Why CBA makes LIC AFIC nervous

Australian Foundation Investment Company boss Mark Freeman has cautioned on the outlook for equities and bank valuations.

Australian Foundation Investment Company boss Mark Freeman. Picture: Aaron Francis/The Australian

The nation’s largest and oldest listed investment company has cautioned on the outlook for equities, warning on the high valuations of Australian banks as “money chases assets”.

Speaking to The Australian after handing down the Australian Foundation Investment Company’s half-year results, managing director Mark Freeman says investor exuberance for the banking sector, CBA in particular, made him nervous.

“We’ve never seen CBA priced like this. The price/earnings ratio on CBA is nearly 26 times. That’s like a growth stock. We’ve nothing against the company, it’s just the sharemarket pushing up the price. But it makes us nervous,” Mr Freeman said, adding that he was cautious on the broader market, even as some sectors see strong growth.

The waves of money flooding in from ETFs and big super funds is a big driver behind the full-priced market, he added.

“If money goes into ETFs and industry funds, they just have to buy (listed companies). You can never pick the exact peak … but if the PE is pretty extreme (like with CBA) then we don’t mind taking a bit off the top,” Mr Freeman said.

AFIC trimmed its position in CBA through 2024, but the bank remains its largest shareholding, at just under 10 per cent of the portfolio.

The LIC posted a 7.2 per cent return for the six months through to December 31, fully franked, slightly underperforming the S&P/ASX200 Accumulation Index, at 7.6 per cent. Over calendar 2024 the fund returned 13.2 per cent, slightly above the benchmark’s 12.7 per cent.

Netwealth, Fisher & Paykel, ResMed, Wesfarmers, JB Hi-Fi, Goodman Group and Macquarie Group all drove the fund’s return through the year, and were offset by IDP Education, Domino’s Pizza, James Hardie Industries and Transurban Group.

AFIC added to its positions in BHP, Woodside, Telstra and James Hardie, among others, through the year, saying the long-term prospects for these companies remained strong.

“These purchases were transacted during periods of short term negative news flow, providing attractive buying opportunities for long-term investors. All these companies hold strong market positions and generate meaningful free cash flow, enabling reinvestment into their asset base for future earnings growth,” the company said.

The fund also initiated positions in five companies through: Ampol, Worley, Macquarie Technology, BlueScope Steel, and Sigma Healthcare.

It trimmed its CBA and Westpac holdings and fully exited its positions in Ramsay Health Care, Domino’s Pizza and Mineral Resources.

On the economic front, Mr Freeman said he was not convinced rates would go down as much as many expected: “From a long-term perspective, the rates we’re seeing now, these are normal levels. They’re just long-term averages. Maybe if things slow down a little they might come down a small bit, but it can’t go back to where things were, with zero rates.”

AFIC’s interim profit rose slightly to $154.2m from $150.1m a year earlier.

The fund declared an interim dividend of 12c a share fully franked, up 0.5 per cent on last year.

Originally published as Why CBA makes LIC AFIC nervous