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

Thank you very much for joining us today. I'm Caroline Gurney, the CEO. I would like to acknowledge the Gadigal people of the Eora Nation, the traditional custodians of this land where I sit today. I pay my respects to elders, past and present. I'm delighted to be joined today by 2 of our leading pro bono fund managers. We have Tom Richardson, who is the Lead Portfolio Manager at Paradice Investment Management; and Nicholas Markiewicz, Portfolio Manager at Lanyon Asset Management. Both of whom manage funds pro bono on behalf of Future Generation shareholders. We also have Geoff Wilson, Founder of Future Generation, Founder of Wealth and Asset Management, who will be joining in the second half of the webinar to discuss our half year results. I'm just going to acknowledge the disclaimer, and obviously, we cannot give advice, I'm not going to read it in full. As you know, the Future Generation companies are unique. They're Australia's first listed investment companies that provide investment and social returns, offering a very unique opportunity for shareholders to invest with leading Australian and global fund managers while supporting high-impact, youth-focused, not-for-profit organizations. In order to achieve these dual objectives, all of our pro bono fund managers, including Tom and Nick waived their usual management and performance fees, and this allows us to donate 1% of our average net assets to not-for-profit. Thank you, Nick. Thank you, Tom. I've asked them both to discuss their market outlooks, highlight some investment opportunities they are identifying as well as answers to shareholder questions, which I'm going to incorporate in the Q&A. Please continue to submit questions in the question box as we go. And thank you to everyone who's already submitted, and we have a fair queue. If we don't get to them today, we will definitely bring you an answer. So let's get down to it. Tom, Nick, thank you.

I might kick off with my first question. So we're nearing the end of 2023, and it's been definitely arrived. So I'm interested in how the end of the year is shaping up, but also what's going to happen in 2024? Perhaps each of you could give a very brief market outlook and tell us how you're actually positioning your portfolios to cope with these challenges. Perhaps Nick, if I can start with you with globally and perhaps the 3 minutes, please.

Yes. No worries. Thanks for having me, Caroline. So I think maybe just to summarize our view of the markets right now. It's a very confusing outlook, I would say. There's lots of mixed economic variables out there that are showing different things. Some are pointing to recession. Some variables are pointing to quite robust conditions. So there's confusion on the ground, but then also a lot of confusing signals from markets and price action as well. So if I was to summarize what we're seeing at the moment, it is the real economy, both globally in Australia and mostly outside the U.S. is slowing, and it's slowing quite quickly. We're seeing that in manufacturing data, trade data, commodity prices, things like that. At the same time, the consumer has been broadly robust in most markets. We're at record unemployment -- record low unemployment levels. But that is slowly starting to change and consumers have run down a lot of their savings that they've built up through COVID. So certainly, a few obvious question marks for the outlooks of a lot of companies. And probably the thing that snuck up on us recently that is causing some confusion or at least a few more question marks around asset prices is the rise in bond yields. And what we're seeing right now is U.S. DASH is now selling off. That is the yields on that debt are rising, and they're rising because I think we're now starting to see question marks over the U.S. government's fiscal position and their ability to fund their deficits and then pay their debt. And why that's really important is that the U.S. treasury -- 10-year treasury is considered the risk-free rate. That is the lowest risk needed to generate an adequate return. And most assets globally price off that. And when you start to see U.S. bonds selling off, it typically leads a lot of other asset classes. But as people probably know, we haven't seen that yet in property. Property prices stayed robust. We haven't seen that more broadly in equity indices. So there is a big, what I would call, a disconnect now growing between what we're seeing in the bond market and what we're seeing in other asset classes. So I'm always a bit cautious in throwing predictions out there, but I would say that we are cautiously positioned. We've got relatively high cash levels and the companies that we're invested in reflect our cautious views there. Excellent businesses don't carry much debt. They generate a lot of profit and they return a lot of that profit to shareholders.

Excellent. Thank you, Nick. And maybe, Tom, if we can go to you and talk about sort of your outlook, especially for the Australian market and maybe reflecting on what some have Nick said and how that impacts Australia.

Yes. And I totally agree with Nick, the U.S. tenure is hard to get away from. It's the risk-free rate for global pricing of every risk asset. So the key thing for us at the moment is interest rates. At the front end we have gone up a lot. They're seeing that. Now they haven't had the impact on the economy in a nominal perspective that we may have expected going back 12 months. And nominal economy has remained pretty strong, and we might even touch on the reporting season here in Australia a bit later. But the risk-free rate is obviously dramatically rising as we speak, and Nick has touched on that, and that has a dramatic impact on the valuation that you're willing to pay for assets and especially long-duration companies. And the third is the earnings, what the earnings will be for these companies going forward, and that's really going to be seen on the economic outlook that we can touch on and has been stronger than we expected today, but also the strength of the individual companies that we're investing in. So with that backdrop, the 3 key elements for us and investments at the moment, a strong balance sheet because the cost of money has gone up. Secondly, you want to be careful with valuation because our expectation is that long duration IP stocks are going to derate. Some are going to grow their earnings strong enough to offset that, but many won't. And the last one is earnings. Make sure you get the earnings right, because we saw through our reporting season a number, didn't had hiccups, but a number of companies were able to reach expectations. So if we can find companies that tick all those 3 boxes, we're very happy. It's just not that easy at the moment.

Thank you, Tom. So I mean, you both obviously talked about reporting season in Australia and globally. You're speaking to many, many CEOs and CFOs. What do you see as the trends that are emerging from these conversations? Perhaps if I can go to you, Tom, first.

Well, there's probably 3 key takeaways, I'd say. First is that the top line is actually pretty strong. So the consumer, in particular, has been more resilient than many people expected. That helped the retailers. So if we go back 12 months, a lot of them built inventory on their supply chain issues. And the fear was that demand would weaken and those inventories were causing problems. Now the reality is 12 months later, consumption has remained pretty robust. So that surprised many. Secondly, cost pressures continue to bite. So electricity, labor costs pretty much across the board, we're not seeing response within Australian companies in particular. Some of those cost pressures are easing more dramatically offshore, and I'm sure Nick will be a better place to see that. But domestically, we're still seeing a lot of cost pressures. And then that's also flowing through to CapEx. And then lastly is the cost of money. We saw interest rates were higher than people expected, and that flowed through to interest costs that were higher than expected and chipped up a lot of companies through reporting season. So what that means is margins are really important going forward. Our companies need to continue to deliver the top line because they're getting chipped away at from an earnings perspective by both the cost escalation, which continues as well as interest rates. So those are really the key takeaways, and all the CEOs are really trying to manage those elements of their business.

And to you, Nick.

Yes. I mean, I suppose a lot of the global companies are echoing what Tom mentioned about the Australian companies down here. I think one of the big themes that have surprised us globally is the amount of pricing power that a lot of these companies have managed to push through. And I guess the question today and what we've seen in the most recent results season is whether that pricing can continue. Up until now, there has been no problem pushing through price. But more recently, we've seen a lot of companies now talk about the end of super normal pricing, if you will. And as a corollary to that, we're now starting to see what I would call the canary in the coal mine type stocks that is the U.S. discretionary sector. I would say there were some fairly large downgrades in the most recent results and some fairly conservative outlook statements. And so for my money, the big question going forward is we've seen this incredibly robust consumer, which Tom mentioned, and consumers have had a huge savings balance that they've accrued through COVID. That has now been run down, and it's an open question of how long that can continue. The final point I'd make is we're now starting to see a 2-speed consumer. Most of the consumer downgrades that we saw in the U.S. were in that low income bucket, where maybe there have been fewer wage increases and maybe the savings accrued through COVID were perhaps less than the higher end consumer. And so certainly, the low-end consumer is now doing it tough, particularly in the U.S. and other markets. So we've started to see -- as I said, the U.S. discretionary names, which is generally the canary in the coal mine have started to downgrade numbers or pull back numbers and maybe that's an omen for the rest of the sector. And why that's important, more broadly is consumer companies are around 70% or consumer spend is around 70% of the U.S. economy. And that's why maybe nominal growth has been so strong is because the consumers held up. But if the consumer doesn't hold up or begins to crack, then maybe we will start to see a slowdown in that growth. But by and large, the results that have been reported have been quite good, but the outlook statements that have been given have been quite measured and have been tempered somewhat recently.

Excellent. So on the back of that, I mean, then now is a really good time to ask you what are the opportunities you're seeing? What would be the stocks that are exciting you at the moment? I mean maybe, Nick, if you would carry -- carry on, please.

Yes, sure. So our framework at the moment, I mean, Tom mentioned it before, his framework and ours isn't too dissimilar. There's lots of question marks around the growth outlook, there's question marks around the cost of capital and what we should be paying for assets at the moment. And in that environment, we're looking for a couple of things. We're looking for inexpensive assets or inexpensive valuations. We're looking for robust balance sheets, typically net cash balance sheets. But we're also looking for growth as well, and we think that growth is going to be rewarded in this market. So a couple of stocks, we're quite interested in at the moment. They are 3 of the largest stocks in the fund, but the first one would be Universal Music. I think I mentioned that we did a podcast on that the other week. And so if anyone wants more detail on that, they can listen to the podcast. But Universal Music is just a wonderful business, high margin, capital light. They have unique assets. They monetize those assets through Spotify. Spotify subscriptions are growing and they're likely to grow, whether we have a recession or not. The company is -- I wouldn't call it particularly cheap optically, but it's certainly cheap relative to the cash flow that they're going to produce over the next decades, hopefully. The second company that we really like at the moment would be Airbus. Airbus is typically classified as a more cycle business, and maybe it's not one that you would typically own into a questionable economic outlook. But why we like Airbus at the moment is they actually have a 10-year waiting list for their aircraft. So over the last 3 or 4 years through COVID, all airlines around the world canceled their orders, and we've seen that with Qantas at the moment with the record CapEx spend in their fleet growth at the moment or their fleet replacement at the moment. And businesses like Airbus are perfectly well placed to benefit from that. So regardless of whether we go into a recession or not, Airbus are going to grow for the next 10 years by just filling orders that they've already taken on their books. And they have a net cash position, a balance sheet position and they're likely to return a lot of capital to shareholders in the coming years. And then finally, a stock that I've mentioned, I think, a long while ago in here, but Lamb Weston is probably a bit more of an obscure name. Lamb Weston is a french fry manufacturer. It's one of only 3 in the U.S. that supply -- just 3 players supply all of the french fries to the big fast food restaurants in the U.S. French fry demand is remarkably resilient. I think in the GFC, fry demand fell 2%. It actually grew through COVID despite half the restaurants in the U.S. being shut down. So it's a very resilient category. Lamb Weston has a lot of pricing power and the company is likely to keep growing and it's incredibly cheap relative to that growth as well. So the common trades in all 3 companies that I've mentioned are those 3 things I mentioned at the start there. We think they're inexpensive. They've got great valuations, great balance sheets. They're likely to keep growing earnings and return a lot of capital to shareholders.

Thank you, Nick. Actually, you gave that stock with Lamb Weston, what, 2 years ago and when we did our roadshow in Adelaide. So -- and all 3 of those are long term, which I think is really what investing is all about. So thank you. So maybe for Tom, if you can give us your opportunities, please?

Yes, sure, Caroline. So the biggest active position in the fund at the moment is ResMed, which is very topical from -- your shareholders might be familiar. The stock is down close to 40% more recently at times. And really, that's around an emerging issue, which is a GLP-1 drug. So this is obesity treating drugs. They're wonderful drug. I'm sure some of you may be familiar with, some of you may be taking it where you can lose 15% without having to do much. Now there is a fear that this drug will clearly go broader than just treating obesity and may even treat helps treat sleep apnea. And there's a study that's underway that will be finalized in March next year to show some results from that. And that's ultimately weighed on ResMed dramatically here and stocks down 40%. So we're now getting compensated dramatically for the possible risk that we see out there. The work that we've done suggests that it could shape off 1% or 2% in top line from ResMed in the medium to longer term, but time will tell. And so with trading -- getting this company for sub-20x, ticks all those boxes that we touched on at the start of the call. It's a good balance sheet, very good valuation now, which we've been waiting for and the earnings growth is going to be supported by a very important fact. So the other element with ResMed is that its key competitor has been out of the market for 2 years on a recall product issue. So ResMed put 60% increase of product into the market. Now what that generates is an annuity stream of marks. So we expect to see an acceleration in mask revenue for this company on a 3- to 5-year view, which is higher gross margin. It's a 30% or 40% higher gross margin for that product versus the machine. So we think that business is ticking those boxes in, not without risk for the reasons that I articulated, but as we know, there's no reward with that risk. So ResMed is the one for us.

Just the one from you. Luckily, we have 3 from Nick. So we've given a 4th [indiscernible] which is fantastic.

Last person to give me one of -- he's actually in also.

Thank you very much, by the way. So I wouldn't mind moving to small caps because obviously, in terms of Future Generation, that's very important for us. We've just reported our half year results, and I'm really keen to get your view on a couple of things. So Tom, you're one of our pro bono managers and your portfolio has a very strong bias towards small to mid-cap stocks. These types of stocks have underperformed the market pretty significantly, especially in the last couple of years. And I know that you still feel this is a very good space to be in, and you've had some very -- some success. So I'm really interested in your thoughts there.

Yes. I think it's a great observation, Caroline. I mean the reality is the top 100, they outperforms more by close to 30% over the last 12 to 18 months, been a dramatic move. And really, that's the fear around the economic cycle. So as we know, the larger businesses are generally stronger businesses, they're less vulnerable through an economic downturn. So there's a bit of a fear that small caps are going to get touched up in an economic cycle that we have all been calling for some time. So the second point is that you're getting compensated in terms of the price that you're paying for these small caps. The other reason we think small caps look interesting is a lot of the small caps are more domestically exposed versus the larger company, which is generally more global businesses. And if you think about what's happened more recently, we've had the currencies being walked into the low 60s, which has been supportive of valuations for global companies, less so for domestic companies, which are less impacted. But also, ultimately, we think the domestic economy is going to hang together better than the global economy. We've got immigration at record levels. We've got an RBA that sends willing to not push the interest rates as far as some of the global central banks have. So as we sit here today, the domestic economy looks in a reasonably strong position. So we should see that earnings growth come through from small caps despite some of the fears about the economic cycle, which will inevitably play out. But at some stage, will come out the other side.

That's great. Thank you very much, Tom. So Nick, I mean you are a Future Generation Global Fund Manager, and that's also skewed towards small to mid caps. Small caps globally hasn't been particularly good in many areas, especially when compared with that sort of the runaway performance of the Magnificent 7. So do you feel this is a long term? Or are you expecting a resurgence in small caps globally? What are your thoughts there?

Yes. Good question. I mean, predicting a recovery in small caps is always difficult or any part of the market really. But just to echo Tom's point, I mean the movements we've seen in small caps are approaching some fairly extreme levels. I mean, during the GFC, the Russell 3000 fell 60%, during COVID it fell 40%, and pick to trough recently, we've had a 30% drawdown. So this is the third biggest drawdown we've had in the last 25 years for the U.S. small caps and global small caps more broadly. And the dispersion that we've seen between those large cap stocks that you mentioned, particularly the Magnificent 7 as they call relative to the small cap end of the market, it's a 1 in 50-year event. So typically, you don't get too many 1 in 50-year events in the market. So certainly, there is a lot of value out there. And if you just look at the absolute valuations, a lot of small companies are trading at the same valuations where they were during the GFC when we thought the world was going to end. So there is significant opportunity out there, both within the U.S. and also within Europe and some Asian markets as well. So I completely agree with the sentiment that smaller companies are providing a really, really good opportunity right now. The only caveat I would put on that is we're looking at smaller companies that can fund themselves, don't have any debt, and won't require access to capital markets if things do actually go per shape. But that aside, there's a lot of opportunity. So I would wholeheartedly agree with Tom.

Excellent. There's some really good points there. Thank you very much. So Nick, we've had a question because obviously, you were talking about U.S. Treasury bonds. And obviously, that's in the news at the moment. So what does U.S. Treasury, the movement in U.S. Treasury bonds mean for markets?

Yes, great question. And I suppose it's why are U.S. treasury bonds falling or why are yields going up. And one of the reasons treasury bonds would fall and yields would rise is that you would expect inflation to be higher. But actually, inflation expectations have been falling. So that means that the other reason you would expect yields to be rising is simply that there are more and more treasuries hitting the market that is the U.S. government is issuing more and more debt and there are fewer and fewer willing buyers for that debt. And the reason we're seeing more and more treasuries hit the market is very simply because the U.S. is running a 7%, 8% deficit right now. And that is quite extraordinary. So if you think about Australia's finances, we've just announced that we're going to run a budget surplus. There's a lot of reasons for that outside of our control. But the U.S. is in completely the opposite count. They're running a 7%, 8% deficit which is the highest deficit outside of the World War II and the GFC, and it's with record low unemployment. So the market is potentially questioning how much more debt is going to be sold and potentially questioning whether the U.S. can service that debt or not. So that is -- that's what's happening. But what does it mean for asset prices? As Tom said before, the U.S. 10-year treasury is effectively the risk-free rate for the world, and you're potentially taking the lowest risk in the market by buying a U.S. bond. And so the way that I look at it is right now, you can buy 10-year bonds that yield almost 5% to carry inherently no risk, whereas the S&P 500 is yielding just above 4%. So for the first time in a long while, you can get a higher return owning government bonds and you can owning equities. Now the reason equities may be priced like that. One reason historically is that you expect more growth from equity. So equities, companies can grow earnings and they can distribute capital to shareholders. Bonds don't grow. They don't grow their coupon payments. But we're not seeing that with equities right now in that most sectors and most countries have come downgrade. So that is probably, in my mind, the biggest risk for equities is if you look at just the secular yields right now, bonds are paying a higher yield than equities are, and that is a risk for markets more broadly and there's a risk for asset prices more broadly when you can get a higher return of potentially lower risk.

Excellent. Thank you. That was a very comprehensive ask because I mean, it is in the news at the moment, that's what people are talking about. But the other topic that a lot of people are still talking about and always will do is China. The China post-COVID hangover, it's been harder to shake. And what does its economic weakness mean in a global context? And realistically, is China investable? I mean, many say, yes, many say no. I'm interested in your view, Nick. And then perhaps if we go to Tom to see what the impact for us is in Australia for that?

Yes, big lots of questions about China. So China -- the Chinese economy obviously has underwhelmed expectations post-COVID. Part of that is simply they followed a different pathway out of COVID than the Western economy. So -- if you think about Western economies, we've put in a lot of stimulus into the market and then basically reopened all at the same time. And that caused a lot of the problems that you're seeing in supply chains today, and inflation and so forth, whereas China went down the opposite path of completely reopening, but not stimulating. And they haven't stimulated for a few reasons, but one is that they have tried -- there's a lot of debt in the system there, then they're trying to, I guess, muddle their way out. So certainly, growth has been underwhelming, and it's been compounded by the fact that there's a concurrent housing crisis there as well or I should say, property developer crisis. And that's put a lot of fear into consumers and particularly those that own investment properties where maybe the prices have been falling or maybe they have a deposit with a developer that they're worried about. So lots of concerns there. And I guess the concern going forward is that the Chinese government has only put forward piecemeal solutions and stimulus. There hasn't been a broad silver bullet, so to speak, in terms of stimulus. And again, part of that is because previously, they used to do infrastructure spending and big ticket items, whereas now it's quite clear that infrastructure spending is not going to have the same benefit to the economy as maybe it had in the past. So right now, the Chinese economy is treading water. But having said that, consumer spending more recently has picked up a little bit. And the manufacturing indices show their back-end expansion, and we've gone from an outright deflation to some inflation again in the economy, which might suggest that things are really stabilizing more recently. But whether they grow strongly or not, that's another question. Is the economy investable? I mean China is 1/4 of the world's economy. So you would have to think that there is some investment opportunity there, both within China but also companies that service China. And certainly, we're finding some very interesting opportunities. Generally, the way that we would invest in China is through Western companies. And so again, going back to the Airbus example, Airbus is 1 of 2 companies that can produce a certified commercial aircraft or -- and China is a huge market for them. And Boeing has been giving -- being given less of a hearing in China given the trade and political issues. But that means that that's where Airbus is taking. And we talk about China being in the doldrums around growth, but the reality is that air traffic is back to pre-COVID levels already in China and still growing really strongly. So like I said, with a business like Airbus, you've got a 10-year customer backlog. It's one of only 2 suppliers in the world, and they're going to benefit from markets like China for decades ahead, similar for BMW, similar for Fiesta, another portfolio company of ours. So China, I think, is investable. And I think there are a lot of ways to do that. You just don't necessarily need to own Chinese companies themselves. There's a lot of Western companies that still have tremendous leverage to China. They're cheap and they're likely to still grow regardless of what the Chinese economy does.

Very quickly, Nick. One of our shareholders, [ Dan ] asked if Airbus will be your highest conviction business on a 5-year outlook.

Well, the biggest stock in the portfolio is Universal Music Group. That would probably be my highest conviction stock right now. Why is that? It's because Universal Music is a capital-light business, has very little debt and people are still going to have their Spotify service subscriptions in 10, 20, 30 years regardless of what happens. So...

Actually let's not go through that. Let's not go through that, because people can listen to the taking stock.

UMG is my highest. Universal is my highest conviction stock at the moment, but Airbus is up there.

Brilliant. Thank you. Tom, now, maybe if I could talk to you about China and what impact is that weakness going to have for Australian investors?

The biggest one for China is clearly commodity demand, pretty much steel market. If we can work that out, we're going to do pretty well in terms of working out where the Australian market goes, which is probably oversimplifying it, but in some way is not. Look, we just had an analyst to just spent 2 weeks in China, just got back, and it was really the message of stabilization. So we're not seeing acceleration and we're not seeing a degradation. We're seeing stabilization. And that might be good enough for commodity prices, iron ore price is [ $115, ] which is a very healthy price for our major producers. So we will be more cautious going back 6 months, but the reality is this market is ticking along. The property market, which looked [indiscernible] is sort of ticking along and they've been able to put steel elsewhere, and that's been into export markets and into infrastructure and utilities. So stabilization, I don't know, an exciting story Caroline, unfortunately, but that's one we're watching.

We're running out of time, unfortunately. But Tom, I just wanted to ask you about Qantas. I mean, obviously, you've been a fan of the company. So in the press on a very regular basis, I mean, are there any observations you can make for our shareholders.

Thanks, Caroline. I really appreciated that you may just squeeze that one in. Full disclosure, I think we had a briefing about a year ago in similar format, and I put this in my topic for '23. So your shareholders should be aware before they rise often, give their stock brokers their ResMed buying order. But I think the point that I'll make is that there's clearly issues we can touch on the brand. But the reality is the market is fading all of these property stocks -- sorry, these as travel stock. So if you look at Corporate Travel is down 15% for the month, [ FLIGHTTIME ] is down 10%, Webjet is down 10%, and I'm pretty sure it's the same offshore as Nick would be more attuned to. But the reality is the market is telling us this is as good as it gets to travel. Now Tom will tell whether that's true or not. I haven't -- that's nearest vision that they're right, and this is what happens in cyclicals. The market will derate these companies until ultimately, they have a downgrade and then you want to wait until the cycle turns to own them again. I think from Qantas' perspective, clearly, they've got to pick up their operational issues and change of management. And I think they recognize that and then going to take a hit to short-term earnings and people might get compensated for value for our shares and NOI going forward. So that will help in the longer term. In the shorter term, there will be a bit of a profit hit and the 80% investigation and the decision in the high court are not helpful from a brand damaging. The company has got to work through and earn this up again.

Look, thank you both very much. I mean we are incredibly lucky to have such fantastic fund managers in managing our shareholders' money. And so thank you very much. Thank you a lot. And I'm going to say goodbye to you guys now, and we're going to go to the Future Generation part of it. Thank you very much, Tom. Thank you very much, Nick. I'm going to welcome Geoff Wilson into the room now. Everybody knows Geoff. He's the founder of Wilson Asset Management and Future Generation and one of our leading fund managers in Australia. I mean, not only is he incredibly philanthropic with Future Generation, but he's also built an incredible funds management business through the listed investment company structure, and there's really nobody better placed to talk about LICs, after all managing more than $5 billion on behalf of more than 130,000 shareholders. We've actually got a couple of questions for you, Geoff. So maybe before we go through our half year results, we've had a lot of questions, and I thought -- we're going to talk about the discount. We're going to talk various other things as well. We have questions on that. But one of the questions was, Geoff, in July 2023, you said you were cautious on shares, but investors should take a long-term view. Are you still cautious on shares now? Have we seen the worst of the reaction to the interest rate hikes? Geoff, are you there?

Yeah and I'm there, Caroline. I'm just trying to polish my crystal ball to tell me exactly what the answer is. Unfortunately, it's not a simple yes or no answer. And a good question back were nearly when I was sort of making those comments previously, that was before the long bond has backed up as it is in the U.S. So -- and that was -- I was probably a little bit wary of the market, and that was assuming then the market was anticipating that interest rates would drop probably 1.5% plus in the next 12 months, that's next year in the U.S. Now with sort of the economy being a bit stronger with what we've seen we have our bonds backing up to levels that we haven't seen since 2007. That -- to me, it makes you a little bit more nervous. To me, the probability of this in being significant pain is still very low, but it's probably increased from, say, 6 months ago, 10% chance of there being some significant pain, probably 20%. The odds are the market it will sort of make it through and there won't be a significant adjustment. But obviously, the risk has increased with bonds increasing. And normally, you see -- we've seen it a number of times before, where the bond market goes up. And normally, the equity market comes down. And we've seen a little bit of adjustment in the equity market, but it hasn't been significant. So to me, it's -- I'm still -- maybe probably a little bit more nervous than when I made that comment last time. In terms of -- it is now a good time to buy. The difficult part and you look at performance over time. And I think -- if you look at the last 20 years, say, in the U.S., if you picked it -- if you just missed one day, the best performing day and each year for the last 20 years, your performance is virtually -- you actually get no performance versus the market doing sort of 7% or 8%. So time in the market is important. So to me, but at the moment, I just -- I'd have some money on the -- definitely have some money on the sidelines, -- just in case things do get really rocky.

One more question, and then we'll go straight to our update in terms of results. But we know that most of the rise in the S&P 500 this year has come from a handful of large tech stocks exposed to the AI theme. However, see Nick talked about that as well. How important is the U.S. quarterly earnings season this month in terms of validating the current levels of the S&P 500?

Yes. And just the Magnificent 7, it's just been exceptional the performance. And when we talk about the Future Gen result, it's relevant there because most of our managers, they have very little exposure to those Magnificent 7, which pretty much given all the performance or a significant percentage of the performance in the U.S. And obviously, this reporting period for the S&P is very important because it's showing you exactly how the broader economy is going. In terms of talking about crystal balls, it's really the crystal ball mix in 6 months' time or in 12 months' time, that's when you want to know the performance of the S&P over that -- the future performance because that's what the market does, it anticipates what's going to happen in the economy. And the -- to me, it's really in 6 months' time on the next quarterly -- not necessarily these quarterly numbers, that would be very interesting to see where the stress is in the economy and who is not performing. But really it's the quarter after and the quarter after that because I would have thought -- now looking at the Australian economy, it looked like sort of April, May, the discretionary spending really took a hit. And it's been tough. You speak to the people in the real world, and it's been tough since then. And then the question is probably when will things improve? Or will they get a little bit worse. And that's sort of the million-dollar question. So -- and we know the market moves in anticipation of the economy both ways. It falls before the economy bottoms and it usually, I think the guys earlier, Tom and Nick were talking about when the sort of the worst is there, that's probably -- that's when you want to be buying. It's nearly too late to buy. I think Tom was talking about that.

Yes. I think they're really valid points. But we should go through just in terms of time, in terms of our -- let's look at the investment portfolio performance for Future Generation Australia first. I mean, this chart is obviously 31st of August 2023. The Future Generation Australia portfolio has always had a bias as we've just discussed, towards more midsized companies because we feel that they get real growth in investment terms. Tom and Nick, I mean, they just went through small, mid and sort of companies and they've been sold off more heavily than the large cap counterparts. And with the S&P ASX All Ords outperforming the S&P ASX Small Ords by 20.3% in the period of September '21 to August '23, which I think Nick, Tom also mentioned. I mean that our investment committee and all our shareholders, I'm sure, are aware that we had 2 great investment committees with the fantastic minds from [indiscernible] Morningstar. And they really believe that this sell-off provides our boutique active managers with attractive investment opportunities in that sort of small mid-cap sector. So I think despite this, and when we look at this chart, Future Generation Australia, investment portfolio increased 8.8% this year, outperforming both the S&P ASX All Ords, which rose 7% and the S&P ASX Small Ords, which increased 3.5%. And since inception, the investment portfolio has increased 8.8% per annum, outperforming the All Ords by 1.2% and the Small Ords by 3.2% per annum. And this is what we actually is the key aim of our portfolio. This put out performance has been achieved with less volatility than the market as measured by standard deviation. And the FX, FGX volatility since inception, you can see the 11.8% in the index of 14.4%. So going on to the chart below, which is Future Generation Global, until the 31st of August 2023, Future Generation Global investment portfolio increased 16.7%, while the MSCI World Index rose 21%. Nick, I mean, as we've just heard, he spoke about the main contributors to the MSCI World Index. And he talked about that Magnificent 7. Similar to FGX, the FGG Investment Committee, they selected leading global fund managers, and they have a proven ability to outperform the market and their peers over the long term. And this has resulted in the investment portfolio having an underweight exposure to mega-cap companies like the Magnificent 7. The FGG investment portfolio exposure to those 7 stocks, and this is a question we've been asked, and this is at 31st December 2022 was approximately 4.2%. And the index weight for the Magnificent 7 rose from 11.7% to 16.6% during that 6 months to June, 30th of June, and that contributed to more than 41% of the index's performance during this period. And that's really what echoing what Geoff was just saying, and that market rally was very narrow. And in terms of what we do with this portfolio, the volatility since inception, 9.7% compared to the index, which is 10.7%. I think that's pretty clear from those charts. I think the next chart is one I really enjoy talking to, and I know Geoff does as well, and that's looking at our half year results because we're very pleased we've been able to deliver increased dividends for our shareholders with FGX declaring increased interim fully franked dividend of $0.0335 per share. And then if you look at the chart there, the annualized interim fully franked dividend yield of 5.8% and gross dividend yield of 8.3%. The long-term portfolio performance and the profit reserve, which currently has a dividend coverage of 4.5 years, you can see there. And that really has enabled FGX to pay shareholders a stream of fully franked dividends since inception, which you can see from the graph. Since inception, FGX has paid $0.398 per share in fully franked dividends to shareholders. And now if we turn to Future Generation Global, FTG declared an interim fully franked dividend of $0.036 per share. The increase in the interim fully franked dividend was possible because of the listed investment company structure and the profits reserve, which is currently 7.3 years of dividend coverage. The annualized interim fully franked dividend yield 6% and gross up dividend yield to 8.6%. And since inception, Future Generation Global has paid $0.195 per share in fully franked dividends to shareholders. That briefly covers the investment side of the Future Generation business, and we're very happy to go into more detail. But the other side, we are equally passionate about, and I know that a number of our shareholders are very passionate about it because I've just been talking to many of them about the donation voting where they want their 1% to go is very much that social impact side. So if you look at this on slide, in lieu of management performance fees, we are announcing $10.6 million to our social impact partners this year, and all of them worked tirelessly with youth at risk preventing mental ill health in young Australians. I think this amount is really an incredible in a year when a lot of not-for-profits have really suffered, especially in terms of their fundraising inflation and the rising cost of living, which are impacting all of us. This year's social investment brings our total social investment to date $75.9 million, a number, I know all of you are incredibly proud of, and we are as well. I think it's important to call out the amount of money in terms of the fees waived. So that's not -- that's basically our fund managers. It's all of our other pro bono supporters from our lawyers, our governance, our media, et cetera. And that's $131 million fees waived. And that's a net saving benefit to shareholders of $55 million, which that goes to the NTA. So I think also -- and one of the questions we've just been asked is these portfolios can't be replicated at the same cost because of our fund managers and our service providers, working pro bono and it's hard to act them as well. So we have a lot of shareholder questions coming in, and we also have some that have been sent in. And Geoff, is there anything you'd like to add before we go to the shareholder questions. I know that we...

Let's go to the shareholder questions and if we don't cover some of the things about how the portfolio is set up and how they perform, then I can touch on that before we close.

Brilliant. So the first question we have is from Leslie Livingstone. What strategy will FGX management used to reduce or better still eliminate the share price discount to NTA? I mean that's a great question. I think Geoff and I are answering on a regular basis. I might go to you, Geoff, to talk about the wider market and then maybe we can talk about what we're doing.

Yes. The -- when I talk to any people that have -- other fund managers have just created listed investment companies or anyone who's interested in listed investment company space. I explained that -- it's very easy to explain in terms of how to get the share price to trade at NTA, it's incredibly difficult to then make that happen. So simply, it's supply-demand. I remember first year economics, they show you the supply-demand chart. And if you can have enough demand, then you move to -- then the others move to equilibrium. And that's pretty much what you need to do with the listed investment company. If you look at both FGX and FGG, over time, they've traded at premiums a number of times. And more recently, they've been at a discount. The 2019, so it's before COVID was when both FGX and FGG were both trading at premiums. And our view is we'll get them back to premiums. In theory, what we're doing is -- and how do you do that is you really tighten up the share register. The people that support what you're doing -- you explain clearly what you're doing, the people that support what you're doing, obviously, stay as holders. If not, you find more -- if they're sellers, you find more buyers. And then slowly, you tighten up the share register with the selling declines and the share price moves to equilibrium. And that does happen. And probably in the listed investment company space, the one that took us the longest -- this is looking -- using the WAM entities was WAM Research, where it took us 7 years to get it to NTA. And we did -- unfortunately, we did such a good job in terms of tightening the register up. And actually, like a year or 2 years ago, it was trading at a 40% premium to NTA, which is as ridiculous as say, FGG trading at an 18% discount at the moment or FGX trading at a 13-odd percent discount. So to me, we're totally focused on that. We know what needs to be done. And unfortunately, there's no -- it takes time. That's the unfortunately, it takes time. So Caroline, do you want to add anything there or...

I mean, I suppose in terms of what we're doing at the moment is we've significantly increased communication, shareholder engagement. We are just about to do a regional tool to some severity of going to the Gold Coast, et cetera. And we're out there talking about them all the time. And I think we also now have distribution, which is something we hadn't had and that's very much thanks to Wilson Asset Management. So I really think we're doing the hard yards. And I think, as you said, Geoff, it is really -- it's time and it's challenging markets, and we're going to narrow the discount. So yes, I think you've pretty much directed the point.

And eventually get them back to a premium where -- when you talked about that statistic, so you're talking about both entities make up -- it's a little over $1 billion of assets. So investors that invested from the start, if they had invested with the various fund managers, it would have cost -- you talked about that $55 million, that's 5% of your assets. So that's an incredible savings. So you actually could argue that these entities, they belong to trade at a premium. It's just going to take a bit of time to work through the unfortunately, to get it back to equilibrium.

And also, I think remembering the dividends that have been paid out, that's really important as well. The next question we have is from Grishma Kumar. I hope I pronounced that correctly. Do you have any products for retirees, pensioners? I mean, obviously, I'm going to say Future Generation is the most brilliant opportunity for self-managed super funds because people need a stable income. I mean, Geoff, you know obviously about listed investment companies. And I think it's a great opportunity if you're an accumulation stage or income phase. I mean, what do you have to that? Because I know that's a question you get asked a lot.

No, I agree with you. I mean the incredible thing is that you can buy dollar of assets for, say, $0.85 or $0.82 in one instance and $0.87 in the other. So if you believe that those discounts will stay around here, if not become less. And as you said, there's the profit reserves, so you know that the dividend for the next few years is going to be maintained, then it's -- they're quite an attractive product. Yes. So in terms of -- look, I'm -- that's in terms of my business, that's a bread and butter for us. I mean, we're setting up a leader's trust at the moment. That's where you get into an NTA and get out of the NTA. That's just to add to our suite of products. But that really hasn't got any great characteristics for retirement income where listed investment companies do.

The next question we had was from [ Noel. ] And it was what is the MER FGG and FGX? I mean, for those who don't know what the MER is, the MER refers to the fund's management expense ratio. And I mean, the MER of the company for us is 0, I mean let's technically correct, because the fund managers of the Board, our investment committees, as I mentioned earlier, they all work on a pro bono basis. But we do have some indirect costs, and these are completely unavoidable and they account for 0.1%. And if you include the 1% donation, the total indirect cost of the company would be 1.1%. And that's actually in our annual reports, and that's under the NTA breakdown. And if anybody else would like me to go through that, I'm very happy to do that offline. A question from Steve. Can you provide return and volatility results on share price as well as the portfolio net tangible assets per share?

I mean we can and Steve, we've got your details. We'll run them, and we'll send them to. If anyone else wants them, please e-mail in and we can send them out.

Yes. I mean we provide the volatility of the underlying portfolio because we think this is probably a better reflection of the index. Dan, we have the highest conviction company on a 5-year outlook. And I think that Nick has answered that, but I will look into that send you and see what we else we have to send you. From Dennis, this is an...

Yes, that was next. Did we ask, we didn't ask Tom that either, do we? We're going to ask from the question.

Yes, I mean, I think I have drive them to jumping with Qantas or so. Okay. So we...

ResMed is a fascinating call it. To me, it reminds me a little bit of when videos came in and everyone said it's going to be end of the sentiments. These businesses -- ResMed has got a great business. The fact that this drug is going to reduce in people's weight, it doesn't mean -- the market tends to react when they see those negative expectations that PE contracts and ResMed, a great business, might have a slight impact, but really it looks relatively cheap.

Thank you. So from Dennis, we have, regarding recent press commentary on the LIC performance on the ASX, particularly in relation to market discounts, many are deep and in transient versus the NTA and the future of the LIC structure. He'd really like your perspectives on this because obviously, LIC -- over to you, Geoff.

Yes. To me, the people get caught up with sort of short-term noise, where the first listed investment company was created in the U.K. back in 1868, Foreign & Colonial. And they've continued to survive and grow since then. In listed investment companies, I remember back in 2003, 2004, where owning 30 listed investment companies floated in a very short period of time. And to me, the listed investment companies treat us like any market, when there's a lot of demand, then supply turns up. And then once supply turns up, you go from that expansion phase to a contraction phase and a lot of corporate activity occurs. I mean, we've been involved in that corporate activity. It will -- at WAM, and I mean, we've taken over, I think, 10-plus listed investment companies. So we've helped shrink the market. We don't want that to occur. But still, there's a 100-odd listed investment companies, and they make up -- they're valued at about 50-odd bill. ETFs, which everyone thinks the biggest sector, they're bigger. They're 3x bigger, like $150 billion, but the whole managed fund sector, ETFs make up about 3% and listed investment companies make up about 1%. So there's 96% of the fund management sector that isn't included in either of those. So to me, it's just a period of discounts, there'll be a bit of consolidation, opportunities for investors. To me, that's a holy grail of listed investment companies, the fact that they can trade at a discount and they can trade at a premium. To me, it's nearly unbelievable that you can get access to these managers and you're not paying full price. And that's what I enjoy. So, yes, so to me, it's just the LIC sector people might think, well, that's the end of the LIC sector. It's never going to grow like ETFs because ETFs are open ended, LICs are closed ended. And there will always be a LIC sector, and there will always be benefits of investing in a close end structure.

Thank you, Geoff. This is a question with Tony. Are there any special -- are there any plans for a special dividend seeing dividend reserves can currently be measured in years? I mean, obviously, I'm not on the board, but as far as I'm aware, it is a decision of the Board, you are. I'm asking this being your approach.

Yes. I mean, we talk about dividends all the time. The profit reserve is there. In theory, what the plan is, the franking -- you might have a profit reserve and you might have paid any tax on that, because it's realized and unrealized profit and the profit reserve. So therefore, you've really got to sort of manage the tax payment over time. And so that's when we can pay -- when we pay out a fully franked dividends over time. And we think it's in shareholders' interest that we give them a reasonable fully franked dividend. And that helps support the share price. I've been around the listed investment company space long enough. I remember Hunter Hall in the old days. They only paid out fully franked dividends when they had franking. And otherwise, they paid no dividends. And unfortunately, it doesn't help the share price trade at NTA, if not a premium. So to me, providing that growing stream of fully franked dividends or strong level of fully franked dividends will actually help us trade at NTA, if not a premium, rather than just paying it all out. If we could. And then the problem is, as I said, if we paid out all the profit reserve, we wouldn't be able to pay a dividend next year unless we made a profit. If the market went down a little bit, we couldn't do that. And the odds are, it wouldn't be -- we don't have the franking. So if we paid it out, they would be only partially franked and which is a waste from a maximizing your returns as investors most tax effectively.

So I think we've got time for 2 more questions. The others that we have, I will call afterwards. We have a question for Brian. I'll read both of them and then we can perhaps answer them both together. Where will the share price -- when will the share price return to equal NTA? And the other question from James is FGG as a manager group is relatively settled. A wave of change happened in the last year. Would you care to talk about that?

We just talk about FGG. It would really -- the -- as Caroline said in early on, you've got investment committees that work pro bono on both those. And we've got the smartest guys in Australia on these investment committees. And they live -- live or die by their investment decisions in their main business, and they're doing all this pro bono. So on FGG, the -- when the -- when COVID, and there was changes, personnel changes, the portfolio positioning, we wanted to change, we wanted to make it a little bit more defensive. And that's why you'll see both FGG's underperformed more recently. And that's had less volatility, and that's because it's got a more defensive portfolio. So even though the market's been very strong globally in Australian dollar terms, it's a lot more defensive than the portfolio we had historically. And the number of the managers for personnel changes reasons and performance reasons were taken out of -- were redeemed from. And then we added other managers that we believe complemented the other managers we're managing money for. And so that's why -- what happened there? And what was the other part of the question, Caroline?

When will the share price return to equal NTA? I mean, I think we have answered that.

Yes. That is a tricky one. I would say, it will just take time. FGG being at a bigger discount, now what you tend to find at 19-odd-percent discount. People will buy at 19% discount. And some of the ones that are buying at 19% discount are going to hold it until it trades at NTA, if not a premium. Some of the people buying at 19% discount -- are buying it at 19% discount, and when it's trading at a 14% discount, they're going to sell because they're just trying to make that the discount arb. So you get a bit of a rotation of money. So it takes you a little bit longer to close these discounts, where FGX at a 13% discount, then people buy at a 13% discount. Some will sell it at a 9% discount. So you'll get a little bit of rotation of -- but you just don't get everyone buying at that discount and holding it until it trades at an NTA if not a premium. So I would say -- yes, it will take a period of time. It could take 12 months, it could take longer. But the beautiful thing is we're at the foundations there. We've got great managers that have performed, probably over this next 12-month period, there's always an argument whether you should have an active manager or a passive manager. To me, if anyone is very interested in that, there's a book called the Intelligent fund investor by guy, Joe Wiggins. He's a U.K. guy. I mean, he basically says his conclusion, so if you are reading the whole book is they have half your money in active managers and half your money in passive. Now you'd say that's a copout, but he's done all the analysis, and there are times where the active managers do well, and there's times where the passive managers do well. Unfortunately, we don't know when they are, and we don't know what the signals are for these to occur. My guess is the next 12 months is going to be a time for active managers. Because it's a difficult period. So we've had the -- we talked about the Magnificent 7 that have -- in the last period, you'd be better in the U.S. just having exposure to Magnificent 7, which Caroline said, gave you, 41% of the performance of the index, all being in an index fund. Going forward, that won't -- that's not always the case. So to me, it's -- we've got all the right ingredients for a great performance. And you're getting it cheaply.

Thank you very much, Geoff. I think that's a very good note to end on. Thank you very much to our shareholders that are listening. As always, any questions, please put them through or e-mail the info box and we'll get back to you as soon as we possibly can. Thank you. Have a good rest of the day.