Is the Australian Foundation Investment Co.Ltd. (ASX: AFI) share price a buy?
One of the oldest listed investment companies (LICs) in Australia has regained some of its popularity after the threat of the removal of franking credit refunds has vanished.
AFIC aims to provide shareholders attractive investment returns through access to growing fully franked dividends and capital growth over time. It's the largest LIC on the ASX with a portfolio of $7.5 billion at the end of May 2019.
One of the most attractive features about AFIC is its very low annual management fee cost of 0.14% with no performance fees, which leaves plenty of net returns for shareholders. Fees are one of the biggest detractors to long term wealth.
AFIC is mostly invested in Australia's biggest companies such as Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP), Westpac Banking Corp (ASX: WBC) and CSL Limited (ASX: CSL).
There are some differences to the ASX index but most of AFIC's top 25 holdings are similar to the ASX index's top 25 holdings. Plus, AFIC held 3.4% of the portfolio as cash at the end of May 2019, an index doesn't have cash.
However, AFIC's net asset per share growth plus dividends (including franking) has been underperforming the S&P / ASX 200 Accumulation Index (including franking) in recent years.
Over the past year the underperformance has been by 1.6% and over the past five years the underperformance has been an average of 1.9% per annum. The continuing underperformance can compound into big wealth differences over time if the numbers aren't reversed.
AFIC has been underperforming because of the poor showing by Australia's big blue chips. In recent times it has been better to own the growth shares and international shares.
Foolish takeaway
AFIC is currently trading at a small discount to its underlying assets, pre-tax. This is fairly attractive because for most of the past seven years it has been valued at a premium. However, the reliable grossed-up dividend yield of 5.6% is not enough for me to want to buy its shares considering the continuing underperformance.
