to vote but has not registered to vote, would you please seek assistance from our share registry, Computershare.
For those in the room, on the reverse of your yellow admission card is your voting paper and instructions. I will now go through the procedures for filling in the voting papers. In respect of any open votes a proxyholder may be entitled to cast, you need to mark a box beside each resolution to indicate how you wish to cast your open votes. Shareholders also need to mark a box beside each resolution to indicate how you wish to cast your votes. Please ensure you print your name where indicated and sign the voting paper. When you've finished filling in your voting paper, please lodge it in the ballot boxes that will be available at the end of the meeting. The second agenda item is the resolution to adopt the remuneration report.
This is required by the Corporations Act to be considered by shareholders annually and is an advisory resolution only. The remuneration report can be found in the company's 2023 annual report. It's a very detailed report covering the remuneration of directors, executives, and the investment team. If you have any questions on this item, please submit them now if you've not already done so.
I've got some questions on the line and ones that were submitted prior to the meeting, John. So I guess this relates to both resolutions in some ways. Will you disclose the proxy votes before the debate on each resolution to shareholders so they can ask questions about the reasons, if there have been any protest votes? Also, why not disclose the proxy positions of the ASX with the formal addressees to offer more timely disclosure to the market, like many other companies do now?
Matthew.
Pass it to Matthew, yeah.
Thanks, Geoff. I'm not aware, actually, that's standard practice to release them before the meeting. As you can see, the voting results are available on screen now for shareholders to look at, so we're content that we're in the course of the Corporations Act and adhering to that.
Okay, thank you, Matthew. I've got a couple of questions relating to the remuneration report that I'll pass to Graeme Liebelt, who's Chair of the Remuneration Committee, if I can, Graeme. The first one says, "Fixed annual remuneration is determined with reference to levels necessary to recruit and retain staff with relevant skills and experience. So why is performance-related pay also required?
Yeah, thanks, Geoff. That's a good question. So we say we benchmark the fixed part of remuneration, and we do. We also benchmark the variable part of remuneration, and so the total package that's available to our executives is benchmarked against the external market. The important thing about variable remuneration is that it enables us to align the executive experience with the shareholder experience so that we can put in place measures such as risk measures and return measures, which reflect your experience, and executives will feel that in their pay packets as well. I've reread the section on page 19, and we could have perhaps been clearer about the fact that we benchmark both parts of the remuneration package, so I thank whoever it was for the question.
Thanks, Graeme. So second question, lists on the annual report, page 22, in fact, lists key personnel as manager, financial officer, investor relations, and secretary. So which of these has actually managed the portfolio risk and being paid or otherwise for it?
Yeah. Again, a good question. So AFIC's a pretty small organization, and I know Mark keeps a pretty open mind and listens to everybody, so I'm sure there's input from all sorts of places in terms of investments that are made. But in terms of the absolute line of accountability, it's up through analysts and portfolio managers through to Mark himself, and that's the absolute direct accountability line with respect to the portfolio performance.
Thanks, Graeme. And the fi-
I think I'd add that, Mark makes it clear to David and the team members related to each of the companies, that they are really responsible and accountable for the performance of that portfolio. Mark obviously has an overlay that if he felt there were any issues with the decision making, he could address those with the portfolio manager. But, you know, there's a strong degree of independence and responsibility applied to the portfolio manager of each of the companies.
Thanks, John. So Graeme, I think the final question on remuneration for you, this is from the Australian Shareholders' Association, which recommends that executive at-risk remuneration includes a hurdle based on total shareholder return in order to ensure the goals of the company and its executives are aligned with shareholders. AFIC does not have such a hurdle. Or can you please explain why executive compensation is not aligned with shareholder returns in this way?
Yeah, again, it's a good question, and it goes back in part to the discussion that's come up a number of times today, which is the relationship between the share price and the net tangible asset value of the portfolio. You know, we've been trying to simplify the remuneration within the company over time. We have achieved a situation in which the number of pages in the remuneration report is now less than the number of employees. That wasn't always the case. But in the process of simplifying that, we needed to choose really between net tangible assets as a measure or the share price as a measure. We did some research and noted that through the longer term, those two things move together.
On average, we traded a bit of a premium, but at times like now, for example, there are times where we're at a discount. But in choosing between those two measures, we chose net tangible assets, really, because it's the most directly controllable measure of the two. A lot more factors go into the share price, which, as Mark mentioned earlier, are not altogether controllable by us. And so we choose NTA in the knowledge that in the longer term, it won't make very much difference.
Thank you, Graeme.
Now, I might ask if there's any questions on the remuneration report from the room here?
That's okay.
I've got any further questions, John.
Right, so we will now move to the third agenda item, which is the resolution to elect David Peever. David was re-elected by shareholders at the 2020 AGM, and so is standing for re-election by shareholders today. In accordance with Rule 46 of the company's constitution, he retires from the Board of Directors and, being eligible, offers himself for re-election. David, would you care to say a few words before I put the motion?
... Thank you very much, John. Just to start by saying it's a privilege and a pleasure to serve on the AFIC board, and a very focused and enjoyable place to be. A great board and a great executive team to work with. By way of background and in support of my candidacy, I spent about, in my working life, executive life that is, about 35 years in the resources sector. Almost three decades with Rio Tinto, working across commodities and across disciplines and across geographies. Having lived in a number of parts of Australia, but also in Asia and U.S. and the U.K. Traveled extensively and have done business in many countries in the world, excluding the Middle East, where I never had that opportunity. Subsequent to retiring...
My last role in Rio Tinto was head of Rio Tinto in Australia, from which I retired in 2014. Subsequent to retiring, in addition to the AFIC board, I've done what you might call some pure business boards, and currently Chair Brisbane Airport Corporation, as well as sitting on the AFIC board. I've done some other things which they're all business, but I guess from a pure point of view, they're more adjacent to business, and they've been really interesting things to do and all, and incredible learning experiences. I guess have improved my general knowledge and knowledge about not just the way business functions, but the way Australia functions and government functions, et cetera. So they've been very interesting.
Looking forward with AFIC, as well as being part of the oversight of the good functioning of the business. I'm particularly interested, given my background, in the way the portfolio is positioned through time, into the future-facing metals in particular. Bearing in mind that the traditional commodities like iron ore look to be flattening out, as we look forward into the medium and longer term. So it's a particularly interesting phase for AFIC and with your support, I look forward to very much being part of that. So with all of that in mind, I put forward myself for re-election and for your ongoing support. Thank you, John.
Thank you, David. I'll now show the proxies received in respect to this resolution, which are now shown on the screen. While there weren't any questions asked prior to the meeting, I think we have one online now.
Yes, John, it probably doesn't relate directly to this, but it's probably the appropriate place to ask it. The chair has been on the board for 18 years, and the chairman since 2018. Why doesn't this board have a deputy chair or a lead independent director who can be directly responsible for leading the annual performance review of the chair and managing chair succession planning? How was the chair performance review conducted this year? And does the chair believe there are multiple potential successors as a chair currently serving on the board? When is succession likely to take place, and could a director other than the chair please respond to this question?
If you look at AFIC, it's had, I think, one occasion when it's had a deputy chair, which was, when Bruce Teele was Chairman, and it was effectively part of the transition process, that Terry Campbell became Deputy Chair. In anticipation of that and making sure there was the position of chair had been considered if there were any issues, in terms of the chairman's health or any other issues. We run a pretty simple company. It's a big company, but it's a very simple company, and so I think we feel it doesn't need a deputy chair in the normal course of things. We run a pretty collegiate process, and we obviously see each other pretty regularly because we've got Investment Committee meetings basically every two weeks.
So we don't think we really feel we need a lead independent director, but these are things that the board will consider from time to time. But the, the structure we've got has worked well. But I might- handing over the chairman's role to Craig, it may be something for Craig to think about going forward as to whether there's any change in policy. Oh, Cathy Walter.
Just to say, as Chairman of the Nomination Committee, we do run a formal board review of all the directors, and that includes the chairman. And periodically, we have an external review, and that feedback is provided to all the board in quite a structured way. Thanks, John.
Certainly, the selection of a new chair is a total board decision. The Nomination Committee looks at it firstly, takes it to the board, and the board considers it across all directors. I might ask if there's any questions in the room on this motion? I don't think so. So, ladies and gentlemen, that con-
Sorry, John, I have got another question. Not necessarily related to David. That's why I was sort of hanging off. But, so I think we have a telephone question that we wanted to be asked earlier on.
... Sorry, there are no phone questions.
Oh, no. Okay, there's a final question here. It's more a comment, I guess, but interesting to say. Thank you for offering shareholders a hybrid AGM meeting this year. Will you commit to keep doing so in future years to maximize shareholder participation? The answer will be yes, we will do it. And the question was, what was the experience like from our end? So I think it's been reasonably seamless, John.
Good. We, we've sort of had a little bit of practice during COVID with our shareholder briefings online, where we are getting questions coming in on the Internet. So we've had a bit of practice. Hopefully we get better every time. But we do think reaching out to all our shareholders around Australia is important. So ladies and gentlemen, that concludes the discussion on the items of business. Craig Drummond now wishes to make a few comments, so I'll pass to him.
Thanks, John. Ladies and gentlemen, I will be very brief. I did want to pass on a vote of thanks to our chairman, John Paterson, who has dedicated an incredible 36 years to serving our company, and as you know, the last five as Chairman. I spent almost 20 years working with John at JB Were, and a more respectful, analytical, and competent man you could not encounter. While stock prices, as we know, go up and down, in John's time as a Director, a AUD 1,000 investment in AFIC has grown to AUD 32,006—inclusive of dividends, and has returned shareholders an annual 10.11% or 232 basis points per annum above the All Ordinaries Index.
So John, on behalf of us all, both on the phone, in the room, the board, and all shareholders, on behalf of us all, thank you very much for your tremendous service to the company. Finally, to you, our shareholders, I wanted to say how much I'm looking forward to serving you, how passionate I am about investing, how passionate I am about markets, and in particular, how passionate I am about our company, and confident in its ability to deliver competitive long-term returns. So Chairman, back to you.
All right. Thank you, Craig. Thanks for your very kind comments, and thank you, shareholders, for acknowledgement of my period on the board. It's been a great privilege serving the shareholders, and it's been a fascinating experience over that period. In a couple of minutes, I'll close the voting system, so please ensure that you've cast your vote on all resolutions. For those in the room, may I now ask that you complete your voting card. Computershare staff will collect your voting card at the end of the meeting. I'd like to thank shareholders for your continued support and for the interest you've shown in the affairs of the company by your attendance in person or virtually. Shareholders are reminded that the team will be holding shareholder meetings in Adelaide, Perth, Canberra, Brisbane, Sydney, during March 2024. I will now close the voting system.
The results of these votes will be released as soon as practical to the ASX later today. Thank you all for attending, and we'll now adjourn for refreshments, and feel free to ask more questions of our team. Thank you.