AFIC (ASX:AFI) share price struggles amid inflation concerns

The AFIC share price is down as the market worries about inflation and China.

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The Australian Foundation Investment Co. Ltd. (ASX: AFI) (AFIC) share price is down this morning amid concerns about China and inflation.

For readers that haven’t heard of AFIC before, it’s an old listed investment company (LIC) which invests in other shares for its shareholders.

The LIC is holding its annual general meeting (AGM) today and decided to give investors a detailed outline about its strategy, some of its holdings and the outlook.

Regarding the outlook, which seems to be getting a lot more investor attention at the moment, there were three elements that AFIC noted. It said it’s mindful of Chinese growth slow, it is noting the inflationary environment and potential end of rate easing cycle, and third it’s seeing that company dividends are recovering.

But the LIC is still positive. It said that the outlook for earnings growth remains solid, saying that companies with international earnings are relatively better positioned to deliver.

However, whilst the AFIC share price is down by around 0.4% right now, the S&P/ASX 200 Index (ASX: XJO) is down around 0.85%. So with that in mind, it’s actually beating the ASX benchmark.

International earnings?

AFIC is giving itself a few different ways to access international earnings.

It has started to invest some money into international shares – ones listed outside of Australia. The LIC invested $47 million in international shares in May 2021, which it called a small amount.

The international portfolio includes 39 companies. Performance from these shares has so far been “encouraging”.

It’s looking to build a consistent track record with this international portfolio. The LIC is applying the “AFIC way” of investing to its international portfolio.

At 30 June 2021, some of its biggest international positions included Alphabet, Microsoft, Nike, Netflix, Alibaba, Amazon, Chipotle, Facebook and HCA Healthcare.

It also has plenty of ASX shares that have international earnings.

What is the AFIC way of investing?

AFIC aims to provide shareholders with attractive investment returns through access to a growing stream of fully franked dividends and growth in capital invested.

Over the last year the AFIC share price has risen 31% and over the last five years it has gone up 45%.

Quality is a key focus.

There are a number of areas that AFIC looks at: uniqueness of assets, long-term sustainability, independence (from the government, suppliers etc.), people, earnings consistency and financial strength.

Further explaining its focus on long-term quality, AFIC said it’s a long-term investor in companies, not traders of share prices. It said it aims to identify quality companies with sound growth prospects that it can buy at a reasonable price. This supports its belief in the power of compounding returns from great businesses.

What ASX shares does AFIC think have long-term potential?

One of the main things that can impact the AFIC share price is the performance of the portfolio, being the underlying holdings.

Xero Limited (ASX: XRO) was one of the shares it pointed to, noting its strong market positions in Australia and New Zealand, with a growing presence in the UK and the rest of the world. The LIC also said that Xero’s software as a service (SaaS) model and economics deliver superior returns. AFIC also noted the strong subscriber and average revenue per user (ARPU) growth. The investment team thinks it has a long runway of growth with large growing global addressable markets.

Carsales.com Ltd (ASX: CAR) was another ASX share that AFIC likes. The LIC points to the dominant market position in used car classifieds in Australia with an audience of 4.4 million average monthly unique users, which was 4.5x bigger than the competitor. AFIC is also attracted to the growing contribution from international businesses, which now represents just over a third of the group profit.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Xero. The Motley Fool Australia owns shares of and has recommended Xero. The Motley Fool Australia has recommended carsales.com Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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