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Edited Transcript of FGG.AX earnings conference call or presentation 17-Sep-19 6:00am GMT

Half Year 2019 Future Generation Global Investment Company Ltd and Future Generation Investment Company Ltd Earnings Call

MELBOURNE Sep 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Future Generation Global Investment Company Ltd earnings conference call or presentation Tuesday, September 17, 2019 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Geoffrey James Wilson

Future Generation Investment Company Limited - Director

* Louise Walsh

Future Generation Investment Company Limited - CEO and Director

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Conference Call Participants

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* Bill Pridham

Ellerston Capital Limited - Co-Portfolio Manager

* Denzil Griffiths;WiseHeads Executive Mentors

* Marcus Hughes

LHC Capital Partners Pty Ltd - Director

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Presentation

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Louise Walsh, Future Generation Investment Company Limited - CEO and Director [1]

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Thank you, all, for joining us this afternoon. I'm Louise Walsh, the CEO of the Future Generation companies: FGX and FGG. I apologize to everyone. We have had a complication with the recording this afternoon, so please bear with me. I'll promise you we'll get it right this time.

I'm also joined this afternoon by the Founder and Director, Geoff Wilson, and also a couple of our very generous fund managers from LHC Capital, Marcus Hughes; and also from Ellerston Capital, Bill Pridham. So thank you, gentlemen, for joining us.

During this call, we will provide an update on Future Generation's investment and social returns, including the most recently announced half year results, the investment portfolio's performance and updated net tangible assets. We'll also discuss the discounts to net tangible assets as part of the presentation.

Our pro bono fund managers, Marcus and Bill, will discuss their current views on the market and reporting season, and provide a couple of stock picks as well.

Please ask any questions you have at the Q&A session at the end of the call. The presentation slides have been e-mailed today, they've been announced on the ASX and can also be found at futuregeninvest.com.au.

So now we'll get on with the presentation. Now firstly, I'll recap that these companies, the Future Generation companies, very much are a win, win, win. They provide investment and social returns for our shareholders. They're very much a win for our shareholders because they provide shareholders with exposure to the best Australian and global fund managers without paying management and performance fees; for our charities, the stream annual investments; and also for our fund managers, a really unique opportunity to make a positive difference to Australia's future generations.

So now if we look at the investment returns firstly, upfront with the portfolio performance. During the 6 months to 30 June, the FGX investment portfolio delivered solid absolute performance, increasing 13.6%. In relation to FGG, continued to deliver strong investment portfolio performance of 12.5% over the last 6 months to 30 June. Geoff will talk more on the investment portfolio performance shortly in his capacity as Chairman of the FGX IC and a member of the FGG Investment Committee.

In relation to operating profit before tax, we also announced at the end of August an operating profit before tax of $19.3 million for the 6 months to 30 June. And in relation to FGG, we reported an operating profit before tax of $12.4 million for the 6 months to 30 June.

In relation to fully franked dividends, on the -- with FGX, we announced an increased fully franked interim dividend of $0.024 per share to shareholders. And in relation to FGG, we were pleased to announce an increased fully franked dividend of $0.015 per share. This represents a 50% increase on the prior year. The dividend dates are there, and importantly, the payment date for the dividends is the 25th of October this year.

Now if we take a look at the social returns by contrast for the companies. We're delighted that this year, since inception, the total amount of the charitable investment or donation is $30.6 million and we are celebrating the fifth birthday of FGX this month. This year alone, the donation or the social investment to charity is a total of $9.5 million, split between the 2 companies.

Now importantly, the companies received significant pro bono support from its fund managers, boards, investment committees and service providers. We estimate the annualized value of this pro bono support at approximately $12.8 million. These savings to shareholders certainly exceed the annual direct investment to charities, which, as I said earlier, is a total of $9.5 million for both companies this year. Similarly, with the comparison of this since inception numbers of $54 million versus the charitable social investment of $30.6 million to date.

So now what I'd like to do is actually hand over to Geoff Wilson, the Founder and the Director of the Future Generation Companies. Thanks, Geoff. Take us through the next section.

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Geoffrey James Wilson, Future Generation Investment Company Limited - Director [2]

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Well, thanks very much, Louise. Just talking of the fund managers that the Investment Committees have selected for both FGX and FGG, it's important to know both investment committees, which continue to boost the quality of the people on the investment committee -- and it was exciting getting John Coombe, probably one of the best pickers of fund managers in Australia, to join us this year. But those investment committees are looking for managers that can continue to perform over a long period of time.

And with those -- with the managers that the investment committees have tended to focus on, it's the boutique investment managers. Because you tend to find with the boutique investment manager that the people that are managing the money, own -- part owners of the business, so they're more passionate and driven to get performance. And I can't thank enough all the fund managers for forgoing their management fee and performance fees, which we know is significant.

In terms of the performance of both -- well, the structures of both the portfolios, for FGX and FGG, and you'll see there with the presentation slides, but also you'll see it on our monthly NTAs, we've got a combination of long managers or managers that are exposed just to Australian or global equities and then we also have some managers that may be able to hold high levels of cash for protection purposes.

And so what we're trying to do is we're trying to get the investor exposure to the market with protection. And you'll see -- an example of that is, if you look at FGX's result last month where the market was under a bit of pressure down a little bit over 2%, and the fund was only down 0.6 of a percent. Now what we're trying to do with those managers is give you the performance of the market at least with less volatility.

Now the last 12 months has been a difficult period. It's been a difficult period in the market per se. And so you'll see the performance figures are slightly below the market, but less volatility than the market. And over time, we're very confident that these managers will continue to perform.

The -- in respect to the structures of the portfolios, FGG earlier this year, the money that was raised in the capital raising was put to work in January. Since then, there really hasn't been any major adjustments to the portfolio. And with FGX, there's only been some slight adjustments to the portfolio. And we've added the Firetrail High Conviction Fund, and also, we'll be removing one of the absolute managers. And in terms of -- in the next month or so in FGX.

In terms of the investment committees, what are the triggers for changing managers, it tends to be personnel changes; continued performance that we can't explain, are they better than the market or worse than the market; and any other major -- if they change their style for any particular reason.

And the investment committee meets frequently, has very -- keeps a very close eye on what's happening with all its managers, and we're very happy with the current portfolios.

Well, I'll pass back to you Louise.

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Louise Walsh, Future Generation Investment Company Limited - CEO and Director [3]

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Thank you very much, Geoff. So now what I'd like to do is call up Marcus and Bill and we're going to have a little bit of a Q&A interview with both of them. So what I might do is start firstly with Marcus.

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Questions and Answers

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Louise Walsh, Future Generation Investment Company Limited - CEO and Director [1]

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So Marcus, the first question for both of you is, can you tell us your view on the market and reporting season of late?

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Marcus Hughes, LHC Capital Partners Pty Ltd - Director [2]

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A view on the market is always a difficult question for a bottom-up fundamental investor, but I know that's a boring answer, so I'll try and hedge my response HY. In terms of our view on the market, it's really easy to be quite bearish when you look at the global events, the macro events that are occurring around the world and also in Australia. Interest rates have been dropped pretty much across the board in order to try and stimulate inflation and economic growth and it doesn't seem to be working too well.

So interest rates are low, growth is declining, there are some shocks that are going around the world with oil most recently, but of course, there's Brexit, there's trade wars going on. And that's really starting to eat away some of the confidence levels. And the confidence levels manifest itself through discretionary spend at the consumer level with a multiplier effect into economy. So really patchy to be honest. So generally speaking on the market, we are on the bearish side of neutral. But with that said, our view is that equities is probably the worst half -- or the best half on the worst trade.

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Louise Walsh, Future Generation Investment Company Limited - CEO and Director [3]

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Very good. Nothing wrong with that. And Bill, can we just have a few thoughts from you on the markets?

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Bill Pridham, Ellerston Capital Limited - Co-Portfolio Manager [4]

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Certainly. So Marcus kind of raised some great points in terms of the macro uncertainties that are out in the market right now. We're similar. We're bottom-up stock picker fundamentalists. So from a macro perspective, we're mindful of it, but we're also mindful not to let us sway too much in our investment decisions.

So as Marcus mentioned, you have the Brexit, you have the U.S.-China trade uncertainty that is impacting consumer sentiment to some degree, more importantly business investment I've seen. And also with the Hong Kong protests, it's incredible what's going on over there. That is impacting companies globally that operate in that region.

Now with that, you think of the overall reporting season that we've just had. So we had investments in U.S., Europe, U.K., Japan, so quite a broad breadth of companies. And I must say, it was actually quite positive. We had a number of companies upgrading the guidance for the year. We had a number maintaining the guidance, only a couple have downgraded and those are the ones that were associated with business spending and the uncertainty around that.

But I think more importantly, what we're seeing there was that the confidence level was okay. It wasn't incredibly bearish especially with some of the big banks in the U.S., there are things like that. One thing we found is as long as you're not exposed to industrial chemicals, autos that was consistently poor in terms of their numbers and downgrading. And yet retail for us was quiet good. Technology companies were quite good as well.

So we had quite a good broad breadth of results, which I came out of the [time] feeling okay, not incredibly over bullish on things, but valuations have come down to a certain level which makes them stand out that the risk reward is not too bad in some of those areas.

One company I'd point out was PVH, which owns Tommy Hilfiger and the Calvin Klein. They downgraded the numbers and the stock was up 6%. So it does tell you that a lot of the negativity was in some of the names that were out there. So geopolitical, there's a lot of things going on, hard to control that, and some of the markets were much more focused on the stock-specific stories.

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Louise Walsh, Future Generation Investment Company Limited - CEO and Director [5]

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Good. Fantastic. All right. Now I might ask you for a couple of stock picks, or 1 or 2 depending on what your view is. But Marcus, I might start with you first. Appreciate it.

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Marcus Hughes, LHC Capital Partners Pty Ltd - Director [6]

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Sure. Okay.

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Louise Walsh, Future Generation Investment Company Limited - CEO and Director [7]

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This is the fun bit.

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Marcus Hughes, LHC Capital Partners Pty Ltd - Director [8]

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This is the fun bit. So the first stock that we've selected that we're very positive on is a Queensland-based building materials company called Wagners. So Wagners listed some 18 to 24 months ago, and it was a very popular IPO. It was very difficult to secure allocations and the shares sparked from a circa $2.90 IPO price up to high of $4.50.

Today, fast-forward the clock 18 months, the same assets remain, so there has been no change in the configuration. The Wagner family remain deeply invested, and we really like to invest alongside families that take their businesses to the next step but maintain equity investment for that alignment of interest. And the equities performed very badly. And what we're always looking for are opportunities to buy really good businesses where there's some form of hiccup, which doesn't impinge on the earnings capability of the business, it just gives you a really good opportunity to buy some assets.

Now in Wagners' case, there's probably been 2 factors that have weighed on the share price. The first is that the broader Queensland construction or infrastructure spend has been a little bit soft and the big projects have been delayed. That will, of course, if you look at Australia at a macro level, so [kind of] -- where macro is important, is Australian growth is relatively anemic. It's a great opportunity for the federal government to start to turbocharge the Australian economy.

We're running a balance budget that should return to surplus -- sorry to deficit. And we should look to create earnings growth given the anemic growth across the country. So we're gearing up and investing in high-quality, long-term efficiency improving projects such as infrastructure. So Wagners is sitting in this earnings pocket where we wait for the government spend to return on infrastructure projects, which, of course, will happen as Australia becomes (inaudible).

Secondly, Wagners have a really unique asset in a take-or-pay contract with Boral, and there's a dispute going on between Wagners and Boral at the moment. The contract specifies that Boral must buy take-or-pay cement from Wagners. And there's been an incident between the 2 companies, which has resulted in court action which we believe was initiated by Wagners. And so the market in taking a very short-term focus to earnings is concerned by the hole created by the fact that Wagners are no longer providing currently cement to Boral.

But of course, we believe that will -- that is not a permanent event. It will reoccur. And if investors are prepared to take a slightly longer view and look through the valleys, as we like to stay internally, then we're quite confident that those cement sales will recommence, the earnings trajectory of Wagners will change and we feel like we've bought a good business at a really attractive price.

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Louise Walsh, Future Generation Investment Company Limited - CEO and Director [9]

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Fantastic. Now if you go super, super quick to the second one.

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Marcus Hughes, LHC Capital Partners Pty Ltd - Director [10]

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Super quick second one is a business called iSignthis, which has been in the press lately. The equity has gone from $0.15, where we established our position, to a high of $1.70, back down to $1 in short shift time. Very quickly, we believe it's an outstanding business. It's only been in production for about 6 months. It's become cash flow positive. It's growing its revenue base very quickly on a fixed cost structure, so we think profits will grow at incredibly high rate. It's sold off owing to an external third-party negative report that was published. We're very comfortable with the information that was -- that caused the share price falloff, and we think it's a fantastic opportunity to pick up shares in Australia's next big growth company at an attractive price.

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Louise Walsh, Future Generation Investment Company Limited - CEO and Director [11]

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Thank you very much, Marcus. And Bill, have you got a couple of gems for us today?

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Bill Pridham, Ellerston Capital Limited - Co-Portfolio Manager [12]

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I do, and on Marcus' bandwagon on fiscal. When you think about the slowing economies around the world, I think the next leg of stimulus will be fiscal, fiscally based. Monetary policy really isn't working as much as the multiplier effect should. And now I think you're going to see a wave of fiscal policies. And one of the areas where there is bipartisan support in the U.S. is infrastructure spending. There's talk of a $1 trillion package. There's actually talk of a $2 trillion package coming through. And it's one area where the Democrats and Republicans do agree that something needs to be done.

One company that's delta one to that is a company called WillScot. It's about a $2.3 billion market cap company. It has roughly 40% market share of the modular office space in the U.S. And what that is, is basically if you have infrastructure projects, you need offices on site and they have 40% market share post an acquisition early last year. Now with that, it gives them a lot of

(technical difficulty)

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Operator [13]

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This is the Future Generation conference call.

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Bill Pridham, Ellerston Capital Limited - Co-Portfolio Manager [14]

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Yes. Hello, can you hear me now?

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Operator [15]

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Yes. I can hear you, you're at the call.

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Bill Pridham, Ellerston Capital Limited - Co-Portfolio Manager [16]

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Fantastic. So as I was mentioning, WillScot is a key player in this infrastructure thematic that's going on in the U.S. It generates over 90% of its gross profit from medium-term leases. So over 30 months in average duration of these leases. And what it has been getting since its acquisition mid last year to get at this market share is incredible pricing power. So it's generating over double-digit pricing growth and they expect that to continue for the next few years as they reprice all of the fleet that they passively bought with this acquisition.

So just an example, last quarter, they announced 16% pricing growth and they said they expect that to continue for the foreseeable future. Now you add on top of that volume growth with these infrastructure projects coming through, and you do have a business that will grow earnings mid-teens for the next few years, the business trades at around 8x EBITDA today, which is about a 2-turn discount to its closest comparable.

And one of the reasons we believe that is the case is that it's a recent new entrant to the market. And one of the things that EGI looks for is companies that are going through a period of price discovery. And this is a business that's recently come to the market, it's recently done a relatively large acquisition and we believe the market will start to understand the business and to understand its earnings drivers over the next few years. So really attractive setup there.

The second stock I'd love to talk about, it's a relatively new addition to the portfolio, but I'm not too sure how many people out there really like to use company call centers. So if you have an issue or a question, I'm not too sure, there's a great affinity for people to want to call. And I think that's showing up in terms of use of texting. And when you think of call center costs, it costs roughly $5.60 for each contact. And there's roughly $1.5 trillion spend globally on 1-800 call centers, which is incredible when you think about it. So it's something that is incredibly high cost yet delivers very little customer satisfaction.

So we have a company called LivePerson. It has a market cap of around $2.3 billion net cash balance sheet. And according to the company, it has roughly a $60 billion addressable market as it is connecting people with their preferred messaging app, with their preferred brand. So if you're on Facebook Messenger, WeChat, WhatsApp, what they do is provide a messaging channel to the likes of a Nike or an Adidas, some of the big brands they've recently signed up are Delta, Home Depot and one of the largest U.S. restaurant chains as well.

It's interesting, one of the first customers was T-Mobile in the U.S., this was a couple of years ago. And T-Mobile has recently run a campaign, an ad campaign, saying "don't call us, just text us, and we'll answer your question" because they know they're getting a better customer experience at a much lower cost. So they've signed several telcos and they just recently signed Telstra here in Australia. So you'll see -- you'll be able to text them instead of trying to phone them, which would be quite a welcome change. And what it does is, it helps these brands efficiently communicate with their customers, and their sales pipeline is showing success for the business.

So in the last quarter, they increased their revenue guidance for the year. But they also increased their cost guidance. They said, we're going to increase our sales reps. And the reason is we're at an inflection point in terms of demand for our business, and our sales pipeline is up 120% last year. It's up 75% since the start of the year alone. So they're incredibly confident of driving revenues over 20% over the next several years on the back of this. So we believe it's a compelling product offering. It's one of those companies that has an incredibly long runway. And at these levels of $2.3 billion market cap bomb, we feel there's incredible capital upside as well. So that's another story we like.

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Louise Walsh, Future Generation Investment Company Limited - CEO and Director [17]

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Thank you. And finally last question, I'm going to ask you a separate question for both of you. Now firstly, Marcus, you are known as a conviction investor. What does that mean and why is it so good?

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Marcus Hughes, LHC Capital Partners Pty Ltd - Director [18]

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Well, conviction investing really means understanding in detail what it is that you want and it's also interchangeable with concentration. So when we run the FGX capital as well as our investors capital, we don't own very many positions, but what we tend to do is know a lot about the positions that we own. So in the event that there is a negative report out on one of your holdings, because you have an increased understanding of the business, you can be the strong hand and benefit from the volatility, which share prices can endure from time-to-time as businesses take hold.

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Louise Walsh, Future Generation Investment Company Limited - CEO and Director [19]

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Very good. And just keep up those good numbers because you had a stellar run.

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Marcus Hughes, LHC Capital Partners Pty Ltd - Director [20]

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We'll catch on. We're working hard.

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Louise Walsh, Future Generation Investment Company Limited - CEO and Director [21]

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No pressure. No pressure. And Bill, last question for you. Why should an Australian investor have exposure to global small-cap equities?

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Bill Pridham, Ellerston Capital Limited - Co-Portfolio Manager [22]

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Great. Thanks, Louise. So when you think about the Australian investor, they're predominantly exposed to Australian mid, large and small-cap companies domestically. Right now, you're seeing an emergence of large-cap companies or large-cap exposures in domestic portfolios, offshore exposures, and that's through different funds or investing directly. But what they don't have right now, I believe, is that mid/small-cap exposure, which really takes a large opportunity set of the market, number one, but also it takes away diversification opportunity, number two, in terms of the portfolio.

So I think from the perspective of opportunity costs, in terms of the perspective diversification, I think it's important to have a global mid/small-cap bent inside your portfolios. But also when you think about the global stocks, they typically have much larger adjustable markets than they will domestically. When you think of some of the strongest investing thematics (inaudible) and some of the strongest investing ideas out there are offshore. There are some great Australian companies, but there's also some amazing companies offshore especially in the global mid and small that people aren't getting exposure to. And I think that's going to -- that's an opportunity cost when you think of their growth and the runway for growth that the companies have in front of them.

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Louise Walsh, Future Generation Investment Company Limited - CEO and Director [23]

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Fantastic. All right. Well, thank you very much, gentlemen. And we'll -- there may be some questions later, so please stay tuned. But we really want to thank you for your amazing support for the Future Generation companies.

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Marcus Hughes, LHC Capital Partners Pty Ltd - Director [24]

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Thank you.

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Presentation

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Louise Walsh, Future Generation Investment Company Limited - CEO and Director [1]

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Now before we get into Q&A, I'd like to just flip back to Geoff, just to talk a bit more about the discounts to NTA, and also the profit reserves. Thanks, Geoff.

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Geoffrey James Wilson, Future Generation Investment Company Limited - Director [2]

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Well, thanks, Louise. And as everyone may know, I'm very passionate about listed investment companies. I think they're fantastic structures. And one of the great positives about listed investment companies is they can trade above what their assets are worth and that's what we call NTA, and they can trade at a discount to that. And for various reasons, as Warren Buffett says, the market is a weighing machine. It depends how sentiment is moving. And at the moment, both FGX and FGG are trading at discounts to NTA, but are both at about 10% discount. And they have been, going back a year or so, at nice premiums.

So from time to time, I buy shares -- I love buying a dollar of assets for $0.90 as I can, when I can. And I was waiting for this call, and then my plan is to take advantage of the discount. And also, you'd be aware, I know Louise talked about dividends and the ability of these companies to pay dividends, and obviously FGX is the one that's getting fully franked dividends from the managers, portfolios where FGG isn't the global one, isn't necessarily getting that flow through. So the yield will always be greater on FGX, and it's yielding a little over 4% fully franked.

And the profit reserve, which is the ability to keep paying those dividends, you need a proper reserve. And also for the dividend to be fully franked, you need franking credits. But with FGX, the profit reserve is currently $0.098. And FGG, it's a little lower, it's $0.0525. Now those profit reserves obviously decline when dividends are paid but also they get topped up when we get distributions from the managers, which we get each -- at the end of each year. So that's probably the summary.

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Louise Walsh, Future Generation Investment Company Limited - CEO and Director [3]

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Thanks very much, Geoff, for that. And now look, just to -- just a little bit about shareholder comps. I mean it's extremely important to us, we do this through our monthly newsletter and monthly NTA reports, half year and full year results, website, media, independent research, investor calls like today, and of course our 6 monthly investor roadshows.

Our next shareholder presentations are coming up in November and we'll be traveling to 9 cities around the country, and for the first time to the Gold Coast, so we're looking forward to that. You can see a full list of the dates and venues on Slide 10, and registrations are now live. Please go to the events page on our website to reserve your tickets.

The Future Generation Shareholder Presentations will follow the WAM, Wilson Asset Management shareholder presentations in each city, followed by lunch with the team. Feel free to bring some guests, and we look forward to seeing you all there. Also on the 28th of November, in Melbourne, we'll be holding our next Investment Forum, which is where you'll hear from a group of our best-performing fund managers with their stock pick ideas. So it's a fantastic opportunity to have what I'd call speed dating with our fund managers. So if you're not in Melbourne, you certainly can listen and watch the stream.

Now if you or someone you know would like to sign up to our monthly newsletters with any news on our Future Generation network, Slide 11 has those details or you can actually jump on the website and subscribe from here.

I'd now like to open up the call to questions. We've got obviously, myself, Geoff, Marcus and Bill here to answer any questions that you may have on anything related to the Future Generation companies. We'll endeavor to answer as many as we can in the time provided. And if we run out of time, we'll contact you after the call. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have our first question from Denzil Griffiths.

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Denzil Griffiths;WiseHeads Executive Mentors, [2]

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I was just going to ask Geoff, why is there such a long gap between the date of declaring your dividend, which I think was back in August, and the date of paying the dividend, which is late October, so about 2 months?

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Geoffrey James Wilson, Future Generation Investment Company Limited - Director [3]

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Denzil, thanks for the question. And the -- it's actually a frequent question, and I'm one of the various board members and the Board obviously decides whether there'll be a dividend reimbursement plan for shareholders. And after deciding the dividend and whether there'll be issued at NTA -- sorry, at the share price or at a discount. The other thing is obviously the payment date for the dividend.

Now what we've found and this is more on -- from the Wilson Asset Management experience and that's about 20-odd years of managing WAM Capital, is that you tend to get a lot of buying in that pre-dividend period. If you want your shares to trade at NTA, if not a premium, then the logic is to have that pre-dividend period longer. If it was up to me, I'd have the shares-cum-dividend all year. Like in theory, I'll pay the dividend in February and then announce another dividend.

Because what you'll find, and I was talking to a financial planner today, he was questioning me about one stock, is you tend to find that companies that pay reasonable dividends -- because a fully franked dividend is so valuable to various groups of people that there will be a lot of buying in that pre-period. A lot of people try to buy the shares in a few weeks or the months before that dividend is paid to get sort of like 3 dividends in 13 months to enhance the yield.

So it's really -- the main reasons to help time up the share register to get more shareholders to have the share price trading at NTA if not at premium. And what we found in WAM Capital, we actually used to pay our dividends a little earlier than that, and what we found is there was sort of a disproportionate rally in the share price and then a disproportionate fall after they went ex-dividend and we still suffer from that a little bit in WAM Capital. So it is trying to smooth that out.

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Operator [4]

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Our next question is from [Jeff Thomas].

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Unidentified Shareholder, [5]

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Once again, I'd like to thank you for the great concept of what it's all about, and it's much appreciated as an investor in both these companies. I had a question regarding this fixed relation with the 2 funds, particularly FGX regarding the absolute bias focus. And I noted that you were one of the managers who is going off, and I think you're going to go for long equities. And I just wonder if that's not a better way to go in the long term?

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Geoffrey James Wilson, Future Generation Investment Company Limited - Director [6]

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[Jeff], sorry, the question is just why have the absolute bias at all, why not just be 100% long equities? Was that the...

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Unidentified Shareholder, [7]

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Not quite that, Geoff, just that why the exposure is higher if it is the bias?

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Geoffrey James Wilson, Future Generation Investment Company Limited - Director [8]

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Yes. The -- I mean, what we've tried to do is pick managers with the absolute bias. We're trying to pick managers that will perform in -- outperform the market in -- over time. And the -- I mean the LHC boys, they're not -- well, because Marcus is presenting, like they have had just a phenomenal year in terms of performance. Marcus, how much do you -- are you holding much cash at the moment?

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Marcus Hughes, LHC Capital Partners Pty Ltd - Director [9]

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Yes, we are, Geoff. We are currently net 40 long, meaning we're effectively holding 60% cash. But really what we do as an absolute return fund is we want to maintain exposure to equities, but we want to try and take a hedge on the downside. So we do that for buying index put options. And because volatility is relatively cheap at the moment, then we're able to maintain long exposure while still so protecting from the downside.

And just to put that context, when it works, it works very well. I think over FY '18, we returned 25%, 26% in what was a flat-to-negative market. For equities, no, because it doesn't always work like that. That comes down to our stock-specific longs. But being able to deploy capital when markets sell off and we can do that because we're running portfolio insurance, really puts us in the game. And we think it's a very valuable strategy, of course, for ourselves but also for a diversified portfolio such as FGX.

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Geoffrey James Wilson, Future Generation Investment Company Limited - Director [10]

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And just finishing off, the ones on FGX -- and we have this group in FGX and not in FGG because we weren't able to find global people that we thought could continually add value, that's dragged a little bit on the FGX portfolio is the market-neutral part of the portfolio. And we had 4 managers there -- and we've got 4 managers there which make up about 10% of the portfolio, a little bit over. And one of the managers -- the money next month is going to come out of one of those managers. That's -- with the absolute bias managers, we're hoping that they can do the market or better than the market and give you some protection.

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Unidentified Shareholder, [11]

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Yes. I just wondered if I'm perhaps a little bit confused between the 2, Geoff, the -- Marcus, can you...

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Geoffrey James Wilson, Future Generation Investment Company Limited - Director [12]

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It's the market-neutral guys, yes, yes, yes. Well, that's -- sorry, okay. Well, at least we went through absolute bias which -- and Marcus could explain how he does it. Yes, it's a market-neutral guys. And that's trying to give you -- that's again -- I mean that's a fair question. That's a fair question. An investment over -- since we've been going over the 5 years, that provided good diversification and reduced our volatility, in particular in down months.

We've performed -- I think FGX has performed extremely well in down months as the portfolios. In the last 12 months, that area has been very difficult, very difficult in Australia but also very difficult globally in those -- the market-neutral managers because expensive stocks have become more expensive, and cheaper stocks have become cheaper.

And well, after we readjust the portfolio, you'll see in the next couple of months, it will be about -- actually been about 8-and-a-bit percent, I think, we'll be in that segment. And it is on watch. As we take a medium-term view, we believe that some of the extremes that have occurred will correct themselves and those managers will be able to perform. But that's a very legitimate fair question, and the investment community asks that every time we meet.

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Unidentified Shareholder, [13]

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Just another one on the discount if I may, Geoff. Just with the FGG, most global funds are selling at not only a 10% discount but some even much more than that, some as much as 33%. So that's doing very well in relationship to that. I just saw that FGX discount of 10% was a bit more difficult to explain after 5 years.

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Geoffrey James Wilson, Future Generation Investment Company Limited - Director [14]

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Yes, it is. I mean the funny thing about the premiums and discounts, they are cyclical. There has been a release, well, a publicity about listed investment companies over the last little bit about these -- the fees about when you're raising money, which in theory doesn't have any impact on listed investment becomes unlisted, but just psychologically for the sector.

We don't believe that its -- with FGX, the fact that a lot of other global funds are trying to get big discounts, that's not an excuse for us. And we would like to see FGG trading at NTA if not at premium, and we'd like to see the same with FGX. I mean the interesting thing is that it's just been in the last period that they've gone [with the] discounts. The market has been very strong over the last period. It does make sense -- sometimes people -- when the market is very strong, they think, well, it's better off buying shares in Apple. You buy them at $1.80 -- $180, they go to $250, I'll make that.

And direct exposure maybe to one stock because you're taking a lot more leverage and lot more risk, what you got with both these companies and maybe some of the money have been rotating out of that because the markets have been so strong. Because they're saying, look, we don't want a diversified portfolio, we want to take the risk. The thing is when the Apple shares, if they did fall from $200 and whatever dollars to $100, then everyone starts looking for diversified portfolio.

So to me that could have been the negative for these 2 over the last little 6-month period. But really it's up to us, as in Louise and the team, to contact the shareholders and we'll be doing that after this. Louise's plan is to -- with other people, bring all the shareholders, engage with them, understand exactly what their thoughts are and that sort of helps. That's part of our -- we have a few other things that we've fought through for working on getting the share price to reflect the true value of the business, and that's back to NTA on both.

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Unidentified Shareholder, [15]

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And also, am I right to conclude that with the FGX and the profit reserves that you'd be able to hold the dividend and possibly continue to edge it up over time, would that be part of the plan?

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Geoffrey James Wilson, Future Generation Investment Company Limited - Director [16]

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Yes, that's the directors' plan. Because we do get a reasonable -- on an annual basis, the distribution from the managers, they retain profits that they pay through as distributions. And yes, we've actually been slowly building up the profit reserve. So in case of a rainy day, that then we can continue to pay that dividend. And the plan is steady state is to generally increase it on an annual basis.

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Operator [17]

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We have one more further question on the queue, Louise, and this is from [David Devon].

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Unidentified Shareholder, [18]

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It's [David Devon], but I'm not sure if that's me.

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Operator [19]

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Yes, it is, David, my apologies.

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Unidentified Shareholder, [20]

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Geoff, I think you've answered my query. I was just concerned about the market performance this year and what has been, as you just mentioned, strong markets. The 1-year performance for FGG and FGX has been a little bit underwhelming, you've indicated the reasons. The global fund is the one that concerns me a bit, just what's happening and so on. And I was just looking for a little bit more comfort to make sure that your investment managers -- you got the right managers and more importantly they're at the top of their game and just monitoring their performance to ensure they're in the right space.

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Geoffrey James Wilson, Future Generation Investment Company Limited - Director [21]

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And that's 100% correct. And the -- and you'll see both FGX and FGG have about 10% in cash. FGX, what we do with the FGX managers, we continue to reinvest with them. So there's nothing on cash flow back to FGX. So the 1% donation plus the 4-and-a-bit percent per annum dividend comes from the cash, that's why we're -- so we've probably got -- in 12 months' time, we'd have more cash -- sorry, less cash than FGX than we have in FGG.

And with FGG, we're looking -- we're still looking for a manager. We've got a number of managers on a watch list. But a manager who can give us a little bit more of that absolute protection because of the fact that we are so heavy into a bull market, but that's why we're probably running them both a little bit more conservatively.

The interesting thing is, I know you don't see the numbers, but we see the numbers, the performance numbers of both FGX and FGG managers. And over the last 12 months -- and this probably is another, what I'll say, is a positive, is there has been significant variance in the performance. It's not as if with FGG, so the index, I think the 12 months to the end of last month was up in Australian dollars 6-and-a-bit percent. Then we had some managers who are up 25%, and we had some managers that were down a little bit.

So from the investment committee's perspective, as long as we understand that the manager is doing -- managing the money as we want them to, as we expect them to, then that gives us the confidence that in different market conditions they will perform. So at any point in time both investment committees can remove managers and have. And at various points in time, we have managers on alert -- sorry, that we've got on review and we have also a sort of a group of managers that we're looking to -- that if required that we can bring into the portfolio.

So we're very happy with both the portfolios. The fact that they both have underperformed slightly over the last 12 months is disappointing, but I think it gives you a little bit of -- the example I gave with you the market last month when it was down -- with FGX down 2-odd-percent and the portfolio I think was down little over 0.6, yes.

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Unidentified Shareholder, [22]

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Yes, yes. Now look, as I said, my main issue is the FGG, the world is a growing place, there's a lot happening. And in the short term, in the last 4 years, it just started well, but it's just tracking backwards. The numbers is not giving us the growth that we'd like to see, but I appreciate the explanation. And it's a listed investment company, and you're hedging your bets, I get all that. So -- but anyway, I appreciate you listening to my concerns and hopefully in the next year we'll continue to move along a bit. But again, thanks for all your efforts [and liaising your time], I appreciate it.

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Operator [23]

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Louise, there are no further questions in the queue at this time.

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Louise Walsh, Future Generation Investment Company Limited - CEO and Director [24]

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Thank you. Special thanks to Bill and Marcus for joining us this afternoon, and also to Geoff. And I want to thank, again, everyone on the line for dialing in. We also hope to see you all, again, at our shareholder presentations in November this year.

Certainly, if you have any questions, please don't hesitate to contact me direct as well on louise@futuregeninvest.com.au. But I look forward to talking to as many of you as possible as I embark on the upcoming calls to our shareholder registering in relation to the half year results and other matters.

So thank you, and have a lovely evening. Goodbye.