AFIC: Annual Report

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Australian FoundationInvestment Company

experience income growth

annual report 2013

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experience+income+growth

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Australian FoundationInvestment Company

experience income growth

annual report 2013

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

Contents

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1 3 4 9 10 13 42 43 44 53 53 55 56 58 59 87 88 90 90 92 94 95 96 97 98 99 100 1011 3 4 9 10 13 42 43 44 53 53 55 56 58 59 87 88 90 90 92 94 95 96 97 98 99 100 101

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

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

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

1 1 3 4 9 10 13 42 43 44 53 53 55 56 58 59 87 88 90 90 92 94 95 96 97 98 99 100 1011 1 3 4 9 10 13 42 43 44 53 53 55 56 58 59 87 88 90 90 92 94 95 96 97 98 99 100 101

1 3 4 9 10 13 42 43 44 53 53 55 56 58 59 87 88 90 90 92 94 95 96 97 98 99 100 1011 3 4 9 10 13 42 43 44 53 53 55 56 58 59 87 88 90 90 92 94 95 96 97 98 99 100 101

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

08

Company’s Profile

Approach to InvestingThe Company’s investment philosophy is built on taking a medium to longer term view of value which means that the aim is to buy and hold individual stocks for the long term based on selection criteria which, in summary, include:

• formulation and execution of the business strategy of the Company and its underlying business value;• key financial indicators, including cash flow, prospective price earnings relative to projected growth, sustainability of earnings and dividend yield; and• corporate governance practices.

The Company has access to lines of credit of up to $250 million which allows it to borrow money when appropriate investment returns are available. During the year, the Company also issued $223 million of convertible notes.The Company also uses options written against its trading portfolio to generate additional income. However, for risk management purposes, at any one time the trading portfolio does not comprise more than 10 per cent of the total investment portfolio.

Company’s

Profile


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

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

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

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

10

In some ways the performance of the Australian equity market for the 12 months to 30 June 2012 was very much a repeat of last financial year with the market showing some positive momentum during the first half of the year, only for these gains to be erased by year end.

A number of factors are influencing market conditions with the ongoing economic, financial and political issues in Europe dominating year end sentiment. Further, the issue of high debt levels is not confined to Europe, With a number of other developed economies also having to make necessary adjustments. To date the policy responses have been more focused on short term solutions which rely on very accommodative monetary settings and the issuance of further debt to alleviate the problem, rather than seeking to implement policies and reforms that are effective in dealing with these unsustainable fiscal positions.

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

Given the generation of fully franked income is one of the key aspects of AFIC’s investment approach, Figure 3 highlights the additional benefits franking credits can make to portfolio returns. Figure 3 assumes an investor can fully utilise the distributed franking credits and these have been added to the AFIC portfolio and Index returns. This adds approximately another 0.5 per cent per annum to investor returns when compared with the overall market.

From a long term perspective the market is currently trading slightly below its long term average. Figure 4 measures the share price return of the Australian market since 1936. The long term return over the period is a compound average return of approximately 6.7 per cent per annum in price terms (that is excluding dividends).

As advised to shareholders in the Half-Year Review AFIC issued convertible notes. in December 2011 which raised funds of $223 million. For a long term investor like AFIC market conditions whilst disappointing have provided some attractive opportunities as value emerged at different stages.

“For a long term investor like AFIC

market conditions whilst disappointing

have provided some attractive opportunities..”

Chairman’s com

ments

Chairman’s Comments


“AFIC’s approach of looking for companies that are well

managed, in attractive industries and importantly that have strong balance sheets with appropriate

levels of debt. “

12

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

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

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

profit &

Loss


$219.19m

20.0c

-4.8%

$4.7b

13c

-1.1%

0.19%

21c

$204.8 mReported ProfitDown 5.8% from 2011

Down 5.8% from 2011

S&P/ASX 200-6.7%

Operating Earningsper share

Total Portfolio Return

Total Portfolio @ 30/06/2012

Net Operating ResultDown 10.3% from 2011

Same as 2011

Share price plus dividends

Fully-Franked Dividend

Management Expense Ratio

Total Shareholder Return

Including Cash of $152.9m

14

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

Donald R Argus AC FCPA SF Fin. Independent Non-Executive Director. Chairman of the Remuneration Committee. Member of the Audit Committee and the Investment Committee.Mr Argus has been a Director of the Company since May 1999. Mr Argus is Chairman of the Advisory Board of Bank of America Merrill Lynch Australia. He is a former Chairman of BHP Billiton and Brambles Ltd and a former Director of Southcorp Ltd.

Ross E Barker BSc (Hons) (Melb) MBA (Melb) F Fin. Managing Director. Member of the Investment Committee. Managing Director of the Company’s subsidiary, Australian Investment Company Services Limited (AICS).

Mr Barker became Chief Executive Officer in February 2001 having been an Alternate Director of the Company since April 1987. He was appointed Managing Director in October 2001.

John Paterson BCom (Hons) (Melb) CPA F Fin. Independent Non-Executive Director. Chairman of the Nomination Committee. Member of the Remuneration Committee and Investment Committee. Chairman of the Company’s associated entity, AICS.Mr Paterson is a company Director who was appointed to the Board in June 2005. He was a former Alternate Director of the Company for Mr Campbell from April 1987 to June 2005. He is Deputy Chairman of Djerriwarrh Investments Limited.

Peter J Williams Dip.All, MAICD, FAIM. Independent Non-Executive Director. Member of the Investment Committee, Nomination Committee and Audit Committee.

Graeme R Liebelt B Ec (Hons). Independent Non-Executive Director.

Mr Williams was appointed a Director of the Company in February 2010. He is Chairman of Olympic Park Sports Medical Centre Pty Ltd and a Director of the Australian Baseball Federation, National Australia Trustees Limited, Foundation for Young Australians and the E.W. Tipping Foundation.

Mr Liebelt was appointed to the Board on 13 June 2012. He is a Director of Amcor Limited, the Business Council of Australia, the Melbourne Business School, Carey Baptist Grammar School and the Global Foundation.

Terrence A Campbell AO BCom (Melb). Deputy Chairman and Independent Non-Executive Director. Member of the Investment Committee.

Fergus D Ryan AO FCA. Independent Non-Executive Director. Chairman of the Audit Committee. Member of the Investment Committee and the Nomination Committee. Director of the Company’s subsidiary, AICS.

Mr Campbell has been a Director of the Company since September 1984 and was appointed Deputy Chairman in September 2008. He is Senior Chairman of Goldman Sachs Australia and New Zealand (formerly Goldman Sachs JBWere) and Advisory Director of Goldman Sachs.

Mr Ryan is a company Director and Chartered Accountant. He was appointed a Director of the Company in August 2001. He is also a Director of the Commonwealth Bank of Australia Limited, Chairman of the Advisory Council of the Global Foundation, a Director of the Centre for Social Impact and a Councillor of The Committee for Melbourne.

Board of Directors

Board of m

anagement

Board & Management


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

Convertible Notes Shares

BB Teele 2,000 2,444,439DR Argus - 521,369RE Barker 250 847,473TA Campbell - 342,374GR Liebelt - 25,000J Paterson - 383,410FD Ryan - 86,767CM Walter 4,262 144,226PJ Williams - 4,422

In accordance with the Company’s policy, no AFIC shares held by Directors are held subject to margin loans.

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

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

16

FINANCIAL STATEMENT

Financial StatementsConsolidated Income StatementFor the year Ended 30 June 2013

Dividends and distributionsRevenue from deposits and bank bills Other revenueTotal revenue

Net gains/(losses) on trading portfolioIncome from operating activities

Finance costsAdministration expensesOperating result before income tax expense

Income tax credit/(expense)*Net operating result

Net gains/(losses) on investmentsNet gains/(losses) on puttable instruments and non-equity investmentsTax expense on net gains on puttable instruments and

2012 $’000

236,157 6,495 4,099

246,751

(15,407)231,344

(14,453) (12,589)204,302

528204,830

21,503 (6,451)15,052

2011$’000

242,982 2,630 3,766

249,378

1,932251,310

(4,268) (12,119)234,923

(6,566)228,357

7,111(2,133)

4,978

Consolidated


Profit for the year

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

Basic earnings per shareDiluted earnings per share

Information on earnings per share, including net operating result per share, can be found in Note 26.

* Total tax expense/(credit) for the year

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

219,882

219,774 108219,882

Cents21.46 21.51

233,335

233,234 101233,335

Cents23.02

23.02

Consolidated 2012 2011 $’000 $’000 5,923 8,699

18

FINANCIAL STATEMENT

Financial StatementsConsolidated Income Statement of Comprehensive InccomeFor the year Ended 30 June 2013

Profit for the year Other comprehensive incomeUnrealised gains/(losses) for the period on securities in the portfolio at 30 JuneDeferred tax (expense)/credit on abovePlus gains/(losses) for the period on securities realised Tax (expense)/credit on aboveGross movement in fair value for interest rate swapTax (expense)/credit on aboveTotal other comprehensive income^1.3

Total comprehensive income^2

Year to 30 June 2012 Revenue Capital Total $’000 $’000 $’000204,830 15,052 219,882

- (464,989) (464,989)- 139,368 139,368- (10,665) (10,665)- 3,196 3,196- (2,139) (2,139)- 642 642- (334,587) (334,587)

204,830 (319,535) (114,705)

1. Net capital gains/(losses) not recorded through the Income Statement.

2. This is the Company’s net return for the year, which includes the net operating result plus the net realised and unrealised gains or

losses on the Company’s

investment portfolio.

3. Total tax movement in other comprehensive income: 2012: $143.2 million; 2011: $(86.8) million.

This Statement of Comprehensive Income should be read in conjunction with the accompanying notes.

experience+income+growthConsolidated Cash Flow StatementFor the year Ended 30 June 2013

Cash flows from operating activitiesSales from trading portfolio Purchases for trading portfolio Interest receivedDividends and distributions received

Other receipts/(payments): Administration expenses Finance costs paidTaxes paidNet cash inflow/(outflow) from operating activities

Cash flows from investing activities:Sales from investment portfolioPurchases for investment portfolioTaxes paid on capital gainsNet cash inflow/(outflow) from investing activities

Cash flows from financing activities:Proceeds from borrowings Repayment of borrowings Share issuesShare issues transaction costs Dividends paidNet cash inflow/(outflow) from financing activities

Net increase/(decrease) in cash held Cash at the beginning of yearCash at the end of year

2012 $’000

Inflows/(Outflows)

35,909 (12,990)

5,881 172,738201,538

4,104 (11,843) (9,830)

(10,645)173,324

117,244 (244,537)

(473)(127,766)

468,649 (200,000)

- (53)

(168,605)99,991

145,549 7,344

152,893

2011 $’000

Inflows/ (Outflows)

32,481 (72,939)

3,372 188,278151,192

3,772(12,097)

(4,473) (4,526)

133,868

64,553 (141,643)

(475)(77,565)

259,000 (259,000)

- (241)

(163,944)(164,185)

(107,882) 115,226

7,344

Consolidated

20

market perform

ance

Market PerformanceFig. 1. S&P/ASX 200 Price Index

5,000

Jul 10

Jan 11

Jul 11

Jan 12

Oct 10

Apr 11

Oct 11

Apr 12

Jul 12

4,800

4,400

4,200

4,000

3,800

experience+income+growthPortfolio & Share Price % per year

Fig. 2. Ended 30/06/2012

1 yr return 3 yr return 5 yr return 10 yr return

-4.8%

Net asset per share growth plus dividends

-2.0%

7.1 % 7.7%

-1.1%

S&P/ASX 200 Accumulation Index

.1.7%

2.9% 7.2%

-6.7%

Share price growth plus dividends

-4.0%

5.7% 7.0%

22

portfolio performance

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

1 yr return 3 yr return 5 yr return 10 yr return

-2.9% -0.2%

9.1 % 9.6%

-5.2% -2.6 %

7.2% 8.4%

Net asset per share growth plus dividends including benefits of franking credits

S&P/ASX 200 Accumulation Index including benefits of franking credits

experience+income+growthAll Ordinaries Price Index

Fig. 4. Long Term Performance

5,000

4,800

4,400

4,200

4,000

Jul 36

Jul 80

Jul 60

Jul 02

Jul 48

Jul 92

Jul 68

Jul 12

Jan 40

Jan 84

Jan 64

Jan 04

Jan 52

Jan 96

Jan 72

Oct 44

Oct 88

Oct 68

Oct 08

Oct 56

Oct 00

Oct 76

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

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

26001:00 :: 002:00 :: 003:00 :: 004:00 :: 005:00 :: 001:00 :: 002:00 :: 003:00 :: 004:00 :: 005:00 :: 001:00 :: 002:00 :: 003:00 :: 004:00 :: 005:00 :: 001:00 :: 002:00 :: 003:00 :: 004:00 :: 005:00 :: 001:00 :: 002:00 :: 003:00 :: 004:00 :: 005:00 :: 001:

AFIC: Annual Report

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