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

Good afternoon, and thank you all for joining us today for the Future Generation Investment webinar. As you'd be aware, this is your company or both the Future Gen FGX being Future Generation investment company, the Australian investment opportunity, and FGG, Future Generation Global, the global investment opportunities. These are both your companies I mean, we're here today to report to you on the last 6- and 12-month period. And so -- and also to answer any questions you would have. If we don't end up answering your questions today, we will come back to you and we will -- yes, we'll definitely be answering your questions by e-mail. So first of all, thank you. In terms of looking at the 6-month period, why don't I talk about future generation investment company, that's is FGX is the code first and then I'll talk about Future Generation Global, FGG. Now the highlights of the last 6 months for FGX and I suppose, FGG, but focusing on FGX to start of was a significant increase in dividend payment. The dividend for the year just -- or for the 6 months just finished increased from $0.026 to $0.03. That's a little over a 15% increase. The annualized fully franked dividend now is running at $0.06. And also, you would have seen in the announcement that we're able to significantly increase our profit reserve. Now that was due to a new way -- or just conversations with [ the auditors ] about how we should look at investments and how they should be categorized, and we've been able to increase the profit reserve. And that is incredibly important. At the end of August, the profit reserve was a little over $0.33. So that's the ability -- you need a profit to pay fully franked dividends to shareholders. And that increase in profit reserve really gives the directors a lot of confidence in terms of being able to continue to pay a growing stream of fully franked dividends to shareholders. And that is why the Board decided on the sizable increase in dividend for the period. Also, that is another reason is why the Board decided on using some capital management initiatives, and that was the announcement of the bonus option issue. Now these are -- it's another piece of paper you get. Shareholders get it at no cost and gives the shareholder the option -- or not the obligation, but the option if they want to, to buy another share of $1.48. Now a lot of, some people are saying, look, why didn't, what about giving us the shares more cheaply than that or the option to buy those shares more cheaply? The logic was, at the end of the previous months, the NTA that we had, the live NTA was around that $1.48 level, the pretax one. So the directors didn't want it to be dilutionary. Since then, the numbers have come in for the fund managers, and they really had a good month last month. And the current NTA, which you would have seen announced the other day, is a little over $1.54. So that's a really -- a solid -- it was a very good month last month. So those options are there. You have, if you buy shares now, you get the options. If you own shares, of course, you'll get them. The x date for that option issue is the 30th of September. So if you buy shares in FGX, at the moment, you're getting -- you will also get that option entitlement. And of course, it's on a common dividend basis. Now in terms of the actual performance of the portfolio and probably now is a good time to talk about -- now we've got Ben Griffiths, who's the brains and some people say the brawn as well behind one of probably Australia's preeminent mid- and small-cap investment fund managers, and that's Eley Griffiths, now he's Managing Director and Senior Portfolio Manager. He's joining us, and he'll be giving us his views of the market and talking about a couple of stocks that he likes at the moment and is also -- Ben is also -- will be available for Q&A. And we've also have -- and Ben is one of the fund managers for FGX, but also, we've got one of the fund managers for FGG. And that is Ryan Quinn. He's one of the senior members of the team. Again, one of the other pro bono fund managers of WCM Investment Management. And so he's, it's well into late evening for him over in the U.S. He will be open to talk about the Q&A available for questions and answers as well. So on behalf -- just while we're talking about the fund managers -- on behalf of all the shareholders, we'd like to thank both Ben and Ryan and all the fund managers that manage the money on behalf of ourselves on a pro bono basis. The -- in terms of the performance of FGX, the portfolio over the last 12 months, outperformed the market again. It was up 33.6%. One of the pleasing things -- that's how the portfolio has performed. One of the pleasing things is the total shareholder return, that's the share price plus dividends was 51%. Now that's over the 12-month period. So it's a very solid performance from FGX. Now turning to FGG. The Board there was delighted with the increase in profit reserve -- the -- because FGG historically have been paying out less in the way of dividends, the actual profit reserve increase was actually a lot greater than FGX. And so the profit reserve now in FGG is a little over $0.50. And historically, you'd seen with FGG that the dividend 12 months ago, was $0.02. It was $0.02 paid for the full year. Now you would have seen the most recent result for the 6-month period, the dividend that's been announced has been a 50% increase now from $0.02 to $0.03. And now with that large profit reserve, there's nearly 17 years of profit reserve there at this rate. You would assume that the Board in 6 months' time will look very closely at paying a dividend and you'd assume it would be of a similar magnitude. So all of a sudden, FGG, which had been mainly a growth stock with not much, much yield is really, I would say, over the next 6 months will come into a time and be providing shareholders with a very nice growing stream of fully franked dividends. In terms of the NTA, I mean, both FGX and FGG, from my perspective, look good value because they are trading below NTA. I always -- in terms of my investing, I love buying $1 of assets for $0.80, if I can, well, $0.50, if I can. But let's say, $0.80 or $0.90 but buying them cheaply. And FGG, the NTA at the end of last month was nearly $1.84, and you see the share price, and it's come dividend with additional dividends to come. In terms of the portfolio performance for the last, for the last 12 months, solid portfolio performance of 25-odd percent and total share of return was better than that, and that was a little over 36%, which, again, was a very solid result. Just looking at -- and I mentioned before the incredible generosity of the fund managers. And really, everyone that's involved in FGG, the service providers, the ASX, our share register, our boardroom, the accounting staff, there is -- there's been incredible amount of generosity there. And in terms of as I said, the fund managers are managing this money on a pro bono basis. And we're going into the best funds. It's really, it's the best boutique fund managers that are focused on Australian equities and the best boutique fund managers that are focused on global equities. But just looking at both of them, in terms of the great deal that shareholders have received in the last 12 months, not only the performance, the increased dividends. But broadly with FGX, the total cost, if FGX had charged normal management and performance fees and the Boards and the investment committees had charged what we have been paid what they normally would get for a listed investment company. The total cost of that would have been $12.7 million. And in terms of -- you'd all be aware that 1% of the assets of the company are invested with charities. With FGX, it's children at risk. And with FGG, it's youth mental health, which is obviously incredibly important at this point in time. The actual FGX money that's -- the 1% of those assets was $5.3 million. So effectively, the -- it was a significant saving for all the FGX shareholders. With FGG, the annualized savings that -- in terms of the cost that we would have paid to fund managers, et cetera, was $9.1 million, and 1% of the assets in FGG was $6.4 million. So just in terms of rounding it out, that's a little over $11 million that was given to -- or invested with charities that focus on children at risk and youth mental health. And since both these vehicles were set up, it's $52.9 million has gone to support those charities. So on behalf of all the people involved, I just can't thank shareholders enough and the fund managers enough for their incredible generosity to allow this to occur. Now what I'd like to do is I'd like to really move over to the brains of this show. And I'd like to ask both Ben and Ryan a couple of questions. Why don't I start off with our local boy, our Ben Griffiths. And Ben, do you want to just give us a little bit of an idea of what you're seeing in terms of the market, how you're positioning your portfolio? And maybe if you can let us have 1 or 2 stock picks. And I know you're always quite cheeky when we're talking. And I will have my pen ready to take a note of what they are. So Ben, if I can pass over to you now. Thanks.

Thank you, Geoffrey, and always good to see you. It was always good to catch up. We don't normally catch up virtually. We know we do it on the street when times are normal. But Geoff, I feel or Eley Griffiths Group feels pretty constructive on equities. I'd acknowledge that with interest rates at record lows, you might expect to see PEs on the wrong side of long-term averages, and that's fine. But I like to look at valuations through 2 lenses, and I'd like to think about whether the market is cheap or expensive through 2 lenses. One is what is the health of the credit market? And what are we seeing in terms of credit spreads and how does the credit impulse look? And I look at that to see whether, in fact, equities are replaced, I should even be contemplating and looking at credit markets, I see benign conditions. I see no great stresses or strains in the system. So that makes me quite upbeat about equities. And then I say, well, okay, knowing that the backdrop is satisfactory and constructive, what about that valuation question? Are we -- is it cheaper? Or stock's cheaper? Should we be looking at them? And I normally revert to my tried and true tool, which is the equity risk premium. And Geoff, that's basically the trade-off between cost of equity and fixed interest markets or bond markets. And are you being paid enough to risk and equity exposure versus the fixed interest exposure? In Australia, the equity risk premium is currently at about 8.3%. In the United States, it's about 5.6%. These are incredible margins for safety for investors to contemplate. They're almost telling you that a risk-on position is safe and should be contemplated. So I think equity risk premiums are in a very generous position, and that makes me feel pretty good about equities right now. The fundamental backdrop is good. Apart from having evaluation indicators [indiscernible] we just had a very constructive reporting season and a number of economic indicators as well. Coming in behind that would suggest that consumers and businesses are looking through the current state of lockdown and talking about recovery and economic revival. So I feel pretty good about things, to be honest. As always, there's a few things on the horizon that an equity manager should be concerned about. But right now, I'm pretty -- I feel valuation is a snug. I feel liquidity is strong, which is the other key driver of equity markets. And did you know, Geoff, I'm sure this point won't have been lost on you because I know you had somewhat of a focus and fascination for dividends. As probably all of our viewers do that in the next 9 weeks, we would expect to see $40 billion worth of dividends paid of about 350 companies and about $30 million of that $40 million will be paid in the last 2 weeks of September. So that's an extraordinary fill up for equity market interest. So I think that should hold the market in good stead.

Now, look, thank you for that, Ben, and I don't know that [indiscernible] that when you said you want to look at things at 2 lenses, and I noticed you've got -- I know I haven't seen you in the street for a while, you've got new pair of glasses. But just in terms of, yes, thank you for your big picture thoughts. In terms of looking at a couple of stocks, what do you -- what have you already bought that you said in that you're happy to tell us about?

Well, there's a couple of stocks, Geoff. As you can imagine, we've been busy through reporting season. We've been moving the portfolio around. There's a couple of stocks that we're particularly fond of, and I'd be happy to talk to today. The first one is an IPO counter that came to market only so many months ago called DGL Group. DGL Group is a chemical formulator manufacturer logistics storage of chemicals, transport of chemicals and ultimately recycling of waste materials. This business has performed particularly strongly, certainly in terms of the share market reaction. But what we like about it is Simon Henry, who is the founder of the business, when he bought the business to market, he didn't sell a single share. He only raised capital and he raised capital for the purposes of business expansion. The company reported its results the other day, and it reported a result that was nicely above prospectus. He articulated his argument that he is keen to acquire businesses, and he'll acquire businesses in the fields that he's involved at the moment, but he'll be disciplined on what he pays and the metrics that he adheres to. And he's going to take advantage of the process of reshoring, and we're seeing more and more Australian companies and New Zealand companies because DGL, after all, is a Kiwi company. More and more companies are going to be reshoring their supply chains back to Australia, and he sees himself playing a crucial role in assisting companies with the whole reshoring trend. So we see a great story there in DGL. It's had a spectacular debut, but we like the management. We like Simon's Energy. We like the runway that he's got ahead of him, which is long and extensive [indiscernible] stock has a fair way to go. The other stock that I would like to talk to, and I'll give you 2 today, Geoff, because it's you. And that's another Kiwi stock. This one actually isn't listed in Australia. It's only available on the New Zealand market. And that's basically, I'm sorry, I should say liquidity is greater in the New Zealand market and that's Serko. And Serko was a travel technology platform, which essentially aggregates the myriad of buyers and consumers of travel products. It aggregates that into a central marketplace where the providers of various travel services can also meet. So it has a technology that's quite extraordinary. It operates in 35 countries. It has 6,000 corporate customers and has some $4.5 billion worth of travel booked through its site every year. Quite an extraordinary number. We see it's a great high beta sort of reopen up stock to be on as travel and travel bookings, reopen, and we start seeing travel become a bigger part of people's lives again, having had a period of absence there. And we see a great growth plan articulated for where Serko will take their business through Australia, Europe and through North America. So there's enormous growth there in that stock. Both stocks look good to us. And you're right, Geoff, both stocks are well represented in the Eley Griffiths Group portfolios.

Perfect. No, look, thank you very much, Ben, and we'll come back to you when we get into question and answers from shareholders a little later.

Sure.

Thanks for that. Now Ryan, first of all, thank you for -- well, I suppose we all know being fund managers that when you're investing in the market, you're working 24 hours a day anyway. So -- but thank you for being up late tonight to talk to us. Ryan, do you just want to give us a little bit of an idea of [indiscernible] and maybe a couple of stocks that you're interested in.

Absolutely. And first of all, I'd like to say thank you for having us here and including us in the Future Generation's portfolio. It's an incredible mission that you all have, and we're very proud to work hard to grow your capital. WCM as a whole, we tend to do things a little bit differently. It's led to some good results, but at the end of the day, we're not going to be like every other money manager. So we don't tend to have a very succinct macroeconomic outlook. We don't tend to predict or try to predict what's going to happen in the marketplace at any given time. We do manage a concentrated portfolio of 30 to 40 stocks, and the globe is our marketplace. We're trying to find the best names we can find that are supported by long-term tailwinds with long runways in front of them. It's led us to the traditional growth sectors in the marketplace, specifically tech technology and health care being our largest 2 overweights. And so what we try to do is find businesses that we can act as equity owners. We want to be business owners of these companies, and that extends our time horizon out to 5 years and longer. And when you're investing with a company in that kind of a time frame, quarter-to-quarter or month-to-month changes or headlines that impact the overall market don't tend to impact the holdings that you have or the view you have on those holdings. It will bring volatility to the market, and we tend to try to use that volatility in our favor so that we can manipulate our portfolio, trim names that have won for some time, add to names that might have a better outlook in the forward 3- to 5-year period. So the economy right now on a global basis feels good to us. The long-term trends that we're betting on are the growth of the middle class, the increase of disposable income of that group. What that leads to is a higher consumption into higher quality health care. That demand expands across the globe. It also leads to increased consumption of technology across the board from the very low-tech items to the very high-tech items, at least a lot of excellent trends that we're going to try and get in front of over time, the expansion of -- extension of Internet penetration across emerging markets as well as developed countries that may be behind some of the other developed countries of the world. So we want to find companies that can benefit from those long-term tailwinds. And then in that interim volatility, use that volatility from a competitive advantage standpoint to get better, to separate themselves from their peer group. The fundamental thing that makes us different in the way we invest is that we're focused on the trajectory of a business's moat. Is there competitive advantage growing over time? Are they getting better? And if we can point to drivers that say that their moat trajectory is positive and they're getting their competitive advantage is growing, then that's a company that will hold in our portfolio, our very selective portfolio of global businesses. And then the second piece of the puzzle is corporate culture. We spend a significant amount of time analyzing and interviewing businesses on their corporate culture because we believe that corporate culture drives employee behavior, whether things are going well or things are going poorly and that corporate culture is going to be the thing that enables the competitive advantage to expand. So in that light, I'll talk about a couple of different companies. The first one being in the health care sector, one of our largest overweights, a company called WuXi Biologics. WuXi Biologics is a contract development and manufacturing organization, or CDMO, based in China. The company basically acts as an outsourced developer for the biologics in health care industry. They can do everything from formulation, analytics, processing, even down to shipment of the biologics. And what's attractive about CDMOs is they bring depth and breadth to the process through their expertise, their equipment facilities and their scale. They have -- WuXi Biologics has customers from around the globe, but they have an 80% market share in China, and then is driven by a number of factors. They're known for being the best in China. The reputation in this industry is paramount because quality really, really matters, but it also will attract the top scientists in the country to join the company. This reputation has led to a backlog of drugs in development, which really provides us a long-term runway of visibility into top line growth. WuXi Biologics is what we like to call a picks-and-shovels play because we're not betting on the individual drugs that are being developed. We're betting on WuXi being utilized as an outsourced developer or manufacturer of those drugs. And there's a booming demand coming from China. In addition to globally, as we've just lived through a pandemic, we expect that demand to grow and at the very least, be high for quite some time. WuXi, we find has the experience, the ability and the technology to assist at any stage of the drug development process, which makes it the premier player in the space. The other business that I'm going to highlight are holding we have is something we've owned since the inception of our strategy called Taiwan Semiconductor. Anyone who's paying attention to the headlines knows that there's a huge demand imbalance in the semiconductor space. The dearth of supply of chips in the world really has impacted everything from automobile sector to the highest of high tech. We've also viewed Taiwan Semi as a picks-and-shovels play. There are picks-and-shovels play on advanced chip making logic. As long as there's demand for the semiconductor chips that go into everything from low-tech items to things that are involved in artificial intelligence or 5G networks or even the increases in technologies in our cars and handsets, Taiwan Semi is the independent foundry that will be utilized to produce these chips for companies like Apple, Qualcomm, Huawei and others. Their moat trajectory grows as the complexity of chip making increases. We are now at the bleeding edge of technology. We're producing chips at the 7- and 5-nanometer node. And Taiwan Semi has with more than 20 years of R&D and CapEx in the ground, proven itself to be the leading provider of manufacturing in this space. They've recently also announced more than $100 billion CapEx program that will be expanding their footprint that will be reinvested into their processes that should sustain their #1 position in the chip-making space.

Thank you very much, Ryan. I just -- the tough thing is when you got something on mute, I'll just quickly trying to find my unmute. Yes. thank you very much. And yes, I mean, as an investor, I love the way you guys think. I love how you've really focused on culture. And I mean, we've all worked for organizations, and we understand that, that is a big driver. And from an investment perspective, I think yourselves that you're sort of a shining light from a global perspective in terms of really focusing in on that. So congratulations and well done. And I'm sure Ben is the same as me. We always love the picks-and-shovels investments to -- that's right. You don't necessarily go for the one that's -- yes, pulling the gold out of the ground, you're better off buying the [indiscernible] that's making the tools to get it out. You find over the long term, they're great investment. So thank you, and thank you for being a more recent -- joining the family at Future Generation and on behalf of all shareholders. Thank you for, again, doing that on a pro bono basis. The -- just before we move over to questions and answers from shareholders, I just, both at Future Generation, both entities, we really do -- we understand yourselves as shareholders, you are in the company. So we're here to report to you. So please do go on to the Future Generation website and sign up for the e-mails. Please you'll get the updated newsletter, the NTA, any insights we're seeing from a philanthropic perspective, but also any insights we're seeing from the managers that are managing your money. So that's really good. Also exciting news that the new CEO of Future Generation, Caroline Gurney. She takes -- she starts next week. So you'll see a sort of a new level of enthusiasm in terms of -- obviously, things will change for the better [indiscernible] one of the Senior Executives at UBS and has been there for a long time, has global experience, and we think will really bring significant value. I mean one of the fortunate things is we bought Caroline on to the Board of FGX a number of years ago because we're always impressed with her while she was at UBS. And then when we went on an extensive search for a new CEO, we really had some high-quality people, global people looking to come back to Australia to do this. And the Board, both Boards in the end decided that really Caroline, we're very excited that she was prepared to accept the opportunity, and we're very happy about that and excited. What I'd like to do now is Olivia Harris, who it really is one of the Wilson Asset Management Senior Comms Executives. She'll run the Q&A. So let me pass over to Olivia, who will take us through the next part of the presentation. Thank you.

Thanks very much, Geoff, and thank you to everybody who is sending questions through the webinar platform. We'll try to get there as many as possible, and then we'll give you a call if we don't get to your question during today's webinar. Geoff, the first one is for you from [ David Nichol ]. In view of the reserves indicated for FGX and FGG, can you just discuss a little bit about the prospect of the likelihood of an increase in future dividends?

Yes. And good question, David. And the, I'm one -- I'm a Board member on both FGX and FGG. There are a lot of other Board members on a 6 monthly basis, the Boards look at the profit reserve, the amount of tax being paid, the franking credits that are there and then they decide the dividend. You've seen in the last 6 months the change in accounting policy, which has significantly increased those profit reserves. So now both companies are in fantastic positions. Now I would expect that you'll see a growing stream of fully franked dividends for both companies over the medium to long term. So really both companies can pay dividends. And that profit reserve gets topped up on an annual basis in terms of assuming that FGX or FGG assuming their NTAs go up. Yes. So to me, the expectations for growing a growing stream of falling franked dividends from both companies is I probably -- it's the most confident I've ever been because historically, if you look at our profit reserves historically, we only had 1 of -- well, 2 years profit reserves at the max. But now we've got a significant cushion, so yes, you'd expect that there will be growing dividends.

Thanks, Geoff. And we do have a number of questions coming through on the options issues. So I'll just ask you a couple on that. So this one is from Rebecca. How will the Future Generation Australia bonus issue of options benefit to shareholders? So what's the benefit to shareholders coming on options issue?

Yes. So what it's doing, the option issue -- well, first of all, if you buy shares now before it goes ex the option issue on the 30th September, you will end up owning, so you bought 1 share or say you bought 10,000. You bought 10,000 shares in FGX, then you'd end up getting 10,000 options. And those options give you the opportunity, if you want to, to buy more shares of $1.48. Now obviously, actually, I noticed during the break that the share price has gone up a little bit today. And it's trading around at $1.46 level. But if the share price was trading above $1.48 and then you could exercise that option and pay $1.48 and get another share, so it really gives you exposure to the company. It's -- we think there was a significant debate at Board level about what price we should issue them at. We thought that the last reported NTA was the fair price. So if people end up buying after their ex option issue, if someone buys shares, they don't get the option. But the price options are excised, but what was the most recent NTA. So we think that was a fair price. It's a very -- effectively, what we've done is -- and those options will trade on the market. So some people might actually buy more options because they want to get more exposure. Some people might sell their shares and take some cash. If they're worried about the market, take some cash off the table and then use some of that money to buy more options. So they get the upside. So it's really -- the company is doing a massive buy [indiscernible] on behalf of all shareholders. And also, if someone knows what [indiscernible] capital to the company as it performs and grows, then they can do that over time because those options will be trading for about 1.5 years. So it really gives you a lot of flexibility. If FGX, the other strategies could have been to raise capital to do a share purchase plan, to do a placement, to do an entitlement offer a rights issue that means you've got to put the money in straight away. And we just saw the FGX, as I mentioned, the total shareholder return was a little over 50% for the period, we thought a very -- yes, a very equitable and fair way of growing the company was to have that option issue.

Thanks, Geoff. And just following on from that, you did touch on this a little bit. But Terry has asked, do the options themselves trade on the ASX? So could you maybe talk through the mechanics a little bit?

So what happens is, if you buy FGX shares now until they go ex on the 30th September, then you'll get -- for every share you own, you'll get a free option. And early October, the options will be starting to trade on the stock market. So what will they be worth? Obviously, it depends what the share price is trading at. The -- and usually, there's some time value of money in the options and some leverage in the options. So the options will trade. So you as a shareholder you might decide they might be trading like at $0.01 or $0.02 and you thought, well, geez, that's very cheap. I'll buy some. And then if FGX does well, then I can make a multiple on my money. I can just or I can exercise them and get some more FGX shares. Or if the options that are expensive, so they're trading at a high price, then you might think, well, actually I'll sell my options and take a little -- it's like getting another little dividend. So they will trade on the stock market until a week before the options expire, and that's in 1.5 years' time.

Thanks very much for that, Geoff. And we do have quite a few people asking this question, still in options issues. Are there any considerations or has the Board discussed anything about an options plan for FGG?

It sounds though someone was on the FGG Board meeting. The...

[indiscernible] asking that.

Well, I mean, the interesting thing is FGX was -- the share price was trading around -- it was trading very close to NTA. The share price was $1.45. And when -- and the NTA was $1.48, and then the Board decided let's do the option issue. With FGG, the NTA is around $1.84 and the share price is at a quite a big discount. Now my view is when people really digest how big the profit reserve is, look at what the Board did in terms of increasing the dividend from $0.02 to $0.03, also look at that profit reserve and think, well, in 6 months' time, wouldn't the Board think of paying another dividend of a similar magnitude, I think -- and with Caroline coming on board and probably just up really accelerating the [ shallow ] communication that you'd assume that FGG share price would move a lot closer to NTA. And as I said, NTA is around $1.84. And then I would -- if the share price was trading a lot closer to that $1.84, then the FGG Board could well look at an option issue. Now that obviously look -- but I would say that would probably be 6 months down the track. So yes, that's it.

Thanks very much, Geoff. I think that was all of them on the options issue. I'll let you know if any other questions come up on that. So Geoff, the next question is from James. Can you explain the benefits of the diversification in the portfolios? And how the investment committee applies that?

Yes. The -- and just on that is what both investment committees FGX has investment community, FGG has investment committee. I sit on both and also John Coombe, who's probably in Australia, sort of he's thought of as the godfather of effectively selecting fund managers. So he's a great resource. He sits on both of them as well. And the other members are totally separate. What both FGX and FGG are looking for? First of all, they're looking for the best boutique fund managers they can find to manage money in Australia and also manage money globally. And that's the real focus. Also, both investment committees are trying to find managers that work together. And that's trying to find managers that are long equities, but also some that have -- some more defensive characteristics. So more -- we talk about absolute return managers and their managers that might -- if they think the market is a bit expensive, they might significantly increase the amount of cash. Some of them actually [ must ] short sell some shares they own. But really, what both investment committees are trying to do is they're trying to give the market, if not better performance in the market, with less volatility than the market or less risk. And that's why there's a combination of managers. And so that gives you good diversity and also gives you some asset protection. And one of the interesting things is FGG, I know the numbers there, like over the last 12 months has been -- incredibly, there's only been 2 months that the index is down. But on both those periods, FGG outperformed the market. So we're trying to capture as much of the upside as we can but also protect people on the downside. So that's why we have the combination of managers.

Thanks very much, Geoff. And we'll flip back to the pro bono fund managers now. There's quite a few questions coming through for them. Ben, I think we'll go to you for this first question. This is from Christopher. Why is the yield curve important in the current value cyclical market cycle?

Thanks, Olivia. Yes, the yield curve is very important, and it's important because it's somewhat of a lead indicator on where the economy is going. And yield curves kind of work the same way, whether it's here or whether it's in the U.S., but the most commonly watched yield curve, of course, is that of the U.S. It's important because the slope tells you a lot about the economic predicament for a given economy where the yield curve inverts or goes negative, it tends to presage a recession or a slowdown in activity. And when it turns positive as it is now, that it points to economic expansion. And the steeper it gets, it generally dictates that an economy is -- our economy's fortunes are improving and rallying and widening. It also hence, that inflation is returning. So the steeper the yield curve gets, the stronger the growth and the more implicit or it becomes implicit that inflation will visit you. It's important for cyclical stocks and resource stocks because it is exactly that. It's the barometer of where levels of demand are and where consumer activity is and where investment activity is at. So it absolutely dictates the interest levels in cyclical stocks. And you can look at a map or a chart of where the yield curve has gone over time. And it will tell you possibly how much steeper the yield curve should get. At the moment, if you look at the 3 months, the U.S. 3 months, the 10-year section of the curve. It's about 130 basis points of steepness, having steepened about 170 basis points in March quarter of this year. But in previous cycles of economic expansion, the curve -- the yield curve has steepened beyond 170 basis points. It's gone out to almost 300 basis points of steepness in that part of the curve. So that should tell investors as in fact it informs us that there's further economic expansion ahead that all the liquidity and interest rate settings that we're enjoying will foster further activity. And therefore, that underwrites to some extent, interest in cyclical stocks and mining stocks.

Thanks very much, Ben. And we'll stick with you for the next question. This one is from Richard. What are some of the key things or the key indicators that you're looking at in the Australian economy right now, given that we're approaching some vaccination milestones?

Yes. Richard, that's a good question. And clearly, the fortunes of the Australian economy have been hinging heavily on lockdown and how quickly we get out of lockdown. So clearly, vaccination rates are a key focus. But just if we just look in terms of economic activity in markets and indicators, I mean, certainly, I always look at the sentiment indicators, I always look at consumer sentiment indicators and surveys, and I look at business surveys and indicators. And in both cases, we're seeing [indiscernible] that suggests that consumers and businesses are essentially looking through the lockdown and the lockdown induced weakness. We are expecting, of course, to have a pretty soft third quarter GDP print in Australia. But interesting to see the National Australia Bank, the NAV business confidence survey that came out for July trended above average ratings. I would have thought, as we were in full-blown lockdown, that business confidence we've been having. But in fact, it's been tracking quite strongly. So it's your confidence surveys that you should be looking at and keeping an eye on those for a lead indication of where things are going. I mean house prices provide another obvious level of confidence, and they suggest that as house prices rise, clearly, people are happy to become indebted and people are happy to expand their home household balance sheet. So that's a positive. And final thing is job adds. The labor market is performing quite strongly, and the level of job adds is increasing each week. So I think you should be looking at each of those indicators to take a temperature check on the strength of the economy and how forward-looking the economy is becoming. So there are a few of the things in my toolbox. I can't share them all. But there is a couple of indicators that I would recommend to Richard.

Thanks, Ben. That's great. Ryan, we'll turn to you now. We have a question from Adam. So Adam says, economic data is continuing to show strong growth. Do you think that, that will hit a peak soon?

If I knew when the peak and growth was going to happen, it'd be a very valuable commodity. We are seeing signs of durable growth in the companies that we own. Growth in the overall economic situation, it might be finite. It may be infinite. It's hard to tell, again, it's something that we don't try to predict because we're much more better off focusing on the qualities of the underlying companies that we own. And when we look at the businesses we own, we tend to own very high-quality company. And again, we look for those long-term tailwinds. And so one of the other defining characteristics of these very high-quality global businesses is the durability of their ability to grow their revenues. In the consumer space, we tend to favor luxury items. I think things like Louis Vuitton and Pernod Ricard and Ferrari. These companies have been incredibly resilient through multiple different types of market cycles looking back in history, and they've been able to withstand growth ebbs and flows as they happen in the market because of the aspirational quality of the products that they put out. Many of our other businesses have pricing power. So if growth does slow down or inflation does pick up, these companies can pass their prices through to the end consumer, and continue to grow over time. So you could argue that the growth is at a peak, today, but you could have probably argue that the growth was at a peak a few years ago. And that's a bit of a fool's errand to predict when these things will happen. We're blessed to only have to focus on a very concentrated pool of businesses to make sure that the economic drivers of that -- those companies competitive advantages continue to be healthy. We don't need the entire world to be being in a growth mode for our companies to perform well and have durable revenue growth. And so we very much look at the health of economies. We look at the health of the consumer. However, we tend not to pay too much attention to it because we're busy focused on not only our existing companies, but the companies that are on our watch list that are competing for capital in our very concentrated portfolio.

Thanks very much for that, Ryan. I think we'll stay with you for this next question. This one is from Sam. Are you optimistic about the equity market given the uncertainty we're seeing right now around the U.S. Federal Reserve tapering talks?

Yes. The Federal Reserve has been in the spotlight ever since the great financial crisis that occurred in 2008. The quantitative easing that has happened and the asset purchases that they've enacted to help study our economy here in the U.S. have had global implications. We pay attention to those things is another thing that goes into the list of the things we pay attention to, but we really don't make decisions off of. However, should -- we did see some examples of these moves in the past, right? So there was a tapering that occurred in around 2013, 2014 that had economic impact. There was a quantitative tightening that happened in and around 2017. That also had some implications to markets. The general comment around that is that it brought volatility. And as I said earlier, volatility allows us to really make offensive moves in our portfolio. We tend to be able to take advantage of that volatility to add businesses to the portfolio. We've long waited to invest in whether it was valuation or timing or portfolio construction. But in general, when market is going to provide us volatility, we tend to be operating from a front foot and taking advantage of that volatility rather than acting reactively and try to prognosticate what these new moves will do to the portfolio as a whole going forward.

Thanks very much, Ryan. And we'll just get through one more question for each of you. Maybe we'll flip back to Ben first for this. Are you able to -- could each of you actually share some of your most notable contributors to your portfolios over this recent period. Ben, could you start?

Sure. Happy to start there. Obviously, we have 2 portfolios represented in the FGX LIC. So I'd be happy to share a couple of great contributors in each of them. I would suggest in an emerging companies fund that will shortly close for those that are looking. Mainfreight, which is the big New Zealand freight group, freight forwarding logistics group has been an extraordinary contributor to our portfolio. Aussie Broadband also new to the Board has been a substantial contributor to our funds performance in recent times. I meant indeed in [indiscernible] before the chemical manufacturer and Storage Group has been a significant contributor, as has Capricorn Minerals and AFG, the home loans originator. On the small companies fund, we've enjoyed terrific performance in recent times from IRESS, which is a shareholding we put in place at the beginning of this business, actually, the inception, some 18 years ago, and it's been taken over as being in the midst of the takeover now. So IRESS has been a great contributor as has Pinnacle, Pinnacle Investments, which, of course, is a big investor and supporter of an owner of investment and fund management boutiques. EBOS, Bevel and IDP Education would also be up there as substantial contributors. So -- and in fact, I would say almost every stock has pulled its weight, but the ones I mentioned are the ones that have pulled probably the heaviest.

Thanks very much for that, Ben. And Ryan, what about you?

Yes. When we look at the construction of our portfolio, we tend to include a few different types of growth stocks. There are defensive growth, cyclical growth and secular growth. Defensive growth businesses are the ones that are anchored to the wind in volatile periods. Those historically have carried performance. Then when we come out of those volatile periods, it's typically the secular growth businesses, the very fast-growing companies that dominate performance. And then through periods of economic expansion or better periods, we look at the cyclical growth businesses that tend to carry performance. So in general, the portfolio performance will be driven by any one of those few buckets. In the recent period coming from the top performers, one of the best performers that we've had has been Shopify. This is an online business that allows companies to sell their products directly to consumers. It's been a real COVID winner because many businesses have had to pivot from their brick-and-mortar sales or the traditional ways to get to consumers by increasing their online presence, and Shopify competes directly with Amazon.com and provides a really terrific alternative for these businesses both large and small. From the health care space, WuXi Biologics has been a great contributor to our performance. We discussed that one a little bit earlier, but another one from health care space would be West Pharmaceuticals. West Pharmaceuticals is a business that's the dominant supplier of pharmaceutical packaging. You can think rubber stoppers used in vials and plungers that are in syringes. They've got a 70% global market share. And that business has done extremely well with the long-term tailwind of increase in biologics as well as the need for inoculations specifically related to COVID. Obviously, not part of our investment thesis in the first place, but this is a business that's sitting right in that value chain that will benefit from the growth in biologics. From the consumer side, Louis Vuitton Moët Hennessy has been a great performer for us. Their fashion and leather area has grown significantly and quite strongly through what's been a very challenging period. It really points to the aspirational quality of their products as well as the adept management team being able to get these products out to market and really maintain that demand in the marketplace.

Thanks very much for that, Ryan. And we're just down to the final minutes here. So Geoff, I will pass back to you if you have any closing words you'd like to say.

Well, thanks very much, Olivia, for doing the Q&A. And thank you very much for Ben, for making yourself available. And Ryan, thanks very much for staying up very late to communicate with the Future Generation shareholders. We all appreciate immensely your incredible generosity in both your organization. So on behalf of all shareholders, please, I thank everyone in your organization for what you're doing for us. The webinar is being recorded. So it will be up on the website very soon. And I'd like to -- on behalf of the Board, I thank all the shareholders for your support. My view is that the future is very bright. For both these organizations, we've got the smartest and the best fund managers in Australia and globally, managing the money on our behalf. We are investing in and/or providing money to children at risk and youth mental health in Australia, which is really is -- it needs it at the moment. And I suppose the icing on the cake is more recently, you've seen with the last results, the profit reserves are significantly higher than they have been historically. So we should assume a nice growing stream of fully franked dividends as these companies continue to grow and prosper. So thank you very much. If there are any other questions, please come through to us. As I said, this is your company, and we're only here because you allow us to be here. So thank you very much.