AMCIL’s profit for the half year to 31 December 2022 was $4.1 million, up 13.9% from the previous corresponding period. An improvement in dividends from various holdings in our portfolio and increased income from option activity contributed to the rise in profit.
Shareholders will receive an interim dividend of 1.0 cent per share fully franked (at 30%), in line with the interim dividend last year. All the interim dividend is sourced from capital gains, on which AMCIL has paid or will pay tax. The amount of the pre-tax attributable gain, known as an “LIC capital gain”, attached to this dividend is 1.43 cents (1.0 cent grossed up for tax). This enables some shareholders to claim a tax deduction.
We have confidence in our portfolio’s long-term performance
Our portfolio’s six-month return was 4.6% including franking, compared to the S&P/ASX200 Accumulation Index’s return of 10.8% including franking. Against the backdrop of continued interest rate rises due to central bank inflation concerns, and geopolitical events driving higher energy prices, sector performance varied greatly across the market. The tight supply in energy and specific resource markets drove strong share prices in these sectors.
Several companies in our portfolio that performed well over the 2021 calendar year (and the 3 – 5 years to end of 2022), experienced sharp falls in their share prices during 2022 as rising interest rates in response to higher inflation reduced market valuations.
Many of our large holdings following on from very strong performance last year, such as James Hardie Industries, ARB, and Mainfreight, experienced material declines in their share prices, which weighed upon the recent performance of AMCIL’s portfolio. Our underweight position in the energy and materials sectors also impacted our relative portfolio performance over the last year.
However, over the long term, we remain confident in the performance of our portfolio against these sectors. Our holdings generate higher, more consistent return on capital, plus superior earnings growth. Our portfolio’s long-term performance, which better aligns with our investment timeframes, was 9.5% per annum for the 10 years to 31 December 2022. This is slightly below the benchmark index return over the same timeframe of 10.2%. Both figures include the benefit of franking. AMCIL’s performance numbers are after costs and tax.
Portfolio adjustments were modest
Portfolio activity during the half year was relatively modest as we patiently awaited value opportunities to emerge before adding to our preferred holdings. We also reduced sales activity, following a period of elevated trimming of positions in response to the buoyant market in 2021. A recent new addition to our investment portfolio was ALS, a strong global provider of testing solutions for the life sciences, industrial and commodities sectors.
We made modest adjustments to existing holdings – given the changing market conditions for our preferred holdings, we took a patient approach to increasing positions. The most significant additions to existing holdings were BHP, Wesfarmers, and EQT Holdings.
We trimmed our holdings in IRESS, Macquarie Telecom, Nanosonics, and Temple & Webster. The portfolio weightings of these companies were higher than our preferred positioning relative to other stocks in our portfolio.
We reduced our holding in Cochlear as we continued to monitor for excess valuation. But our trimming of highly valued stocks is much lower than in 2021 when we realised significant capital gains in response to a very buoyant market.
Long-term prospects of our portfolio remain positive
Inflation and interest rates remain in focus, but corporate earnings are also likely to be an important factor in the direction of the market. Inflation pressure on costs and slowing economic activity will test the earnings resilience of companies.
Although such conditions demand caution, we believe the long-term prospects of our portfolio holdings are relatively strong. Their ability to generate attractive returns and market share gains through challenging economic conditions is a key factor in our portfolio construction. We move forward with a good level of cash, which enables us to take advantage of long-term investment opportunities in a volatile market.