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Edited Transcript of VG1.AX earnings conference call or presentation 18-Aug-20 1:30am GMT

Full Year 2020 VGI Partners Global Investments Ltd Earnings Call

Sep 30, 2020 (Thomson StreetEvents) -- Edited Transcript of VGI Partners Global Investments Ltd earnings conference call or presentation Tuesday, August 18, 2020 at 1:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Matthew Philippe

VGI Partners Limited - COO

* David P. N. Symons

VGI Partners Global Investments Limited - Investment Director

* Robert Michael Paul Luciano

VGI Partners Global Investments Limited - Non-Independent Director

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the VGI Partners Global Investments Limited FY '20 Results Briefing Conference Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Robert Luciano. Please go ahead.

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Robert Michael Paul Luciano, VGI Partners Global Investments Limited - Non-Independent Director [2]

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Good morning, and welcome to the 2020 Full Year Results Conference Call and Webcast for VGI Partners Global Investments Limited or VG1. I'm joined in the room by Adam Philippe, the VGI Partners' Chief Operating Officer; David Symons from the investment team; David Jones, who is the VG1 Chairman; Ingrid Groer, who heads up our Investor Relations; and Rob Poiner is on the line from New York.

Thank you for joining us today. We appreciate your support and interest in VG1. The primary purpose of today's call is to give you an opportunity to ask any questions you have for me and our investment team. But before we open the lines, I'll provide an update on the portfolio and how we are now positioned.

To be clear, from the outset, after a challenging period in equity markets, we are very confident we have made the right changes to the portfolio and to our processes over the last couple of months. Our global strategy has delivered a compound return after fees of 13% over the last 12 years, and that's for the Master Fund, which VG1 now replicates. And I believe we are well placed as ever to continue to deliver on our investment objectives over the long term.

I'll turn now to Slide 9 of the presentation, which we think is a good place to start for an overview of the portfolio as it currently stands. You may recall from our July investor letter, that starting in early June, we've been working on a few refinements to our investment process. We did this because we are always looking to improve and learn from our mistakes. As we went through a process of reassigning responsibilities within our team, it was timely to revisit our approach more broadly. We did this in part because of the highly unusual environment driven by the pandemic and the associated policy response, which also has ramifications for portfolio construction.

As a result, the letter outlined 4 key changes to our approach. The first 2 relate to this slide. First, we flagged that we would not be maintaining cash balances as quite -- at quite the same levels that we've previously done. And previously, we had averaged close to 30% over the last 12 years. You can see here that VG1's cash weight stood at 26% at the end of July and is slightly lower today. This is down from 29% at the end of June.

Second, we cautioned that in a world of endless money printing and government stimulus, the traditional short-selling approaches may not work as effectively as they have done before. And this is because we expect investors will look through near-term volatility in earnings. Similarly, unless you're talking about something like a Wirecard-level fraud, it is going to be quite some time until the market cares about accounting issues in our view.

So in this environment, it's too easy for a management team to cover up weak underlying profits and accounting shenanigans with COVID-related excuses and provisions and also government assistance. Our more cautious approach to shorting is reflected in the portfolio at the end of June. As you can see here, VG1's short equity exposure was down to only 9%, with just 2 short positions remaining. This is substantially reduced from earlier in the year, where short exposure peaked at 47% in April. While we won't be increasing VG1's short exposure to prior levels until the macro environment changes, the VGI Partners' investment team is still doing its work to identify companies that meet our usual criteria for short selling and what we refer to as red flag analysis.

Another thing to note on this slide is VG1's currency exposure. VG1 has been 100% exposed to the Australian dollar since late July. This is significant as VG1 started the year with 100% exposure to U.S. dollars and moved to a 50% hedge position in June. Changing VG1's strategic currency positioning came up for several months in which the performance of the Australian dollar was highly correlated with global equity indices and risk asset prices. At the same time, changes in the macro environment mean that we are now far less confident that the Australian dollar is fundamentally overvalued than we were previously. In these circumstances, we would prefer to generate returns from fundamental stock picking without exposing VG1 investors who are primarily focused on Australian dollar returns to currency movements.

Moving to Slide 10. The top 10 portfolio long investments as at 31 July illustrate the 2 further points from the July letter regarding adjustments in our approach to managing the portfolio. The first of these was to try harder to avoid holding on too long to situations that have performed well but now offer modest incremental returns. One example of where we got this wrong in the past in our global strategy was Medibank. With hindsight, the time to sell was 12 to 18 months after the IPO. But we held on considerably longer. We've made a handful of recent portfolio changes as part of this effort to avoid falling in love with our own ideas.

Since the end of June, we've exited our holdings in WD-40 and Colgate-Palmolive. We have also exited General Electric and recently sold down our investment in Kikkoman, which is relatively illiquid and thus better suited to our Asian-focused strategy. However, we did shift this capital into leading Japanese medical technology company, Olympus.

The final change to how we are managing the portfolio is to seek to have more of your capital invested in companies that have the potential to deliver higher growth for a longer period of time. We've recycled the capital from situations with what we believe is capped upside such as WD-40 or Colgate-Palmolive and invested in companies that we see delivering attractive returns over the next 3 to 5 years and in our view, longer.

Olympus, for example, which is listed on the Tokyo Stock Exchange, is the world's leading manufacturer of gastrointestinal endoscopes with approximately 70% global market share. And this is one of the examples of a company that we see has much higher growth prospects for a long duration. Olympus is positioned for long-term secular growth as screening programs for colon cancer are improving around the world, and the company has set out a clear transformation plan focused on improving profitability. And this includes divesting its loss-making camera business, which is what the business is well-known for.

The other recent addition to the top 10 is Pinterest. It's a relatively small market cap listed in the United States, and it's a visual search and social media platform that's in the very early stages of delivering on its commercial potential. We started building a position in Pinterest in late June, with the company included in the top 10 portfolio holdings after the company's quarterly financial results showed substantially stronger growth than both we and the market expected, and the share price responded accordingly.

Another name worth mentioning from this page is OTIS Worldwide, the elevator and escalator business. We commented on the OTIS investment in our July letter. We initiated the position in April when the company was spun out of United Technologies. OTIS went on to report a very strong quarterly result, the company's first as a separately listed entity, which improved margins and market share.

VG1 has a meaningful exposure to a number of very powerful long-term thematics in the current environment such as a shift to e-commerce, the rise of cloud computing and the move away from cash transactions. And this is largely captured in our positions in Amazon and MasterCard, which represent just under 30% of the portfolio combined. At the same time, we've substantially reduced the portfolio's exposure to situations with capped upside or a bias to consumer products. We may shift the dial a little further towards evolving growth businesses when opportunities arise.

Quite separately, from what you can see on the page, we've identified a number of additional long-term thematics, where we are actively building positions or still assessing the optimal way to gain exposure. We'll have more to say about these in the future.

Most importantly, the investment team is working extremely well together now. And it's great to be working very closely with our senior analysts, Robert Poiner, Thomas Davies, Marco Anselmi and Andrew Chou, on the portfolio.

Now turning to Slide 11. There are 3 important points here relating to capital management and shareholder communication. First, we've announced a fully franked dividend of $0.015 per share. And that's a 50% increase on the $0.01 dividend announced with the half year results in February, bringing total dividends for the year to $0.025 fully franked. There's no change to our dividend policy. The Board of VG1 is focused on distributing available franking credits while maintaining and growing the dividend over time.

Secondly, we've announced an on-market buyback today, and the relevant paperwork has been lodged with ASIC. Announcing a buyback gives us the flexibility to buy back shares if the Board considers this to be in the best interest of all shareholders over the long term. I should say that, and while we appreciate that a buyback at a discount is accretive to NTA per share, we've seen from the experience of other listed investment companies that a buyback generally does very little to nothing to close a discount to NTA. We know there are no easy fixes on that front outside of fund performance, which we're extremely focused on and enhanced shareholder communication.

On that point, some of our shareholders and other investors have provided feedback on how we communicate and how we should improve in this area. We're responding to this feedback and hope that by doing so, we will better position ourselves to work on narrowing the discount.

Our Investor Relations team is currently overhauling our monthly reporting so that from September, we will identify our top 10 positions provided where we do so would not prejudice our investment operations, and that's a key point to note. We're happy to disclose our top 10 holdings, but not in situations where it may impact on our capacity to grow that position, particularly in smaller situations or lower liquidity situations. And also more discussion on both of these portfolio positions and the contributors to performance each month, again, given the previous caveat I've made.

We will also be hosting more webcasts to provide portfolio updates with at least one a quarter as well as short videos with our senior analysts in Sydney, New York and Tokyo discussing key stock positions. This year, the annual October roadshow will be held virtually. We've started planning for this, and we hope that all of you on the line will join one of the town hall meetings. We'll release the detail of these sessions in coming weeks.

Outside of this, we are always happy to get on the phone or do a Zoom call to take any of your questions and talk through the strategy. Please just get in touch with Ingrid Groer from our Investor Relations team, and we will get the right people on to the line to speak with you.

So that brings us to the end of the presentation, and we'll now move to questions. So operator, can we please start off by taking questions that have been submitted over the webcast before we go to the phones? Now I've asked Adam Philippe to read out the questions from the webcast. So Adam, it's over to you.

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Questions and Answers

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Adam Matthew Philippe, VGI Partners Limited - COO [1]

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Thank you, Rob. We have around 20 minutes available for questions today. There's a couple that are coming through on the webcast, but we did have one submitted prior to the meeting, which we might attend to first. The first question is a recent Berkshire Hathaway filing showed that they added Barrick Gold and reduced some financials, including MasterCard. This is a massive shift in thinking for Buffett. What is VGI doing to protect capital when most of the portfolio looks pricey going forward?

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Robert Michael Paul Luciano, VGI Partners Global Investments Limited - Non-Independent Director [2]

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Okay. Thanks, Adam. Well, I'll make, first of all, a comment on the Berkshire Hathaway move. And we obviously have huge admiration for Warren Buffett and his business partner Charlie Munger. But many years ago, some of you may be aware that Warren Buffett allocated a very large amount of capital to 2 other portfolio managers. And they run their own separate portfolios and have done a number of things that Buffett perhaps -- Warren Buffett would have never done. That included buying airline stocks. Berkshire Hathaway had very large positions in airline stocks, which obviously changed a number of months ago, and have had various other positions that don't necessarily represent what Warren Buffett himself or Charlie Munger himself would do.

I would suggest to say that given Warren Buffett's historical comments on gold, that the Barrick Gold position is a position by 2 of those portfolio managers or perhaps collective position. I find it highly unlikely it's a position that Warren Buffett has undertaken. And Warren Buffett and Charlie Munger have always said in relation to gold that you are much better off owning a business or an income stream that has pricing power. And that is the best way to protect yourself from debasement of currency and the debasement of currencies has been happening every year since the move away from the gold standard. And the way to protect yourself from debasement or the ravages of inflation is to own assets with scarcity or assets that have pricing power.

So I'll make that comment first. We did do a review of gold at VGI last year in the fourth quarter. We looked at a variety of situations. Obviously, the best way to play a thematic on gold, instead of owning a gold ETF or get gold outright, which has a cost of carry, ETF has a cost of carrier itself, too, is obviously through a physical producer. Barrick Gold comes out as one of the best physical producers, also pays a dividend yield.

But then in turn, you have the business risk of Barrick Gold itself and the operational risk. We would rather gain exposure or protection from the potential for inflation and further debasement of currency through owning high-quality businesses. And in the shorter to medium term, I think it's more likely to have -- we're more likely to see a period of disinflation than inflation. And that's a separate conversation.

And then moving in terms of -- and the other point I should make on gold and one of the smarter longer-term investors is Paul Tudor Jones. And I recently read a commentary from him where he looked at a store of value in a period of high inflation or hyperinflation, and he did an analysis of gold versus a very another scarce asset, which is bitcoin. And his view was bitcoin would be a much better store of value than gold given its scarcity. It's far more scarcity with bitcoin because of its capped supply than there is of gold, which is something to think about. But you could also argue that certain pieces of art, very high in property, other assets of scarcity will be stores of value and always have been through time.

So if I then move on to what are we doing to protect capital, well, first of all, we're selling businesses that we think are expensive or have capped upside. We're shifting that capital into businesses that we think are undervalued or have longer-term growth profiles and have pricing power. We have cash on hand, and we have a modest amount of short. And we're constantly looking to sell down positions that we think have approximated or approached fair value. And that is how we've constantly, over the last 12 years, looked to protect capital. So I think, hopefully, that summarizes or answers the question with some detail.

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Adam Matthew Philippe, VGI Partners Limited - COO [3]

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Thanks, Rob. There was a couple of currency-related questions that came in during your presentation before you got to the currency section. So hopefully, they've been covered off. If there is anything else, please come through to Ingrid Groer and either Rob or I can explain further.

Two related questions. Rob, what is your view on the current mega cap tech valuations? Understanding that you're focused on quality and growth. However, valuation seems incredibly expensive. And relatedly, are you concerned that Amazon is overvalued after its recent price increase?

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Robert Michael Paul Luciano, VGI Partners Global Investments Limited - Non-Independent Director [4]

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So the commentary on mega cap tech valuations, well, there's a reason for the valuations, it's because the growth is so high. And the consequence of -- so which is point #1. So there's growth, extraordinary levels of growth, which require minimal levels of incremental CapEx. And then there's an accelerant to growth, and the accelerant to growth has been the crisis, which we touched on in our letter in, I think, in May or April, but there are a couple of structural trends coming out of the lockdown towards cloud computing and a variety of other contactless payments, which we thought we had very good exposure with Amazon and MasterCard. The error we made was not to look at other opportunities in that space, and many of those have substantially have performed very well.

So when you add together growth and accelerant of growth, you end up with a revaluation, which is what has taken place in the case of say, Amazon, in the case of Microsoft, even Apple. So if you look at that mega cap tech squad of stocks, that's what's taking place. And with the risk-free rate falling, and in some instances, the fear of deflation, or even in the case of inflation, you talk about a scarcity of an asset where no one's printing more Amazon shares, no one's printing more Apple shares. There is issuance through options, but there's a scarcity of it and they have growth.

But what is happening with the evolution of these market caps becoming so large and the power of this businesses becoming so large, you've now seen a lawsuit been lodged against Apple for its 30% fee that it charges for companies that are providing apps or software on its store. You're starting to see increasingly the growing threat of regulation, and that's something that we look at in terms of a traditional analysis matrix.

There are about 6 key forces that affect the sustainable competitive advantage of the business, and one of them is the threat of regulation, particularly government regulation. And you could argue the threat of regulation for some of those mega cap tech stocks is growing rapidly. And the areas that seem to attract the most interest of governments is obviously social media. And then the other one you could argue is outright monopolistic behavior, and this lawsuit against Apple sort of argues that kind of point.

So what do we think about the valuations? In some of them, the valuations stack up, which is the reality of the situation. But that does require a discount rate or a long-term risk-free rate that is at current levels, and that's the question. Do we -- are we moving into a period of low government rates forever with government suppressing the yield curve? Or do market forces eventually make their way through into the longer-term risk-free rate, which then changes everything, given the amount of government issuance that is yet to hit the marketplace.

And this is one of the big questions that is unanswered, and that is the big ultimate driver of risk asset prices over the years to come, is do we see -- because of the tsunami of government bond issuance by Western countries, do we see pressure ultimately on the long end of the curve? And does this bailout that has taken place of the global consumer through government injection into the consumer's pocket, the removal of unemployment benefits and what is effectively now income replacement, the rescuing of all companies, and that's made its way into money supply, whereas in the financial crisis, the money made its way largely into the banks and the banking system. Now the money has made its way into the hands of the consumer and the consumer is spending.

And that is ultimately creating a question mark as to what does happen, not in the short term, but over the medium term to inflation and what happens to the longer end of the yield curve. And it's something that the market is constantly trying to work out, but current prices would suggest the market is not worried, and the market thinks that rates will remain low for a very long period of time.

And what we're seeing now is government intervention into the yield curve. As we're seeing in Australia, the 3 yield curve is stepped on by the Australian Reserve Bank. The U.S. Federal Reserve is talking about yield curve control, as is others. And that, therefore, creates an optical allusion in terms of risk-free rates and arguably a mispricing of risk-free rates. And that relates back to this question on mega cap valuations and technology valuations. But scarcity of growth means the demand for growth is high, and therefore, the prices adjust accordingly.

In terms of Amazon, we've owned Amazon for many years now. We've owned it from about, I think, an average of $2.70 or $2.80 a share. If we didn't sell any Amazon, I think it would be roughly just under 50% of the portfolio, which is something to think about. It's currently about 15%, 16% of the portfolio. It got up to 20% of the portfolio only a number of weeks ago, and we reduced it down to about 15%, 16%.

Why did we do that? Risk management and the valuation started to get closer to our view of fair value. We don't think it's expensive here. We think a lot of the growth has been brought forward, which has lifted valuations accordingly. And parts of this business that we would have put a lower value on before have accelerated, for instance, the -- its capacity to have a very valuable advertising franchise.

And so what I would say with Amazon, and one can argue about the weight and perhaps keeping it at 20% was the right thing, but we -- I mean I chose not to, is you need to divide it into 3 businesses: a global retail platform, which is making money in the U.S. but losing money internationally; Amazon Web Services, which is the #1 player in cloud computing, second is Microsoft, and our error has been to be all over cloud computing many years ago via Amazon but not looking at Microsoft, which is an error that we'll try not to make again; and the third part is advertising. And so really, it's 3 platforms that are extraordinarily valuable and need to be looked at in isolation in order to get the valuation. And that is how we approach it. That's how we look at it.

There are other parts to the business that could emerge and evolve over time. Remember, the web service -- the Amazon Web Services business spun out only a number of years ago and is now arguably the value driver of Amazon. We think it's less likely to have regulatory risk than other tech mega cap. And we see a very attractive medium to longer-term growth profile. Does that mean it won't be volatile? It will be volatile, and you'll see that ultimately in monthly returns. But we need to accept some of that volatility in order to allow that business to continue to contribute to the portfolio returns. And so I hope I adequately answered that question.

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Adam Matthew Philippe, VGI Partners Limited - COO [5]

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Thanks, Rob. Another question here. What information can you provide and [old idea], but we don't speak specifically around our shorts. But what information can you provide as to the reasons for the performance of the short book that did struggle over the financial year?

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Robert Michael Paul Luciano, VGI Partners Global Investments Limited - Non-Independent Director [6]

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Well, what I can say is that we had a short book going into the selloff. We added to shorts in late February, early March. And the cumulative effect of that was a very substantial positive return for the portfolio, which you may have seen in March, also facilitated by being 100% U.S. dollars.

What we did was we covered a very substantial amount of shorts during the period. But then what we did was take a view, which in hindsight has turned out to be completely wrong, that the environment was going to be weak for a very long period of time. And we looked for new short positions and new situations, a number of which we had known before and we had been short before, and put those shorts on and stayed short those over April and May, which was obviously not the right decision. And we were too slow to take off a number of those shorts as the market continued to rally. And we did not believe that the fundamentals for those businesses would improve anywhere near what people were expecting.

As it turns out, a number of those situations have proven to have their share prices come back over. Plus the June, July period, the reality is we've covered a number of those situations, but we're just finding it -- but yet, some other companies that we think have very weak prospects and continue to have weak prospects, their share prices have held up.

So I cannot provide you granular detail. There's a very substantial number of shorts that we had, but a number of them were new ones. And a number of them were long-term shorts that we had on that we didn't cut during the period because we had very high conviction in them because they were long-term shorts. We thought the catalyst had arrived for them to become very substantial performance, and they did perform, but the area we made was not to realize the change in the environment and that the consumer would be propped up for a lot longer than we had thought.

So we had -- we were too focused on the company analysis and the thematic analysis, and we ignored the change in the macro environment, which was the stimulus going into the hands of the consumer and that, that would provide a short-term benefit, which the market in its infinite wisdom has capitalized forever. And you could say that's the case with consumer stocks, retailers, retailers who are benefiting from short-term trends that has capitalized in their prices for a very long period of time. Whether that may happen or not, time will tell.

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Adam Matthew Philippe, VGI Partners Limited - COO [7]

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Thanks, Rob. We may have time for one more. Operator, could we just check the lines?

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Operator [8]

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(Operator Instructions) We are showing no questions.

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Adam Matthew Philippe, VGI Partners Limited - COO [9]

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Look, there's a couple of questions regarding the current discount, and obviously, noting the buybacks that we have announced this morning. Rob, you alluded before that as buyback may not necessarily close the discount, you did allude in the presentation to a few more initiatives. Are you able to elaborate a little more on why and how we're focusing on that? So you've guided a couple of them. And there's 3.

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Robert Michael Paul Luciano, VGI Partners Global Investments Limited - Non-Independent Director [10]

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Right. I'll try to weave those 3 together. Okay. Well, so it's really that question. There's one shareholder who said, "You note that the buybacks don't generally close the NTA gap. Instead, that's driven by performance."

Yes, correct.

Why then undertake a buyback now rather than wait for performance to improve and therefore, solve the issue?

Thanks. Well, excellent question. I think the -- that really is a question for the independent directors. I don't know, David, if I could hand that over to David Jones or David Symons. Would you…

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David P. N. Symons, VGI Partners Global Investments Limited - Investment Director [11]

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Yes. Thanks, Rob.

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Robert Michael Paul Luciano, VGI Partners Global Investments Limited - Non-Independent Director [12]

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David Symons speaking.

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David P. N. Symons, VGI Partners Global Investments Limited - Investment Director [13]

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I'll just speak very briefly on this topic. Look, we've had a great deal of feedback over the last several months as the discount has widened. And there's a diversity of views from our shareholders as to whether or not they would like to see capital management or whether they are, in fact, share the view of our questioner here, maybe saying that a buyback is not a great idea. And I think on balance, it was something which the independent directors looked at, recognizing that every time you purchase shares at a discount of current levels or potentially greater even that it would be materially accretive to the shareholders who remain.

And therefore, they thought that it was timely just to provide the company with the flexibility to purchase shares at some future point if it became a smart path to take. You do face a 14-day delay between announcing a possible buyback and being able to purchase shares. Therefore, it makes sense just to get all the paperwork done and gives us flexibility to actually take action if we choose to and if the independent board members believe it to be desirable at some future point.

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Adam Matthew Philippe, VGI Partners Limited - COO [14]

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Great. Thanks, David. Another one's just come in, Rob. This investor notes that Wells Fargo was the sixth largest position in June '19. This position appears to have been exited. It would be interesting to hear you discuss this, of course, in addition to the comments you've made on the interest rate and the broader economic environment.

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Robert Michael Paul Luciano, VGI Partners Global Investments Limited - Non-Independent Director [15]

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So look, I always -- I've been in the -- I started as an analyst in 1996, and I'm not sure how soon after that, despite other people doing very well. And then I always said that I'd never buy a bank. And I think that's just due to the complexity and what can go wrong. There's a lot can go wrong, and they're very hard to analyze. You think you can analyze them but you can't. Even inside the organization, you can't analyze it.

Having said that, when you're in Canada and Australia with an oligopoly and the government largely constantly giving you assistance, what we've seen with the Australian banks, which is a transfer of wealth from really the Australian tax payer to the Australian banks and their shareholders, you can't seem to go wrong. But in the case of Wells Fargo, at the time I made the decision, and it's my error and my error alone, I made the decision that Wells Fargo was extremely well positioned in the U.S. banking sector. It's been consolidating really over the past decade. It was increasingly attractively priced.

And post the investigations and issues into Wells Fargo where it had its balance sheet capped, I thought that, that was a catalyst for what was going to be a high-quality recalibration of its business, focusing on a much higher-quality business. And I thought that, that was quite an interesting evolution because it was the first time you're going to see a very large U.S. bank in a consolidated industry structure focused on quality in its loan book and move away from lower quality. And I hadn't really seen that happen before, and I thought that it was an interesting evolution for what was overall a very well-positioned bank and was attractively priced and was also very aggressively managing its cost structure and aggressively buying back its stock, which was a huge accelerant to value and value creation given how it was priced.

The issue with banks is obviously they're interest rate sensitive. At the time, we also had a view why we were also cautious and probably for the frustration of VGI shareholders conservatively placed over 2019. And we saw interest rates going up, and we thought that, that would create opportunities in the equity market and volatility in the equity market. And we thought Wells Fargo, along with the CME, would be well placed to benefit from that.

What transpired, and the error was when that first interest rate cut happened this year, was not for me to cut Wells Fargo. Obviously, the U.S. federal funds rate got cut 25 points. That was negative for its business, and then it got continued to cut further, which is a disaster for its business. In the current environment, it has many issues. If interest rates do continue to increase over time, banks, in particular, U.S. banks will be well placed. But it's a highly complex environment.

We made the decision that the environment -- particularly with the possibility of yield curve control, which is what, like I said, the RBA is doing, standing on the Australian yield curve for 3 years, there's a prospect that the U.S. Federal Reserve does the same. It creates many complexities for the banks, particularly the U.S. banks, but they are well capitalized and they will survive. It's just a question of what earnings they can generate, in earnings growth, they can generate. And their capacity to pay dividends will be hamstrung, particularly under a democratic administration.

So we exited Wells Fargo. We also sold down our position in CME at a higher price than is currently, which is about 12%, because of this concern, this concern about yield curve control and lower interest rate volatility. And it's seen a subsequent material reduction in the trading activity of interest rate derivatives in the Chicago Mercantile Exchange and in other exchanges -- trade interest rate contracts over the last number of months. The CME interest rate trading activity is down over 50% over the last few months. Other activity in complex is up, for instance, equities. But as a whole, low volatility have low trading activity.

If you think interest rates and if you think inflation is coming back, the much better thing to own than gold and -- look, I don't know what Warren Buffett is thinking. I wish we spoke, but we don't. But yes, the reality is he would say you want to own businesses with pricing power, and perhaps you would also say you'd want to have businesses with ad valorem income stream. So an ad valorem income stream is something like a MasterCard or a Visa. I dare say it like a casino operator that gets a croupier or something that gets a percentage of value through the pipe.

And that could be something that has a digital network that sees a lot of value grow or the same token, the CME is a digital network. The vast majority of its trading activity is electronic. And if you think there's going to be inflation and if you think there's going to be rising interest rates, the primary beneficiary of that is going to be the Chicago Mercantile Exchange because that is where the entire U.S. yield curve is traded, 24 hours a day. And at the moment, there's low activity. And the index that tracks interest rate volatility is at all-time lows. And it is a far better place to have a play on inflation. Hence, why it was our 12% weight last year when we thought interest rates was going up, and there was ongoing money printing by the Fed and the ECB and the Bank of Japan.

We felt it was much better positioned to have exposure than gold. And that was our choice after we did our gold analysis. We'll have a large position in CME, and we'll have a position in Wells Fargo, and we'll have a position in MasterCard. And collectively, if you add that up, you get to nearly 30% of the portfolio. And we thought that, that was a very nice inflation hedge. It just didn't turn out the way we thought. As Mike Tyson says, everyone has a plan until you get punched in the face. And the plan didn't work out as we thought.

So we still have 6-and-a-bit percent position in CME. We think it is -- we've sold it down to a position where if it fell due to more erosion of its volumes, we could buy more without impacting returns substantially. And we just don't know what will happen with the yield curve control, and I don't have a very strong view on interest rates in the short term. If I did, I'd be a well-regarded macro trader like Paul Tudor Jones.

I don't have a strong view, but I do think over time, the Chicago Mercantile Exchange is extraordinarily well positioned to benefit from volatility in interest rates, equities, commodities and metals. And that is it's a franchise, and it has the leading franchise in the planet. Like I said, it dominates the interest rate curve. And I think that's a very important complex. And that, in turn, gives you a bit more of an answer to Wells Fargo. But I think we'll be avoiding -- I'll stick to what I said in that I think I'll avoid buying banks of -- it's not something that I'll be doing again.

All right. Now if there's -- we have one question on, are you still short Corporate Travel, from one of our very good investors who have supported us. I'm grateful for their support. Are you still short of Corporate Travel?

Look, we don't usually comment on our shorting activity. We have made a number of public short-selling presentations at the Ira Sohn conference, which is a wonderful event started in Australia by Matt Grounds. And it's an event that we'd like to support and we presented at that and supports wonderful charities, particularly Victor Chang Foundation.

And we presented 2 shorts there. We presented Pandora jewelry, which was a very large short for us and something we covered in the sell-off and made substantial return on. I think total return on that was 70% or 80%. We also presented at the Ira Sohn conference Hanesbrands, which was a long-term short for us. I believe we generated a return of about 80% on that, too. And we closed at maybe 90% even, we made or we closed that in the sell-off, 2 things that we covered.

We have not -- we did make a presentation to our shareholders -- or our investors, I should say, our sophisticated -- the clients who meet the criteria of sophisticated investors on Corporate Travel and then on Slater & Gordon previously. They're 2 Australian shorts. And I should say Pandora -- the Pandora short was driven and underpinned by Thomas Davies, who's one of our senior analysts. And that work was done by him, but I'll take all the credit for it. Hanesbrands was driven by Robert Poiner, who runs our New York office and is on the phone. And if you've got any questions for him, please send them through. And I would say the 2 other shorts, Corporate Travel and Slater & Gordon came out of our Sydney office, and Doug Tynan had a lot to do with it. And I'd like to think other people helped as well. It's a team effort here.

So we do have -- to answer a question that people keep asking us, we have substantial short-selling capability. We have substantial stock-picking capability. And we have 12 people in our investment team, right? So I want to labor that point that we are a team of 12 people. And I've been picking stocks since 1996, and I'll continue picking stocks for a very long time.

Are we still short Corporate Travel? No, we're not. We covered that during the sell-off. I wish I could say we covered it all at $4, $5. We didn't. We got a good average price, not a great average price. But I would put it at an average price below, I believe, $9 or thereabouts. And it is just an issue in terms of we had -- we were short so much Corporate Travel, it was hard to cover it all at the right price. And that's one of the issues with shorting in Australia, is just lack of liquidity.

And it's a situation that I would say not Corporate Travel in particular, but I would go back to a more generic comment where it's very hard in this environment when you have companies that have very substantial business model issues, earnings issues. And the market looks through that, or the market uses last year's earnings and says, "Well, eventually, it will get there and prices it accordingly." And this is no reference to Corporate Travel. It's just a reference to a variety of businesses.

Hanesbrands, I'm not sure, Rob Poiner, if we can take you off mute. But Hanesbrands is up a number of times from where it was on its lows despite its business model arguably being in a worse position. Pandora jewelry is up now a couple of times from its lows despite being in a worse position, although it has done an equity recapitalization. But this is an environment where some very strange things are happening.

And it is a -- the invisible hand, which is an economic term created by Adam Smith, the invisible hand of market forces is no longer in play. And it, therefore, makes it very difficult to short sell. And it's something that we are focused on. We have a list of shorts that we want to reactivate. But we are going to be very cautious because this is a partially rigged market now, and we are very cautious about moving back to a wholesale short-selling program.

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Adam Matthew Philippe, VGI Partners Limited - COO [16]

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Okay. Thanks, Rob. That's all we've got time for today. Thank you all once again for your interest in VG1 and for joining today's call. If you do have a question that we didn't directly address, please contact Ingrid Groer, and we'd be happy to discuss off-line. Thank you all again.

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Operator [17]

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That does conclude our conference for today. Thank you for participating. You may now disconnect.