Why did the AFIC share price just hit a new 52-week low?

AFIC shares are falling even though the ASX share market is up.

| More on:
A woman sits with her hands covering her eyes while lifting her spectacles sitting at a computer on a desk in an office setting.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • AFIC shares are dropping today, it’s down when the ASX is up 
  • It owns a portfolio of blue chip names like CBA and BHP 
  • Rising interest rates could be one of the main headwinds 

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 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.

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. has positions in and has recommended CSL Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on 52-Week Lows

A man holds his head in his hands, despairing at the bad result he's reading on his computer.
52-Week Lows

5 ASX 200 stocks at 52-week lows

These shares are down in the dumps on Tuesday.

Read more »

A male sharemarket analyst sits at his desk looking intently at his laptop with two other monitors next to him showing stock price movements
52-Week Lows

Are Telstra shares a no-brainer for income after hitting a fresh 52-week low?

Let's see what analysts think of the telco giant's shares at this level.

Read more »

A man holds his head in his hands, despairing at the bad result he's reading on his computer.
Industrials Shares

Why is this ASX 200 stock crashing 16% to a 52-week low on Tuesday?

This stock is having a very red start to the week.

Read more »

A man with his back to the camera holds his hands to his head as he looks to a jagged red line trending sharply downward representing the ASX tech share sell-off today
52-Week Lows

3 ASX shares sinking to 52-week lows today

These ASX shares are having a bit of a nightmare this year.

Read more »

Young man sitting at a table in front of a row of pokie machines staring intently at a laptop. looking at the Crown Resorts share price
52-Week Lows

Star Entertainment share price crashes 26% upon return to trade

This is a new 52-week low.

Read more »

Rede arrow on a stock market chart going down.
Materials Shares

Core Lithium and 2 other ASX 200 lithium shares plunging to 52-week lows

Lithium stocks like Core are exploring new lows today.

Read more »

A man looks nervous as he inflates a balloon, scared it might pop.
Materials Shares

Arafura share price resets 52-week low after quarterly update

The rare earths explorer also announced the results of its share purchase plan today.

Read more »

A woman stands at her desk looking a her phone with a panoramic view of the harbour bridge in the windows behind her with work colleagues in the background.
Industrials Shares

APM shares rebound on Friday following 40% thrashing on weaker profit news

The international employment services company was punished for its 1H FY24 update.

Read more »