U.S. Markets close in 5 hrs 40 mins

Edited Transcript of VG1.AX earnings conference call or presentation 23-Aug-19 12:30am GMT

Full Year 2019 VGI Partners Global Investments Ltd Earnings Call

Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of VGI Partners Global Investments Ltd earnings conference call or presentation Friday, August 23, 2019 at 12:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David Fletcher Jones

VGI Partners Global Investments Limited - Non-Independent Chairman

* Robert Michael Paul Luciano

VGI Partners Global Investments Limited - Non-Independent Director

================================================================================

Conference Call Participants

================================================================================

* Andrew Anagnostellis

* Richard Lodge

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Thank you for standing by, and welcome to the VGI Partners Global Investments Limited FY 2019 Results Briefing. (Operator Instructions) I would now like to hand the conference over to Mr. Robert Luciano, Portfolio Manager.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good morning, and welcome to the Full Year 2019 Results Conference Call and Webcast for VGI Partners Global Investments Limited. With me in the room is Douglas Tynan and Ingrid Groer, VG1's Investor Relations Manager. David Jones, our Chairman of VG1, is on the phone from Canberra. Thank you for joining us today. If you are a long-term shareholder, we thank you for your ongoing support. We also welcome any new shareholders who may have recently joined our register, whether through buying on market or participating in our entitlement offer in June.

Now turning to Page 2 of the presentation. We're pleased to report that VG1 reported an operating profit after tax of $50.6 million for the year to June, which equates to earnings after tax of $0.18. This means that VG1's portfolio generated a post-tax return of 10.2% net of fees for the financial year. NTA finished the year at $2.39 per share and rose further to $2.45 at the end of July. We have not declared a dividend. And this is consistent with the messaging that we have provided since listing in 2017. Namely, that the portfolio is focused on capital growth. Furthermore, our long-term global investment strategy generates insufficient franking credits to pay sustainable fully franked dividend for now. As mentioned earlier, a key event during the period was the entitlement offer that we announced in May. This was a unique structure with participants in the VG1 offer entitled to participate in the IPO of VGI Partners, the manager of VG1. And there was no other way to access the manager IPO if you were not an investor in VGI Partners funds, VG1 or purchased VG1 rights on market. Now we very purposely put in place the structure that would materially increase the alignment of interest between VGI Partners, VG1 and investors in VGI's funds and individually managed accounts. As many of you would know, the offer was oversubscribed. And we raised our target of $300 million. We also welcomed many new shareholders onto the VG1 register, including a number of our largest fund investors and IMA investors.

VG1 shareholders who participated in the VGI IPO would be aware that VGI Partners shares have traded strongly since listing. And they're currently up well over 100% from the $5.50 listing price. We are pleased that we've been able to share this share price performance with our investor base.

Now please turn to Page 4 for some background on VGI Partners, the manager of VG1. VGI Partners is a specialist wealth manager focusing on global equities. Post VGI's IPO in June, it is 80% owned by myself, Douglas Tynan and Robert Poiner, who manages our New York office. We did not sell down any shares in this process, and we remain fully committed to the business, with the vast majority of our shares escrowed for 5 years. We now have 28 professional staff across 3 offices in Sydney, New York and Tokyo. Over the last year, we have grown the team in our representative office in Tokyo to 4 professionals, and we continue to add to our professional staff base in Sydney and New York.

VGI Partners currently deploys a single investment strategy across all our funds and managed accounts. Our unlisted funds are closed to new investors. So this means the only way to currently gain access to our strategy is by purchasing VG1 shares on market or becoming a wholesale investor in our charitable foundation class, which has extremely limited capacity.

Turning to Page 5 of the presentation. VGI Partners invests primarily in global equities, comprising long investments, short positions and cash. Our investment philosophy reflects the following 3 key tenets: capital preservation, that is, do not lose money. We're extremely focused on seeking to avoid any permanent loss of capital. We aim to increase the likelihood of capital preservation through 2 means: first, by investing in high-quality businesses that are easy to understand and that trade at prices, which we believe, exhibit a sufficient margin of safety. That is trading at prices that are significantly below the intrinsic value of the business; and second, by using little or no leverage and keeping prudent cash buffers at all times.

Our second key tenet is long-term compound growth. We seek to deliver superior risk-adjusted returns over the long term. Our target is to achieve compound returns of 10% to 15% per annum after all fees and expenses, over the long term and through the investment cycle, which we deem to be 5 to 7 years.

We also aim to do this through portfolio concentration. And this is the third tenet. Portfolio concentration means concentrating capital in a relatively small number of high-quality investments. As a result, the top 5 investments will typically represent 40% to 50% of VG1's portfolio, when it's fully invested. Importantly, we are not afraid to hold cash when attractive opportunities fail to exist.

Well, that sums up our 3 key investment tenets. So at this point, I'd like to talk about our philosophy on alignment of interest. As shown in Slide 5, when we launch VG1, we sought to design a fund that would appeal to all investors. This included VGI Partners, the manager, committing to pay VG1's upfront listing cost and permitted ongoing operating costs.

VGI Partners also paid for VG1's transaction cost in the recent VG1 raising. We also took a number of steps to make sure that key management of VGI Partners were aligned with VG1 shareholders. In particular, the founders of VGI Partners being Doug Tynan, Rob Poiner and myself committed to a performance fee reinvestment mechanism and the importance of this should not be underestimated by VG1 shareholders.

As a result, in addition to our initial purchases of VG1 shares in the IPO process and ongoing purchases on market, the reinvestment mechanism has meant that Douglas Tynan, Rob Poiner and I collectively are the largest shareholders of VG1. Going forward, the reinvestment scheme means, when VGI pays a dividend, then we, the founders of VGI, will reinvest our pro rata amount of performance fee back into VG1 shares. As far as we're concerned, we don't believe that there is a greater system in place by any other listed investment company to encourage and enhance the alignment of interest between the manager and the shareholders of a listed investment company.

We note that VGI Partners' result will be released next Tuesday, the 27th of August. So we're going to have more to say then about the mechanics of the reinvestment structure and mechanism. However, what I can say, if VG1 share price is below the 30 June NTA of $2.39, the reinvestment mechanism that we have in place will require a material on-market purchase of VG1 shares over a 20-day trading period starting in September. Please see section 4 of VGI's prospectus, which is available on our website for more detail of the reinvestment mechanism.

Turning to Page 6. The VGI Partners Master Fund portfolio has delivered compound annual returns of 15% after all fees since it was established in January 2009. The table also demonstrates that VGI Partners has been successful in achieving its performance objectives every year since inception. It's important to note that this has been achieved with an average cash weighting of approximately 30%.

Turning to Slides 6 and 7. You'll get a summary of the VGI Partners Master Fund returns and return profile and that gives you, as a VG1 shareholder, a sense of the return profile that the investment strategy delivers when it's fully invested. The VG1 portfolio at the moment has a larger proportion of cash, so its returns will vary from our fully invested master fund. But the reason why we are including these slides is, as a point of reference, to get a sense of how our strategy has performed and continues to perform.

Now please turn to Page 9 for a discussion on VG1's performance. VG1's post-tax NTA increased 10.2% during the reporting period to $2.39 per share at the end of June. This rose further to $2.45 in July. The VG1 share price rose 6.6% over the year to $2.37 as of 30th of June. Note that this performance has been adjusted for the impact of the rights issue and this is consistent with the approach taken by Bloomberg and other professional market data providers. While VG1 has traded at an average premium of approximately 4% since listing, this has not been maintained in the last couple of months and the stock is currently trading at a modest discount. Now we believe this is primarily due to investors rebalancing their holdings in VG1 post the recent entitlement offer, which may have resulted in some holders purchasing additional VG1 shares in order to access shares in VGI Partners, the manager. We do anticipate that this will be resolved over time. But we note that VGI Partners has the capacity to buy VG1 shares on market, and we did this as recently as 1 week ago. We also remind VG1 investors that the VG1 Board is committed not to issue any new equity in VG1 until June 2022, unless it's part of a value-enhancing acquisition of another listed investment company or to satisfy the performance fee reinvestment mechanism.

Now turning to Page 10 of the presentation. VG1's long investments rose in value and contributed 6.2% to the performance during the period. Short positions contributed a positive 0.7% and the contribution from our long-term currency strategy was 3.3%. CME, MasterCard and Amazon were the largest long contributors during the period. The largest long detractor was Zillow Group. Zillow has now been fully exited from the portfolio.

Regarding the short portfolio, we are pleased with its positive 0.7% contribution. We continue to believe that maintaining a short portfolio can generate positive returns over time. And that our shorting process helps us to scrutinize long investments more carefully. This is a competitive advantage that very few other funds have the capacity to offer. Currency contributed 3.3% to VG1's net performance during the period.

VG1 is denominated in Australian dollars but is very substantially exposed to the U.S. dollar through both investments it owns as well as its cash holdings, which we have decided to hold entirely in U.S. dollars today. 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. We will actively manage currency hedging as our analysis of the economic outlook for Australia revolves relative to the U.S., but also Europe, the United Kingdom and key countries in Asia, especially Japan. We continue to believe the U.S. dollar remains attractive relative to the Australian dollar. At some point in the future, we will progressively hedge VG1's U.S. dollar exposure. However, this will not happen until our fundamental analysis suggests that the Australian dollar is more fairly valued.

Now please turn to Page 11 for an update on VG1's portfolio. The table on the right here sets out the top 5 long investments as at 30 June. These collectively represent 33% of the VG1 portfolio. As shown on the table, the portfolio had 52% net equity exposure at the end of June with 70% long and 18% short. The cash weighting was 48%. This cash weighting partly reflects the recent $300 million capital raising. We've started to prudently deploy this additional capital. As discussed earlier, all cash is currently held in U.S. dollars and this position is not hedged. In terms of geographic split, 74% of the long portfolio investments were listed in North America, 18% in Asia, which includes Australia, and 8% in the U.K. and Europe. Many of our long investments, which are listed in North America, have material exposure to international growth. This is especially the case for Colgate-Palmolive, Amazon, MasterCard and also Spotify. We're also seeing a range of opportunities in Asia with most of our recent investments occurring in this region.

Now please turn to Page 12 for our view on markets. In essence, 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. However, market volatility has returned, and we believe there will continue to be good opportunities in the future to make purchases for the VG1 portfolio. Thus, the VG1 portfolio continues to maintain 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'll continue to generate acceptable risk-adjusted returns through the investment cycle 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.

Now our shareholder engagement program is summarized on Page 13. By now, many of you would be aware of the major events on our calendar and the independent research that's available on VG1. What you might not know is how important it is to register your e-mail address with our Investor Relations team, if you're going to get the full benefits of being a VG1 shareholder. We would like to be able to send you our meeting notes from Berkshire Hathaway Annual Meeting and the Daily Journal Annual Meeting. There's also relevant material, which we send to our investors in the funds and VG1 shareholders. So if you haven't already done so, please sign up or ask your financial adviser to add your details to our register. So that brings us to the end of the presentation. And now we'll move to questions. And so operator, could we please have the first question? Thanks very much.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question today comes from Andrew Anagnostellis from Umgeni Investments.

--------------------------------------------------------------------------------

Andrew Anagnostellis, [2]

--------------------------------------------------------------------------------

Rob, just 2 questions. You did address the 2 questions I had. But I was hoping to perhaps dig a bit more detail into them. And the first was the discount to NTA. Just wondering if you benchmarked that against other listed funds. I also believe a lot of it is due to the overhang with the recent issues, but I would have thought it should've cleared up by now. It does seem quite a sizable discount. And perhaps, related -- the second question is on the franking. I note your comment that your fund is certainly not a dividend income type fund. But you would be aware there's substantial value to Australian shareholders from franking credits, which a number of companies have chosen to release. I'm wondering what's your thinking on that going forward on a long-term basis. Certainly not day-to-day or month-to-month.

--------------------------------------------------------------------------------

Robert Michael Paul Luciano, VGI Partners Global Investments Limited - Non-Independent Director [3]

--------------------------------------------------------------------------------

Sure. All right, Andrew. Well, thanks very much for the questions. Look discount to NTA, do we track discount to NTA of VG1 versus others? Yes, we look at it on a weekly basis. And what we've noticed is, in general, across listed investment company sector, premiums have come back quite substantially over the last few months. And in fact, a number of other listed investment companies who haven't done any raisings, little undersized or a quantum of what we have done with VG1, have started to trade at discounts and there are a number of [strategies for] trading at far greater discounts than VG1 is.

We've already discussed our views and -- look, we agree with each other that there is some overhang. We also are in the midst to have discussed -- made a public announcement about our new strategy. And so there could be the possibility that some investors who have VG1 shares are looking to cash up or prepare themselves for that new strategy that we're looking to launch, which will -- we won't talk about now because we're restricted. But that could explain. We have discussed it in the public forum. So it is out there but we really can't discuss that transaction per se. So hopefully, that answers it. We think the -- who knows what the future holds. But as discussed, we have a very substantial amount of stock to buy as the original owners of VGI Partners on market. And that will certainly come into effect in September.

And I think the other key point to make, Andrew, is sort of when you look at our strategy and our global strategy and certainly versus the peer group out there who are doing global equities, certainly in a confident fashion and have the team in place. That's one thing, to do global equity. The other thing is to have a team in place to do it and the capacity to execute. As you know, our team is probably the biggest if not -- one of the biggest if not the biggest doing global equities and certainly a single strategy. We would say that you have a look at these other groups and they've got multiple access points. And the LIC is just one of many avenues and many access points to invest in that strategy. And with VGI Partners, the only way now to access our strategy is through the listed investment company. Because our funds are closed, so if you call up and you'd like to invest in our Aussie dollar fund or our U.S. dollar fund, you simply can't. In fact, even if you redeem your money now at our funds, you can't come back in. So the incremental dollar for those who are interested in our strategy needs to go in by the listed investment company. And so that has resulted in some quite reasonable on-market buying, which we've noticed from people who have approached us and wanted to invest in our fund. And now some of these individuals or groups have quite large holdings in the LIC based on the shareholder register that we track on a weekly basis that I think boardroom provides us.

So anyway, I think, the final point that would add to potentially narrowing the discount certainly versus peers, who seem to have regular raisings for their listed investment companies, is that we've very purposely committed post the VG1 raising, which was stapled to the VG1 Partners IPO is that -- we're not raising any fresh capital for 3 years. And that doesn't mean to say that we're going to do something straight after 3 years. It's just we put a caveat in place. There is no further fundraising for 3 years, which I think -- I don't think you could say that for any other LIC in the country. And so I think that's another point to make.

But then in terms of franking credits, look, I'll hand that -- and dividends, I'll hand that over to David Jones on the franking credits. But I'll just make the one point, well obviously, we all love franking credits. We certainly love franking credits as shareholders of VGI Partners Limited. And so we're very mindful of the benefit of franking credits. But I think that the June 30 balance date franking credit in -- someone's is going to show it to me in VGI -- in VG1 was de minimis. And even after the tax is paid in -- for the current year, I think we're going to end up with maybe total franking credits of $8 million or $9 million. And I think that's going to allow, at its maximum, would allow, I think, a total dividend of, I think it's around $0.005, a one-off $0.005 dividend. So look, at the moment, there's nothing there. But look, I'll hand it over to David. David's on the line in Canberra and he can give you more -- the Board's view on dividends and franking credits.

--------------------------------------------------------------------------------

David Fletcher Jones, VGI Partners Global Investments Limited - Non-Independent Chairman [4]

--------------------------------------------------------------------------------

Andrew, David here. Look -- thanks, Rob. And just briefly, look Robert has covered it. As he said in his opening remarks and as we were very clear through the prospectus and subsequently for VG1, we're very focused on capital growth. And so that is the main orientation to VG1, as you know, we have very limited -- indeed we only have one large long Australian holding, and therefore, modest franking credits from that position -- from that investment. And so as that -- through to June now, our total franking credits are just over $1 million and so as Rob said, that equates to 1/4 of 1% -- of $0.01 per share in round numbers. And so there is effectively a de minimis ability today to pay franking credits -- to pay a franked dividend. We hope to over time but only when we build up enough franking credits. So that if we -- when we start a dividend program, we'll be able to maintain it. But as is very clear, we are globally invested, the vast bulk of our positions are offshore and so those dividends do not come back to Australia franked. And so we think over the medium term, we would hope to pay what might be a very modest franked dividend, but we do not expect that in the near term. I hope that's helpful, Andrew.

--------------------------------------------------------------------------------

Andrew Anagnostellis, [5]

--------------------------------------------------------------------------------

Yes. No, that clarifies that. Now to understand clearly you are not an income fund but just in terms of releasing value, perhaps, sometime in the future, I suppose that will be considered at the appropriate time.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Andrew, we hear you loud and clear, and we're all ongoing buyers of VG1 shares. So we certainly -- Doug and I and Rob Poiner -- David Jones got meaningful investment too. We're very focused on franked dividends. And numbers have got shown to me, we've -- once we pay all the tax for the fund, we'll have $8.8 million in franking credits towards the end of this year and I've been told that, that's going to be -- it's $0.005 now but it'll be around $0.025 post that date. As that builds up, if we can start, as David said, and the Board's discussed it, if we can pay a sustained ongoing dividend, even if it may be modest, we will do that. But we want to able to pay a dividend on a sustained basis. I guess that's the point. But we are open to discussion and if a one-off is deemed valuable, we'll take the views from our other shareholders. But getting something sustained over time seems to make the most sense and I think would be appreciated based on the feedback we've received from the biggest shareholders, who we do speak to.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

The next question comes from Richard Lodge from Lodge Partners.

--------------------------------------------------------------------------------

Richard Lodge, [8]

--------------------------------------------------------------------------------

Just a question in regards to what you mentioned in terms of the founders reinvesting 100% of their pro rata amount in performance fee. Firstly, I noticed there was some change in interest early this month. So am I to take it that that's nothing to do with this reinvestment from performance fees because that hasn't been allocated yet?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sorry. Can you ask the question again? What did you...

--------------------------------------------------------------------------------

Richard Lodge, [10]

--------------------------------------------------------------------------------

So there was some on-market buying looks like in July and August. And that's got nothing to do with the, I guess, reinvestment from the performance fees because that hasn't been allocated yet.

--------------------------------------------------------------------------------

Robert Michael Paul Luciano, VGI Partners Global Investments Limited - Non-Independent Director [11]

--------------------------------------------------------------------------------

Correct. That on-market buying, I believe, was entirely on-market purchases by VGI Partners Limited.

--------------------------------------------------------------------------------

Richard Lodge, [12]

--------------------------------------------------------------------------------

Okay. So that -- so it wasn't personal. It was all...

--------------------------------------------------------------------------------

Robert Michael Paul Luciano, VGI Partners Global Investments Limited - Non-Independent Director [13]

--------------------------------------------------------------------------------

That was all. VGI Partners Limited has been the recent buyer. And based on the disclosure forms that the ASX provides, it looks like I have been making those purchases. But it's been -- because I'm the biggest shareholder of VGI Partners, if you look through the lodgment form, you'll find that VGI Partners has been the buyer of those shares and VGI Partners Limited was the buyer even last week.

--------------------------------------------------------------------------------

Richard Lodge, [14]

--------------------------------------------------------------------------------

Okay. Just another question around strategy. You mentioned there volatility providing some opportunities potentially going forward. Are those opportunities going to be more on the short side, increasing cash weighting or increasing loan position?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Look, it's a really good question. It depends on the region and it depends where the opportunities present themselves. So a good way to answer that is, for example, we've likely and certainly over the last number of months been actively adding to our positions in the Asian region because of trade war and the consequence of that has seen some substantial share price volatility in Asia. There's obviously been issues in the current peninsula, there've been issues in Hong Kong. There's a variety of tensions and that's translated into share price weakness in the region. And so that obviously creates some buying opportunities. When you start seeing more QE buying momentum take place in, say, European markets, or U.S. markets, to a lesser extent here, although there is the chase for yield everywhere, that can create a situation where there's huge amount of complacency, people ignore accounting irregularities, and in some cases, accounting fraud. And that creates potential shorting opportunities. But we're very cognizant that shorting opportunities are abundant but the catalysts are few and far between. Because in this environment, every long-only fund manager, that I'm being -- it's a broad sweeping statement. But there's a high level of complacency and failure to read notes to financial statements, failure to quiz management and as interest rates keep falling, risk asset prices keep rising and there are a lot of people asleep at the wheel. So that's a complexity for short selling because we short sell to make money. And if we can see -- we're seeing a lot of opportunities on the short side. We just -- we need catalyst in order for our shorts to make money over time, unless the industry is in rapid deterioration.

And the issue with low rates is that it's an oxygen mask for accounting frauds, it's an oxygen mask for companies in structural -- requiring structural reform in industry unwinds. It's an oxygen mask for companies on the cusp of failure. And so we just got to be very careful about our short selling activities in this environment. I know that it doesn't directly answer your questions, but it depends on what the opportunities present themselves but we're very mindful of this environment and we've seen the volatility of late, even in the sell-off when the tariffs came in. It's August now but everyone's forgotten fourth quarter, last year volatility. There's the great for some substantial savage price moves. And we're seeing it with some companies when they beat by a tiny bit and even the beats underpinned by accounting chicanery or if they missed by a tiny bit, the share price moves are dramatic and not reflective of underlying economics of the business. That shows you inherent volatility in the system.

--------------------------------------------------------------------------------

Richard Lodge, [16]

--------------------------------------------------------------------------------

Yes. And without probing too much into your, I guess, secret sauce and what you guys do, I mean, would you, therefore, be -- and it was something maybe mentioned that you're looking on an investment horizon or maybe this was the fund's investment horizon, more generally, it's 5 to 7 years now. But for those short -- potential shorting strategies, like is that something you would look on, on a day-to-day basis to take advantage of, I guess, ridiculous price movements in valuations?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Look, the 5 to 7 year reference point is -- when we talk about the 10% to 15% return net of fees to the investor, that's the -- that's our target time horizon. I think if someone buys VG1 shares and expects it to grind out 10% to 15% per annum every year, rain, hail or shine, you're going to be sorely disappointed. That's not how we operate, that's not how we invest. And I don't think anyone could promise that and if they do, they're probably doing something unscrupulous. What we're saying is we believe our investment strategy, and we said this to our investors in 2008, our target return is 10% to 15% through the cycle net of fees. And then people say, what's the cycle? And we say, we think it's 5 to 7 years. Admittedly, that was before 3 bouts of QE and perpetual QE by the AASB. But that's roughly what it's been traditionally. But it's gone longer this time.

--------------------------------------------------------------------------------

Richard Lodge, [18]

--------------------------------------------------------------------------------

So that doesn't apply to your, I guess, individual stock investments?

--------------------------------------------------------------------------------

Robert Michael Paul Luciano, VGI Partners Global Investments Limited - Non-Independent Director [19]

--------------------------------------------------------------------------------

It doesn't apply to any individual, long or short. But generally speaking, our long positions, most of them have been in the portfolio for many years. And in some instances, we'd like to buy and hold them forever. CME is a good example and WD-40 is a good example. If they keep growing and keep performing and the moat -- the depth and width of the moat around the business, the competitive advantage period around the business is getting better, we'll keep them.

But by the same token, if we see something go from being materially undervalued to extremely overvalued, we'll sell it. So we're not looking to collect stocks. And we're not looking to build the portfolio that we can advertise recognized brand names around the world that we can sell to retail investors. That's not what we're doing. We're looking to build the portfolio of the best businesses that we can find, adopt the buy and hold strategy but we're very focused on recycling capital. Because we're looking to optimize our return on capital.

--------------------------------------------------------------------------------

Richard Lodge, [20]

--------------------------------------------------------------------------------

So just a final question. Sorry for taking too much time. But in relation to the comment around investing or seeing opportunities in Asia, is there -- I don't know if you're talking about having -- starting an Asian fund. Is the thinking that you see, like a lot more opportunities, hence why you're starting an Asian fund? And -- but you will be participating in VG1 and in looking at some of those Asian opportunities as well?

--------------------------------------------------------------------------------

Robert Michael Paul Luciano, VGI Partners Global Investments Limited - Non-Independent Director [21]

--------------------------------------------------------------------------------

Yes. Look, we set up an office in Tokyo over a year ago because we've been seeing more and more opportunities and a substantial number of catalysts have taken place in the Asian region particularly in Japan in terms of corporate governance reform and substantial Chinese improvements that we think will result in a better investment return for international investors in the region. We've also been of the view that there is going to be some kind of shakeout in the region under the Trump administration. And that was going to benefit other peripheral countries. Vietnam is a big beneficiary of China manufacturing shutdown. South Korea is benefiting substantially in advanced manufacturing, as is Taiwan. And Japan, in some places, is a substantial beneficiary and is benefiting, in general, from the improvement in living standards throughout the Asian region. It's an area where we see a lot of growth, we see a lot of opportunity. It's one of the few places outside our core investing countries, being Western Europe, North America and Australia and New Zealand where we see some very high-quality investment opportunities and bundled around that we have the rule of law, private property rights, in most instances, decent quality accounting standards. And despite language barriers, which you can overcome with your own team and staff on the ground who have language skills, we feel as if as a whole we're dealing with reasonably decent management teams. Not in all the countries in the region but in a number of countries. In developed Asia, we feel that the management teams have only got better particularly as most of them have been educated in U.S. or U.K. universities. The new batch who are coming through.

So it's a -- yes, so the answer to the question is yes. We see a lot of opportunity and we spend a lot of time looking at South America, we spend a lot of time looking at other developing regions and there are some great businesses and companies there. The problem there is lack of rule of law, lack of private property rights, high corruption levels, low-quality accounting and in some instance, good management but everyone else around them is corrupt. So it's very hard to get comfortable investing your money there. And we like to have the motto on the wall. It's not the return on our capital, it's the return of our capital that we're interested in. And when you're investing internationally, you've got to focus on the return of your capital.

--------------------------------------------------------------------------------

Richard Lodge, [22]

--------------------------------------------------------------------------------

So you're -- like in Slide 11, you have a pie chart in terms of makeup of your level of exposure. So -- and that's going to be quite fluid in terms of increasing in Asia exposure potentially and...

--------------------------------------------------------------------------------

Robert Michael Paul Luciano, VGI Partners Global Investments Limited - Non-Independent Director [23]

--------------------------------------------------------------------------------

Potentially but it's opportunistic, right? So what would be a big flex driver of that Asian exposure increasing? Look, the Australian dollar moves below 60, we could see a substantial acceleration of our investment activities in Australia itself. All right? We see a real slowdown and a real washout here, which may not happen with ultra-low interest rates. Again, that's the oxygen mask to everything. But if that circumstance were to take place with further slowdown in China, et cetera, we would act accordingly. We're highly flexible in how we can move our capital around. We're not wedded to anything. Like I said, we are not looking to advertise a page to our investors of multinational company brand names that everyone recognizes. That's not our investor base. Our investor base is a sophisticated investor base and that includes VG1. The average investment in VG1 of our shareholders is double to triple that of any other listed investment company in the country. So we don't need to sell brand names. We're looking to invest capital in the best businesses we can find. And at the moment, we've got 4 great investment positions in Asia that happen to be in Japan. We've had one in Hong Kong that we got very close on but we're watching, certainly in this current unrest. But we've invested throughout the region previously but at the moment, we have got 3 very -- well, 3 investment positions in Japan that we are very focused on and we've been active in. And we obviously had our position in Medibank in Australia.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

(Operator Instructions) At this time, I'm showing no further questions. I'll hand the conference back to Mr. Luciano for closing remarks.

--------------------------------------------------------------------------------

Robert Michael Paul Luciano, VGI Partners Global Investments Limited - Non-Independent Director [25]

--------------------------------------------------------------------------------

All right. Well, thank you, everybody, for joining us. We appreciate your investment with us, and we appreciate your questions. Ingrid is always available if you have any follow-up questions. And as I mentioned on the call, if you haven't registered your e-mail with us, please do so and it will facilitate our ability to contact you. And if you don't have the time to do that, please ask your financial adviser to contact us. Thank you very much, and have a good day. Bye-bye.