Announcement PDF Annual Report 2023 Contents About Letter from the Chairman 2 Letter from the Managing Director 3 Shareholder returns 4 About Argo Investments 5 Shareholder benefits 6 Investment approach 7 Portfolio overview 8 Top 20 investments 9 Directors’ Report Board members 10 Operating and Financial Review 15 Remuneration Report 20 Auditor’s Independence Declaration 43 Financial Report Statement of Profit or Loss 44 Statement of Comprehensive Income 44 Statement of Financial Position 45 Statement of Changes in Equity 46 Statement of Cash Flows 47 Notes to the Financial Statements 49 Portfolio holdings 73 Directors’ Declaration 77 Independent Auditor’s Report 78 Further information Shareholder information 83 Company directory 85 Annual General Meeting details85 1 2023 overview Profit Earnings per share $251.2m in 2022 (Excl. one-off, non-cash income) 34.3c per share in 2022 (Excl. one-off, non-cash income) Full year dividends Total assets Fully franked per share 33.0c per share in 2022 $6.4b in 2022 Management expense ratio Argo shareholders 0.141% in 2022 96,100 shareholders in 2022 $271.7m 34.5c 0.155% 36.1c $6.9b 95,600 Letter from the Chairman Dear valued shareholder, It is my great pleasure to present Argo Investments’ 2023 Annual Report. Against a backdrop of market volatility and ongoing macroeconomic challenges, I am pleased to report that Argo reported a solid profit and delivered shareholders record fully franked annual dividends. Russell Higgins AO Chairman Argo’s full year profit of $271.7 million represents an increase of +8.2% when excluding the one-off, non-cash income received in the prior year. Several of the largest companies in our portfolio increased their dividends, bolstering Argo’s income. These higher dividends were partially offset by lower dividends from BHP Group and Rio Tinto, reflecting softer commodity prices, particularly iron ore. The Board was pleased to declare a final dividend of 18.0 cents per share, bringing dividends for the full year to 34.5 cents per share, fully franked – up +4.5% on the previous year. Significantly, both the interim and final dividends for financial year 2023 represent record highs for Argo. Argo has now paid dividends to our shareholders for 77 consecutive years. Since the introduction of Australia’s imputation system in the late 1980s, every Argo dividend has had franking credits attached. Furthermore, since 1995 every dividend has been fully franked. This is an enviable track record. Our priority remains providing sustainable and tax-effective dividend income and capital growth for our shareholders by consistently applying our conservative, longterm investment approach within our low-cost business model. On behalf of the Board, I would like to thank you, our loyal shareholders, for your ongoing support of Argo. I would also like to extend a warm welcome to shareholders who are new to the Company. Yours faithfully, Russell Higgins AO Chairman 7 September 2023 2 Letter from the Managing Director Dear valued shareholder, The Australian share market defied consensus expectations in financial year 2023, displaying resilience in the face of steep interest rate increases, historically high inflation and a sombre global growth outlook, with the S&P/ASX 200 Accumulation Index climbing +14.8% over the 12 months to 30 June 2023. Jason Beddow Managing Director Although the share market’s performance was punctuated by periods of considerable volatility, investors were generally unperturbed by the economic headwinds. The Reserve Bank of Australia’s decision to begin aggressively raising interest rates, coupled with high inflation, saw sentiment falter sending shares lower in the first quarter. However, optimism soon prevailed as investors ultimately ‘looked through’ these and other challenges and shares rebounded sharply later in the year. All industry sectors ended the year in positive territory. After experiencing falls over the prior period, technology stocks were the standout performers – the sector surged more than +30% as interest in the future applications of artificial intelligence rapidly gathered momentum. The Utilities and Health Care sectors were the share market’s laggards, gaining just +2.3% and +5.7% respectively as investors overlooked stocks with more defensive attributes. Argo’s investment performance, measured by the Net Tangible Assets (NTA) return after all costs and adjusted for company tax paid, was +11.4%. Argo’s relative underperformance this year reflects investor sentiment pivoting back to growth-style investments, particularly in the technology space, whereas our investment process favours more mature businesses that can maintain and grow their dividends so we can pay sustainable dividend income to our shareholders. Our focus on this objective sometimes impacts our portfolio performance compared to the Index. Looking ahead, with no debt, cash available and a diversified portfolio, Argo is well-positioned to navigate any further volatility and variable conditions. Yours faithfully, Jason Beddow Managing Director 7 September 2023 3 Shareholder returns Long-term returns – $10,000 invested over 20 years $58,492 $42,077 $19,298 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Share price 2013 2014 2015 Plus dividends 2016 2017 2018 2019 2020 2021 2022 2023 Plus franking A $10,000 investment in Argo shares on 1 July 2003 would have grown to a value of $42,077 (+7.4% per annum) at 30 June 2023. The tax effective value taking into account franking credits is $58,492 (+9.2% per annum). Annual dividends paid (cents per share) 35 30 28 29.5 30.5 2015 2016 31 31.5 2017 2018 33 30 33 34.5 2022 2023 28 25 20 15 10 5 0 2014 Interim dividend 2019 2020 Final dividend 2021 Total returns 14.8% 11.4% 12.0% 10.5% 11.1% 5.7% 6.4% 7.2% 7.0% 7.9% 8.6% 3.2% 1 year Total Shareholder Return (TSR) 3 years (pa) 5 years (pa) NTA after management expenses All figures are to 30 June 2023. 4 10 years (pa) S&P/ASX 200 Accum. Index About Argo Investments Argo Investments is one of Australia’s oldest and largest listed investment companies (LICs). We offer investors low-cost, conservative and diversified exposure to approximately 90 Australian listed companies. Argo's history Through various economic cycles and disruptive events since Argo was founded in 1946, our long-term investment approach and straightforward business model has proven resilient. Adelaide-based chartered accountant Alf Adamson and lawyer Kevin Ward QC founded Argo in 1946 with £10,000 of capital invested on behalf of a small group of South Australian shareholders. From a boutique investment firm, Argo steadily grew through acquisitions of listed and unlisted companies, new share issues and capital appreciation. Today, Argo is one of the ASX’s top 100 companies, investing approximately $6.9 billion on behalf of more than 95,000 shareholders from across Australia and around the world. Over 77 years of investing, Argo has weathered various market cycles and disruptive events including the oil crises of the 1970s, the 1987 share market crash, the Tech Wreck, the Asian Economic Crisis, the Global Financial Crisis and, more recently, the COVID-19 pandemic. Argo has a strong track record of delivering capital appreciation and has paid shareholders dividends every year since being established. Low-cost, straightforward business model Argo generates revenue primarily from dividends and distributions received from the companies in our investment portfolio. The majority of that income is paid out to our shareholders as fully franked dividends. Our name The name Argo comes from to the Greek myth of Jason and the Argonauts who sailed in their ship the Argo in search of the golden fleece. The ancient ship has long been incorporated into our visual brand and has come to represent Argo’s journey over time, safely navigating through various conditions. Our operating costs are relatively stable and are significantly lower than most other managed investment products. Argo has few employees and is internally managed, meaning no fees are paid to external managers. Our efficient business model also benefits from economies of scale with costs remaining relatively stable, even as Argo’s assets increase. Our objective Maximise long-term shareholder returns through reliable fully franked dividend income and capital growth. Simple to invest Actively managing a diversified portfolio of Australian shares with a low-cost, internally managed business model, we apply a conservative, longterm investment approach which has proven resilient since 1946. Argo shares are bought and sold on the ASX. There are no upfront, ongoing or exit fees to invest in Argo. The only costs to invest are stockbroking charges to buy or sell shares. 5 Shareholder benefits Low-cost, internally managed Internal management structure ensures low operating costs and no external fees. For the year ended 30 June 2023, total operating costs were 0.155% of average assets at market value. Fully-franked, sustainable dividends Dividends paid every year since inception in 1946 and fully franked since 1995. In addition, dividends sometimes include a LIC capital gain component which provides a tax deduction for eligible shareholders. Diversified and administratively simple Exposure to a highly diversified portfolio of Australian equities through a single ASX trade. Long-term, proven investment approach Resilience and growth through various market cycles and conditions over 77 years of investing in Australia. Experienced board and management team Highly experienced board and management team with strong governance and conservative culture. Strong balance sheet with no debt Conservatively managed company with a strong balance sheet and no debt. Dividend Reinvestment Plan (DRP) Argo's DRP gives shareholders the opportunity to reinvest their dividends. In addition, Argo has a Share Purchase Plan (SPP) which, when offered, gives shareholders the opportunity to acquire additional shares (up to $30,000) with no brokerage or transactions costs. 6 Investment approach Since 1946, Argo has invested in Australian listed companies, applying a patient and conservative approach navigating through various market cycles, events and conditions. Investment philosophy We review external information, although primarily conduct our own research to ensure independence. Based on a detailed analysis of a company's financial metrics, we construct a valuation. Being long-term and patient investors, we only buy a stock when it is trading below our valuation. We strongly believe in the cumulative effect of investing in quality companies for the longterm, while avoiding the temptation to seek short-term gains in higher-risk situations. Investment process Our investment process helps us identify companies with a strong market position, disciplined business strategy, a strong board and management team and an established track record of delivering earnings and dividend growth. The investment team continually monitors and reviews all investments to ensure our portfolio meets our investment objective. ESG integration Analysis of environmental, social and governance (ESG) factors are inherent to our assessment of a company's risk profile and impacts on its long-term value. For more detail see our ESG Investment Statement on our website. We undertake extensive qualitative and quantitative research before we invest any of our shareholders’ capital in a company. 7 Portfolio overview Comprising approximately 90 Australian companies across a range of industries, offering both capital growth and consistent and growing dividends, our investment portfolio is focused on quality and diversification. household names. In addition, we own some smaller, growing companies with attractive long-term prospects and the potential to become future leading Australian listed companies. Highly diversified Many of our shareholders invest in Argo because we offer an easy and effective way to gain exposure to a diverse portfolio of Australian listed companies. Superior structure Our portfolio is not overly exposed to any one sector of the economy. Importantly, it includes exposure to Australian companies with overseas operations providing further diversification. Argo's close-ended, listed investment company structure insulates our portfolio from inflows and outflows of capital. Unlike managed investment funds with an openended structure, this means that Argo is not forced to sell any of our investments to fund redemptions when investors want to exit. This diversification helps reduce volatility. Quality companies Our portfolio is weighted towards established companies with reliable cashflows and sustainable dividends which we pass through to our shareholders as fully franked dividends. Importantly, Argo's portfolio is made up of companies that have sound long-term growth prospects. These tend to be at the larger end of the share market and include many Having a stable pool of money to invest means our investment team can take a long-term approach to investment decisions. We can also take advantage of market volatility to buy stocks when their16% share prices Materials trade below their inherent valuations. Other Financials 13% Banks 12% Health Care 11% Sector diversification Materials 16% Telcos & I.T. 8% Other Financials 13% Energy 8% Banks 12% Consumer Staples 8% Materials 16% Industrials 8% Other Financials 13% Consumer Discret. 7% Banks 12% Property 3% Health Care 11% Telcos & I.T. 8% Energy 8%Care 11% Health LICs 2% Consumer Staples Telcos & I.T. 8% 8% Utilities 2% Energy 8% Industrials 8% Cash 2% Consumer Staples 8% Consumer Discret. 7% Industrials 8% Property 3% Consumer Discret. 7% LICs 2% Property 3% Utilities LICs 2% 2% Figures above are at 30 June 2023. CashUtilities 2% 2% Cash 2% 8 Top 20 investments Argo's 20 largest investments at 30 June 2023 are listed below. We announce our top 20 investments every month via the ASX and on our website. $m % of portfolio Macquarie Group 464.3 6.8 BHP 414.7 6.1 CSL 347.7 5.1 CBA 276.1 4.0 Rio Tinto 252.0 3.7 Wesfarmers 248.7 3.6 Telstra 208.6 3.0 ANZ 196.0 2.9 Santos 192.5 2.8 Westpac 179.4 2.6 NAB 156.5 2.3 Aristocrat Leisure 153.6 2.2 QBE Insurance 149.5 2.2 Woolworths 138.2 2.0 Sonic Healthcare 132.5 1.9 Transurban 131.0 1.9 Computershare 127.6 1.9 APA Group 120.0 1.8 Woodside Energy 114.4 1.7 Ramsay Health Care 113.9 1.7 Top 20 equity investments 4,117.2 60.2 Cash and cash equivalents 125.3 1.8 Portfolio holdings Argo's portfolio of long-term investments, including the value of each holding and total number of shares held, can be found on page 73 of this Annual Report. 9 Directors’ Report The Directors present their 77th Annual Report together with the financial report of the consolidated entity, consisting of Argo Investments Limited and its controlled entities (Argo or Company), for the financial year ended 30 June 2023 including the Independent Auditor’s Report. Directors At the date of this report, the Board comprised six Non-executive Directors and the Managing Director. The Directors in office during or since the end of the financial year are as follows: Experience Experienced company director who has also held several senior government positions in industry, science and energy, and in economic and fiscal policy, in Australia and overseas. ASX directorships, current Argo Global Listed Infrastructure (since 2018, Chairman) Russell Higgins AO Independent Non-executive Director and Chairman BEc, FAICD Joined the Board in 2011, appointed Chairman in 2018 Audit & Risk Committee member ASX directorships, last 3 years Other directorships Telstra Foundation (Chair), Argo Service Company (Chair) Experience Australian and international experience in global investment markets as a Non-executive Director and executive. ASX directorships, current ASX directorships, last 3 years Spark Infrastructure Group (2021) Lianne Buck Independent Non-executive Director BCom, MAcc, GAICD Joined the Board in 2022 Audit & Risk Committee member (Chair) Other directorships Argo Service Company, AusNet Services, ISPT, St George Community Housing 10 Experience Extensive experience in the wealth management and philanthropic sectors, including as CEO of Colonial First State and Challenger Financial Services, and Chairman of UniSuper. ASX directorships, current Hearts and Minds Investments (since 2018, Chair), Global Value Fund (since 2014) Christopher Cuffe AO Independent Non-executive Director BCom, FCA, FFin, FAICD Joined the Board in 2016 Audit & Risk Committee member ASX directorships, last 3 years Class (2017–2020), Antipodes Global Investment Company (2016-2021) Other directorships Australian Philanthropic Services (Chair), Realside Financial Group, Third Link Investment Managers, The James Fairfax Foundation Experience Experienced director and former Rhodes Scholar with extensive executive experience in banking and investment banking in Australia, Japan and the US. ASX directorships, current Charter Hall Retail (since 2018, Chair) Roger Davis Independent Non-executive Director BEc(Hons), MPhil(Oxon), FCPA Joined the Board in 2012 Remuneration Committee member (Chair) ASX directorships, last 3 years Other directorships NSW National Parks & Wildlife Conservation Trust (Chair) 11 Directors’ Report Experience Extensive background in the financial services sector, including wealth management, investment banking and superannuation, in Australia and the UK. ASX directorships, current Elizabeth Lewin Independent Non-executive Director GAICD Joined the Board in 2018 Remuneration Committee member ASX directorships, last 3 years Other directorships Australian Chamber Orchestra, Kaldor Public Art Projects Experience Experienced company director with extensive knowledge of the financial services and investment banking sectors. Former Chair of Macquarie Group. ASX directorships, current IPH (since 2021, Chair) ASX directorships, last 3 years Macquarie Group (2007–2022), ASX (2006– 2020) Peter Warne Independent Non-executive Director BA(Actuarial Studies), FAICD Joined the Board on 1 November 2022 Remuneration Committee member Other directorships UniSuper, Allens, NSW Net Zero Emissions and Clean Economy Board Experience Started his career in mining engineering before moving into the investment industry, working in broking, research and funds management. Joined Argo in 2001 as an Investment Analyst, became Chief Investment Officer in 2008 and Chief Executive Officer in 2010. ASX directorships, current Argo Global Listed Infrastructure (since 2015, Managing Director) Jason Beddow Non-Independent Managing Director BEng, GdipAppFin (SecInst), GAICD Joined the Board in 2014 ASX directorships, last 3 years Other directorships Argo Service Company (Managing Director) 12 Retired director Experience Experienced company director with executive experience in a variety of financial roles with large corporates and chartered accounting firms, particularly in audit, corporate finance and transaction services. ASX directorships, current (24.10.22) Endeavour Group (since 2022), GPT Group (since 2022), The Lottery Corporation (since 2022) Anne Brennan Independent Non-executive Director BCom(Hons), FCA, FAICD Joined the Board in 2011 Audit & Risk Committee member (Chair) Retired on 24 October 2022 ASX directorships, last 3 years Charter Hall Group (2010–2021), Nufarm (2011–2020), Spark Infrastructure Group (2020-2022), Tabcorp Holdings (2020-2022) Other directorships Argo Service Company (until 24.10.22), Rabobank New Zealand, NSW Treasury Corporation Directors’ relevant interests The Directors’ relevant interests in shares and executive performance rights, as notified to the ASX in accordance with the Corporations Act 2001, at the date of this report are as follows: Shares Performance Rights R.A. Higgins AO 118,734 - L.M. Buck 10,184 - C.E. Cuffe AO 15,000 - R.A. Davis 33,773 - E.A. Lewin 14,711 - P.H. Warne - - J. Beddow 415,495 366,971 13 Board and Committee meetings At the date of this report, the Board has an Audit & Risk Committee and a Remuneration Committee. There were seven Board meetings, four Audit & Risk Committee meetings and four Remuneration Committee meetings held during the financial year. The number of meetings attended during the financial year by each of the Directors while in office were: Audit & Risk Committee Board Remuneration Committee No. of meetings held while a Director No. of meetings attended No. of meetings held while a member No. of meetings attended No. of meetings held while a member No. of meetings attended R.A. Higgins AO(a) 7 7 3 4* 2 4* A.B. Brennan 2 2 1 1 - - L.M. Buck 7 7 4 4 - - C.E. Cuffe AO 7 7 4 4 - - R.A. Davis 7 7 - 3* 4 4 E.A. Lewin 7 7 - 3* 4 4 P.H. Warne 5 4 - 1* 2 - J. Beddow 7 7 - 4* - 4* (a) Mr. Higgins was a member of the Remuneration Committee until 24 October 2022. He became a member of the Audit & Risk Committee on that date when Ms. Brennan retired from the Board. * Includes meetings attended as non-members Secretary Tim Binks BEc, CA, FGIA, GAICD held the role of Company Secretary during the year and at the date of this report. Mr. Binks joined the Company in 2007 and is an experienced governance executive with a background in accounting, funds management and stockbroking. He was appointed Company Secretary in 2010 and Chief Operating Officer in 2015, while still maintaining the company secretarial duties. Principal activities and state of affairs The principal activities of the Company during the financial year were the investment of funds in Australian listed securities and short-term interest bearing securities. The Company’s wholly owned subsidiary also provides management services to an external listed investment company under an Australian Financial Services Licence. More details are provided in the Operating and Financial Review below. 14 Directors’ Report The majority of Argo’s profit is paid out as dividends to our shareholders, with fully franked dividends a priority. Argo has paid dividends every year since it was established. Operating and financial review Summary of business model Argo is a listed investment company which seeks to maximise shareholder returns through reliable fully franked dividend income and capital growth. Argo shares offer investors a professionally managed, diversified and easily traded exposure to the Australian equity market, without the need to pay fees to an external investment manager. Actively managing a diversified portfolio of Australian shares within a low-cost, internally managed business model, we apply a conservative, long-term investment approach which has proven resilient since 1946. For the last 10 years, the Company has produced a compound investment return of +7.9% per annum, as measured by the movement in net tangible asset (NTA) backing per share, assuming dividends paid are reinvested. This return is after management expenses and adjusted for company tax paid, and compares to a return of +8.6% per annum from the S&P/ASX 200 Accumulation Index, although the index does not take into account any costs. Argo’s total shareholder return (TSR) based on the share price over the same 10-year period was +7.0% per annum, and +8.8% including the franking credits attached to the dividend payments. Argo generates the majority of its income by ‘harvesting’ the dividends received from the companies in our investment portfolio. Additional income is derived from interest earned on cash deposits, premium income from selling exchange-traded options, a small amount of share trading activity and fee income from managing an external listed investment company. Argo’s operational costs are relatively stable and are lower than those of most other managed investment products due to our internally managed listed investment company structure. In the 2023 financial year, the Company’s total operating costs were equivalent to 0.155% of average assets, which is very low by industry standards. Argo’s main expense items are remuneration, share registry fees, insurance, software and office rent. In addition to managing Argo’s portfolio and operations, the Company’s wholly owned subsidiary, Argo Service Company, manages an external listed investment company, Argo Global Listed Infrastructure (ALI). The management activities include administration, financial reporting, company secretarial duties and supervision of ALI’s share registry, asset custodian and its US-based portfolio manager. The above characteristics make for an efficient business model which benefits from economies of scale. The low proportion of variable costs implies that in general, profit will fluctuate according to the performance, and in particular the dividend payout policies, of each of the companies in the investment portfolio. At balance date there were 89 different stocks in the portfolio, providing the Company with dividend income from a diverse range of industries. 15 Directors’ Report Investment process war in Ukraine, the pace of China’s belated reopening after COVID, bank failures in the US and rising costs of living for consumers. The investment team, led by the Managing Director, is responsible for constructing and maintaining an appropriately diversified portfolio which generates dividend income and long-term capital growth. In Australia, all industry sectors delivered positive returns for the year. Technology was the best performing sector with +32%, regaining lost ground from last year and boosted by investor optimism around potential productivity gains due to the use of artificial intelligence. The Materials sector returned +22%, with particular pockets of strength in lithium and gold stocks, and Energy rose +20%. Health Care and Utilities were the laggard sectors, although still marginally positive. The investment process, which involves the monitoring and review of existing investments as well as analysing potential new investments, includes extensive research, company visits and industry studies, as well as economic analysis to help identify emerging trends and assist with the timing of transactions. The closed-end structure of a listed investment company is ideally suited to building a long-term portfolio, as Argo does not experience investor redemptions which might otherwise force desirable long-term holdings to be sold. Instead, shareholders wishing to liquidate their holding in Argo simply sell their shares on the share market. This stability allows Argo to take advantage of short-term market fluctuations in order to buy or add to holdings when prices trade below the long-term valuations calculated by the investment team. Although the Reserve Bank of Australia raised interest rates at 10 of its 11 meetings during the year, increasing the cash rate from 0.85% to 4.1%, the strong performance of the share market overall indicates that investors now expect that this has been largely successful in taming inflation. The larger moves in Argo’s portfolio during the financial year included: Purchases Allkem* BHP Group CSL G.U.D. Holdings IDP Education Macquarie Group Santos Stanmore Resources Viva Energy Review of activities and events during the year The Australian equity market rebounded from last year’s decline, with the S&P/ASX 200 Accumulation Index returning +14.8% over the financial year ended 30 June 2023. After a weak first quarter, the full year return was stronger than expected given that a range of concerns continued to hang over global markets, producing considerable volatility. The main driver of market fluctuations during the year was macroeconomic news flow, as central banks globally attempted to calibrate the pace of interest rate rises in order to control soaring inflation without tipping their economies into recession. Other issues of investor concern included the ongoing * new portfolio position Sales Australian United Investment Co. Diversified United Investments Insurance Australia Group Pact Group** Tabcorp Holdings** Tassal Group (takeover)** ** fully exited position 16 Directors’ Report Income from Argo’s portfolio was boosted by increased dividends from several of the companies in our top 20 holdings, including Macquarie Group, Commonwealth Bank, National Australia Bank, Santos, QBE Insurance Group and Transurban Group, while dividends from BHP Group and Rio Tinto were lower than last year’s elevated levels. Overall, $198 million of investment purchases were made during the year and $124 million was raised from investment sales. The total number of holdings in the portfolio reduced from 93 to 89. Argo’s full year portfolio return after deducting management costs and adjusting for company tax paid was +11.4%, underperforming the S&P/ASX 200 return of +14.8% although the index does not take account of any costs. This reflects the outperformance of higher-risk, growthorientated stocks, such as in the technology and lithium sectors, compared to dividendproducing, value-orientated stocks. Interest income on cash deposits increased from $0.6 million to $5.0 million due to the rapidly rising interest rates during the year. In addition, income from trading and writing exchange-traded options increased from $5.6 million to $22.8 million. Administration expenses rose by 9.2%. Argo’s balance sheet remains strong, with total assets increasing by 7.2% to $6.9 billion, with the investment portfolio increasing in value as the equity market rose. Argo’s share price return of +3.2% was lower as the share price moved from a premium to NTA of 4.1% to a