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Should you buy AFIC (ASX:AFI) shares?

Australian Foundation Investment Co. Ltd. (ASX: AFI) (AFIC) is the largest listed investment company (LIC) on the ASX and also the oldest.

Today, the LIC gave an update about its net tangible asset (NTA) backing per share at the end of June 2018.

Its before tax NTA was $6.27 and its after tax NTA was $5.34. This compares with the current share price of $6.16. So, it’s trading at a decent premium to the post tax NTA.

There is a lot to like about AFIC. It has one of the lowest costing management fees in Australia, being 0.14% per annum with no performance fees. Fees eat up a lot of investor’s returns, so the lower the fees the better.

It makes long-term investments. Investing for the long-term has been proven to be the best way to make good returns.

AFIC has grown or maintained its dividend every year over the past two decades. It’s a good source of reliable income.

For a lot of people in Australia, AFIC would be a good investment because it ticks a lot of boxes. It’s something you can buy and own for a long time, perhaps forever.

However.

Over the past year, three years and five years it has underperformed the S&P/ASX200 Accumulation Index. Over the past year the index returned 13% whilst AFIC’s NTA plus dividends returned 10.8% and the share price plus dividends returned 10.3%.

It’s true that over the past 10 years AFIC has outperformed the index by 0.1%, but that’s essentially neck and neck.

AFIC invests similarly to the index, but there are differences. It appears those differences have led to underperformance over the past five years.

The concept of beating the index sounds simple – simply avoid the bad ones and you should do well, but of course it isn’t that easy.

Foolish takeaway

If AFIC continues to underperform the market then investors may as well have held the index instead. Due to the size of AFIC it gets quite hard to choose growth shares and for them to be a meaningful position.

However, that’s exactly why I don’t own AFIC. I think too much of its portfolio is allocated to slow-growth blue chips like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) that won’t generate the returns I’m hoping for over the long run.

Instead, I'd much rather fill my portfolio with shares that are likely to beat the market, like these share ideas.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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