Tristan Harrison has been a contributor to The Motley Fool since October 2016. He has an advanced diploma from the Association of Accounting Technicians (UK) and is currently studying to be a Chartered Institute Management Accountant. Tristan's goal is to help Australians learn about the great businesses listed on the ASX that will help grow their portfolio, wealth and confidence about investments over the long term. He's a keen tennis fan and can't wait for the next Australian Open to roll around.
The Australian Foundation Investment Co Ltd (ASX: AFI) (AFIC) share price is in the red right now, hitting a 52-week low of $7.35, even though the S&P/ASX 200 Index (ASX: XJO) is actually up by around 1.8%.
That may seem strange considering the ASX 200 index and the AFIC holdings list look pretty similar with names like Commonwealth Bank of Australia(ASX: CBA), BHP Group Ltd (ASX: BHP) and CSL Limited (ASX: CSL) among the top holdings.
As a listed investment company (LIC), the job of AFIC is to invest in other ASX shares and generate returns for shareholders.
Why is it down so much in 2022?
It has been a rough year for plenty of ASX shares this year as investors get to grips with a tricky economic environment. Inflation is elevated, which isn’t good for economic stability. A stable economy is one of the main areas of focus for a central bank.
The Reserve Bank of Australia (RBA), and other central banks, are putting a lot of effort and policy decisions into bringing inflation back to a more normal level.
Time will tell how long it takes to be successful and how this affects the AFIC share price.
However, in the meantime, interest rates are jumping higher. This is unsettling for markets, such as the ASX share market. Assets are heavily influenced by interest rates, which act kind of like gravity. The higher the interest rate, the stronger it pulls down on asset values, in theory. Warren Buffett once explained:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature…its intrinsic valuation is 100% sensitive to interest rates.
Back to the AFIC share price
AFIC, the LIC, has a portfolio of assets that has a value worth many billions. The basket of shares that it owns can go down in value as well as up. However, how much investors decide to pay for that basket of shares can change too. They could pay 10% more than the value of that basket, 10% less than the basket value or any other premium or discount.
For the last two years, AFIC shares have traded at a premium to the underlying net tangible assets (NTA).
Investors may have been attracted to the blue chip investment style and the stable stream of fully frankeddividends. However, ‘safe’ places to put cash (like savings accounts and term deposits) are now offering a much better return. Perhaps the AFIC share price has been falling today partly because investors can find income from other sources? The longer-term decline can be explained by the reduction of the asset value of the portfolio in 2022.
AFIC's investment portfolio includes the following companies: BHP Billiton, Commonwealth Bank of Australia, Westpac Banking Corporation, Rio Tinto, Telstra, Wesfarmers, Woolworths, and AGL Energy. The key benefits of investing in the Company are: Diversified portfolio. Tax effective income via fully franked dividends.
The reasons for the stock market to be down can vary, and various factors can cause it. Some reasons could be based on economic indicators such as rising interest rates, high inflation, or a recession. Political uncertainty, natural disasters, or a crisis in a specific industry could also cause it.
Despite the recent underperformance, AFIC increased its dividend by 10 per cent as investment income jumped to $174m, up from $159.4m in the corresponding period last year.
Once you have set-up your broker account and have funds available in your broker account, you are ready to buy shares in AFIC (ASX code: AFI). There is no set limit on the number of AFI shares you may purchase, however your broker may apply a minimum amount (typically $500).
There are typically 2 dividends per year (excluding specials). Our premium tools have predicted Australian Foundation Invest. Co with 98% accuracy. Sign up for Australian Foundation Invest.
While debt funds can be riskier when held for a long duration, the maturity period of 91 days of liquid funds makes them one of the safest options for investors. Liquid funds, because of their short-term underlying securities, have minimum risks.
10% Return for S&P 500 a Real Possibility by End of 2023
Short of a recession — a very real possibility — consensus estimates are for about 5% earnings growth (opens in new tab) for S&P 500 companies in 2023. That's certainly less than what it was in years past, but still respectable.
Yes, you can lose any amount of money invested in stocks. A company can lose all its value, which will likely translate into a declining stock price. Stock prices also fluctuate depending on the supply and demand of the stock. If a stock drops to zero, you can lose all the money you've invested.
Supply factors that affect share prices include company share issues, share buybacks and sellers. It's important to note that share prices will come down when supply is greater than demand, and when more investors start to sell.
Dividend stocks are vulnerable to rising interest rates. As rates rise, dividends become less attractive compared to the risk-free rate of return offered by government securities.
One reason for a lower dividend payment is that the company did not earn as much in profits as in previous years. Dividends to shareholders are paid out of net profits, so the board may have its hands tied after a year when the net income was down compared to previous years.
Despite funds under management growing 38% in the first half of FY22, Australian Ethical Investment Ltd (ASX:AEF) stock has nonetheless tumbled -50% since December, as part of a New Year global market rout driven by rising interest rates and geopolitical jitters.
Some institutional shareholders set a target to sell their stock at a given price or if a certain event transpires. The end result is that the supply of shares available for sale (after the event transpires) usually depresses the share price.
Australian Foundation Investment Company Ltd quote is equal to 7.230 AUD at 2023-03-25. Based on our forecasts, a long-term increase is expected, the "AFI" stock price prognosis for 2028-03-17 is 10.135 AUD. With a 5-year investment, the revenue is expected to be around +40.18%.
Conversely, if many people want to sell a particular stock simultaneously, its supply will increase, so its prices will fall. Now, there can be several reasons that can impact this demand and supply chain. Suppose a company has declared dividends or announced a bonus issue of shares.
Introduction: My name is Barbera Armstrong, I am a lovely, delightful, cooperative, funny, enchanting, vivacious, tender person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
