The Australian share market was on track for a very strong year until the world was unexpectedly hit with the COVID-19 virus in the early part of the 2020 calendar year. From the market peak in February through to the low point for the year in late March, the S&P/ASX 200 price index was down 36.5 per cent. Surprisingly, despite the significant decline in economic conditions, the S&P/ASX 200 price index increased 29.7 per cent from this low point until the end of the financial year, driven primarily by an expansion in market valuations.

In these volatile market conditions, the S&P/ASX 200 Accumulation Index over the year to 30 June 2020, including the benefit of franking, decreased 6.6%. AFIC’s portfolio outperformed over this period, with a negative return of 3.1%, which also includes the benefit of franking.

The COIVD-19 pandemic has led to extremely challenging economic conditions for many companies and markets. These conditions have hurt the earnings of many of our investments and several companies have reduced or deferred dividends.

AFIC's Full Year Profit for FY20 was $240.4 million, down 40.1 per cent from $406.4 million in the corresponding period last year. The difference in performance year on year was largely driven by several one-off events in FY19that were not repeated this year, such as the participation in the Rio Tinto and BHP off-market share buy-backs. There were also several special dividends distributed last year from many of our holdings, such as the dividend from the Coles demerger from Wesfarmers, which were not repeated this year.

AFIC, as a long-standing listed investment company, has reserves that can be used in difficult times. Drawing upon these reserves, the final dividend was maintained at 14 cents per share fully franked despite the fall in income in the second half.

Managing the Portfolio through this difficult environment

Several companies in the portfolio contributed strongly to AFIC's relative returns such as CSL, Wesfarmers, Fisher & Paykel Healthcare, ResMed, James Hardie Industries, Xero, NEXTDC and Carsales.com. We have been steadily growing our position in these companies while reducing the number of holdings in the fund over the year from 76 to 61, with the goal of reinforcing the quality of the portfolio by focusing on investing in companies showing a long-term, sustainable competitive advantage.

Several purchases were undertaken during the year. This included placements in National Australia Bank, Cochlear, Auckland International Airport, Oil Search, NEXTDC, Ramsay Health Care, Reece and Qube Holdings. Major additions included Goodman Group, Telstra (to bring some income into the portfolio), Macquarie Group, Cleanaway and Sydney Airport.

While there has been a reduction in the number of holdings in the portfolio, three new companies were added, given we consider the long-term opportunity for each business to be attractive: Altium, Netwealth and Ryman Healthcare.

Major sales included the complete disposal of holdings in Treasury Wine Estates, Suncorp Group, Scentre Group, Adelaide Brighton and Perpetual, as these funds were deployed elsewhere in the portfolio. There was also some small trimming of the position in James Hardie Industries, although this remains a major holding in the portfolio.

Quality is key

As we move into the new financial year, the outlook remains unclear as companies face an extremely difficult operating environment. While recent fiscal and monetary support from the Government has provided some breathing space for the economy, moving forward, performance is going to be largely dictated by the progress made on suppressing COVID-19 in Australia and across the globe.

In this environment, it is difficult to justify the expansion of market valuations with the pressure that company profits and dividends are likely to remain under. Given the strength of the market since the lows recorded in March and the further adjustments that have been made to the portfolio during this market weakness, we are content to be patient.

We believe the portfolio is well positioned given the high quality of companies in the portfolio.