Future Generation Australia Limited (FGX) Earnings Call Transcript & Summary

[Audio Gap] Louise Walsh, the CEO of the Future Generation companies: Future Generation Australia, otherwise known as FGX; and Future Generation Global, FGG. Thank you for joining us today for the Future Generation Investor Conference Call and Webinar, which is designed to update you on primarily our half year results. I am joined by Founder and Director, Geoff Wilson AO, who also chairs the Investment Committee of FGX and sits on the Investment Committee of FGG. We're also joined by L1 Capital Joint Managing Director and Chief Investment Officer, Mark Landau, as L1 is one of our FGX fund managers. As well as joining us this afternoon is Munro Partners' Founding Partner and Chief Investment Officer, Nick Griffin. And Munro is one of our FGG fund managers. During this call, we will provide you with an update on both FGX and FGG's half year results and the investment portfolio performance. Our pro bono fund managers will discuss their current views on the market and provide one of their stock picks or investment ideas as well. [Operator Instructions] Now I will start with a high-level update on the results and also an update on shareholder engagement. Firstly, just to remind people that the aim of these companies is to outperform both benchmarks with less volatility than market. And it's very pleasing that we have been doing that in all time periods since inception, and that was September '14 for FGX and September '15 for FGG. And obviously, what we're doing here is we're providing our shareholders or our investments with that dual purpose, investment returns and social charity returns. And what we're talking about here is a leading example of impact investing in Australia. So firstly, just to cover up on the high-level investment portfolio performance. For the 6 months, FGX, firstly, had an outperformance of 3.3%, and during a volatile period for equity markets. The All Ords index fell 10.4%, while the FGX investment portfolio only declined 7.1%. interestingly enough, in the 12 months to 30 June, we had a very strong 12 months, where FGX outperformed by 6%. And if we take a look at FGG, the outperformance there for the 6 months was 4.7%. While the MSCI World Index fell 4.4%, FGG -- the FGG investment portfolio rose 0.3%. So we were, in short, very pleased with those performance results. We really believe that they speak for themselves, having performed -- outperformed, as I said, in all time periods over the last 6 years for FGX and 5 years for FGG. We're very happy with those numbers. If we take a look at the dividends as well from the half year results, it was very pleasing indeed. We've had a dividend policy since inception that we always like to keep at least 1 to 2 years in reserve at the current level that we're paying dividend, in case of the severe downturn like we have at present. And it's been pleasing that -- been very pleasing, in fact, that we have actually been able to increase both dividends. So taking, firstly, FGX. We announced a few weeks ago with $0.026 per share fully franked interim dividend, which is an increase of 8.3% on the prior corresponding period. The fully franked interim dividend represents an annualized fully franked full year dividend of $0.052 per share. And that dividend will be paid on 30 October 2020. The profit reserve as at 30 June as $0.086 per share. And obviously, we have to take off the dividend that we've paid and also the donation to charity, which will also be paid in October as well. Now if we take a look at the dividends in relation to FGG. A few weeks ago, we announced it was pleasing, a $0.02 per share fully franked dividend. And that was, in fact, a 33.3% increase on the prior year. Future Generation Global has held -- or held an estimated profit reserve of $0.068 per share as at 30 June, which represents, in fact, 3.4 years of dividend coverage. The increased dividend has been achieved through the profit reserve available and the sound risk-adjusted returns of the investment portfolio during this unprecedented period of volatility for equity markets. And I'll just remind people that in relation to dividends, of course, FGG is more a capital growth stock than a dividend stock. And that's because some of the fund managers involved in FGG, of course, are domiciled offshore. So they're subject to different tax and legal structures to some of the fund managers, like, say, a Magellan or a Munro that are headquartered here in Australia. We did actually have, in fact, a 50% increase in the distribution income from fund managers compared to the same period last year for FGG. Now if we take a look at the charitable side of the business. I just want to touch on that very briefly. It's also been pleasing that we will be donating $10.5 million this year to charity. So that's the 1% that's donated to charity due to the incredible generosity of our fund managers who are managing the money pro bono for us. And that $10.5 million is an increase on $9.5 million, which was the same donation we made the same period last year for 2019. So if you're a shareholder, you may will have just completed the donation voting to have a say in where that donation of $10.5 million will go. I think it's particularly pleasing that the donation to charity since inception is a total -- a grand total of $41.2 million. And what's also pleasing is that the fees foregone since inception by the fund managers and our service providers, et cetera, is $63.1 million. So there's a significant saving there to shareholders because those fees foregone greatly exceed the donation amount. I think in the past, sometimes we might have spent a little bit too much time on the charitable side of the business, and maybe historically, we haven't actually stressed enough the downside protection and the defensive nature of the portfolio. And we're certainly going to be doing more of that from hereon in. So now I'd like to just conclude my update to talk a little bit about shareholder engagement and why this is particularly important to us, so this is our shareholder engagement strategy, our communication with shareholders. Because it's particularly important at the moment because we're working hard to close those discounts to NTA that we currently have. We've certainly traded at premiums consistently in the past, and we're very confident that we can get them back to NTA again. And what we've done is -- the Boards -- both Boards actually met together for a combined strategy session in January this year, and we decided at that Board strategy session to significantly boost the resources, the team that's supporting me with Future Generation. Up until that time, I was really the only paid employee of both companies, and there was an incredible amount of support from our service providers to keep the cost of the companies down, particularly Wilson Asset Management who provided our finance support, our communication support and our operation support. But what we've done is we've boosted the team and we've added a brand manager, a communications adviser and a social impact manager to manage the charitable side of the business. And that's to help us tell the story better, to promote more buying. Because very simply, what you want to do in closing a discount is actually stop any selling that might be happening, but importantly, promote more buying. And that buying can happen from existing shareholders but also from potential shareholders. And just to give you a taste of the shareholder engagement strategy and what we're up to, there's a number of particular initiatives that we've introduced in the last month or 2, and there's more that we've got coming up. What we're doing is we're increasing our number of shareholder calls to update shareholders, but also to seek feedback. We're increasing our number of investor calls, like this one you're on now. We did an extra one, for instance, in April with John Coombe, who's now on the Investment Committee of both companies. He's been on the Investment Committee of FGX, and we've recently added him to the Investment Committee of FGG from the point of view of an asset allocator with his role at JANA Asset Management. We have converted our investment forums that we held every 6 months, where we've handpicked our top-performing fund managers and asked each of them to present a stock pick or an investment idea. We converted that into a virtual event in May. We actually had 40,000 views, which is an incredible increase. We normally would get 1,000 people listening to that event in a hotel in Sydney or Melbourne. But by converting that into a virtual event, the audience has really gone through the ceiling, which is great. We're now planning our next investment forum, which -- with some extra special additions to that lineup, which will be held in October. So stay tuned for more details. We've also started a podcast series that I'm doing with prominent Australians. And I've interviewed people like David Gonski, Joe Hockey, Anna Bligh, Christine Morgan, who heads up the National Mental Health Commission. And tomorrow, I am interviewing Peter Morgan, the prominent ex-fund manager, who's a private investor these days. And I'm sure that will be an interesting conversation with him. Now that podcast series is very much about lifting the profile and the brand because what we're trying to do here, again, is create more awareness of the Future Generation Company and the fantastic model that it is. We've also introduced a new quarterly update for advisers out there. We're doing more talks, more presentations, more media. Geoff Wilson and I recently did a talk on impact investing for the Australian Shareholders' Association. I've just recently been profiled in Money Magazine. We're about to engage a PR agency for the first time to again help us lift that profile so that we attract more buyers, which will help us in our quest to close the discounts even further. We're in the middle of a virtual roadshow at the moment of presentations for financial advisers and their clients. We've done over 50 meetings, and we've still got more work to do on that. And we're about to embark on a new roadshow for family offices and philanthropic foundations in our quest to attract more of those to become shareholders. Now what's interesting on the discount front is that the discounts are closing. The discounts were 17% and 22%, respectively, for FGX and FGG at the end of June. And I think we're around about 9% at the moment for FGX and 6% for FGG. So they are coming down. I think we have a lot of experience with Geoff and the team at Wilson Asset Management and the Board. The Board's on closing those discounts. We're particularly focused on attracting new long-term shareholders who are drawn to that dual purpose and see us as a leading example of impact investing. And just reminding us that this is a great deal for investors who are involved here. As I said, the performance numbers are good. The investor is not paying any performance fees, and typically, they might be in the order of 15% to 16%. I mean, instead of paying what typically is a management fee of just over 1%, what we're doing here is donating 1% of the assets to charity. So look, I think I will leave it there. And what I'll do is hand it over now to Geoff Wilson to update you in more detail on the investment performance of both companies. Thanks, Geoff.

Look, thanks very much, Louise. And thank you, everyone, all shareholders, for dialing in because, yes, this isn't possible without you. And also Mark and Nick from L1 and Munro, respectively, yourself and all the other fund managers, as a Board member on both entities, I can't thank you enough because -- as your incredible generosity has made this a success. And Louise talked about the performance numbers and -- for both groups, but this is the boutique Australian fund managers and the boutique global fund managers. And we've got 18 or 19 managers in the Australian -- in FGX, the Australian product; and FGG, the global product, 12 fund managers. And they've all performed incredibly well. The headline performance figures, which you'll see, and their outperformance every time period -- and I know we're talking the period to June even though we've announced the July figures, so you can see them on the website or on the ASX. But both funds outperformed the last 6 to 12 months by -- whether it's 3% to 6%. Now those performance figures are very good. And the reason why they are is because both investment committees who sort of live or die by the selections in terms of the managers to manage this money, both of them have put together a group of managers that not only give you -- will perform better than the market, but with less volatility. And you'll see there -- we talk about long-only managers and market-neutral managers or absolute buyers managers. And it's those other managers that could go to cash or may have some short positions in their portfolio that give you -- in volatile times, can't give you protection. So what we're -- both investment committees attempting to do is give the shareholder a portfolio that outperforms the market, but with less risk or less volatility than the actual market. And it's very pleasing to see that both companies are delivering that. Louise mentioned in terms of the -- a few changes in our Investment Committee. John Coombe, who's talked about probably as the godfather of selecting fund managers in Australia and has very good overseas contacts, he was on the FGX Investment Committee and has also joined on the FGG. And Kiera Grant, who -- she was on the Board of FGG. She has come on as Chairman of the FGG Investment Committee. So both investment committees are high-class investment committees. And in terms of adding or subtracting managers, there's been -- I think about 11 or 12 managers have been taken out of these portfolios and another 10 managers have been added. And what are the flags we look at is change in style; performance, either underperformance or outperformance and trying to understand why that is the case because all these managers are selected for a particular reason; and of course, any personnel changes. And the Investment Committees are -- they live or die by the selection of the managers and then, therefore, the performance of the managers. So even though the managers are doing pro bono, they understand that the Investment Committee is putting together the best combination of managers. So that's pretty much what I'd like to add, Louise, and I'll pass it back to you. Thanks.

Thank you very much, Geoff. I'd now like to invite Mark Landau and Nick Griffin onto the call now. And I might start first -- or I'll do this in a bit of an in-conversation type style. So I might just begin with Mark first, just for his view on the market at the moment. Thanks, Mark.

Thanks, Louise, and thanks very much for the opportunity to present and to be part of Future Generation, where I'm incredibly proud to be part of it. And you and Geoff deserve a lot of congratulations from the shareholders and from the investment community generally for the work you guys are doing. So thank you. In terms of the market, I guess we called the market totally wrong back in January. We obviously weren't expecting a global pandemic, and we suffered during that January -- sorry, during the February, March period. But I guess the one thing that we did well was that we became very positive on markets and we increased our net long to around 100% back in the middle of March when the market was right near its lows. For context, we typically have around a 60% net long in our fund, but we're now tracking just slightly above 100%, which is the highest level we've ever had in the 6 years since the fund's inception. The reason we became positive on the market, and I think most of these reasons continue to hold and that's why we've continued to retain a positive outlook on markets, is when the market had its huge sell-off for the first time that I can remember since the debt of the GFC, the valuations were incredible. There were stocks left, right and center that we thought had 100% upside. And that's obviously a very unusual backdrop. Investor positioning was as defensive and negative we've ever seen it. You had really high short interest levels. You had record cash levels. You had investor panic. So a lot of the selling that you saw in the market was not fundamental. It was based on redemptions or margin calls or ETF outflows. A lot of systematic selling, which is huge quant funds that increase or decrease their market exposure based on market volatility. And obviously, at the time when the market was crashing back in March, volatility in the market was 5x higher than its normal levels. And these quantitative strategies want to reduce market exposure during that time to maintain a static level of risk. And then you obviously had the biggest and most extreme in terms of size and timing central bank stimulus that we've ever seen, even bigger and faster than the GFC. Central banks did things that they've never done before. They went -- effectively, they went in an indirect form into corporate bond markets to underpin what was an extreme period of dysfunction in credit markets. And then we sort of subsequently, in the last few months, we've done an incredibly large amount of work on the prospect of the vaccine. And we've been consistently saying that we think the likelihood of a safe and effective vaccine is much better than, I guess, the consensus opinion. I think incremental data points have been positive over the last few months. And surprisingly, we think that a lot of the COVID-hit stocks are still not reflecting any improvement in likelihood of a vaccine. And we think that, that represents, by far, the best risk reward that we can see in the market at the moment. So even though the markets had a good rally from its March lows, we continue to be pretty constructive on the market. We expect volatility to remain elevated, particularly in this interim period until we get some certainty on a vaccine. But we're incredibly excited by what we can see in terms of valuation upside at the stock and industry level.

Right. Thanks so much for that, Mark. And Nick, how about your view on the market?

Yes. Thanks, Louise. Yes, I'd agree with most of what Mark said. I think he's summed up pretty well market backdrop. And I would doubly add that it is -- it has been -- all those things that Mark talked about made it a very good period for active management. There was a lot of, as Mark talked about, index selling, which allowed us active managers, I suppose, to sort of pick our way through it. From my point of view, the one thing that we would flag is that -- a lot of people do struggle with this, is they struggle with why the equity market doesn't perform like the economy. And I think in the COVID pandemic, this is more so true than ever. And I think -- I thought I'd share that with your listeners, is ultimately, you've got this situation where you have a health crisis and you have this unprecedented level of stimulus to deal with the health crisis that Mark just nicely detailed. But that stimulus is really to help everybody, including the man on the street. Whereas in the equity market, you're really not dealing with the whole economy. You're dealing with the top 300 companies in Australia or you're dealing with, say, the top 500 companies in the U.S. And when we look just at those top 500 companies in the U.S., you have to go all the way through the top 100 to find just a handful that are probably net worse off because of COVID. They all have lower funding because of what the Fed's done. They all have this opportunity to take a lot of market share because they have the ability to use their balance sheet. And so ultimately, this inequality in the world between big businesses and small business has been accelerated by COVID. The last thing we'd add there is that particularly technology businesses are seeing this huge pull forward of demand, whether that's e-commerce, whereby -- it took nearly 20 years for e-commerce to become 20% of retail sales in the U.S., and it's only taken 5 months for it to get 27%. And so it is hard when people say a share price like Amazon at its all-time highs. But it is actually quite logical because the reality is that even though the retail sales pie has got smaller, e-commerce's share has got bigger. And Amazon is the biggest e commerce-player, so their earnings go up, so their share price goes up. And you see this all the way through the S&P 500. And so even at the stock level, you are seeing some good opportunities. The last thing I'd just say is this pull forward -- and I do agree with Mark that a vaccine is a lot closer than you think. But this pull forward is probably permanent. And things like Zoom or things like e-commerce or things like health care advances are going to become a more permanent part of our life. And so what you're seeing at the moment is you do see a little bit of exuberance in the market, but you also see the market trying to price in that pull forward of demand. And I think it's doing a reasonably good job of it at the moment. And so from our point of view, yes, we still remain constructive. The opportunity is not as good as they were at the depths of March, but they are still there today. And yes, we still remain constructive on markets in the months and years ahead.

All right. Thanks so much for that, Nick. And Mark, back to you. I mean just a little bit on the portfolio positioning in light of coronavirus. Is there anything you'd like to comment on there or tell us about?

I think that there's probably 4 key themes that are probably the best summary of how we've positioned the portfolio. We're obviously -- so I'm coming from a top-down point of view. We're bottom-up stock pickers, but if you had to sort of summarize how we're positioned, there's definitely a view that the situation with COVID is going to be better in a year's time than it is today and that a lot of these COVID-hit stocks, so whether it's travel stocks or casinos or shopping centers or oil stocks, they all are clear COVID losers, I guess. And to the extent that you get a vaccine or you get some improved treatment or outlook for COVID, those stocks will be clear beneficiaries. And many of them are trading 50% lower than where they were trading back in January. So the nice thing about maths is does that mean 100% upside, if we're right. The second area would be what we call monopoly real assets. So these are typically monopoly infrastructure companies or broadband or rail lines, things that are incredibly defensive. They're almost like a bond. But the difference from bonds, which are basically giving you a 0 return at the moment, is that these stocks are giving you a 6% or 7% or 8% yield. And in many cases, they're under-geared as well, so stocks like Chorus, atlas Arteria, Aurizon, and I guess not as much anymore, the yield's come down to around 6% or 6.5%, but it's stock like HPI, which is the pubs group in Queensland. The third area would be resource stocks that are trading at a cyclical low point. So as I said at the outset, we have value on contrarian. So iron ore is a sector that we're pretty wary of at the moment. We think it looks very toppy and at risk of a bit of a retracement in iron ore prices as supply comes back. But on the other hand, we're quite positive on the energy sector, whether that's oil stocks or things like coking coal, which is used for steel production. We think that coking coal prices are not sustainable because so much of the industry is loss-making at current prices. So examples of stocks we like there would be things like Oil Search, Teck Resources, which is listed in the U.S. and Canada, and Warrior Met Coal, which is a really high-quality U.S. coking coal producer. And then, I guess, the last area, just quickly, would be restructures or conglomerates with catalysts, which are companies where they've typically got a very undervalued share price based on an aggregation of assets, but there needs to be a catalyst to trigger a re-rating of the valuation. We've seen that with Iluka, which is one that we were heavily involved in agitating to get a demerger occur, and that's been positive. But we think we'll see similar stories with News Corporation, CK Hutchison and Vivendi over the next 12 months. So it's probably a long answer to a short question, but hopefully, that gives you a sense of how we're positioned.

No, that was great. Thanks so much, Mark, and really appreciate that. So with Nick, how about you? And any portfolio repositioning in light of COVID?

Yes. So look, from our point of view, we are probably a bit different to Mark in the fact that we're global and we're growth investors. And so most of the repositioning, we did back in March. And it's done well for us, and we think it's going to keep them well. So basically, our goal there as growth investors was to focus on areas that would be net better off because of COVID, i.e., COVID has accelerated their business model. And so from that point of view, we really doubled down on things like e-commerce, so that would be Amazon and Alibaba are our 2 biggest positions in the fund. And we do think what was happening already before the crisis goes faster because of the crisis, and that's e-commerce penetration and cloud computing penetration. I think that's reasonably obvious for most people to see. Other areas we're focused on, things like cloud computing, so software. And again, look, we had these investments before the crisis, and we really just doubled down on them. And so here, you're looking at how important software is going to become in our lives. And we can all see that with Zoom, but you can also see that with just Microsoft or Microsoft Teams or salesforce.com or some smaller companies like ServiceNow or Atlassian here in Australia. So those are some of the software companies we like. The one area that has got much bigger for us that I'll probably talk a bit more about in a second is health care. This is a health crisis. It's not a financial crisis. It's going to be solved with vast amounts of money being put into testing, diagnostics and vast amount of money being put into vaccine development. And so from our point of view as global investors, we can find the beneficiaries of that and invest in those companies and hear these companies like Thermo Fisher and Danaher, again in the U.S., I'm afraid, but really to take advantage of the money that's going to pile in, i.e., they will be net better off in a post-COVID world. And look, the last one is one I discussed at your forum last year, and again, somewhat counterintuitively, has been accelerated in a COVID world. And that is the acceleration towards green energy or to the decarbonization of the planet. I think I talked about it when I was there last year. And we talked about the fact that decarbonization is no longer an opinion anymore, it's a corporate responsibility, and that the companies are going to drive this change. And if anything, quite strangely, or I think, surprisingly, the COVID crisis -- normally when you have a recession, you slow down expenditure on so-called social projects. But if anything, they look like they're going to get accelerated. And I think that people are now thinking about what's the next crisis that could befall the planet. And so from that point of view, you've seen the European Green Deal come through, where they want to be zero carbon by 2050. We think that's going to cost nearly $7 trillion. If Biden wins the U.S. elections, then you can see probably green moving to the top of the Democratic agenda. And from that point of view, lastly, the corporates are going to make sure this happens anyway. And so from our point of view, that's investments in renewable energy, wind OEMs and even building materials companies that specialize in insulation or packaging companies and recycling companies. Those are sort of the 4 big areas that we've been focused on since the lows and still are today.

All right. Well, thank you. Now I'd like to come back to Mark now, and this is really the final segment for the 2 of you, where -- which is a bit of a favorite of mine. And I know a lot of our listeners will be -- and investors will be keen on this, too. We're interested in a stock pick or an investment idea from both of you. So maybe we'll start with Mark. Thank you.

Well, typically, across our fund, most of our positions are in large-cap stocks of that sort. To make it a bit more exciting, I might pick a small-cap one for today. And the stock is Imdex, the ticker in Australia is IMD, and they're the global leader in exploration drilling technology for the mining sector. The vast majority of their exposure is to gold. So obviously, with an elevated gold price, you'd expect to see a delayed reaction but you'd see an acceleration in gold drilling. And we think that the market is not appreciating just how much activity you're going to see particularly over the next 12 months, but more so over the next 3 to 5 years. 80% of their business is exposed to gold, copper and iron ore. And all of those, we think, have a very attractive outlook in terms of both exploration and production drilling. The company is a genuine global leader. It's made an absolutely enormous investment in R&D over the last 5 years to the point where it spent roughly 30% to 40% of its annual profit were invested in R&D. And unlike most technology companies, it fully expenses its R&D. So there's none of it that's capitalized and effectively hidden from the P&L. The company has averaged about 27% EBITDA growth per annum over the last 3 years, and that's despite a very weak backdrop for exploration drilling, which is the main exposure in the business. You've got a fantastic management team, really conservative balance sheet with no debt and net cash, and you've got the best product lineup that we've seen in the history of the company. So they're launching 4 major new products over the next 2 years. We've spoken with more than 20 mining companies globally, a lot of drilling companies, competitors to understand exactly what the outlook for Imdex products and the prospects of the business more generally. And the feedback is consistently extremely positive. We've never had such consistently strong feedback about the outlook for a new set of product launches. And customers' biggest frustration is that they want the products now, and Imdex is struggling to keep up with demand. So I think what you're going to see is both a cyclical and structural tailwind. The shares are trading about 10% lower than where they are trading back in January just because of the market sell-off. But if anything, the outlook for gold drilling is even more attractive than it was back in January. So that would be our top small-cap on the stock pick.

Thanks very much, Mark. And you did take me by surprise there because it's true. You normally give us a large cap. So thank you. That was good. Good for a change to have a small cap, so thank you. And Nick, a stock pick idea from you. Thank you.

Yes. Thanks, Louise. So look, I will give a large-cap that -- now normally, I would do a small cap. So we'll just reverse roles for a second. But look, from our point of view, we're global investors, and so the company I'm going to talk about is Thermo Fisher in the U.S. So I mentioned earlier around health care. It is reasonably obvious that vast dollars will be pushed into the health care market, be it on drug discovery, be it on testing, be it on vaccine capacity, et cetera. And so from that point of view, Thermo Fisher really is sort of your ultimate weapons manufacturer in this war or the ultimate shovel at the boom. It is a conglomerate life sciences company listed in the United States and has a market cap of around $140 billion. And from our point of view, if you look across there businesses, whether it's in life sciences equipment or diagnostics or in production of the vaccine, they really do benefit in every possible level. And so to give you a simple idea of how they benefit. If you do get a COVID test done here in Victoria, for instance, it costs roughly $25. Thermo Fisher runs -- has nearly 50% of that capacity, and we are talking -- we've done more than 2 million tests in Victoria alone. And so we expect their revenues to grow an extra $7 billion this year from COVID testing alone, which will be an extra 30%. And then on top of that, they still have the vaccine growth to come as the testing comes off. And then on top of that, they'll have the spending that will come for -- as we prepare for the next crisis. And so they really are the partner of choice for most countries in the world when they look at this. And so from that point of view, you get all of that for roughly 25x forward earnings today. And we'd expect EPS growth in the double-digit -- high double digits for at least the next 5 years. And so from that point of view, it's a fairly safe and stable place to put your money, and the tailwind, I think, is fairly clear. And so that's why we like them. We think it's a good one for your listeners.

Thank you, Nick, for that. And again, thank you to both of you. As Geoff said earlier, I mean, we can't thank you enough and your team for your generosity for being involved in Future Generation and giving up your time and doing calls like this one and being part of our current roadshow. I know you've done presentations to advisers with Geoff and myself and our Head of Operations, and we truly are indebted to you because we wouldn't be here and this model would not be possible without your generosity. So thank you again. Now if you or someone you know would like to sign up to our monthly Future Generation newsletter, Slide 17 in the deck has the details, or alternatively, please jump on our website where you can subscribe from there. Now I'd like to pass to Alex Hopper Irwin, the Future Generation Brand Manager, now to open up the call to questions. It's always the most interesting part of the call, I always think. We've got myself, Geoff, Mark and Nick, of course, here to answer any questions you may have, and we'll endeavor to answer as many as we can in the time provided. And we certainly won't be going beyond 3:00, but if we do run out of time, we'll contact you after the call. Thank you, Alex.

Thanks, Louise. So what we'll do is we'll answer a few of the webinar questions first, and then we'll open up to those of you who've dialed in. So Geoff, the first question is for you from [ Andrew Peters ]. He'd like if you could give us an indication of the overall cash exposure across FGX and FGG as he assumes many of the underlying fund managers are holding a higher-than-normal cash allocation.

Look, thanks, Andrew, for the question. The interesting thing is, I wouldn't necessarily assume that fund managers are holding higher cash allocations. And just with FGG, at the -- you see -- on the Slide 9 and 10, you'll see that there's a fraction -- at the corporate level, a fraction of over 11% cash. On the June 30 numbers for FGG, it looks like the see-through cash adds nearly another 8%. So we're just a little bit below that 20% in total. With FGX, at the corporate level, there's less cash, the 7-and-a-bit percent. And the see-through, looking at the various managers, our best guesstimate would be a little over 15% cash. You've got to remember with FGX as well, we've actually got market-neutral managers, the Firetrail, the Bennelong Long Short and Watermark. So that makes up about another 10%. So in theory, they should perform -- their performance shouldn't be correlated to the market. They're the guys that buy -- start with $100, buy $100 worth of stock, shorts $100 worth of stock and keeps $100 in cash. So if the stocks they buy go up and the stocks they sell go down, then they give you performance with no correlation to the market. Obviously, the negative is you're taking double risk because if the stock they buy go down and the stocks they sell go up, then there's more leverage there. But that's where they are. I mean, just with -- at Wilson Asset Management, just to give you an idea, is when -- in March, our largest fund, WAM Capital, which is about $1.3 billion, mainly mids and smalls. When it was clear that the coronavirus was spreading globally, that was at the third weekend in March, then obviously it was clear that there was going to be a major impact on global economies. And so we had to work out how we reposition the portfolio because we had a position for a certain growth outlook and that was going to change significantly. And we actually -- in the process of doing that, and that obviously always takes a little bit of time, we moved to 43% cash at the peak. And then we've run that down, and that's around about 14% cash at the moment. So that just gives you a bit of an idea.

Thank you, Geoff. And the second question is for Mark from [ John Boardman ]. And he would like to know if the L1 Fund will be paying dividends anytime soon.

It's hard for me to speak on behalf of the Board, but I've heard Andrew Larke, our -- the Chair of LSF Fund previously communicate that he's very keen and the rest of the Board is very keen to see dividends commence. Obviously, they want to do that in a tax-effective way. So they're looking to build up franking credits and retain profits -- the profit reserve in order to distribute that in a tax-effective way to shareholders. You should expect that over time, we will be a dividend-paying stock. But as of the August result, that wasn't possible.

Thank you, Mark. And Geoff, we've got another question for you from [ Sam Brindal ]. So he's asking if we ever considered introducing a wind-up mechanism along the same lines as the one WAM has proposed for Blue Sky to close the current discount, and then [ Nigel Grainger ] has asked, or if we've considered a share buyback?

Thank you. Look, I mean, both good questions. Just in terms of the situation with Blue Sky, they had a listed investment company, Blue Sky Alternatives, which is going up through a vote on the 8th of September, which Wilson Asset Management is -- the plan is, assuming shareholders vote for it, which we think they will, it will become WAM Alternative Asset Fund. And we hadn't managed alternative assets before. We've got -- we've built a team to do that. So when we've put our proposal in a couple of years ago to take over the management of that, we were competing with another person who had a performance fee. We didn't think that was fair. So we put in our proposal a lot of management fee than them and no performance fee. And we also said, "Look, we believe we can do a great job and get it back to NTA, if not a premium, et cetera, et cetera. But if we don't, the first 5-year period, at the end of the 5 years, we'll let shareholders decide if we've done a good job or not." So that's sort of a one-off. And then the other question is about share buybacks. What -- my observation is share buybacks tend not to work. I know logically, when you buy -- if the company is buying $1 of assets for $0.80, then if it buys 10% of the company, then the asset value increases by 2% effectively at no cost. But psychologically, investors don't like it. And investors think they can't -- the fund managers can't find good opportunities. And all the studies we've done is you discount -- discount disappears a little bit in the first little period of the buyback and then the actual discount increases. People tend to want to be associated with companies growing, performing, et cetera. So I'm not a big believer in buybacks, even though back with [ WEX ], which is now trading at a -- like a 30-odd percent premium to NTA, one of our listed investment companies. It took us 7 years to get that NTA. And in the early days, it was trading at a 35%, 40% discounts back in the early 2000s. We did buy back 35% of the capital in the early days. So I'm not sure if that was the right decision or wrong decision. But that's sort of my view on buybacks. And you've got to remember, these are listed investment companies, and there's -- one of the -- to me, one of the holy grails of listed investment companies, besides a lot of other factors, is the fact that they can trade at -- you can buy $1 of assets for $0.80 or $0.90. And at various points in time, those -- that $1 of assets can be worth $1.10, $1.20. I mean, if anyone doing the -- so sort of everyone knows when they come in there. And to me, to actually take that opportunity away from someone is -- to me, it's sort of illogical from a Board's perspective. Aren't you better off allowing people to get that opportunity? And you find that the market is reasonably efficient over time. And the good managers continue to grow and survive. And the ones that can't deliver the results, they end up changing the structure. And if you think of '03 -- 2003 and '04, I think there was about -- in a short period of time, there was 20-plus LICs-raised money, I think, in a 9-month -- 8-month period. And now it would be, I think -- a number of them have used various mechanisms, turned into trust, something like that. But there's probably only half of them still around. And so there is a bit of natural selection. To me, FGX and FGG is -- so you could have this conversation, we could have had this 2 months ago when -- Louise were saying they're trading at significantly bigger discounts. But for the people that do their research and do some analysis and understand that things trade at premiums and discounts. And FGX and FGG have traded at 7% and 10% premiums. So from my perspective is you've got exposure to the best boutique fund managers in Australia, and they're doing it -- you're not paying performance fees, and -- because they're donating everything back there, management fees and performance fees. To me, there should be an embedded premium on these 2 vehicles. Now because of -- the other markets impacted by supply/demand, at various points in time, there's more supply, less demand. That goes to a discount. Other points in time, there's more demand, less supply. It goes to a premium. And with -- even with their short lives with FGX and FGG, we've seen both premiums and discounts. So to me, -- to take that opportunity away from someone, to me, it's sort of a little bit illogical. Sorry, I was sort of -- I think I got on my high horse here a little bit, but that's my view. Thanks, Alex.

Thank you, Geoff. And the next question for Nick from [ Jeffrey Barker ], have U.S. tech stocks distorted the underlying status of the U.S. market, which points to potentially serious volatility in the future?

So the answer is, well, yes, U.S. tech stocks make up a lot of the U.S. market. And this comes back to my point that the equity market is not necessarily the economy, particularly in the U.S. These U.S. tech stocks, it's important to recognize, they win across borders. So they're in for the world. Google is the search engine for the world. Microsoft is the software -- enterprise software player for the world. Salesforce is the CRM for the world. Facebook is the social network for the world. So they are taking meaningful share outside of their own country. And that meaningful share is likely to continue, in fact, if anything, accelerate in a post-COVID world. So they have performed well. I would argue there's nothing there today that actually doesn't make intuitive sense to me. And I recognize there have been some stocks that have done very well. But if you think about it, a lot of these trends were in place pre-crisis, i.e. all of these companies were winning and taking share pre-crisis. The crisis has happened, and all it's done is accelerated their ability to take share. And so the performance of these stocks has accelerated. I understand that, that can look a bit scary and that can lead to volatility in the future, and I suspect that's probably going to be true. There will be some volatility, but I don't think these trends will change. The trends have been there for a while. They're now accelerated. I think if Mark is right and a vaccine comes along, it may go back a little bit in the short term. But over the medium term, these trends are here to stay. And ultimately, I think these companies make up good parts of anyone's portfolio. The last thing I'd say, particularly the big ones, the really big ones, are just really not that expensive. They don't trade at excessive multiples, anything like what they would have traded at in 1999. And they all have fortress balance sheet. So the real risk is regulation, and I'm sure that question is going to come. But at least the trends, as we see, intuitively makes sense to us today, and we suspect they continue.

Thank you, Nick. And a question for Mark from [ Stephen Langford ]. What evidence do you have that a vaccine which actually provides immunity will be widely available or that travel and the close association of people will recur? He also says, with markets having run so hard in huge PEs, is there still room for growth?

I guess in terms of the likelihood of a vaccine working, I think what's interesting to us is that -- we've done probably more work on the vaccine than any other topic in the history of L1. So we've done more than 100 meetings specifically on COVID, and we've done more than 30 with the people who matter globally in terms of vaccines. So that could be the CEO or the Chief Scientific Officer or the Head of R&D or the Head of Operations for all of the major western and Chinese groups, so Pfizer and Moderna and AstraZeneca as well as companies like Sinovac and Sinopharm and CanSino. So I feel like we've done as much work as we could possibly do. And we also have a medical doctor who was brought in China who covers the space. So we're very lucky that we're in a position where we think we've got a genuine sort of information advantage to help us understand the science. And the reason we're more positive is because you've got so many shots on gold. Now we don't know which of these vaccines is ultimately going to prove successful. But the fact that you've got well over 100 different companies working on it, you've got 9 different companies that are all very close to the end of their trials, so they're all in Phase III trials. And you're likely to get what we think will be an emergency use authorization, which is effectively a lower hurdle than a full authorization to distribute to mass market. We think that emergency use authorization is likely to come through in October. The reason we're confident on that is because if you look at the safety data across all of the various vaccines in Phase III trials, they've all had excellent safety data. Not one of them has had serious safety issues that would cause a likelihood of not getting what they call, EUA, an emergency use authorization. Secondly, the efficacy data has been outstanding. So in all cases, you've had neutralizing antibodies which are at the same level or higher than a recovered COVID patient. So the immune response of someone who's actually recovered from getting COVID, you're getting exactly the same neutralizing antibody. So importantly, this is not just a generic type of antibody. It is exactly the type of antibody that kills the virus and helps you get better if you happen to get infected. The other thing I'd say is that you've never had a time in history where you've had so many global resources all united and determined to get a cure as fast as possible. So it's not just big pharma and biotechs. It's regulators like the FDA. It's governments like the U.S. government that's allocated more than USD 8 billion to Operation Warp Speed, which has basically funded advanced manufacturing of these vaccines. So if we do get an approval from a company like AstraZeneca, they're going to have 400 million doses available by the end of the year. If it's Pfizer, they have committed to more than -- of around 100 million doses. And then you've got massive amounts of capacity coming online in 2021. So AstraZeneca has at least 2 billion doses already confirmed. Pfizer has 1.3 billion doses. Moderna will have at least 500 million. And the list goes on, whether it's Novavax, INOVIO, and there's a bunch of other companies as well. So I think -- obviously it's not a certainty. But we feel like if you look at the share prices of travel stocks or energy stocks or casinos, they're all trading 30% to 50% below where they were in January, and they haven't really rallied that much. So we think that the odds you're getting, I guess, from a probability point of view, are incredibly attractive at the moment. I'm happy to chat off-line if anyone wants more details on the research we've done or our thoughts on the vaccine, but in the interest of time, I might pause there.

Thank you, Mark. Now I'm going to pass over to Nash, the conference call organizer, to explain how to ask your question if you've dialed in. Thank you, Nash.

[Operator Instructions] There is no question from the audio line. I will pass it over to you, Louise (sic) [ Alex ], if you want to take questions from the web.

Thank you, Nash. We actually have another question from [ Sam McCain ]. And he would like to know, with Australia today entering its worst recession in history, how much has the RBA and Fed underpin the strength of long equity index positions? And he hasn't assigned that to anyone. So maybe Mark or Nick, if you'd like to take that?

I can go first, if you want. The answer is a fair bit. So yes, I mean, there are 2 things at play here. One is the ability for the companies to grow their earnings and the second thing is the discount rate that you discount that at. And the RBA and the Fed have indicated that they're going to keep interest rates low for a very long time. In Australia, I think they've made a statement of 3 years. And in the U.S., they've said that they will not increase until inflation is running above target. And both of that -- both of those things are designed to create confidence for people to invest, which will hopefully drive growth and drive earnings growth. But secondly, it will also mean that we can -- it's reducing the alternatives that you as a retail investor has to invest in. And so the other simple way to think about this is the earnings yield -- so say, the U.S. market was trading at a PE of roughly 20% which it is, it's actually slightly above that, then 1 divided by 20 is the earnings yield of the market, which is 5%, assuming the earnings estimates are right. And the U.S. 10-year sovereign bond rate is 66 basis points. And so even though equities have gone up a lot, if we take that 5% and we subtract 66 basis points, you're getting a carry of over 4% for owning U.S. equities. And that's -- that would actually make them nearly as cheap as they've ever been over the last 20 years versus bonds. And so there's 2 ways that equation finishes: one, either we've got the earnings wrong, which we don't think we do now because COVID is fairly well understood. And if anything, I agree with Mark. It probably gets better from here this time next year; or the second thing is the bonds go up a lot and the thing that's holding the bonds down is the Fed and the RBA. So that is creating a supportive environment for equities, full stop. And our job is to take advantage of that supportive environment and find some companies that are going to grow earnings within that and provide good investments, and that's what we're doing. I'll stop there and see if Mark has got any comments.

I think Nick touched on the key points. The only thing I'd add is essentially, the central bank activity has forced people into equity, so that we now essentially can't get an adequate return in casual bonds. And for most people, whether it's a 6% or 8% type return for a typical retail investor and even for endowment funds and pension funds, they're essentially getting forced into equities. And we think that rather than getting consumer price inflation, you're getting asset inflation from the actions of central banks. And that is -- I think it is an intended consequence. They do want asset prices to rise to provide some ammunition for people to spend and to have more confidence in the economy. And then at a government level, obviously, if you think about the government, the top priority is getting reelected. And the most important thing at the moment is jobs and making sure that we're not in a depression. No one's really talking about deficits or how much the government is spending on JobKeeper. People are more concerned about downside risk to employment in the small business. So I think sort of standing back and thinking about the incentives and alignment of governments and central banks will give you a good sense of why it's a safer place to invest at the moment in the stock market than people might realize at face value.

Okay. Well, thanks again for everyone for dialing in. And a special thank you to our pro bono fund managers, Mark and Nick, for joining us. And so many valuable insights from you guys, so we're indebted. The recording of the call will be available on our website shortly. And just also, if any of you would like a presentation to your investor group or your club or equivalent by Zoom on Future Generation, on the world of impact investing and/or anything to do with charitable giving or philanthropy, please e-mail us at [email protected]. No matter how small or large the group is, we'd be very happy to talk to them over the coming months. Please stay tuned, as I said earlier, for our next virtual investment forum next month. And details will be available shortly. And also look out for that next podcast I'm about to do with Peter Morgan. So in concluding, please stay safe and well, and don't hesitate to e-mail us on [email protected] if you have any further questions, comments or feedback. Good afternoon, and thank you.

This concludes today's conference. You may now disconnect.