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A student project for Graphic Design 371 in Curtin University The Brief: To redesign a local investment company's branding and annual report publication. Concept: Looking forward to the future. (Time and futuristic) To create a coherent design for the annual that is modern, high-end and futuristic I used subtle colours of gray and light blue, cityscape and bokeh photography, dotted lines, and stylized typography, clean white spaces with the keywords: over a long period of time and the concept of looking toward the future. This concept gave a modern, high-end and sophisticated design to the annual report that will highly appeal to the stockholders and investros and it also helped establish the brand identity of the investment company.
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Australian FoundationInvestment Company
experience income growth
annual report 2013
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experience+income+growth
:: 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
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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
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
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
experience+income+growth
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
experience+income+growth
“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
experience+income+growth
$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
experience+income+growth
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
experience+income+growth
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.
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:
experience+income+growth
:: 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: