Australian Foundation Investment H1 Earnings Call Highlights

Australian Foundation Investment (ASX:AFI) executives used the company’s half-year results briefing to emphasize a long-term, low-cost investment approach while acknowledging a disappointing stretch of relative performance and outlining portfolio actions taken during the period.

Half-year financial result and dividend update

CFO Andrew Porter reported half-year profit of AUD 147 million, down 4.6% from the prior corresponding period, equal to AUD 0.117 per share. Porter noted that AFIC maintained its interim ordinary dividend at AUD 0.12 per share despite earnings per share being lower than the payout, and declared a AUD 0.025 per share special dividend for the half.

Management said another AUD 0.025 per share special dividend is expected to be paid with the final dividend later in the year, and cited the listed investment company (LIC) structure—along with profit and franking reserves—as a reason AFIC can seek to deliver consistent dividends through market cycles.

Porter attributed the decline in profit largely to lower dividend income from some large holdings. He cited examples including BHP (dividends received falling from AUD 23 million in the prior six-month period to AUD 19 million in the current period), as well as reductions from Woodside and Woolworths. He also flagged a higher-looking tax charge driven by a lower proportion of franked dividends versus unfranked income and a deferred tax timing difference that he said should “sort itself out by the end of the year.”

The company reported a management expense ratio (MER) of 0.11%, which Porter described as helped by the “non-investing of incentives” and the absence of certain one-off costs from the prior period. He said the MER is influenced by portfolio size, with the investment portfolio valued at about AUD 9.9 billion at December 31, down from AUD 10.4 billion a year earlier.

Performance backdrop and key drivers of underperformance

Portfolio manager Brett McNeill said AFIC’s short-term performance had been “very disappointing.” The company’s NTA total return after costs and realized tax was -2% for the six months to December 2025 and 1.2% over one year, both trailing the ASX 200 accumulation index over the same periods. McNeill said this weaker recent performance has also weighed on longer-term three-, five-, and 10-year returns.

McNeill pointed to pronounced sector moves in the market over the past six months, with Materials contributing the most to index gains—driven not only by large-cap miners such as BHP and Rio Tinto, but also by strong returns from small- and mid-cap resource companies, especially gold stocks. In contrast, he noted that Information Technology and Healthcare were among the poorest performing sectors over the period.

Management grouped AFIC’s underperformance into three main buckets:

• Large-cap detractors: McNeill highlighted CSL (calendar 2025 total return of -37%), James Hardie (-38%), and CAR Group (-13%). He described CSL as having suffered a “huge de-rate,” but said AFIC intends to maintain its large holding based on perceived long-term growth potential. On James Hardie, he cited a poorly received acquisition, prompting AFIC to reduce its holding due to concerns about the balance sheet and governance turnover. He said CAR Group continued to deliver good results and experienced a smooth leadership transition, and that AFIC sees long-term value at current levels.
• Smaller company weakness: McNeill said Reece and ARB had faced largely short-term issues in 2025 despite strong long-term compounding track records. On IDP Education, he called it a “very disappointing investment,” saying AFIC bought too early but plans to hold for now while confidence in management and the balance sheet remains.
• Gold exposure gap: McNeill said AFIC historically has not been a large investor in gold stocks, which hurt relative performance amid sharp gains in major names including Evolution (+170%), Northern Star (+78%), and Newmont (+156%). While he said the sector appears “hot” and difficult to value at current levels, management indicated it would keep an “open mind” toward gold stocks in the future.

Portfolio activity: additions, trims, and a small-cap diversification push

Assistant portfolio manager Winston Chong said transaction activity during the six months to December 31 was in line with long-run averages. Buying was concentrated in Woolworths and Telstra, which management said offered an opportunity to add to “high-quality blue-chip businesses” at more attractive valuations.

Chong said AFIC also increased its position in Sigma Healthcare, describing it as the owner of the Chemist Warehouse business. He said Chemist Warehouse is a market leader in health and beauty retail, a category experiencing secular growth, and that Sigma shares had underperformed over the past year despite progress on growth plans.

AFIC continued adding to CSL, and added to Macquarie Technology, with Chong citing an opportunity created by weakening sentiment toward AI-related stocks and pointing to the company’s data center build-out and longer-term outlook.

The company also added three small-cap positions—Life360, Objective Corporation, and Temple & Webster—which Chong said reflected a more refined, diversified approach to small caps, leveraging experience from the group’s Mirrabooka team. He said the three additions together represented about 0.3% of the overall portfolio at the time of the briefing.

To fund purchases, AFIC trimmed holdings where valuations appeared stretched, including Wesfarmers, Netwealth, and the banks, and reduced James Hardie further due to balance sheet and governance risk. Chong also said AFIC exited WiseTech after reassessing governance risk.

In discussing specific valuation decisions, management said Wesfarmers was materially reduced at an average price around AUD 92, when the dividend yield was below 3%, and Netwealth was trimmed when its valuation exceeded 60 times earnings.

NTA discount, buybacks, and shareholder communication

Management addressed AFIC’s share price trading at a discount to net tangible assets (NTA). Porter said the discount was about 9% at the end of December 2025. He said the company has been conducting buybacks and intends to continue over the next six months “if the market conditions allow.”

CEO and Managing Director Mark Freeman said periods of discount are not unusual historically and suggested discounts have tended to occur when markets appear “hot” or speculative, a pattern he described as frustrating for shareholders. He said AFIC has increased marketing and shareholder communication efforts, including outreach to financial planners and greater use of podcasts and other channels aimed at engaging a younger investor audience.

International equities and outlook

McNeill said AFIC’s international equities portfolio continued to add value, but that the company is not considering listing a separate international fund at this time. Instead, management intends to invest internationally within AFIC in a “more concentrated and complementary” manner.

At December 31, the international portfolio was valued at AUD 170 million, representing 1.7% of AFIC’s total portfolio, and held 27 stocks. Management cited several holdings, including Nvidia, Microsoft, Netflix, and Visa. Freeman added that the initial investment was “just over AUD 100 million” and had grown to AUD 170 million, which he characterized as accretive to shareholders.

On outlook, McNeill cited “extreme geopolitical uncertainty” alongside equity markets near all-time highs, leaving the market “moderately expensive” in AFIC’s view when considering metrics such as price-to-earnings ratios and dividend yields. Still, he said the team has found selective opportunities—highlighting Telstra and Woolworths for income, and Sigma, Macquarie Technology, and recent small-cap additions for long-term growth—while reiterating that the focus remains on owning high-quality companies for the long term and improving execution after a period of underperformance.

About Australian Foundation Investment (ASX:AFI)

Australian Foundation Investment Company Limited is a publicly owned investment manager. The firm invests in the public equity markets of Australia and New Zealand. It invests in value stocks of companies. It benchmarks the performance of its portfolio against S&P/ASX 200 Accumulation Index. It invests in companies across diversified industries. The firm employs fundamental analysis with a focus on bottom-up research to make its investments. The firm conducts in-house research to make its investments.