AMCIL seeks to create a portfolio comprising 30 to 40 stocks from the Australian and New Zealand equity markets, both small and large, which are likely to grow their earnings and dividends over the medium to long-term. In constructing a portfolio in this way small and large companies can have an equally important impact on investment returns.
By combining the benefits of investment in quality companies with those of a focused, but still diversified portfolio, the investment process seeks to produce attractive returns that are ahead of the general market. Given the concentration of the portfolio, there maybe periods when the performance of AMCIL can vary quite markedly from the Index.
Depending on the profit from year to year the dividends paid by the Company will maximise the distribution of franking credits. It would not be our normal practice to distribute realised capital gains unless franking credits have been generated. As a result, AMCIL’s dividends may vary over time.
Our assessment of quality includes criteria such as the board and management, financial position, pricing power as well as some key financial metrics such as the level of gearing in the balance sheet, margins and cash flow.
The structure of the industry and a company’s competitive position in its industry are also important indicators of quality. Linked to this assessment of quality is the ability of companies to grow earnings over time, which ultimately should produce good dividend and capital growth.
Recognising value is also an important aspect of AMCIL’s investment approach. Our assessment of value tries to reflect the opportunity a business has to prosper and thrive over the medium to long term.
AMCIL is however willing to move quickly to realise investments when we form a view for risk management purposes that an investment is well overvalued or there has been a material adverse change in a company’s circumstances or prospects. As such, we believe it is important to be nimble and responsive to material changes affecting these investments.
Tax can be a significant drain on the returns to investors. Our focus on investing in companies that pay franked dividends helps to generate efficient after-tax returns for our shareholders.
The buy-and-hold approach adopted by AMCIL typically results in a low level of capital gains tax payable because few positions are sold each year. Where AMCIL does realise a gain, we aim to pass on any LIC credits generated, thereby providing the opportunity for shareholders to potentially claim a tax deduction.
AMCIL seeks to reduce investment risk by diversifying its investments across a range of companies and industries, thereby ensuring that the portfolio is not overly exposed to one company or one particular sector of the market. While the Company has not set specific minimum or maximum levels of the portfolio that can be invested in a single company or sector, the weightings of individual securities and market sectors are regularly reviewed by the Investment Committee.
The participation of the Investment Committee is a key component of the Investment Process. This allows for wide-ranging perspectives on current and potential investments utilising the business expertise of Directors, the Company’s Investment professionals and senior management team.
We operate a trading portfolio to generate additional income by taking advantage of shorter-term opportunities in the market. The objective, therefore, is to buy with the intent of resale at a profit. This may include utilising selective option strategies approved by the Investment Committee. The Trading Portfolio is maintained within limits set by the Board and is very small relative to the size of the overall portfolio.
Appropriate levels of gearing may be utilised where potential investment returns justify the use of debt. This is managed within very conservative limits, as determined by the Board.
AMCIL is fundamentally a long-term investor in companies and these investments are monitored closely to ensure ongoing alignment with our Investment Philosophy. However, given the focused nature of the portfolio, AMCIL is more active in managing the holdings. In managing the risk in the portfolio, the Company is prepared to scale back or exit holdings completely if the investment case alters markedly, the position becomes too large in the portfolio or share prices become excessively high.
Share markets can be very volatile and periods of significant share price weakness may not reflect the true underlying value of a business. These periods can often provide opportunities to add to our holdings in companies we continue to believe have excellent long-term prospects.