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Edited Transcript of VG1.AX earnings conference call or presentation 4-Feb-20 11:30pm GMT

Half Year 2020 VGI Partners Global Investments Ltd Earnings Call

Feb 10, 2020 (Thomson StreetEvents) -- Edited Transcript of VGI Partners Global Investments Ltd earnings conference call or presentation Tuesday, February 4, 2020 at 11:30:00pm GMT

TEXT version of Transcript


Corporate Participants


* Douglas Hugh Tynan

VGI Partners Global Investments Limited - Non-Independent Director

* Ingrid Groer

VGI Partners Global Investments Limited - IR Manager

* Robert Michael Paul Luciano

VGI Partners Global Investments Limited - Non-Independent Director


Conference Call Participants


* Andrew Anagnostellis

* Brent McGoldrick




Operator [1]


Thank you for standing by, and welcome to the VGI Partners Global Investments Limited 1H '20 Results Briefing. (Operator Instructions)

I would now like to hand the conference over to Mr. Robert Luciano, Executive Chairman and Portfolio Manager of VGI Partners Limited and Manager of VG1. Please go ahead.


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


Good morning, and welcome to our investor conference call and webcast for VGI Partners Global Investments Limited. With me in the room is Douglas Tynan; Robert Poiner; David Jones; and Ingrid Groer. Thank you for joining us today. We appreciate your support and interest in VG1.

In today's briefing, Doug and I will run through some of the key points from the presentation slides that we lodged with the ASX this morning before opening the lines to your questions.

Now turning to Page 2 of the presentation. The return for the VG1 portfolio for the 12 months to December 2019 was 8%. Net tangible assets finished the period at $2.39 per share. We experienced a strong start to the calendar year, with the portfolio generating a 5.2% return in the month of January. This is the best monthly performance we have recorded since VG1 was established in late 2017. Net tangible assets at the end of January were $2.52 per share.

Now at the result last week, we declared an inaugural fully franked dividend of $0.01 per share, which is payable on the 3rd of April. This was flagged at our AGM last November. Now as many of you know, we were waiting until we had sufficient franking credits before we started paying dividends. We now hope to maintain and ultimately grow the dividend per share over the longer term.

We also recently announced that a dividend reinvestment plan, or DRP, will be available commencing with this dividend. Details were released to the market around 2 weeks ago, but please note that if you would like to participate, you have until 5:00 p.m. on the 4th of March to register. I'm pleased to confirm that Doug Tynan and I will both be participating in the reinvestment plan in full as will VGI Partners Limited.

In terms of key themes for the half, not much has changed in that we continue to focus on investing your capital wisely and patiently as we aim to achieve superior risk-adjusted long-term returns. We look to invest when we believe there is a margin of safety, and we will not change our process in what we believe to be hot markets. That said, and in hindsight, we have been too cautious in deploying capital since formation of the company in late 2017, and we will discuss this later in the presentation.

It is also worth highlighting that my family, Doug's family and the team here are major investors in the company. In fact, if you combine the VG1 holdings and VGI Partners Limited, my family, Doug Tynan's family and our team, we collectively own just over 11 million shares in VG1. This is an investment of $28.6 million at the current NTA, and VGI Partners continues to buy VG1 shares on market as you would see from our daily ASX lodgments.

Now I don't propose to talk to the detail of the next few slides. I'm sure you're all familiar with VGI Partners, who is the manager of VG1, and our approach to investing. You will see that we have included slides 8 and 9 in the pack, which set out the share price performance of VG1 and our initiatives to close the gap between the share price and net tangible assets. The discount emerged following the capital raising last year, and eliminating the discount is a substantial priority for us in 2020. The fact that my family, Doug's family and the team here are major investors in VG1 means we are completely aligned with all shareholders and we very much want to see the discount addressed and eliminated as quickly as possible.

You will see that the initiatives set out on Slide 9 are primarily designed to maximize ongoing secondary market demand for VG1 shares. Doug and I will be happy to take any questions on these initiatives in the question-and-answer section that will soon be following.

Now before I talk about the portfolio, it's worth pausing for a moment on Slide 10. I know that many of you on this call have been VG1 shareholders since our IPO, and for you analyzing stand-alone VG1 returns is only half the story. This page shows the returns achieved by a VG1 IPO investor with $100,000 who subsequently participated in the VG1 raising and then the VGI Partners IPO in 2019.

You can see on the left-hand column that this investor would have invested a total of $145,422 after taking up their VG1 entitlement and investing in the VGI Partners IPO. That investment now has a market value of around $165,000 as at the end of January for a return of 13.6%. However, if VG1 shares are valued at net tangible assets, this total current value increases to around $185,000, which is actually a return of 27.1% on the funds invested over that period.

Now turning to Page 11 of the presentation to discuss portfolio returns during the December half in a little bit more detail. So VG1's long investments rose in value and contributed 1.7% to the performance during the period, and this was in a strong equity market. Short positions detracted from this by 1.3%. The contribution from our long-term currency strategy was minimal given the Aussie dollar was pretty flat over the period versus the U.S. dollar. MasterCard, Wells Fargo and WD-40 were the largest long contributors during the period.

The largest long detractor was Grubhub, although a substantial part of this negative performance has been clawed back over the month of January. And we talk more about our Grubhub investment and the errors we made in our most recent investor letter, and I urge you to read that if you have not already done so.

Now regarding the short portfolio, and with the benefit of hindsight and as we discussed in our investor letter, it would have been pretty easy to argue that we shouldn't have had any short positions at all. However, we continue to believe that maintaining a short portfolio generates positive returns over time and that our shorting disciplines and processes help us scrutinize long investments more carefully. It's a competitive advantage that we have, and very few funds have the genuine trialed-and-tested capacity to offer.

I would also add and say that our short portfolio is not a trading book, it's a long-term investment operation, where we short-sell the securities of companies that we think are embarking upon financial fraud, have a fad in their business or have a business that is subject to long-term industry structure decline or a combination of the 3. It's very hard to trade that and, as a consequence, regardless of the direction of the market, even if the market is going up, that short book will remain in operation because we cannot pick the time that a financial fraud will be revealed to the broader investment community.

Now moving on. The contribution of currency was broadly neutral during the second half of the year. And as you probably know, VG1 is denominated in Australian dollars but is very substantially exposed to the U.S. dollar through both its investments as well as its cash holdings, which we have placed in U.S. dollars since inception.

As you know, we made the conscious decision to not have any U.S. dollar currency hedges in place at the time of the IPO. In fact, at the time of the IPO, we sold the company's Australian dollar holding and bought U.S. dollars. We actively manage currency hedging as our analysis of the economic outlook for Australia evolves relative to the U.S., but also Europe, the United Kingdom and key countries in Asia, particularly Japan.

At this stage, we continue to believe the U.S. dollar remains attractive relative to the Australian dollar. However, as we've said before, at some stage in the future, we will progressively hedge VG1's U.S. dollar exposure, although this is not going to happen until our fundamental analysis suggests that the Australian dollar is more fairly valued.

Now please turn to Page 12 for an update on VG1's portfolio. The table on the right sets out the top 5 long investments as at 31st December. These represent approximately 42% of the VG1 portfolio. Now as shown in the table, the portfolio had 67% net equity exposure at the end of December, with 94% long and 27% short. As a consequence, the cash weighting was 33%. All cash is held in U.S. dollars, and this position is not hedged.

So in terms of geographic split, 67% of the long investments were listed in North America; 17% in Asia, which includes Australia; and 16% in the U.K. and Europe. Now that said, many of our long investments in North America have material exposure to international growth. This is especially the case for Amazon, Colgate-Palmolive, MasterCard and Spotify.

In Asia, we are seeing a range of opportunities, particularly situations where corporate governance standards are improving and yet valuations still appear relatively attractive when compared with global peers. Our Tokyo office continues to assist us with expanding our knowledge of the region, and we were able to visit 11 cities across Asia in 2019.

Now regarding Europe, if you follow our releases closely, you would have seen that our exposure to the European region increased over the half. Now this was primarily due to our participation in the IPO of the French monopoly lottery operator, Française des Jeux or FDJ. This was VGI Partners' first participation in an IPO since 2014.

Now I traveled to London and Paris on 2 occasions with 2 of our senior analysts to meet with FDJ management and representatives of the French government in the lead-up to this IPO. Our efforts to thoroughly research the opportunity and present our credentials were well rewarded as VGI was allocated the fifth largest institutional allocation globally and the largest of any foreign institution. The FDJ's share price increased 14% on the day of the IPO and finished the year up 20%.

Now I'd like to briefly comment on markets more broadly, and this reiterates the comments made in our recent investor letter. Now due to the low interest rate environment, we feel that the vast majority of high-quality businesses continue to trade at valuations which imply unlikely levels of growth into perpetuity. The VG1 portfolio currently maintains a relatively sizable cash holding, and this will enhance our ability to execute in times of market uncertainty and extreme volatility.

We remain confident that we will continue to generate acceptable risk-adjusted returns over the long term and through the investment cycle. We will do this by concentrating our capital in a relatively small number of high-quality businesses that we believe are significantly undervalued, combined with selective short-selling and limited use of leverage.

If you'd like to read more about our portfolio, please have a look at our investor letter, which we released last week.

Now if we turn to Page 13, you'll see a summary of our shareholder engagement program. Many of you would be familiar with the key events and the independent research that's available on VG1. But we are looking to do much more this year, and we're very pleased to be expanding our Investor Relations team as a result.

Whether you're an existing shareholder, adviser or potential investor, please feel free to call or e-mail us at any stage. We've recently written to shareholders who have not previously provided us with their phone number as we are looking to build our contact list.

As we have just announced our first dividend, I would also like to remind you to sign up for our dividend reinvestment plan or to register for electronic payments rather than check. This can be done at the InvestorServe website or by completing a form.

And finally, I would encourage you to visit our new website. Here, you can find our investor letters, briefings and other materials such as our annual meeting notes from the Berkshire Hathaway annual meeting. You can also subscribe on the Contact Us page if you are currently not on our distribution list.

So that brings us to the end of the presentation, and we'll now move to questions. Operator, could we please have the first question? Thank you very much.


Questions and Answers


Operator [1]


(Operator Instructions) There are currently no questions via the phone line. I'll hand back to Mr. Luciano now.


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


That's a surprise because I'm anticipating a few questions. But Doug, do you want to -- we've got some filler here. We need to put in some filler. Well, I'll wait until some more questions or any questions do come through. I'll give it about 60 seconds because we have a large number of people on the line, and I really haven't got anything else prepared. I can make things up, but I'm sure everyone will get bored with that.

We've got Doug here. I've got -- Rob Poiner from our New York office is in Sydney this week and next week. And we've got a number of other people from our team. So I'm hoping we'll get some questions, and if not, we will be hanging up shortly.

Look, is there one question? No, 0. Oh, 2 questions. Here we go. Hang on a moment. That's via the Internet?


Ingrid Groer, VGI Partners Global Investments Limited - IR Manager [3]




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


Okay. Here we go.


Douglas Hugh Tynan, VGI Partners Global Investments Limited - Non-Independent Director [5]


And we've got 2 of them.


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


All right. So we've got some online questions. Here we go.

What are your thoughts on the impact of the U.S. election this year?

This is outside of our circle of confidence. And this is from [Paul Bridgford]. So thanks, Paul, for the question. Look, I'll give you my view real time. We woke up this morning, and everybody said that the market rallied because of a decline in concern over the coronavirus. And my view is that is -- I think that's a [verity]. The reality is the -- this Iowa caucus was a complete debacle for the U.S. Democrat Party, and I think it massively increases the probability of a Trump reelection as a consequence. And I think that's the primary driver of some renewed exuberance in U.S. equity markets.

The probability or the possibility certainly of a Sanders or Warren win would be hugely negative for risk assets and risk asset prices and hence, equity markets. And I think there's a little bit of relief seeping into the market. The odds of a Trump election had been rising over the last few weeks in betting markets, and they've picked up again since the Iowa caucus.

So that's our initial read. And I think the odds of a Trump reelection are increasing by the day. And I think the -- like I said, the recent Iowa caucus debacle is a huge positive for President Trump and the Republican Party.

We have another online question. In fact, we've got a fair few here. I'll take one more online question, and then I think we have, I think, one on the phone. This is from [Marco Mollado]. I hope I pronounced that correctly. Interest rates are having such a major impact on share prices, how do you think about this in your process?

Well, interest rates are having -- interest rates are everything. And the reality is, is the rally in equity markets in 2019 was underpinned by one thing and one thing only, and that was interest rates falling and the risk-free rate, particularly the U.S. 10-year, falling by over 100 points over the 12 months. If you look at the fourth quarter of '18 where our funds performed very well, generally a positive return when most others were losing money, and that was when environment rates were going up and you could see the very powerful effect on asset prices have pushed them down.

The subsequent announcement by the fed in January of '19 was a reduction of the federal funds rate and more easy money from the ECB, an additional injection of easy money into the system via the repo market by the fed in the third, fourth quarter of last year. All these things accelerated, particularly, that repo market intervention accelerated asset price inflation in the second half of '19. And it's something that, as we've conceded, we've been too conservative. In an environment where interest rates have been collapsing at a precipitous rate, we have been too conservative.

I guess the point is, and as we say in the letter, when you turn up to the best party in the world and you choose to drink mineral water, when you change your mind, you change your mind as the party's -- do you think the party's starting or do you think the party's getting close to an end, and it's very hard when there is exuberance, and that exuberance is driven by extraordinarily low interest rates.

Now it's easy to argue that low interest rates could continue for many years. And if that's your bet, then you would be long-risked assets and have leverage, and it would be full steam ahead. And I guess our skepticism and our cautiousness is acting as a handicap in this environment.

I don't want to sort of go on about it too much more because it's a topic you could talk about for a very long period of time. But I hope that, that touches on some of our thoughts and gives you a sense of it.

But interest rates is everything. We don't fall into the camp that the value of assets should be infinity if interest rates are 0 to negative. I just think that's absurd. But what I do think is very low interest rates encourage you to have much higher spot valuations.

The crunch point will be not if but when interest rates go up, and I think that, that could have a devastating effect on risk asset prices and I don't think people's minds are calibrated for it.

Now I'll move on to a question, operator, from the phone, if that's okay. We have a couple of questions on the phone. If we could take one of those, please?


Operator [7]


Your first phone question comes from Andrew Anagnostellis from Umgeni Investments.


Andrew Anagnostellis, [8]


Look, my question was similar to the previous one but slightly nuanced. In this low interest rate environment, the fund has underperformed. And I was thinking about it in quite a lot of detail, and it seems to me that shareholders are handicapped because of the high cash weighting and the shorting positions with the currency thrown in as well, so clearly not participating in the party, as you put it.

Is -- what I'm trying to understand is the interplay within your thinking and management strategy, in terms of the technical, this underlying strategic analysis you do, in other words, we don't expect you to throw out your fundamental analysis, that's obviously the core of the fund. But is there scope to take, perhaps a bit more of a technical view, and go easier on the shorts or look at the cash holding or perhaps take into account the environment we're in?

Related to that is the second part to my question is, isn't a fundamental part of closing the discount to NTA getting outperformance? It's a bit like the P and E in an equity example. It seems you've suffered both under the E and the relative de-rating under the multiple, so to speak. Just -- as I said, just throwing out those thoughts and interested in your comments.


Robert Michael Paul Luciano, VGI Partners Global Investments Limited - Non-Independent Director [9]


Yes. Okay. All right. Thanks, Andrew. So look, the second point first. VG1 traded at a premium to NTA for the first 19 months of it being listed, so I'd make that point loud and clear. Were -- was VG1 outperforming for those out for 19 months and our outperformance versus the, what, the S&P 400, the MSCI? We've never, and never from day 1 when we first opened to clients did we say that we would be a fund that is looking to be fully invested or is looking to replicate an MSCI or any other [product].

What we've said from day 1 in 2008 is that we're looking to generate a return through the cycle of 10% to 15% net to investors. That's always been our target, and that remains our target and that remains our objective. So I would make that point. And I think you can see from the slides that we've presented, we seem to do reasonably well in down markets, and we do far less well in up markets. In up markets, we seem to generate a return of half of the MSCI. But in down markets, when MSCI is down quite sharply, we seem to hold off much of our gains and tend not to participate in the losses.

So when you've got a directional market, and what you're talking about is when the market is going up, do we cut that short to get more invested and participate; that's just, frankly -- that's a trading strategy, and that's a tactical view, as you say. And that's not how we operate. That's not how we have ever invested, and that's not how we will invest.

But what we have done, to try and answer your question, is over the last couple of months, we have reduced some holdings that we believe we have made -- we've been too slow to cut. So there have been a couple of investment situations where we've reduced the holding sharply. We've cut a couple of short positions where we have conviction that we believe in this market we're unlikely to have our fundamental analysis rewarded because this is a momentum-driven market. And the care factor of this is that risks and risk assessment seems to be very low on people's list in this environment. And as a consequence, poor accounting or even fallacious accounting goes unnoticed, not just by market participants, but by regulators. Maybe not the American regulators, but regulators, perhaps, elsewhere in the world.

And so we're acting with a couple of handicaps on the shorting side, in that it's -- you've got a rising market, you've got low concern for any types of risk or risk factors, and there's a general level of complacency.

So what have we done? Well, we've cut some longs that we believe have been dragging us. We've reduced some shorts that we know have been dragging us. We've invested in a couple of new positions that we believe will work and grow and act as compounders for the fund, and we've discussed FDJ. And we've built a couple of new positions, which, in due course, we'll be able to reveal.

And as it turns out, in January, which was a relatively volatile month for most people, market indices did not perform that well. VG1 was up 5.2% and substantially outperformed the market. Now that's a market that was not going straight up. That was a market where stock picking came into play. And our outperformance was driven by stock return and currency positioning, and the currency positioning has been rewarded.

We've got back a lot of return in currency. Currency is now in the 67 level, not in the 70 level. We've seen some double-digit price appreciation over January and early start of February from Amazon, from Colgate, which has been a large position for us, from General Electric. And we've seen some double-digit falls in some of our short positions. And the combination of that together, despite holding cash, has produced an outcome that we would classify as a reasonable quality risk-adjusted return. And that's what we're striving for.

So I hope that, that helps to answer your question, Andrew. And I've tried to answer in as detailed fashion as I can, off the cuff. And we will hopefully move on to the next question, if that's possible, please, from the telephone.


Operator [10]


Your next question comes from Brent McGoldrick from MCG Wealth.


Brent McGoldrick, [11]


Yes. Just with regard to some of the exhibits we're seeing in the market. One of the more kind of recent phenomenons has been Tesla. I was just wondering if you and the team have any particular comments regarding that stock at the moment. And is it kind of indicative, do you feel, of some kind of ridiculous hysteria almost building up in some sectors in the market?


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


Yes. Well, I would say that we've got our team here. We've got our Chairman, David Jones, here and he is a bona fide and avid Tesla customer. I think he's on to his second or third Tesla. So he is a strong proponent of EVs and certainly, the Tesla brand. And I know my business partner, Doug Tynan, has put a deposit down for a Tesla, the whole -- 4-wheel drive, and so he's waiting for one of the trucks to come. So you'll see him driving around Sydney, no doubt, perhaps even up around Brisbane in his Tesla 4-wheel drive.

But our views -- jokes aside, our views on Tesla, and I think I made the quote to a media outlet a while back on Tesla when it was in vogue to short, and that is that we never short a TAM. We never short a total addressable market, and that is something that Tesla certainly has. And it's got multiple TAMs. It's not just in the business of electric vehicles. It's in some various other business niches, including energy storage and ultimately, a couple of other niches that could stem from its system and its platform. So you could argue it has a platform business, which is highly scalable.

We found it difficult to analyze, and there's an absence of financials, but what we have said is we wouldn't short a TAM and we also said we would never short a billionaire genius. And Tesla has a TAM and multiple TAMs, total addressable markets, and it's founded and managed by a billionaire genius. And that's a -- we find that a highly difficult combination to short.

So then owning it, why wouldn't we own it? Well, at various points in time, the mathematics and the outlook for the business has made little sense for us. We think that there are interesting prospects for the business. But the EV industry is highly competitive. Some of the other various niches and verticals that Tesla are talking about are highly competitive, and there is aggressive competition. And if Tesla is something we miss, well, we've missed many things that we liked, but I'd rather focus on things that we understand and we think we have an edge in like Amazon, when people thought it was profit -- was prosperity, we had an edge in that, or other businesses that we've built up over time that have worked for us and have been multiyear compounders like a little old company in San Diego called WD-40 that we've owned for nearly a decade. It's been a multi-compounder for us. They're the kinds of things we'll focus on. And we certainly won't be shorting a situation like a Tesla that can go from 200 to 900 in a month.

To answer your question, do I think that this is an indication of euphoria or an indicator of a party where the punch bowl has been aggressively spiked later in the night, well, it feels like it. It certainly feels like it. When a market cap of that size can go hyperbolic in a short period of time for no real reason, it is certainly symptomatic of an environment that is not normal.

Having said that, we're in an interest rate environment that if you looked at the last 1,000 years, you would have never seen either. So if you stand back and wake up each day and go, "Wow, I'm experiencing something that someone over the last millennia hasn't experienced," you wouldn't be wrong.

And so there's a lot of things at the moment that are highly unusual, and I think that this is -- Tesla is a symptom of that environment, coupled with the fact that a billionaire genius is running and managing the company and he's clearly doing an extraordinary job at that, so good on him.

I hope that answers your question, Brent.


Brent McGoldrick, [13]


It does.


Robert Michael Paul Luciano, VGI Partners Global Investments Limited - Non-Independent Director [14]


Thank you. Thanks for your support.


Operator [15]


Your next question comes from [Peter Mirror from Mira Super].


Unidentified Analyst, [16]


Rob, listening to your comments on addressable markets, there's been -- I've been reading a lot about what the addressable size, the addressable market, the cloud and technology involved and how the cloud could emerge into trillions of dollars of value or economics, I should say. How does that -- and particularly, if a rate environment does stay subdued for some time, how do you think around that in terms of value? So some of these stocks that have -- progressing that long-term lead into this type of technology, but also are opening up, at a fairly rapid rate, these economics. I mean this could go to value in quite a substantial way potentially.


Robert Michael Paul Luciano, VGI Partners Global Investments Limited - Non-Independent Director [17]


Yes. Look, it's a very good question and it's very hard to answer accurately. I do think the current environment, not just for -- not just the cloud, but a couple of other new technologies is -- the Bill Gates quote comes to mind where people tend to underestimate the technological change in the first couple of years and then you end up seeing the changes that then result over the -- over 5 years or 7 years, and it's extraordinarily profound. And we're seeing the effects of cloud computing and the businesses that have benefited from it real time.

We participate in that growth through Amazon Web Services, which is one of the global leaders in the provision of capability to the industry through its Amazon Web Services business. It has seen extraordinary growth over the last 5-plus years. Most recently, in the fourth quarter, it still had growth in the 40% range. Its margins are stable, which is extraordinary, given the growth and despite ongoing and incessant price cuts to customers. And it is a component, an extraordinary, valuable component of the Amazon business franchise. And it's one of the reasons why it's one of the largest positions for VG1. It's well over 11% weight at the moment. And it's a situation that we think will be a long-term, multiyear compounder for the fund.

What else do we have that is directly a beneficiary of it? Look, we're looking at a couple of things at the moment, but there's really -- there's nothing that we have come across that we think has the type of economics that Amazon Web Services is experiencing at the moment. What I would say is there are businesses that benefit from the proliferation of the cloud and there are other companies that benefit from the evolution of 5G technology, which will stimulate more and more usage via mobile devices. You could say social media will be a huge benefit of 5G. And there are various question marks about who will be a winner of -- out of that business niche. It's not something that we've participated in, we've looked at very closely and sucked our thumb on, but it's not something we've participated in.

But something that we do and it's a beneficiary of the proliferation of mobile devices and extraordinary acceleration of broadband and 5G technology is going to be a business like Spotify. And the experience and the user experience that you have seen evolve in Spotify just over the last 12 months shows you what is in store for consumers as your devices become more powerful and as you have greater signal power, and that will be turbocharged with the rollout of 5G. So Spotify is one of those businesses that we think is going to be a very substantial beneficiary and who has a business model that we find highly attractive.

Of course, a point that I should highlight is the cloud and a business like Amazon Web Services has -- requires very substantial amounts of capital and very substantial capital investment. And that's either on balance sheet or off balance sheet through leases. Amazon's used the lease route, but it is a business that has good economics, but you've also got to look at the total liabilities and capital involved. So trying to find beneficiaries of the environment who are asset-light like a Spotify, maybe, to a certain extent, you could argue a Netflix-type content model, but then you've got to look at their investment in content. So there are different businesses and there are different ways to approach it.

But no, we don't disagree with what you're saying. It's just a very big world. It's a very big industry. Things are moving very rapidly. And there's huge amounts of capital being thrown at these industries, and trying to find the winners is something that we're spending our time on. And where we don't run a VC fund where 90% of things can lose and the 10% that work make all your profit. We run a different type of model. And therefore, we work on very different handicapping.

So at the moment, our key star or our key focus for cloud, I would say, would be Amazon, particularly via its Amazon Web Services business. So I hope that offers you an insight into how we're thinking about things. Brent?


Operator [18]


We just have a follow-up question from Brent McGoldrick.


Brent McGoldrick, [19]


Rob, you made reference to the fact that given the potential sustained low interest rate environment, potentially -- or you have been increasing the net risk of the portfolio. On the flipside, given a whole bunch of factors, excessive valuations, potentially market getting wind of rates starting to rise even, how closely do you look at it from the reverse as well, i.e., starting to materially cut your risk exposure should the environment start to recalibrate back?


Robert Michael Paul Luciano, VGI Partners Global Investments Limited - Non-Independent Director [20]


Yes. Look, it's a good question. Well, the best answer would be fourth quarter of '18, we didn't cut high-quality long investments. What we had was more shorts and some of the positions we had are going to be major beneficiaries of the environment that you described. Chicago Mercantile Exchange would be a classic. Wells Fargo would be a classic positive beneficiary.

And so the point is just ensuring that you own -- A, you've got the right position sizes; B, depending on any pullback you can add, that you don't own anything that has a stratospherical, illogical valuation; and then ensuring that you've got short positions that will -- I guess, the old bucket quote that you find out who's swimming naked when the tide goes out, well, that's the case for rising interest rates. The shenanigans -- corporate shenanigans tend to be exposed by a combination of the rising interest rates or market volatility. It took a lot of market volatility for the Madoff Ponzi scheme to be revealed. And no doubt, other schemes, sinister schemes, whether they're corporate schemes or other schemes, will be uncovered by a bout of market volatility and rising interest rates.

So the answer to that is it gets back to the question from -- what Andrew had is we're not a tactical -- we don't do tactical investing. We're not traders. We don't all of a sudden change. We're not going to sit there and sell a great asset all of a sudden because of the interest rate environment.

If you have a look at the property empire and property portfolio that Sir Frank Lowy built when he ran Westfield, he didn't chop and change when interest rates moved, and he operated in an environment where interest rates nearly went up to 20%. He took advantage of the environment, and he was well-capitalized and he bought the best. And he continued to refine his portfolio.

So it's very much the same approach with our investment portfolio, where we're looking to build a long-term investment portfolio. We have a long-term investment portfolio in place. And we roll out changes as the circumstances and situation changes, but nothing will be rapid.

Where we can make rapid changes is in our short portfolio in that we can move far more quickly. And in the currency side of our operation, which it's been exposed to U.S. dollars for a considerable period of time, that can change and change quickly when the facts change. So I guess my answer is when the facts change, we'll change our mind. And in the last 12 months, the facts haven't changed. It's a 25-point cut by the federal -- the U.S. Federal Reserve and the desperation for return, and that has driven asset prices. So I hope that helps answer the question.

We have a few more online, which I'll look to answer. So Ingrid, do you mind going up to the top there? Or are these over -- although we have quite a lot of questions from online. I'm not sure we'll be able to answer all of this, but why don't we go through it?

We've got a question here on, can you elaborate on why the shares are trading at a discount for VG1 and VG8? Well, look, we have -- I think we've touched on that a number of times. We would say that over 2019 -- and that question comes from [Stephen Rowley].

Over 2019, a vast majority of international list investment companies moved from a premium to a discount, so that's point #1. VG1 moved to a discount when we announced the additional fund raise, or the $300 million entitlement, and stapled to that was the IPO of VGI Partners, the manager. What has transpired is a combination of overhang and people selling VG1 in order to keep the manager's stock.

Again, if you go back to our slide and commentary before the Q&A, if you add the components together, if you participate in the entitlement offer, you will find that a proportion of that discount is eradicated when you include the value of VGI Partners' stock, which was issued at $5.50 and is currently trading at just under $12. So the stock has gone up a reasonable proportion.

On VG8, look, this isn't the forum to talk about it, but it's a similar situation. There was a componentry of value, just under 8% of value of the issued price was awarded in shares in VGI Partners, the manager. And so there has been some arbitraging going on, coupled with, I think, a general disdain for listed investment companies, which has perhaps accelerated over the last few months due to various reports from the media and I would say some misinformation in our view, but that's really it.

And then, perhaps getting back to Andrew Anagnostellis' comment that performance is the driver of a premium. The VG1 performance has been disappointing over the last 6 months particularly. January, we've, I think, outperformed most funds. January is only 1 month. And so the reality is we need to generate returns and performance and improve our fund buys, I think, for that discount to narrow in both VG1 and VG8. However, on VG8, VG8 is largely cash, U.S. dollar cash, 75% cash. So the discount baffles us a lot more because you're buying U.S. dollar cash and a basket of very high-quality Asian business franchises at an over 10% discount to net asset value, which makes little sense to us. And I guess, that's why my family and Doug and the team here at VGI Partners has $40 million acquired of VG8 stock in addition to the $30 million we have invested in VG1. So you could say that we're aligned with our VG8 investors. So I hope that answers the discount question because we've got a couple there.


Unidentified Company Representative, [21]


There's one here about FDJ.


Robert Michael Paul Luciano, VGI Partners Global Investments Limited - Non-Independent Director [22]


So we have a question -- we've got another question on FDJ. And just what's the question?


Unidentified Company Representative, [23]


It's just the business -- it was what was the core business?


Robert Michael Paul Luciano, VGI Partners Global Investments Limited - Non-Independent Director [24]


Okay. What's the core business of FDJ? And we'll be -- we discussed FDJ in our most recent investor letter, but the quick summary is that FDJ is the monopoly lottery operator of France. So if you view it as the -- Tatts as well comes to mind, perhaps for people in some states. But instead of having state-based lotteries in France, they have a natural lottery. They have a national lottery operator that's been in operation for nearly a century. It was owned by the French government. And it was recently privatized by the Macron government. And we participated in that IPO at the end of last year, and it's been a good performer for us so far. We think that the management team is very good, has a lot of interesting growth opportunities, and it's a business with no debt and some surplus capital and we like it. So hopefully, that answers that question.

And I might take a couple more questions to -- Ingrid, do you mind moving further down? Or where do we start from here? We have a question. Could we go to [David Thompson]? So David Thompson . The market has rallied 20% over the last 12 months. However, the VG1 return has been low. Can you expand further on this and where the next 12 months is headed?

Well, yes, we agree with you that the VG1 return has been disappointing, and we talked about that in our letter and the reasons why. Where's the next 12 months going? I -- we have no idea and we -- that's not how we operate. We're invested and we buy businesses at what we think to be fair value and hold them for the long term.

And I think the best way I can answer is if you look at January, January markets were -- depending on the indices and whether you look at it in Aussie dollar or U.S. dollar context, but U.S. dollar market returns were negative and Aussie dollar market returns were about 1%, 1.5%, and our fund return was 5.2%, and that's with a reasonable chunk of cash. So I'm not going to say go extrapolate that. If we have some volatility, I think we'll do well. If we just have a market that continues to go up, I think we'll participate, but we tend not to participate as much as the market.

So our focus is on generating a 10% to 15% return through the cycle, that's been our target. And whether the market is going up by a staggering amount, we're not looking to track the market. That is not how we operate. And we don't operate like that at all. So I think that that's probably the best answer I can give.

And last, I think I'll just take one more question. At what point -- this is from [Bruce Kluck]. At what point would you change your position on the currency hedge between U.S. dollar and AU dollar?

Well, it's a very good question. It sort of runs at the epicenter of a key part of our strategy that's been in place now for a number of years. Really, when the facts change and when our data tells us so, we do discuss in quite considerable detail in our investor letter the Australian economy, the U.S. economy and our overall view on the Aussie dollar.

One of the things that we talk about is the general weakness in the Australian economy, the level of indebtedness of the Australian consumer. We've now got some added headwinds with a meaningful part of China effectively shut down and a big proportion of other parts of Asia seeing business grind to a halt rapidly.

Only recently, in the last 48 hours, we've had multiple conferences that we were going to attend in Asia that have all been canceled, and that's spanning Japan, Korea and other countries. We're increasingly aware of people in other countries in Asia not leaving their houses or apartments, and this is a real-time report.

All these things are going to have quite negative consequences for the Asian region, the Asian economies, and particularly, a flow-on effect that I think is quite negative for Australia. Perhaps it's short term and perhaps not. We don't really have the data yet to ascertain what the true effect will be. This is new information and the facts have changed.

You could argue that this is incrementally more negative views on the Australian economy and we will adjust our view accordingly, but what we believe is Australian interest rates will continue to fall despite the RBA's decision yesterday. We've held this view now for a considerable period of time, even at a time when people thought Australian interest rates would go up. And so far, that view has been rewarded in that the Australian RBA cash rate has fallen. We believe the 75 points will be lower this time next year and, as a consequence, that's a headwind for the Australian dollar.

We continue to see positive signs in the U.S. economy. A Trump reelection would continue to be positive for the U.S. economy, U.S. business momentum. And as a consequence, we don't really have anything that would change our mind in the short term. Our view is that the Australian dollar will continue to underperform the U.S. dollar on a fundamental basis. But again, we'll change our mind when the facts change. So that's how we analyze it. It's the way that we'd analyze any business. And what we're doing is we're analyzing the Australian economy. We're analyzing the U.S. economy. It sounds complicated, but we've been doing it now for over a decade. And that's how we take our view on currencies and hence our currency positioning now for at least, what, 7 years as we've been positioned this way from about parity, and it's rewarded the portfolio accordingly. So I hope that that helps.

Look, there are a few other questions, but I believe that there's nothing that incremental or things that we haven't touched on. There's a question on coronavirus. We've talked on that. There's various different types of questions on NTA and closing the discount. I believe we've touched on that. We certainly outline our strategies in the presentation on what we're looking to do. And as we highlighted in the presentation, we, the manager, and the team here are all very much aligned with all shareholders. And hence, we are very focused on narrowing the discount. But as one of the -- as one of our shareholders has pointed out, it's performance that will be the key driver of that. And we're certainly very focused and very incentivized to generate returns, but we'll generate returns through our process and philosophy and not through a tactical move or some type of chasing a momentum. That's not how we operate and that's certainly not how we tend to invest our shareholders' money.

So I think I'll end on that point. Thank you very much for your support and interest in VG1. And we look forward to staying in contact with you. You have our website details. You have Ingrid's details. We continue to operate our roadshows through the country. You'll be pleased to know that Doug and I attend those meetings. We don't send out any junior investment personnel like other funds do. Doug and I attend them and are happy to take your questions. And please stay in contact and contact Ingrid if you would like to have any follow-ups or any other questions for Doug or I. Thank you very much.