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.
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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 franked dividends. 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.
