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

Welcome to the Future Generation's webinar. Before I begin, I'd like to acknowledge the Gadigal people of the Eora nation. The traditional custodians of this land we met here on Sydney, and I pay my respects to both elders, both past, present and emerging. So I'm really delighted to be joined today in person by renowned fund manager, David Paradice, who founded Paradice Investment Management in 1999, and he manages funds for both Future Generation Global and Future Generation Australia, and he does that pro bono. So with no management fees and no performance fees. And we have Steve Anthony, who helped cofound Giant Steps. One of Future Generation Australia's social impact partners. For those that don't know, Giant Steps specializes in working together to develop high-quality education and support for students with autism spectrum disorder and complex needs. So today's webinar, we're going to speak to our guests, Dave and Steve. And then Marty is going to come into the room, and we're going to give you an update afterwards on Future Generation. So if you have questions for Steve and for David, please enter them into the Q&A box, and we're going to monitor that throughout. And any questions for future generation as well, and then I will answer those afterwards. Thank you to everybody who's already submitted that some really great questions there that I will summarize. So to our guests, as most of you do know, David Paradice, one of Australia's most respected stock pickers and the founder of Paradice Investments. So he started as an investor in Australian small cap stocks in December 1999 for funds management business. They're experts in Australian and global equity. And David is also on the Board of Future Generation Australia. So he manages our money pro bono while his portfolio managers too. And so thank you, David. Thank you very much for that, and thank you very much for being on the webinar today.

No problem, it's good to be here. Thank you.

Thank you. And Steve, who is also there in the other room. He basically is one of -- he cofounded Giant Steps, as I mentioned, but also he worked from Citibank from 1992 and he was Head of Investment Management in Japan. And then he's Head of Financial Markets in Australia to '96. So he helped cofound Giant Steps in 1995. And in 2016, he established SILC, which is supporting independent living cooperative to help other groups of families really establish cooperatives to approach similar homes under the NDIS system, and he's recently retired as the pro bono CEO. So you guys don't need any introduction to each other. You first met in the '70s at Sydney Uni, you played Rugby together. And I suppose just one quick question. Who was the better player?

No, no, no. He never -- he was also the coach, and I showed him that I was great, but he never picked me.

But their lives have been firmly intertwined ever since. In fact, we were just talking about how David contributed to see in terms of Giant Steps when they were at a launch that was organized by Michael Hawker, who many of you might know who was that sort of Rugby great. I mean is it worth Steve, you just quickly going through that story because I think it really shows how you've worked together over the years, and Dave has been a very generous supporter of Giant Steps. And now, obviously, you've been a consultant to Paradice Investments as well.

Sure. David had forgotten this, but I hadn't. In 2003, Mike Hawker organized a lunch to raise money for Giant Steps and invited David and he also invited Dick Davis, who was the inaugural CEO of a company called InvoCare, which had just been listed, and David was as an investor. And David very generously said that he would donate $1,000 to Giant Steps for every cent that the InvoCare share price went up in the next 12 months, they went from $2 to about $3. So ended up donating $100,000. And ever since then, he's continued to be a very generous supporter of Giant Steps.

Yes. That was good [indiscernible].

And in fact, a funeral parlour. And in fact, in a way, I think it's not dissimilar to the idea of FGX that in our fund -- the fund managers are contributing a percentage of their gains to help charity. So [indiscernible] Geoff Wilson's thunder, but in a way it was -- Para was about 13 years ahead of him.

It's a very unique vehicle in terms of what Future Generation. So let's go to David in terms of markets, and we'd really like to get your view. Obviously, it's incredibly volatile at the moment, and everybody is looking at Australia's economy. A lot of our shareholders basically talking about Australia being one of the better performing markets in the world. And one of the questions there is, how do you view the Australian market relative to opportunities overseas at the moment, David?

No. I think Australia is in a reasonably good place. It's obviously got our commodities and, over the years, there has been an underinvestment in a lot of commodities, especially energy, palladium and other particular commodities. And Australia is proving to be a beneficiary of that on the commodity side of things. But also, if you look at Australia and it's -- there's a lot of the -- in the same Asian time zone, and there's a number of things that benefit Australia over, say, other countries up there. So it's like -- it's a nice place to visit, tourism is strong, healthcare is strong, technology -- a lot of people come to -- a lot of Asians come down here for -- to go to University as well. So education is strong. And so if Australia continues to focus on that as well as the commodity side, I think long term, Australia is in a really good place to be. I mean at the moment, the currency, as you probably know, is being belted and that's just because people are really uncertain about where things are going. And that's, as you said, inflation driven. And you had this up until the beginning of this year. I mean the year-on-year number for the beginning of this year was, say, 10%. And that 10% inflation is concerning. If you look at some of the emerging markets, countries like Argentina, for example, inflation is about 60% or 70% and interest rate is about 80%. We obviously don't want to get into that particular area. But I do feel that we are beginning to see that the rate of increase is declining and interest rates, the other day, the Americans came out with some good labor numbers, strong labor numbers. And so they felt that interest rates going to go up. So the equity market went down. So actually, what's weird is that the market is looking for weak indicators, economic indicators coming out to go up out of that work well. That's how the markets work, the markets look a fair way in advance. So we have a view that things -- although things -- there's a lot of people that are very nervous at the moment, but that always says to me, it's probably not a bad time to start sniffing around in 2 years' time. I mean, I don't know, but in 2 years' time, you would see that the equities is not a bad place to be.

So we've talked -- I mean, obviously, you talked about Australia a little bit globally there. Geopolitics, what should people be looking out for? What are the things that you look at?

Look, it's very tough one because you've got China and Taiwan, North Korea and Japan, and you've got Ukraine and Russia happening at the moment. And there is some concern there. The thing that's driven part of this inflation has been; one, coming out of the pandemic, and there's been massive demand. But two has been the kind of general lockdown in China because of COVID. And three, the Russia and Ukraine war has put a bit of a skid under the oil price, which has been inflationary. And it's also caused the energy issues in Europe. So that last one is obviously a bit of a geopolitical thing. Now who knows when it's going to get sorted. But it does -- those things overshadowing the market, it can be an issue. But it's not like at the -- like back many years ago in 2007, there was a fundamental problem with the GFC, Global Financial Crisis. It's not like the economies are broken at the moment, you've got this inflation. But in a year's time, you would hope that inflation has come back a bit. And you are seeing it happening at the moment, like I said before, you are seeing not so much declining, but the rate of increase is slowing down. And you're seeing that the labor shortages aren't as great. You're seeing the cost of transport, say, shipping costs is winding right down. So you're seeing the demand for labor from IT people is going down a bit. So there are signs that inflation is not going to keep on going 10% year-on-year. So next year, around about this time next year or, say, at the end of this year, you will be looking at a lower number you would think, which then has ratifications for interest rates and equity markets.

So the IMF has just downgraded its growth [indiscernible] in '23, it's going to feel like a recession for millions of people. And I think people are fearful, but they're also quite hopeful. I mean, as you said, you've got surging inflation, further interest rate hikes. You have also recently said and you just said that maybe the time was to look at that stock picking. What do you actually mean by that? And is it really now? Or is it over the next quarter?

No, I think it's over the next -- if you've got a long-term view, which you should have been investing, that being a kind of contrarian investor, where you're investing in companies that are still growing, but there's been a deterioration in the evaluation, say, because of interest rates. So the fundamentals of the business is still the same. It's just that there's been a move away from what they call growth stocks, which is these companies that buy technology stocks, which have got growth many years out. And what happens is people apply -- I'm going to [ try and get too ] technical here, but people apply an interest rate to those earnings to bring them back to current day discounted cash flow and their present value. And if rates go up, then the valuations of those goes down. There's a number of stocks in the NASDAQ and around the world that are still producing good cash, but the valuations have come down. And the growth -- you can see their growth entering into new markets, and it's not like they're reliant on, let's say, the economy to turn, they -- like Amazon has grown from next to nothing over quite a few years, but that's not like where you've got something like large companies [indiscernible] and Ford, they went like that, and then they kind of went like that. The things are changing so much at the moment because of technology, and that is creating growth without relying on the economy, and it's those kind of companies that have been marked down quite considerably over the last couple of months. And amongst all those companies, there are technology, there are beginning to be good things to buy. But also not only going into technology, we talked about a reduction in spend on some of the commodities. People said there hasn't been a lot of money spent on exploring for oil. Uranium is also another area especially as the world moves into more of the green energy, things like uranium, and we're a big shareholder in Paladin and a few things like that. But there has been an underspend and a structural -- underspend on supply and a structural change in demand and a lot of these things, and that does create opportunities. So here, look, it's -- people talk about copper, for example. I mean I'm not a big buyer. I mean companies where you have to rely on outside forces like whether it's currency, whether it's interest rates, whether it's commodity prices, things that you really don't know where they're going to are always hard to pick because you can't pick those particular data points. But over the long term, you're a believer that there's this massive change to electric vehicles and away from the carbon side of things, then things like copper or things like Paladin are going to be a beneficiary of that, but you have to take a long term view and you have to do a lot of work on the particular companies because there's a number of companies that I've invested in over the -- over many, many years, which I remember there was one -- this massive amount of -- I'll try and describe it easily -- had this massive amount of oil under the ground and they were able to show it all there. The only problem is that it is miles down, kilometers down, and it was in the ocean. The only problem is that it's like black spaghetti, right? So it was all over the place. So if you're trying to drill it, you couldn't. The ore body was very ordinary. And there are a number of examples like that of companies that have been worth $1 billion, $2 billion that have got a really bad asset, but they've gone up on the back of a dream. And I give it to people like Andrew Forrest and those kind of guys that I know is a lot easier because it's on the surface [indiscernible] and you can read the iron ore body a lot better. But for every one of those Fortescue's, probably about 20,000 ones that don't do very well. So it's all about my job or the people who work with me, their job is to go and pick good investments.

I think I might just draw you back on investment styles. You just mentioned then that it's been that sort of growth investors who have been the really big winners. So what does sort of -- where does that style of investments sit in the current market? And who do you expect to be the winners going forward as we continue into that sort of high inflation market? What kind of investment style is going to work for the foreseeable future?

Look, over the long term, buying good quality companies that are growing or conversely buying cyclical stocks that are super cheap and the economy is going to pick up the stocks that will benefit. The guys that are buying blue sky -- pipe drains, and they have their short-term blips, but long term, they do get -- they -- the bandits end up getting you. And I've seen over the years masses of situations where -- and I'll give you an example, I think back in 2000, I had a company that came in and saw me, it was a technology company. I think it was valued about $1 billion. And I was looking at some brokering reports and it was towards the end of the reporting season. And a broker said it was going to make $100 million, another broker said it was going to make $200 million, another broker said it's going to make $300 million. And so for the market to be -- have got this really, really inconsistent message. They said to me, there's problems here because the company is just telling the community -- the investment committee -- changes their tune, and it's massive divergence too. And that company ended up going broken. There's a lot of companies back in 2000 -- because I think the -- I started in March 2000. And the first 3 months were horrible for me because we underperformed when I just started, and we only had $30 million. But then in about June, July '14, I think, it was, market started turning down and all the speculative stuff came out of the marketplace. And we started doing very well because we based our investment on fundamentals and not on speculation. So the IT guys that speculate won't do well over the long term. They might do the short-term stuff, but buying quality companies is, obviously, always the way to go.

Yes. So I might turn to Steve now. I mean, obviously, the Giant Steps is one of our key partners. And when Giant Steps was founded, it was experiencing autism and to alleviate the associate stress and to guide the achievements of measurable results. And Steve, I'm really actually interested how did it come about what or who inspired you to start this pretty amazing school at a time when there really wasn't that much else at all?

Well, actually, I man called, Rob Llewelyn-Jones, heard about Giant Steps which was a school for children with autism based in Montreal, Canada. And he got a group of 6 families with children with autism together and said let's work out what we need to do to establish a school in Australia. And so that's really how it started.

And why did that model appeal to you? Why did you decide to do a school?

Because what Darlene Berringer and her school in Montreal did was to include on the one site, not just teachers, but one-to-one support for these students and a whole range of therapies. So they had, as we have, speech therapists and occupational therapists and music therapist, working collaboratively as a team and the benefits of that to children with severe autism is massive. And so we said, well, that's the state-of-the-art, let's bring it to Australia.

So you started in 1995 and you had, what, 12 kids and you ran the school out of a small administration block. How has the school evolved over time? And I mean, obviously, now you've got School in Melbourne. Tell us more about that and what you're doing in terms of the programs?

Sure. So look, in 27 years, it's grown beyond our wildest dreams. So as you say, we started a school in Melbourne, I think, about 7 years ago. We started an adult program. So my son Patrick was 5 when Giant Steps started and he is now 33. So we started an adult program in 2009, and they have 2 years ago started adult program in Melbourne as well. We've established the Rob Llewelyn-Jones clinic so that the children and adults with autism don't have to go and visit a doctor or go to a hospital which is very difficult for them. But the doctors come to the school and see them in their familiar setting and meet with the whole team, so the families and the staff that work with them as well. So it's going beyond our wildest dreams.

I mean we've had, obviously, the pandemic and that's been incredibly tough for many, many people. Can you give us some insight into what was it like for the families with autistic children? And how did you at Giants Steps get through in terms of how did you manage to stay open and funding?

Well, the credit to the staff, the program ran pretty much at full capacity for the whole of the pandemic. what they did was to -- and the parents -- 1 or 2 parents withdrew their children to the family home, but nearly all the parents, including us, said we actually can't manage particularly during lockdown with Patrick at home 24/7. And so they organized the school in bubbles so that there were -- fortunately, we've got quite a lot of space at the site. And so pretty much 1 staff member worked all day with 1 student and they didn't come in contact with anybody else. Say the risk of spreading infection was very low. From a fundraising point of view, the pandemic was a problem because we -- so when we started in '95, we received a $0.5 million of funding and had to raise $0.5 million. So pretty much the formula hasn't changed. We needed to raise -- because we have the therapies and high ratio staff to students, it cost us a lot more than the government provides and so we have a substantial fundraising task. So that was $0.5 million in '95, it's now $6 million a year. And so we've relied very heavily on generous donors like Para and FGX has been amazing. But we raised about $10 million a year from events. So we have a ball every year, which raises $0.5 million and organize a bike ride and have for 18 years, which David's participated in with Mike Hawker [indiscernible] actually and that raised a couple of hundred grand a year. Well, during the pandemic, all those events were canceled. And so we had quite a big hole. But people have been remarkably generous, and we managed to get through the -- and of course, donations like the money that comes from FGX, continued during the pandemic. So we managed to stay financially viable and to give fantastic student service to our students and to our families.

And how great is this -- how great is the need for this type of school?

It's substantial. So I mean, Giant Steps caters for very high support needs people. So autism is a spectrum and there is a lot of people in the financial markets are probably on the spectrum, including myself. But the group of students that Giant Steps support are at a very high end of support needs. And which is why they require very -- a lot of resources to make things work best for them. So look, there's plenty of demand. Fortunately, the NDIS has done a lot of good for people with disabilities. So it means that many people in the NDIS now have access to therapies that they previously didn't. And also, fortunately, the general awareness in the community of disabilities like autism has changed massively in the last 30 years. And so people with disabilities like autism are much better off. But still, I don't know, Giant Steps has a waiting list with, I think, 400 people on it, and we have 130 students. So there's a massive increase of demand over supply in terms of such services.

I think the work that Giant Steps do, the teachers, all of the people that are involved is really impressive in terms of the results as well. We just got a few questions coming in. But I just wanted to ask you, David, what is the question you asked Steve and Steve, what is the question you would ask David? Because I mean you obviously know each other very well, like what is the -- what do you talk about on a regular basis and what's important?

Well, he comes and helps me with my business. So our discussion revolves around that a lot of the time, doesn't it?

Yes, yes, yes.

Well, it's joking around. My question for Steve, just listening to that was how do you fill up the 400? How do you take account -- what happens to the people outside the 130 that aren't getting there?

Yes. Well, a lot of them want them go to local schools with different levels of support. Some of them are homeschooled, some of them miss out, so it's like anything where there's the need exceeds the viable services. And some people will have to survive with less than optimal support.

You guys must save the government quite a bit of money by taking into...

Well, that depends on how you look at it. So...

So why wouldn't they go and support you more?

Well, it has been -- we -- well, we get the funding which the government provides to special schools, right? And we -- our [indiscernible] has always been that we need that. With that we couldn't operate absolutely. But if you get so much extra value from the additional resources that we've -- our model depends on that. And we've -- so some people surprised, we've gone for 27 years and grown every year and managed even through the COVID, managed to stay financially viable. Basically because people are amazingly generous actually. Even during the pandemic, we had almost no drop-off in donations which is incredible, right? So we had a big drop-off in terms of events fundraising, but almost no drop-off in donations. One of the things which happened during the pandemic so one of the things which FGX has enabled Giant Steps to do is establish a learning hub, which is incredibly important because not only -- so we've got 130 students and nearly about 120 staff and they require a lot of training. So the learning hub facilitates that. But it's also -- they also do training for the families and people who aren't at Giant Steps. So you mentioned SILC, I've been involved with and SILC has 130 employees also in our 12 houses. And almost all of those have been trained by Giant Steps in terms of how you support somebody with autism. And during the -- during COVID, there was no ability to do face-to-face training. So Trish and Rachel, who run the learning hub, developed a whole suite of online training programs, which thanks again to FGX, but which has meant that people were able to continue to learn about autism and how to work with people with autism most effectively even during the pandemic.

Excellent. Thank you. We've just got some questions coming in, and one of them is to David in terms of -- you talked about the tech companies, tech sector or described as the profitless tech sector, not performing. And obviously, it's been hit hard recently. What value or potential do you see in that sector?

I think there's potentially massive value there, but because -- taking a contrarian view there are things out there that get thrown out baby with the bathwater, so to speak. And there's great value, and it happened back in 2007 when [ SILC ] and car sales and realestate.com got turfed out, and they turned out to be massive buying opportunities and they're multibillion dollar companies now. So those opportunities are out there. It's just a case of finding the buggers, it's hard.

That's what the stock pickers -- that's the way you guys do. So it's important. So another question was, you have seen many economic cycles. What are your thoughts on this one? And how do you think it's going to pan out? Is it going to be the same? And is it how long do you think it will last?

I don't know. But I do -- I think that in the short term, interest rates probably will start going up. And as I said before, inflation is still moving up, but the rate of change is diminishing. And so I do think that if that was the case, say, some of the companies that we've invested in at the moment, Computershare, which is a share registry, which has a lot of cash on its balance sheet and it benefits from interest rates going up in the short term. Long-term rates will start rolling over and when that happens, financials are the place to probably be. But I do -- in these situations -- and it happened in the bottom of the pandemic where people were saying, "Oh, you've got to get rid of staff, you got to do this and you got to do that." I feel these times create great opportunities. And within the next 6 months to a year, I think we'll have some better clarity and I think it's a good opportunity to start sniffing around and if you're a contrarian, for example, there's lots of little opportunity. Someone was explaining to me today that because the Aussie dollar is quite low, that gold prices as Aussie dollar terms are near their highest. But the share prices of gold companies, for example, are at their lowest, 98% of the companies probably aren't worth a great deal, but there's a few out there that have been where the baby has been thrown out with the bathwater. So look, it's not like the whole system is broken. I think that in 6 months to a year, things will be -- will have a lot more clarity and view better.

Caroline, you invited me to ask David a question. Can I do that?

Yes, please do, please.

So as a naive person, everybody seems to think that interest rates going up is a massive problem. But if interest rates go to 5% or 6% and stay there, is that really excessive?

That's a really good point, Steve, because you might have been alive in '87.

No, we remember when interest rates were 15%, 18%. And that was not obviously good for the market, right, and for profitability. But I think that everybody's got used to be 0 interest rates and everybody is getting very distressed at the moment that the poor people who have just bought a home for the first time might be able to pay the mortgage payments. But I would have thought that in the long run, we've got to get used to interest rates around 5% or 6%. That's a sort of moderate level.

That's a good point. It's still low relative to -- absolutely, I know that. And quite a big retailer in the country said the same thing. We think things are pretty good at there, rates and not like they were many, many years ago. And unemployment is quite low. So people are getting paid and I mean, yes, sure. I think you're right, there are some individual balance checks when people buy houses at the top and 1% increase in interest rates is quite significant to them. But generally, a lot of the small to medium enterprises and people's balance sheet are okay. So yes, no, I think you are right, rates are low.

I'm just going to ask you the final question from a shareholder. David, you mentioned the next quarter, it might be time to start stock picking again. What is the main thing you look for before going all in?

Sustainability of earnings and cash flow relative to, say, the size of the company, like business strength, margins and all that kind of a stuff are very important. But what's good at the moment is like a year ago, when the equity market was 25%, 30% higher, and there was a massive amount of speculation in the market. It is really hard to find those particular companies because the valuations were so high, [indiscernible] was a good quality company, but the valuation was really high. And what's happened over the last 9 months to a year that a lot of stuff has fallen, and so you can find good quality companies that have those attributes and those asset strong cash flow, strong balance sheet, strong margins, defensive positioning and significant growth runway. They're out there and they're hard to find, but they're a lot easier to find nowadays.

Yes. Thank you. Thank you very much, David. Thank you very much, Steve. You are incredibly important to us Steve in terms of Giant Steps and the funding that we've given you since inception. And David, thank you very much for your support for Future Generation Australia and Future Generation Global with both of the funds that manage our shareholders' money, so we can give that 1%. But thank you very much, both of you.

Thank you very much.

No problem. Thank you.

I'm going to give you an update on FGX and FGG, and just briefly go through what we've actually just seen in terms of the last quarter. So one of the things I actually wanted to talk to you as well about is the IC. So we have 2 investment committees for both companies, and they're responsible for selecting and monitoring the mix of fund managers and our investment styles. And I'm going to ask Marty McCathie to come in and actually talk to you a little bit about the Investment Committee and how we're actually making sure we have that diversified investment portfolio and try to outperform through the market cycles with reduced volatility and downside protection. As you know, in FGX, we have 18 leading Australian pro bono fund managers. And obviously, you've just spoken to one of them, and we have 24 funds there. The managers include Regal, Paradice, Coopers, L1, Firetrail, to name a few. And on a look-through basis, the investment portfolio now has its view towards small and mid-cap companies, and that did weigh on the Future Generation Australia investment performance during the year. As you can see from this slide for FGX, we have increased our fully franked interim dividend. I hope you can actually see that. We've increased our fully franked interim dividend by 8.3% and profit reserve of $0.29 per share, and the dividend yield is 5.5%, and that's based on Future Generation Australia's 11 October 2022 share price of $1.175 per share. And the annual year '22 fully franked interim dividend of $0.065 per share. Our grossed up dividend yield is 7.9%, which I think is very strong. And our dividend coverage there is 4.5% -- sorry, 4.5 years. So if you look on the other side in terms of Future Generation Global, that's our global investment portfolio and it's made up of 13 leading global pro bono fund managers, and we've got Munro, Antipodes, Cooper Investors and obviously Paradice, to name just a few. So for FGG, we've increased our fully franked interim dividend by 16.7% and, obviously, that's now twice a year. And the profits reserve is $0.452 per share. The dividend yield is 6%, and that's based also on Future Gens Global's 11 October share price of $1.165 per share. And the annualized full year '22 fully franked interim dividend of $0.07 per share. So the grossed up dividend yield there is 8.6% and dividend coverage is 6.5 years. So the investment portfolio remains exposed to absolute bias managers and traditional long equities managers, and that did weigh on Future Generation Global's investment performance during the period, especially given the volatility in global equity markets throughout the year. We're very well across in terms of what's been happening in Ukraine, inflation, supply chain issues as Dave was talking. The Future Generation Global Investor Committee reviews the individual fund managers within the portfolio continually, especially during these volatile times, and we have made changes to the investment portfolio and welcome new fund managers which I will ask Marty to talk about. So the slide here, which is our fully franked dividend since inception, you can see really there where we've got that stream of fully franked dividends. And you can see how it's increased in inception to the benefit of our shareholders. And that's really -- that's what we're all working towards to making sure we increase that fully franked dividends for both of the companies. You can see there that the fully franked interim dividend is up 8.3%, $0.0325 per share. And then for FGX, it's at $0.0325 per share, which is up as 8.3%, as I said on the previous slide. I think these slides are worth looking for because for both companies, it's very consistent with what we're trying to do and is pay that stream of fully franked dividends to shareholders. And that's something that we really hope that, that will give you long-term certainty, especially when we have the profits reserve. So now I'm going to ask Marty to join us and to go through a few questions. I think, Marty, are you here?

Yes.

So we're getting some questions in from shareholders. And I think they're really important. A lot of them are about the IC and what we're actually doing in terms of that portfolio construction, the diversification and also the fund managers, but one of the main questions we've got is like how do we choose the fund managers? And Marty, who is on the IC is the perfect person to answer that. So thank you, Marty.

Thanks, Caroline. Look, how do we choose the fund managers? And I guess what's probably interesting is how we identify the fund managers and how the opportunities to invest in these managers come along? And then capital and the due diligence process that we go through. So on the identification of fund managers, we're extremely lucky across both investment committees to have representation from [ Jana ] Lonsec, the co-founder of Zenith, Morningstar and E&P Research. So we're able to leverage...

And fund managers that really know what's happening in the market about, which I think is really important.

I think so. And I was going to get on to that. But I think with the research side of it, obviously, we're able to leverage them and their teams. The meetings that they're conducting annually with the fund managers, and we can leverage the output from those meetings. And as you said, the fund managers themselves, fund managers are a competitive bunch. They tend to know their peers who is performing well, and up-and-coming managers as well. So great opportunity for us to get access to up-and-coming managers. The other point of that is, as Future Generation as the profile of both companies has grown. We've been going for almost 8 years now in the case of FGX and 7 years for FGG. The number of inbound inquiries we're getting has significantly increased. Managers approaching us who want to be involved with the unique model that we provide and looking to get back to the community as well. On the onboarding and how we go through that next step once we've identified potential managers and that's over to the investment community to complete our due diligence framework, which includes scrutinizing the trust, the service providers, the security of capital, but also meeting with the managers in person and going through that process understanding how they fit within the construct of our portfolio to make sure that they'll add value to our shareholder base.

So the next question, actually, which I'm summarizing because I think it does really follow on, in terms of the portfolio diversification. The -- why are there more fund managers in FGX as compared to FGG? And then if you -- one of the questions that comes in is like if you could just briefly talk about the diversification in each portfolio, please.

Yes. So looking at FGX, it does have a larger lineup of managers, there's 18 managers, 21 funds. And in the case of FGX -- sorry, FGG, it's 13 managers at the moment. With FGX, it's obviously a domestic product. The Australian market is a lot smaller than global markets. The capacity that Australian fund managers have compared to their global peers is a significantly smaller. And therefore, the capacity of the managers are willing to give up on a pro bono basis as a result of that is smaller again. So what we've got with the group of managers that we have in FGX, the smaller managers whether they are managers that have given us maybe less capacity but they've done so because they are either investing in a niche investment process or investment philosophy, which we believe adds value or they're investing in that small micro-cap scale of the market and they want to be able to remain nimble and active and add performance to shareholders. And pleasingly, the tail of managers have done so for us. There've been outperformers compared to some of the larger managers, which is why we've decided to retain them. On the second part of the question, was it diversification?

Yes.

Got it. So on the diversification across both, I guess, one of the criticisms often laid against fund of funds is that you end up with 2 managers in the portfolio, competing or opposing views, their strong views are offset somewhat and you end up with index or index return. With the analysis that we've done with FGX and FGG, we go through this on a quarterly basis with all of our managers. We have a very -- from a portfolio construction point of view, we've got a very active share percentage, which means that we're not giving shareholders index style exposure or index style return. So an investment in FGX or FGG can be really complementary to a broader investment strategy. [indiscernible] take you ASX style ASX 200, 300 and really give you exposure to [ and research under covered ]...

So one of the next questions I'm just reading it out is, FGG has underperformed the benchmark. And what are the drivers for the underperformance and how are we addressing on it. I mean, firstly, I would very much like to say that it's something we're incredibly focused on. I mean it is primarily -- it is an investment vehicle, and it's really important that you have that performance and that's something that the IC is working on. I mean, we have an extraordinary bench of fund managers, and they are exceptionally good at what they've done, and they have managed the money incredibly well over the long term, and we expect them to do the same again over the long term. But I think, I mean, Marty, maybe you could speak a little bit to the IC process in terms of how we've recently changed the portfolio and in terms of that, the bias in terms of growth and what we're actually doing there, please.

Yes. And I think to start, I think it's important to know how active and busy the FGG Investment Committee has been. We have been meeting on a very regular basis. There was a period this year, we were meeting more than monthly where we've got a scheduled meeting cycle of quarterly. So we're really getting our pound of flesh from each of the IC managers as we look to navigate these extreme situations we're seeing in equity markets at the moment. Within FGG, as I touched on earlier, we do conduct look through analysis in the portfolio as part of our risk management framework. And what that has given us is an understanding of the drivers for performance in the portfolio. And we've long known that we've growth bias in the portfolio. And we've long known that we've had a bias to small, mid and micro-cap as well. Both are a function of the managers that we've got and a function of where they have been able to find value and believe they'll find long-term value within their respective funds. What that's resulted for FGG and our portfolio performance is as we've seen a derating of growth companies and, I guess, a return to value, that's hampered performance. That's been, in addition to that, small, mid-cap stocks globally and domestically have underperformed large-cap peers. That's [ horror ] performance. And there's been an element of idiosyncratic fund manager underperformance in there as well, which is kind of compound it and wrap it all off. I guess we have had a couple of exits in the investment portfolio for FGG. We are recycling that capital at the moment. And we're taking this time to make sure that we're bringing complementary managers into the fold. There's an opportunity at the moment to add strategies, which are complementary. And to that, we've added quant strategies. We've added 2 managers in the quant space. We've also added a value manager to subtly [indiscernible] play that, and we'll be making a fourth investment imminently with another value manager, which will hopefully complete the rebalance of the portfolio. And what we're looking to do there is set that portfolio to perform over the next 5 to 7 years. There will still be changes. I'm sure things will happen, managers will come in our favor. But we do take that longer-term view and think we've got the right mix of managers from a style perspective on a go-forward basis.

So we have another question, and I'm going to read this out verbatim. So, our shareholders like to really know about thoughts, targets and trends around ethical types of investments in the portfolios, particularly clean energy, biodiversity, inclusion, circular economy. And this is with FGG. And do we have any fast drives in plan to remove all fossil fuel linked companies from the portfolio? This is Rebecca. She's actually hoping for that. I mean I think it's really important. I mean, we have this huge social impact working with these amazing not-for-profit organizations to help sort of [indiscernible] of Australia. And I mean I look at the FGG portfolio, and that's what 99.2% ESG aware. And we're very lucky we've actually just got the new [indiscernible] reporting on the 11th of October. So we have no exposure to weapons and some other sectors. But Marty, you were just going through it yesterday. Would you -- just at a high level, what sectors are we there? And what are you looking at in that respect?

Yes, hot off the press. I guess from a sector and industry's perspective, I know you talked about ESG aware there. We've got a couple of sectors that we classify as non-ESG aware, and where we've got exposure there is gaming and casinos. We've got a small exposure there, less than 0.5%. And we've also got exposure to vineyards -- sorry, Vineyards alcohol vineyard and breweries, again, less than 0.5%. Sorry. So as you said, no ammunitions, no tobacco, which is pleasing from the portfolio. We don't enforce negative screening on our managers. So our managers can hold any stock around the world unless they have their own internal ESG framework and policy that they abide to. We don't enforce it upon them.

But we're seeing a number of them now sign up.

Yes, we are. And I've been involved with FGG and FGX almost since inception and worked alongside the Investment Committee. And what we have seen is that really pleasing transition. David is a great example of a fund manager that has brought an internal capabilities in relation to ESG, incorporated ESG principles within their investment process and the broader team. And we're seeing that trend throughout our managers, especially in the global space. it's definitely more prevalent.

And we're seeing a lot of our fund managers. I mean you sort of read about it in the newspaper. It's actually lobbying the companies to do better. And I suppose that the argument is if you don't lobby them to do better and get them to do better than they just slip off the radar and therefore, they are sort of allowed to sort of continue on their own devices.

Exactly. And it's that active ownership versus exclusion and I don't have the answer for which one is the right way, but, yes, I definitely prefer the active ownership. You can make meaningful change by owning the shares instead of simply excluding them. So that's where we're at today. We've seen positive change and then hope that continues into the future.

So our last and final question, because I'm very aware of time, is -- and this probably wraps up what most people are asking about is that sort of are we getting enough diversification through our fund managers? Are you comfortable where the portfolio is sitting from an IC perspective?

Yes, we are. And we've made a lot of changes with FGG. There's one, as I said, that's imminent. We're in discussions with a couple of managers. What's pleasing joining the IC, we've got additional resource now. And what we're able to do is really engage with the managers more regularly, not only existing managers, but prospective managers. And the plan there is to have a bench of managers that if for whatever reason we lose a manager, we've got a like-for-like replacement or if we lose a manager and we want to make a change to the portfolio construct, we can do because we've got an opposing manager or a complementary manager that can come into the mix. From a diversification standpoint, I think we've covered a lot of it already. It's -- you're getting non-benchmark style returns. Definitely, that small, mid and micro-cap exposure, as our managers are seeking value in underresearched, undercovered segments of the market.

Excellent. Thank you. I think I'm going to wrap up now due to time, but I really wanted to thank David Paradice and, obviously, Steve Anthony, for speaking to us today and to Marty from our Investment Committee. We are incredibly grateful from the support of our shareholders and what we're actually trying to do and also to the fund managers that work pro bono with that no performance fees or management fees and also our service providers. We're looking forward to our next update. We released a podcast on Monday with Tim Minchin, talking about the business of giving. I really encourage you to listen to it. It's really -- it's very entertaining. Thank you very much again for joining us.