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Edited Transcript of HFA.AX earnings conference call or presentation 8-Aug-19 12:01am GMT

Full Year 2019 Navigator Global Investments Ltd Earnings Call

Sydney Sep 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Navigator Global Investments Ltd earnings conference call or presentation Thursday, August 8, 2019 at 12:01:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Amber Stoney

Navigator Global Investments Limited - CFO & Company Secretary

* Michael Henry Shepherd

Navigator Global Investments Limited - Chairman

* Sean Gerard McGould

Navigator Global Investments Limited - MD, CEO & Executive Director

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Conference Call Participants

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* Phillip Chippindale

Ord Minnett Limited, Research Division - Senior Research Analyst

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Presentation

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Amber Stoney, Navigator Global Investments Limited - CFO & Company Secretary [1]

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Good morning, everyone. I think it's (inaudible). Thank you for joining us for the Navigator Global Investments 2019 Annual Results Briefing. My name is Amber Stoney, and I'm the Chief Financial Officer. And with me also is Sean McGould, our Chief Executive Officer; and our Chairman is with us today as well, Mr. Michael Shepherd.

So in terms of the briefing, firstly, we will have a discussion of the financial results, followed by Sean giving a presentation on some strategic business points that he would like to discuss, and after that, we will actually open it up for questions.

So one thing I just wanted to point out, I know those of you who are familiar with this know that we report in U.S. dollars. But I do just want to point out that everything that we discuss today will be U.S. dollars unless we otherwise let you know they're in Australian dollars. So I think, firstly, I'll just try to make (inaudible) who gets lost, we've found that everyone reads (inaudible) and as you've seen, the exchange rate has plunged for us now essentially.

So just in terms of a couple of the key highlights. So on Page 2 of the presentation, we just have a couple of the key numbers that represent our results for the 2019 financial year. So as was previously reported, a couple of weeks ago, we closed 30 June with $14.2 billion of assets under management. So that was down from our peak of assets at 1 July 2018, about 15%. But we -- it's very hard when you -- we've transitioned $5.4 billion in that we knew what's going to have some attrition to it, that would likely be the case. That has meant that we've come in, though, with $105.4 million of management fees for the year, so that's actually up 40% growth, demonstrates how much value in the business it actually add during a year, and leads to a profit of $37.7 million. So we did that report, we expected $37.5 million, so I'm very happy to say that we have come in slightly ahead of that once the audit has been completed.

And so that leads us into our dividend. So the directors have determined a $0.09 dividend for (inaudible) actually, $0.17 for the full year. On current Aussie exchange rate, the final dividend should be about AUD 0.132. So it equals about a 73% of EBITDA, so within our expected payout range of 70% to 80%.

So just moving on to Slide 4, so this is a summary of our annual results, and here, setting out our revenue and expenses to come down to EBITDA and our statutory profit. So one thing I will just point out is that we have actually reformatted our income statement this year, so you will see that the half year when we (inaudible) was up for the full year. And that's really been part of our focus when we've adopted the new revenue accounting standard we take in this year.

So those of you who are very familiar with the revenue standard, it has caused a lot of changes for many companies, but luckily for us, it actually wasn't too bad. In terms of our management fees, there's been no change to the amount that we recognize or the timing that we recognize. That's obviously very important given it's the lion's share of our revenue. Same for the performance fee, so the new standard has not impacted like when we recognize the fees or how much they are.

With -- the new thing that you will see there is the inclusion of revenue related to reimbursement of fund expenses. So this is a line item that we used to just treat on a net basis. So we would pay for an expense upfront for the fund. They would reimburse us. And we just would net it off to 0 in our accounts because it wasn't really our revenue, wasn't really our expenses. Under the new standard, we actually look at as being the principal because we're the ones that are contracted to do that expense. Most of those things are like research costs like Windows fees where it's impractical to have individual contracts with all the funds, so we just have one contract and then allocate it out to the funds. So -- but now we recognize that growth, and that's that $6.3 million. And then there's also an offsetting -- exactly offsetting expense, but it has 0 impact on EBITDA, just gross staff revenue and expenses for the year.

And the only other thing that came out of it, we did rename -- we used to have a line item for sublease income, which is where we actually provide some office space for our portfolio managers within our offices. Having a closer look at the provisions, we think it's better to actually call it revenue from the provision of office space and services. So it's a little bit like a service offered to (inaudible).

So another thing to note is we've also -- we used to present a net management fee number where we offset distribution costs against management fees. We actually just include our distribution expenses as part of total expenses now because they've come down so much in terms of size, that it just makes it neater and more comparable with most of our competitors in the way that they report.

So if you actually have a look at the next page, we do a reconciliation for everyone to -- essentially, we changed a little bit, slicing and dicing in how we're actually thinking these things, particularly when you've got gross-ups affecting revenue and expenses. So we just wanted to set out to make it easy for everyone to look at these numbers in detail about how you can see where we get to the total expenses in our statutory financial report, which is $78.7 million. You back up of the amortization, and that's the expenses that fits in that slide we just went through. And from an internal perspective, we actually then also just offset those fund reimbursements and the provision of the revenue because they just directly offset expense items so (inaudible) that's affected. So hopefully, that's of benefit for those who actually are trying to figure out the numbers and what we add and put together.

So the next slide is probably one of the more interesting ones, our revenue slide. So just in terms of a bit more detail with management fees, those have been fixed for the year. We had $105.4 million of management fees. $54.8 million of that is in the first half, $50.6 million of fees from the second half. So it was down $4.2 million. And those of you who may recall, we did some guidance back in January saying we thought the second half fees might be down about 10%. Pleasingly, we had some better than what had been anticipated performance in the second half, so that's not down quite as much, which is good.

So the key drivers for management fees are assets under management and fees. So in terms of the assets under management, clearly and quite logically, the biggest increase in our AUM for the year on average was from the transition of MAS assets. But as we mentioned, we took $5.4 billion across on 1 July. As at 30 June, we managed $3.1 billion of those assets still. So a significant increase since we started at 11 before that transition -- $11 billion.

And the other thing that's also impacted AUM is we actually have had 9% higher average AUM across the 2 financial years on the other Lighthouse asset. That's really the impact of getting really good net flows in the back end of 2008 -- '18 being impacting on our average fees -- average AUM, in particular, for the '19 year. So they're the 2 drivers for AUM.

And then on the flipside, we actually had a reduction in our average management fee rate. So that went to 68 basis points for the year. And the big driver in that is the range of the mix in the AUM. So we have a lot more at our Customised Solutions business commingled. So we put a chart in the presentation just to show that there's that correlation that as we get a higher proportion of that total AUM in customized, our average fee comes down just from a mathematical perspective because the customized fees are lower than the commingled fund fees.

So the other thing we've also just put in there is a little snapshot in terms of revenue concentration. We still have our largest client in Customised Solutions, a client representing 8% of our revenue in total, and that actually has been fairly consistent for a number of years. The next -- the top 3, so the next 2 top clients, that's another 8% of revenue. And our top 10 clients in Customised represent 31% of our revenue overall. So from that point of view, we're fairly comfortable that we're not heavy reliant on a single client, which is nice.

In terms of performance fees. Clearly, performance fees were down $6.5 million compared to last year. Last year was an exceptionally good year in terms of performance fee revenue. This half, we actually picked up $900 million in fees...

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [2]

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$900,000.

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Amber Stoney, Navigator Global Investments Limited - CFO & Company Secretary [3]

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$900,000. I wish it was $900 million, my apologies. $900,000 to bring it to $1.1 million for the year. It's actually a little better than we first thought. So again, back in January, we thought we'd probably have nominal fees for the year, so that has come in a little bit better. And Sean can certainly comment [benchmark], but the improved performance has put us back closer to high watermark. And our ability to generate fees in the 2020 financial year improved compared to this year, I think, or at least, we've got a better start.

I won't say too much in the fund -- the revenue because we've discussed that in terms of fund operating expenses and that provision from office spaces, again, where we provide some space for our portfolio managers. The one thing I will note, we don't do a markup on that, so it is actually just a straight cost recovery in terms of that item. So we don't add a markup onto that.

So the other big slide is our net operating expenses. So the biggest change, obviously, with the transition of MAS, we had an across-the-board increase in scale in our operations and across all departments. The biggest impact to that was through the employee expenses. So we took on 56 staff, I think, for MAS. There was an average about 50 MAS staff across the year. And we also had an increase of 8 staff in terms of average staff compared to last year too on the Lighthouse side. We have mixed resources particularly in IT and those sorts of areas from an average perspective. So that accounts for the fact that we had increased spend in our employee costs of $13.1 million compared to the prior year. The bonus expense is a function of EBITDA, so that's just driven from the actual performance for the year.

Our distribution expense is where essentially before we used to net that off against our management fees, those are the costs that we pay away to third parties where they introduce -- it's actually pretty much the same as last year, $3.4 million. Of note though, it's actually a smaller percentage of management fees because, obviously, our management fee revenue was higher. They tend to be related to our commingled fund, and our commingled fund AUM has actually fallen over the year, so makes sense that they would be about the same but smaller as a percentage of the overall revenue.

Our professional and consulting fees are also higher this year, so they're up by $3.2 million. The increases relate to 3 key areas: So we spent about $900,000 of consulting fees in relation to the integration of the MAS client relationships, so paying external consultants to help us transition across the business. We had about $900,000 of additional spend in relation to our risk management systems and risk analysis. And this is something Sean can talk about a bit further, but it's definitely been a key focus in improving those internal systems over the last couple of years. And we've also spent $1.5 million in development of a proprietary trading platform, so it's an in-house capability to replace some of the old packages. And again, it's been another big initiative. So one of the things Lighthouse is constantly looking at improving and enhancing the systems, and certainly, there is some spend that goes along with that.

So the other expense area is information technology. So IT costs were up about $1.9 million. About $1.4 million of those relate to the MAS transition or, at least, the MAS [business]. Most of those transition costs, there are some ongoing costs in there as well just in terms of bringing on more people and clients required, more IT licenses and functionality. So -- and those are ongoing as well. And we also had a high spend to do some things like our data warehouses and cybersecurity. But unfortunately, for most companies around the world, these cybercriminals keep getting smarter and we keep having to spend more to make sure that we protect ourselves and, more important, our clients.

The other key increase was occupancy. So we took up the new Chicago offices. So with the MAS transaction, we obviously brought on more staff. Most of those were based in Chicago so we needed to find new premises for all of our staff. So that was the change there in terms of occupancy costs for the year.

The next slide, I won't go into a lot of detail, but we do like to just split out like half-on-half comparisons because it helps to give a bit of a trend for the business. Certainly, you can see the key covenants in management fee revenue for the last year, for first half compared to prior years. And note that their operating expenses have stayed pretty consistent between half 1 and half 2 at about $34.5 million. So that's actually pretty consistent. Back in January, we said we do not think that while revenue was dropping, that we would have much cost reduction this year, but when we start looking at cost reductions, it's really going to keep improving from the FY '20 financial year.

So the next thing that brings me onto is the balance sheet. So as at 30 June, we had $29 million of cash. We made $22.6 million from our operating activities, and normally, that marries up fairly closely with our EBITDA. This year, it doesn't, mainly because there was -- we undertook to change our bonus cycle at the Lighthouse level. So traditionally, we've always paid Lighthouse bonuses in December. For those of you who know our financials well, you would have always seen the cash flow difference coming through December when we pay bonuses. Part of integrating them, staff, was looking at how we actually realign everyone's performance when it would have been at the 12th month. So it was a good thing too changing that across the board. And I like it much better because it makes my life easier, managing it to financial year versus calendar year. So we pay those bonuses in June. So what you see is a reduction in cash, but there's a corresponding reduction in employee entitlement in the liability section of the balance sheet as well.

The other thing I might just note is our deferred tax assets. So it is a big number on the balance sheet, the $52.6 million. But those DTAs largely relate to deductions from goodwill when we set to acquire Lighthouse back in 2008. We've used about a bit over $9 million of those this year. So as you can see, we are steadily getting through them. Based on that, we'd expect another 4 or 5 years of not having to pay tax. So the fact that we have those significant losses there, obviously is a very big benefit to us, and it does mean that while we have an accounting tax expense in the P&L, to come down to net, we don't actually have a cash tax payment or liability to make, so. So it's widely based on [EBITDA] because tax -- paying tax is not actually an issue for the company at this point in time.

And the other thing I'll just note is that we don't have a deferred purchase consideration liability from the MAS acquisition. So as we have disclosed, that was a 7-year earnout arrangement whereby any consideration we pay them will be worked out at the end of each 12 months subject to a minimum to be earned. And then anything above that floor, we would actually make a payment at in [relationship] to the EBITDA to them. So we haven't finalized the amount with the vendor at this point, but we actually expect it will be nominal or nil, which is not to say they didn't make any money. It actually did, being one of the big accretive impacts for this financial year compared to last year. So I want you to look at the comparison to go and make $34 million on EBITDA last year and $37.7 million this year. The thing to remember is the $6.5 million of performance fee extra in last year that we still actually made up for through management fee revenue, and the lion's share of that has actually come from the MAS acquisition and the EBITDA that's generated.

But having said that, I will forward Sean for his excellent negotiation skills that (inaudible) has meant that we have struck a really good balance where we've been compensated for all of the effort involved in transitioning the assets across and also protecting us from future attrition of those assets. So that's been a good thing from our perspective. And I think we'll take $3 billion of assets but at potentially no payment fees, that is good].

That just brings me onto the dividend slide. I won't go through it again because I did mention at the beginning that we would be paying a USD 0.09 dividend, which will be about AUD 0.132, and that will go on the 14th of August. So it will be certainly quickly.

And that actually brings me to the end of my part of the presentation. And I will now hand it over to Sean where he gets to talk about the much more interesting forward-looking things.

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [4]

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All right. Great. I only have a few areas. One, I'll start off by just addressing Mesirow, the acquisition. So we are primarily integrated at this point. So the only remaining things that need to be done are some of the client data and some of the reporting that we do. So the technology spend that we incurred, we need to make sure we keep all that information and provide the reporting that the client expected. So from an investment standpoint, we're very much integrated. From an accounting standpoint, there's a few things that we still have to clean up and transition to our administrator, but nothing -- I don't see any issues with doing that.

And then on the client side, as I mentioned, there's still some reporting that was certainly detailed that's valuable for those relationships that we want to maintain. And then might want to -- that (inaudible) some of the spend occurred in the technology area.

And as far as the clients, I don't expect major changes from this point going forward. We thought it would take about a year to integrate these assets and to get stability in them. I would say the original model that we drew up, we've probably achieved about 80% of it. So we knew that there was going to be some slippage in terms of the assets coming out. I think some of those things were positive as far as we weren't able to do the jobs for their clients that I think that they were asking to do. In some cases, I'm not sure who could do those tasks based on what they were trying to accomplish, and they could be very hard in a hedge fund format.

But I think from the standpoint of the remaining volumes, I think we did a great job for them. I think as far as the people that integrated from the Mesirow, they're very valuable to us. Certainly, we've had some reduction in both the Mesirow head count and in the Lighthouse head count. And I think we're at an appropriate level of staffing. There'll always continue to be some changes, and some of the changes that were made at the end of the year really won't flow through until this year. And the expense of that, we see this year. So we're definitely more in a state of normalization when it comes to Mesirow.

And as Amber mentioned, I think it was a good transaction from a trade standpoint. One, I think from client standpoint, it was good to the extent they wanted more liquid alternatives. I think Mesirow has done a very good job within the less liquid credit [states] and other areas, emerging markets, things like that. So that was very beneficial from a client perspective.

I think from our talent perspective of employees, I think it's been very good for us as far as a pickup there. And then as far as the financial transaction, I think this will work out well and we will negotiate it as a benefit to the shareholders going forward.

So from this point forward, I don't think you will be hearing me refer to Mesirow or the integration or anything. It's all one firm now. We're pretty much done there. So we won't break out the flows as far Mesirow redemptions or inflows. It's just one company, and that's how we're moving forward.

The second thing is on the marketing pipeline. So always been a lot of questions about what the -- what kind of the future holds. As you know, these things are very hard to predict, inflows, outflows, things like that. I would say over the last 6 weeks, I have kind of gotten around the world twice, so I've met with all of our major clients. And I don't see any changes in those relationships. So I think we continue to deepen those relationships.

And on the marketing front, we try and bring on new relationships. So the pipeline that we have remains consistent with what we've seen over the past 3 years. Converting those into clients has different ebbs and flows. As I've mentioned in the past, when we go through a tougher performance period, things tend to slow down a little bit, and that's certainly what we saw in the first quarter this year. I would say that things are starting to normalize, and I'm becoming more optimistic that, again, things will normalize going forward here.

I think that we find some of our clients in a very tough situation. When you read the newspaper just around the globe, with your pension plan, there's really nothing for them to invest as far as fixed income. And so with interest rates going negative in large parts of Europe and large parts of Asia, even when looking at some of the commentary today in the local perhaps, saying that it wasn't out of the realm of possibility for Australia to go negative. You're going to be continually faced with how do you deploy these assets and whether that's an institutional perspective, which tends to be our kind of mainstay of our business. It's a big issue, and it's not going away, I think, anytime soon. And from my conversations, trips around the globe, again, it doesn't seem to be letting up. The central banks aren't going to let up, and I think that's a source of opportunity for us. So I am optimistic that we will convert that and that the pipeline remains robust.

Where does it remain robust? It's still very good in Japan. I would rank it, again, Japan, Middle East, Europe, U.S., if I had to rank it. All of those areas those have a pipeline and a nice pipeline. But some of the commentary that I made previously, where you have negative interest rates and you have large pension savings, I think it produces a very unique opportunity set. So we continue to expand our marketing, not necessarily by adding more employees but, certainly, the emphasis over in Asia, the Middle East and Europe.

As far as Europe is concerned, this change with Brexit, right now, our office is located in London and will stay there. We're actually looking for new office space there. We don't know at this point what any changes that Brexit would bring. The U.K. is still going to be an important part of our business. Continental Europe is still going to be an important part of our business. And we will adjust our plans (inaudible).

With a company of our size, if you have a management company, I think you already need to start planning for this and deciding what you're going to do when some of the regulations change. For us, we can adapt when we see what happens.

So on October 31, if it's a hard Brexit, if that changes some of the way that new market in Europe, we will adapt to it and move forward from there. Right now, a lot of way that we operate within Europe is through reverse inquiry. So it is done through consulting relationships that we have with existing clients. Our existing clients are a very good referral source for us. And just being in those markets now for 15 years is very important as well. So none of that is going to change. The relationships aren't going to change with Brexit. However, we may need some more licensing, and perhaps, we need to set up a new marketing office someplace in Continental Europe. But we'll have to see how that unfolds a little bit later in this year.

But overall, again, very happy with our marketing team, marketing efforts, with our client service team, which is incredibly important. Especially when performance isn't going as well you would like, the servicing aspect of the clients is incredibly important. But I'm very happy with how we're positioned right now. I think again, the investments that we made, probably going back now 4 years ago, and some of marketing resources continues to pay dividends, and we've seen nice growth out of that.

When we look at the product performance, a lot of the results this year really were driven just by poor performance in the fourth quarter. And mainly in our equity long/short -- in our global long/short product. Our global long/short product is designed to have beta so it is going to suffer when markets go down. Our other products don't have as much beta exposure, don't have as much market exposure, maybe about 10%, and that's why you're not going to see the impact there.

Of that performance, where do we have the most issue? The biggest issue is on the China exposure, again, which isn't surprising. We've done extremely well in China over time. We're continuing to stay there. We're continuing to build up more research efforts within China. I think it's an important area and an important market for us. But occasionally, it's going to cause some issues as it did back in 2015 and other times when we look back. But certainly, the performance has improved in the 6 months we -- the first -- or in the first 6 calendar months of this year. Again, even the first few days of August, with all the market gyration, really hasn't caused any major issues.

When we look at the markets that have been the best for us, Europe has been extremely good return-wise and from an alpha production standpoint so we continue to deploy more capital there and more resources there. The [Americas] has been good. Japan has also been good. But China certainly has been a problem area. And we've taken some corrective action across the portfolios to try and improve things, as you can imagine. And that was really the focus of a lot of my attention in the fourth quarter and we've addressed a lot of those issues and we're moving forward. So it's been a good start these first 6 months, and we continue to go from there.

Also from an investment team standpoint, we are fully built out where we need to be. So we've had some reductions in the investment team area. Saw some rationalization of what we're doing. We've brought on some people. We've had some change there. I think it's the best team that we've ever had. It's the deepest resource that we've ever had, and it's critically important to continue to invest in what I would say is the R&D of the business. And you see some of that in what we're doing on the risk systems, on the trading platforms. All those things are vital.

We continue to make some more investment over in Asia. I remain optimistic that Asia will be a good market for investment and a way we can differentiate ourselves over the coming decade. And we'll continue to put more resources there.

So I'm very happy with the investment team we have, with the research that we're doing. We're interviewing over 1,200 portfolio managers a year. I think we have a really good feel for where the talent resides. I think we have a good platform where that talent can come onto, but we need to continue to invest in that platform to continue to improve the tools, improve the process that we're doing to improve the results for our clients. But overall, again, I think we're there in a much better spot here on product performance.

As far as the platform initiatives that we outlined last year, the marketing continues to go very well there. I think some of the price discipline that we have has -- I wouldn't say hurt the growth. It's just we're very disciplined on what we want to take as far as business and what's profitable for the future. We are not interested in taking on the business for the sake of growing revenue if it doesn't have appropriate margins with it. So a little bit of what we faced this year is that some of the pricing has been lower on the platform side than what we've been willing to offer. The pipeline there remains very, very good.

Our first [proprietary] platform client, it probably took about 3 years to get that. The discipline has paid off in that. I think we added a lot of value to that client. I think we can add a lot of value to the clients that we have in there, but we're going to maintain our pricing discipline. It's a business that I still feel very comfortable with and we continue to make progress with. And even if we didn't have a big win in the platform side, I would argue it is leading to other opportunities and other flows just on the product and the investment management business.

So it's not something we will shy away from. We'll continue to have the resources that we have new there now. We'll continue to plow ahead, but I want to assure all the shareholders we're going to do this if it makes economic sense but it's leading to other opportunities across the path. But I'm happy with the progress we've made there, and we'll continue to push forward there.

One thing, just on the returns, I'll bring up this chart, but I think it's important to keep in mind. One of the ways that I really think about this company is over 5- to 10-year periods. And if you look at Page 11 in the presentation, it shows the returns that we've been able to generate to shareholders over the last 5 and 10 years. If you look the last 5 years on the returns, just with the dividends reinvested and interest rates, which are really nothing across the globe right now, it's been about a 35% compound return through Jan 30, 2019. If you go back to 10 years, it's about 21%.

So the reason I didn't put comparables up for this of the market is (inaudible) show up. The returns were about 80% over this time period when you look at the ASX 200. They were slightly better if you break it out from the financial indices. So I'm very proud of what we have accomplished over what I feel is a relevant judgment period. There's been a lot of capital returned to shareholders through dividends, and I think that's very important. The business has continued to improve year-over-year. It's never linear in the way that we would like. And we go through periods of higher investment and better growth and then we go through low periods.

We have to continue to make the investment. Some of the biggest investments that we made at the Lighthouse proper were actually in the 2008 to 2010 time period. If we didn't make those investments, we wouldn't be where we are today. And sometimes, you don't get to pick your timing as to when you want to make these investments and improvements in certain things.

So I can assure all of the shareholders we are reinvesting in the business. We're trying to continue to innovate in what we're doing, and I think that's really, really important. When you look at companies across various industries and their success rate, having investment in R&D and things that you're working on are critical to the future success of the business.

Also, if you just look at the business landscape, over time, when we look at things like the S&P 500 in the U.S., when you go back, business trends are accelerated and you really have to stay nimble and focused on them. When you look back in the 1950s, 1960s, the average tenure of an S&P 500 company in that index was 60 years. When you look at it in 2017, it's 15 years. So you're talking about shorter life cycles with these business, you're talking about innovation happening very quickly, staying nimble and moving forward. What you're seeing less and less of, unfortunately, is just a 45-degree line to the right with earnings, with growth, with things like that.

The important thing is that we achieve it over time and that we compound the capital that's given. So not every year is going to be a great share price year. But I think continuing to compound the capital, improve the business. We've paid some nice dividends, and if we could reinvest the business or if it pays dividends in the business at a high rate of return, we would do so and I think (inaudible) things we can get.

We have a well thought out policy on how we're going to drive returns over time to shareholders. And I'm very proud of the results that we've driven over the last 5 and 10 years.

But again, it comes through the hard work of the team that we have and having a vision of where we want to continue to take the business. But I think the business is functioning well. We're always going to be challenged by the markets. We're going to stumble on occasion. We're not going to quit, but we're going to keep moving forward and keep trying to innovate in this business.

As far as any other major investments that we have planned. I don't think there are any Mesirows on the horizon. As we said last year, I think that was a unique set of circumstances where we understood the business well and the people well, and that it made sense. And we really thought that we could help the clients, again, and Mesirow achieve their objectives, which is the most important thing because ultimately, that's going to drive the returns of the business.

As far as smaller investments in some of things that we've done over time. We're certainly being more selective. We do want to find things that can move the needle. We're not afraid of making those investments if we're going to learn something from them. But certainly, the threshold has increased because we want to spend the time and the energy where we think it's going to drive results going forward.

So nothing contemplated in those types of areas, add-ons, some other existing management firms and things like that. However, we do have an ongoing effort to look at things. There's lots of things that come across our desk, our colleagues that look at that the most are [Zachary] in New York. He's doing a great job, helped out a lot with the integration of Mesirow and the ongoing relationships that we have there.

So it's a vital role that we have that we continue to look at things, but that we have a pretty high filter for those things that we would do. And like I say, lots of things come across our desks, but we want to make sure they fit in with what we're trying to do here, fit in with the culture and fit in with how we're trying to drive the business forward and drive results in the business.

So with that, I'm going to pause for any questions or comments from anyone that's here. I don't know if we'll open it up, Amber, on the phone line. You're going to have to (inaudible).

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Amber Stoney, Navigator Global Investments Limited - CFO & Company Secretary [5]

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I can help -- I'm going to help (inaudible).

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Questions and Answers

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [1]

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We'll start here first with any questions from anyone's here live, then we'll open it up to anyone on the [line].

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Unidentified Analyst, [2]

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Just want to know (inaudible), as you mentioned, you've really calibrated the staff members at year-end, at the June end and just give us an impression of how many staff have we reduced over the recent period.

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [3]

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Okay. Look at more as time we retained and what the head count -- I think we're at the appropriate head count where we continue -- every year, we always have tweaks in the business where we need to add new resources and where some things that we're doing don't make sense at the senior levels. We've got an incredible level of staff turnover, and I think that we'll remain the same.

But when we look at the staffing level, it's really what are the needs that we have for the business today? I think we're appropriately staffed, and (inaudible) come off to take that up as well. So I think -- potentially I just look at. I don't see major reductions in the staff head count in total, so (inaudible), but we're going to adjust the business. So in 6 months' time, when we give an update, I'm sure the number from where we're at today is going to vary and it could be we're down I think 38 staff. It could be 130, it could be closer to 150 at that point. It's going to depend on what we do. But I don't think you're going to see substantial variations off of that number.

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Unidentified Analyst, [4]

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Is it about 150 at the moment?

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Amber Stoney, Navigator Global Investments Limited - CFO & Company Secretary [5]

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It's 139 including 4 more at the -- [Hill Stock Dryer]. So as the Lighthouse, with, what, 135 (inaudible).

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [6]

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So we look at those numbers and some of those reductions did come in at the late end of the year, so it will make a difference in the expense load for this year. [The funds will] all have to be factored into what we're doing here going forward. But we'll continue to review (inaudible) and it's a process what we need, but we are never -- I wouldn't say in Lighthouse, it has to begin ever with that as a primary mechanism to drive results.

We have really good people tending to the service of clients and those things. So we're never going to skip on that, or in the short run just to drive financial results. And going back to 2009, 2010, the easiest thing you can do in that time period is just cut people out. We didn't have a single reduction because we knew the platform we were building required the head count that we had. And I think we were just in (inaudible) if the demand could never come up, [the person that's] out there in the year is happy that we've built something going (inaudible), and we would have to made adjustments then.

But while we're trying to carry out the vision of what we're doing, we're going to be staffed appropriately, and I think we're at a good level now. We have a really good team of people globally, a really good team of people. I'm super happy with the talent levels that we have and continue to improve. So we'll see where we go, there'll certainly some changes, but I wouldn't be expecting anything (inaudible).

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Unidentified Analyst, [7]

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Just in terms of Mesirow, (inaudible) the fund that's basically well almost halved from 12 months (inaudible) and I personally think it best to (inaudible) and they don't understand the context of where the fund's going with Mesirow. You didn't pay anything for it. Can you just put a little bit of color around why the outflows have been so significant, and why you think they've stabilized now?

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [8]

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Well, we knew they would be -- I mean, knew they would be pretty significant. So...

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Unidentified Analyst, [9]

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I don't think we did.

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [10]

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Yes, but here's the trouble. (inaudible) So what if we're wrong? Meaning, what if forecasts wrong, some worse to the ground in the cost? It's not so much the kind of -- aside to the fact that even if we have retained all of those assets, the cost associated with them may have remained the same.

So I realize that may be hard to believe, but some of the mix of business can actually dictate that. So when we spoke about this, I know, and probably dig up on one of the transcripts, whether we retained the assets at $5 billion, $4.5 billion or $2 billion, the results driven off of that wouldn't be material. We're not going to judge the personnel that we have, and we're going to look at the mix of business and the clients that we have.

So from my perspective, it could have turned out differently (inaudible) results. So that's why I get confused sometimes. I thought we were pretty clear in saying this is going to go down, but I'm not up here saying I'm all that worried because of the fact that (inaudible).

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Michael Henry Shepherd, Navigator Global Investments Limited - Chairman [11]

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I think [personally] I shared is that, [Mark], we were as clear, we thought an awful lot about how they're going to describe this and we -- I think we landed on the best way to describe because there is no certainty about markets. We didn't want to be overly pessimistic or overly optimistic. And I think at the end of the day, we are obliged, as Sean's taking great pains to mention this, the EBITDA coming off that wouldn't have varied all that much. I mean Sean's fed up with me -- hearing me saying this but you can sell an awful lot of $5 notes for $4, and that's what you're going to avoid doing. Not all clients are profitable. But I think we've landed pretty much where we thought we're going to land. How we're going to communicate that with any certainty was almost impossible.

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [12]

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And what would have changed some of that outcome, some of the outcome (inaudible) could have changed that. And again, I don't -- I was very clear at the end of the year that, that had been -- and what we were forecasting at that time was not driven by Mesirow. That was going according to plan. It was the only performance of the firm. So I mean we owned up to that and said that and we still say the results were driven by that. But from a pure financial standpoint, Mesirow's done almost exactly as I would have expected. It's just some of the [outcomes] are a little bit lower than expected, but that's okay. It's been -- there's still 100 opportunities out there. (inaudible) that is something why it wouldn't. It does take a lot of work and a lot of migration and things like that. But it was in the final billing, and I think the -- I guess the few reasons we're doing it is because we currently see that client base certainly that we (inaudible) I think the people and the people from Mesirow were doing to improve in their compete, (inaudible) we would throw things. But it certainly wasn't to try and take all the team over (inaudible), I mean, that we're going to come out of that, I guess, maximum (inaudible). That was never the (inaudible). It wasn't the issue.

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Amber Stoney, Navigator Global Investments Limited - CFO & Company Secretary [13]

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What was the question?

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [14]

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Can we deliver a month of client (inaudible) when people said it was holstered, we checked that, moved forward and it doesn't make financial stake, are we taking undue financial [measures]?

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Unidentified Analyst, [15]

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(inaudible)

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [16]

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Yes, if we didn't do it -- I reflect on it a lot more if we do something...

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Unidentified Analyst, [17]

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Maybe you'd like to lie (inaudible).

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [18]

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Absolutely (inaudible) but it doesn't have to relate to the financial disclosure; it has to relate to something [outwards]. Still that's only a (inaudible) there to transactionalize it.

(technical difficulty)

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Unidentified Analyst, [19]

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(inaudible) Trading system or the software update but is it an inflate that's going to continue again this year? This is now going to be an ongoing or this is a finer project? Tell us.

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [20]

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Some of it -- typically when we do these projects, you can still ramp-up in the first thing to it and then there's normalization. I would say I mean for this year, the forecast should be it stays at these levels. I wouldn't say any changes, but then going forward, I would say it won't necessarily (inaudible).

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Unidentified Analyst, [21]

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(inaudible)

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [22]

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It will -- and it only has a piece of my interns. By that time, I may come up with something else that we need to do, so it's not normal. We normally get the projects, they get built up. They get to a life cycle. A lot of the programming that we've done historically, we have used different consulting firms to help with that. So when the heavy build is over and then that phase is down. In some cases, we've been able to offset some of those costs, by client use of it. And that can certainly happen here, and then other users of it.

So we're constantly trying to figure out how the best way to do it is. But one thing we learned about developing any of this is we jumped head long into it. We get the prototypes working, and then we typically figure out how to scale it, and at that point, we start to get some reduction in the cost.

So I think the expectations should stay where they are for this year. But I can assure you it's necessary that we do this, and that we continue to spend the money on it to do it. But I'll certainly give an update as to where we stand in 6 months' time as to where it is because we'll have better visibility at that time.

As anyone knows who's done these projects, they can take a life of their own. I think we've done a really good job with them and looking at the cost/benefit, but we'll continue to push forward on that. Some of the other expenses that Amber highlighted that were more measured or weighted, those will tail off a little bit. So we still do have some more work to do on the client reporting integration, so it's not going to be a complete 0 this year, but it's just going to normalize.

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Amber Stoney, Navigator Global Investments Limited - CFO & Company Secretary [23]

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Any other questions in the room or do we risk opening up the lines again?

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Michael Henry Shepherd, Navigator Global Investments Limited - Chairman [24]

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Well, that's normal, let the line go first.

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Amber Stoney, Navigator Global Investments Limited - CFO & Company Secretary [25]

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All right. I mean the lines (inaudible) some of them?

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Unidentified Analyst, [26]

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Would it be all right just if I ask some more questions?

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [27]

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Go ahead, please.

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Unidentified Analyst, [28]

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Okay. Just in terms of the third-party platform business for you, I think you announced it about a year ago.

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [29]

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Yes. Yes.

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Unidentified Analyst, [30]

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You kind of referred to it briefly. But can you just explain exactly -- obviously, it's a long -- they're long-term horizons. You've explained in the past that it takes a long while to tick all the boxes much more than winning a fund mandate. Can you just talk us through how optimistic you are and how you feel and how far along you'd go?

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [31]

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Yes. I really am. And I (inaudible) we're opening up some new relationships. And we didn't have access to before. So some of the conversations -- we have a couple number of conversations going on in Australia, and those conversations wouldn't have happened. And they'll also need to look at when you get the platform but this is really interesting what you're doing, and we need help with that specifically with European talent or something else like that. So...

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Unidentified Analyst, [32]

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On the funds space, you mean?

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [33]

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On the funds space. So it's really beneficial in that, but these things are really lumpy. They're really, really lumpy. Sometimes you're waiting and you get a phone call out of the blue with them saying discuss this and this and that. I would say the one structural issue that we have in the marketplace is we're a little bit more expensive than some others that are doing this. But we think there's a premium to be paid because we think we're offering something differentiated. So rather than just collapsing on the price because we've been through the cost of service with them, and we want to make sure and say we can demonstrate that the premium is worth what we're doing. And we think that's working.

Or if we absolutely think we're already delivering it, well, we would just lower the price and say it's not necessary. But some of the things that we're asked to do in these relationships are different than others. And they're not cheap and they're value-add and then we may be complicated on that. So that's some of the feedback that we've gotten and that's an educational exercise moving forward but we'll (inaudible).

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Phillip Chippindale, Ord Minnett Limited, Research Division - Senior Research Analyst [34]

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It's Phil Chippindale from Ord Minnett. Can I ask a question, please?

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [35]

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Sure, Phillip.

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Phillip Chippindale, Ord Minnett Limited, Research Division - Senior Research Analyst [36]

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Just if I can turn to Page 7 of the presentation, just had a couple of questions regarding some of the comments there and, Sean, I think some of your commentary has answered them in part. I just wanted to drill down a few more of them. So you called out $900,000 cost for the MAS integration. It sounds like that's not really -- some of it's going to be ongoing in its entirety but perhaps in part, is that right? Have I got that clear in my mind?

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [37]

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Yes. That's correct, Phil.

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Phillip Chippindale, Ord Minnett Limited, Research Division - Senior Research Analyst [38]

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And does that include -- when you're talking about this client reporting functionality that you haven't quite finished, is that within that category? Or is that more of the IT spend?

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [39]

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Yes. That's more in that category.

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Phillip Chippindale, Ord Minnett Limited, Research Division - Senior Research Analyst [40]

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Okay. Then just moving to the IT increase of $1.9 million on the year, you've called out $1.4 million relating to MAS mostly about transition. Again, it sounds like that's largely going to sort of curtail a reasonable amount against that fee categorization.

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [41]

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Yes. I think it's a fair statement, yes.

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Phillip Chippindale, Ord Minnett Limited, Research Division - Senior Research Analyst [42]

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Okay. Great. And then finally, you did touch on the proprietary trading platform. But I'm just wondering if you could give a little bit more color around what it is that you're developing there. Presumably, it's a bit of a closely guarded secret. But maybe just give us a more high level, what it is that you're spending the money on? And what you're hoping to achieve for that?

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [43]

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It breaks out again in just 3 different areas: one, there's improvements to the risk system; two, there's improvements to where it's tracking the order management of what we're doing; three would be to bring in some analytics on a portfolio level side as well. So it all revolves around portfolio management all the way from (inaudible) to analyzing the portfolio at the end of the day. And some of that is also -- we have to spend some money on hardware and things like that, that get included in some of these numbers and spaces as well to upgrade (inaudible) of what we have.

So we want to continue just like we made some big advances with our asset commander system years ago. You can almost think of this as the newest version of asset commander but taking the data into real time, which is where we need to go for analytic purposes. So almost tick by tick and second by second. So that we can continue to analyze and isolate -- when I think about it from a pure investment perspective, isolate the forms of alpha and isolate the forms of risk in the portfolio that we have.

So trading system, (inaudible) I think that'd be the best way to enable analysts [funds] because when you think of the trading system, you think of some sort of we're not trading or putting an algorithmic or trading system together. We're trying to analyze trades and trying to be more efficient on the front end of those trades, and part of it is software and part of it is hardware.

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Amber Stoney, Navigator Global Investments Limited - CFO & Company Secretary [44]

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Any other questions?

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Unidentified Analyst, [45]

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It's [Stewart Darhey]. Can you hear me?

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Amber Stoney, Navigator Global Investments Limited - CFO & Company Secretary [46]

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Yes, [Stewart]. Go ahead.

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Unidentified Analyst, [47]

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Just on your comments, Sean, around bigger exposure for the Global Long Short, I know it's going to vary, but can you sort of help us try and understand that? I mean obviously, given where equity markets are, that's a very interesting area to delve into. So I guess just in terms of questions, what proportion of your overall assets under management are in that strategy? And secondly, how should we think about the beta, either at this point in time or going forward in some context?

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [48]

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Yes. The beta will stay fairly consistent at 30%, and that's more of a product feature that the clients want. So certainly, if all equity markets went down 20%, we're going to lose 6% just in terms of beta, not much [work in there]. So if that's thoughtfully -- if the Global Long Short piece is roughly 15% of our business, that will give you a scale.

But I want to expand on that because the other portion of this, that's the other 85% of the business would have (inaudible) joined as well. So if you were have to aggregate things, I think a fair estimate of the beta across our platform would be, call it, 15%, 15% to 20% exposure just in that (inaudible). And you'll see at different time period, for example, this May, despite the markets having a really tough month, going all (inaudible), the alpha production over tail in the exposure that we have. (inaudible) month (inaudible) output production. But in a market sell-off, the way I would model this on is assume the cost for the whole firm, we've got 15% exposure.

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Unidentified Analyst, [49]

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Okay. That's good. And just what I'm thinking, we were all -- you took a lot of time of the questions, we're all trying to dig into the expenses, et cetera. But if we sort of turn that around, historically, you talked about a normalization in the EBITDA margin back to where you had it in the past. Can you just talk about where we are on the journey? And do you have an expectation to get back to those sorts of margin levels next year? Or is it further out? How should we think about that?

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [50]

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One, I mean, really EBITDA margins are really healthy. They've been healthy for a long time. And when you compare them to the asset management business in general, our margins have been higher. So I think it's because of -- it's because it's maybe magnitude. And also some of the margins get distorted now because of some of the things we have to put in the revenue.

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Amber Stoney, Navigator Global Investments Limited - CFO & Company Secretary [51]

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Yes. Well, it's in the slide…

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [52]

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Well, there are 2 of them. And let me answer the question directly. I think we can make improvements certainly over time. I haven't really seen a business that's going to do it purely through expenses as oppose to revenue and products. And if you have good products, and you're doing a good job to your clients, I think the margin management becomes easier (inaudible) expenses, (inaudible) over 10 years. But I think there are some improvements that we made.

And my specific comments related really to the Mesirow business which we knew the margins would be lower than our business, and we thought we could normalize those over a period of 2 to 3 years, and I still think that we can do that. But overall, I'm still pretty happy with the EBITDA margins that we drive on the business.

And also as I said, if the mix of business changed, I would much rather have us making $100 million or $200 million of EBITDA a year and have a 20% EBITDA margin making $38 million and have close to a 40% EBITDA margin. So we're going to do intelligent things to drive that margin but, again, the focus is on using our capital that we have intelligently and earning returns on the revenue.

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Amber Stoney, Navigator Global Investments Limited - CFO & Company Secretary [53]

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Any other questions?

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Unidentified Analyst, [54]

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Just in terms of -- I understand where your comments about it's a low interest rate environment. I don't know if you're aware, Australian bonds went under 1 0 yesterday for the first time. Just in terms of (inaudible) products use (inaudible) products (inaudible) that you have now inherited and managing? And where you are seeing opportunity to meet the needs of those clients?

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [55]

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Yes. I mean look, I'm going to divide the credit into liquid and less liquid pieces. Liquidity, our allocations are almost the lowest we've had in the firm district because the spreads on credit are very, very tight and it doesn't mean we can't go lower, but I think you're starting to reach insanity levels when over in Copenhagen, you have negative mortgage rates. And whether we're issuing negative mortgage rates, it's hard to even comprehend that when you look at the Italian 10-year bond and that trades through U.S. rates, that makes no sense to me. It's just -- it's uneconomic, and I don't think anyone would [do that]. That's what we don't do. So we see really economic (inaudible) on the platform.

The thing that's very interesting in the less liquid credit markets are where banks have vacated as lenders. So they have vacated parts of the [liquidity market] and they're going to continue to vacate parts of that market. Parts of the [entity] market had been vacated in the U.S. and it's (inaudible). I read in the local paper that one of the banks (inaudible) in a few years' time. So when you see these things starting to happen and if they vacate, that there's still economic (inaudible), that's where you want to be. Those are longer-dated opportunity and where historic Mesirow capital has been deployed, and I think those are good risk/reward opportunities. So we would want to continue to pursue those for the clients that want that type of exposure.

So I would differentiate it again between where there's supply/demand imbalance and either that opportunity is priced right and really true liquid credit markets which are mispriced because of uneconomic [markets]. So hopefully, that's helpful.

So I don't see major changes so far in liquid credit allocating. There's some things we've done that are more trading line into that market, and I think (inaudible) because they are going to have a negative correlation to what's going on in those markets and still produce positive returns. But I generally think the negative interest rates have obviously buoyed asset prices. It's hard to say how much they have, but if we get positive real interest rates, asset prices -- we saw this last August in the U.S., asset prices are where they are with really real interest rates in U.S. for a few months and the market went down 20%.

So if you have it for 10 years, you can make your own assumption as to what would happen, and one of the investment banks produces what they call -- I believe they call it the Zombie index which measures companies that are really uneconomic from an interest cost perspective, and that said, it's all (inaudible). So you know you have some just odd behavior in there, but we've had to deal with this for 10 years, so we got to get on with our jobs and figure it out and move on. But I think it's -- unfortunately, it's here for longer than what we would have thought. I think what's interesting in this go around is with the U.S. bringing down rates, we're not seeing (inaudible) suppress and then it's something we saw and that absolutely impacted the performance of hedge funds, but we're not seeing that. We are seeing more (inaudible) more -- much more normal levels and that's good for us.

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Unidentified Analyst, [56]

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If there was an unforeseen bond crash or credit bond crash, presumably, the downside risk could be more than 15% you indicated because your credit products could be tangled up in it also and the downdraft from that also?

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [57]

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In the short term, yes. We don't have a time out just direct credit exposure that it would be worried about in that. From a mark-to-market perspective, absolutely. So when we set the firm up 20 years ago, one thing that we can't get away from, we can hedge equity risk, we can hedge credit risk and things like that, but liquidity risk is not something we can do. And that's more of a short-term phenomenon than a long-term phenomenon, but we have to put up with some mark-to-market thing. But I think after that, the opportunities would be abundant, and I look forward to maybe not the front end of it, [Mark], but on the back end of it, I think we can (inaudible) nice rate.

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Amber Stoney, Navigator Global Investments Limited - CFO & Company Secretary [58]

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Okay? Well, we've just gone past 11, so I think it's time there to wrap up. Thank you for those attendance and for those on the line and (inaudible).

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [59]

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Thank you. Thank you.

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Michael Henry Shepherd, Navigator Global Investments Limited - Chairman [60]

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Thank you, Sean.

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Sean Gerard McGould, Navigator Global Investments Limited - MD, CEO & Executive Director [61]

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Thanks.