Regal Partners Global Investments Limited (6L20.F) Earnings Call Transcript & Summary

Welcome to the VG1 webinar. My name is Brendan O'Connor, CEO of Regal Partners Limited, the ASX-listed investment management firm formed through the merger of VGI Partners and Regal Funds Management in June 2022. We're delighted you could join us for the call today, the webinar on VG1. And as a reminder, VG1 listed in 2017 to provide investors with exposure to a concentrated portfolio of long short exposures in quality global companies. I'm joined today by VGI CIO, Rob Luciano. And whilst many of you would be familiar with Rob Luciano and his background in VGI Partners, I'm also pleased to advise that I'm joined by Marco Anselmi and Simon Birrell. Now Marco has spent over 10 years working alongside Rob Luciano at VGI Partners on the global strategy. And Simon Birrell, prior to joining VGI Partners last year, had spent over 15 years working in global equities for Manikay Partners in both New York and London. So both Rob, Marco and Simon are going to provide an update on the opportunities they're currently seeing in the VG1 portfolio at the moment. Before I go on, though, let me reiterate that today's presentation is of general advice only, and I'd encourage you all to seek independent financial advice before making any decisions. But against that backdrop, global markets have certainly been very interesting at the moment. And so you've started the year really, really well. The fund is up over 17% year-to-date. So why don't I ask Rob now a little bit about the current environment and how the team is seeing it.

Yes. Thanks, Brendan. It's great to be here. It's terrific to be here obviously with Marco and with Simon. Look, how we're seeing the environment? Well, it's -- all investment environments are tricky. Our portfolio and our approach doesn't change. We're focused on assembling a portfolio of high-quality businesses, businesses that have both overt quality and covert quality, which we'll talk about in our presentation. And yes, the performance has been pleasing. NAV is up 17.2% for the 5 months. We're pleased with that. We're particularly pleased with how we've generated that return. The return has come from a series of positions that we have high conviction in, but are also very different to what's driven the return in the market. The return in the market has come from a very high concentration in FANG stocks. We have one of those companies, which is Amazon, but the rest of our portfolio return has been driven by some very different situations, high-quality companies. And we believe, in terms of the return, it's also been generated with a relatively low exposure. So the risk-adjusted return, that's what we're particularly pleased with. In terms of our philosophy and approach, it hasn't changed since 2008. We'll go through that in the presentation. And particularly in this presentation, Marco and Simon are going to take everybody through a couple of our newer ideas and high conviction ideas. So I hope that helps answer the question. Perhaps we'll move into our philosophy now and what we've been doing really since 2008 and certainly since we started the VG1 portfolio. We concentrate capital in our best ideas. That's a very core tenet of what we do. We're focusing really our efforts on generating a risk-adjusted return through the cycle, and we have a predetermined idea of what that return should look like and should be. And we're doing that through not just stock selection on the long side, but also through our short portfolio and holding cash and our currency overlay. And at the moment, the currency overlay, we're fully hedged to the Australian dollar. And so Brendan, when we talk about quality, we're talking about both overt and covert quality. And overt means quality that I think anybody can understand. Anyone can understand the biggest companies in the world, the brands, consumer goods, luxury goods. They're relatively straightforward things to understand. But there's also covert quality. And some of these companies that are well known today or celebrated today weren't so well understood many years ago. And so we're looking to build a portfolio with a combination of high quality that I guess is overt and obvious but where we have some variant perception. We might talk about some of those today. But we're also looking at things that are covert or camouflaged, which we would call camouflaged quality, and we discussed in our letter at the start of the year, things where we think there is quality but they're not as obvious perhaps to the crowd, where we have a variant perception, but also more importantly, where we perhaps are seeing the business heading towards an objective in the years ahead. And because we have a longer-term time horizon, which is a real competitive advantage -- many people don't have long-term time horizons. We do, and it's very powerful to have a long-term time horizon. And it allows us to invest in businesses where we can take advantage of, a, our fundamental analysis; and b, concentrating our capital in that idea; and c, that long-term time horizon, it's a very powerful combination. Now in terms of the slide that everyone is looking at, things that we're looking for and sometimes would be quite obvious in terms of what creates quality. Obviously, industry structure. We've always been proponents of looking for a high-quality industry structure. That's typically a monopoly, a duopoly, oligopoly. Since 2008, we have owned consistently businesses of that characteristic. We're looking for businesses that have secular growth, secular growth versus cyclical growth. So secular growth that it can grow for a very long period of time, and they're very powerful tailwinds that support that growth. Sustainable competitive advantage is another factor, and we talk about sustainable competitive advantage a lot. When you have sustainable competitive advantage and you have concentrated industry structure, what you end up with is economic profit for a business. And we're focused on economic profit. We're not focused on accounting profit. Most short-term investors focus on accounting profit. We would rather focus on economic profit because that drives true value over time. In terms of other characteristics that we're looking for, obviously, quality management is terrific. And management is a characteristic that we like to spend time on. It is something that's important to us. Having said that, the quality of the industry structure and the sustainable competitive advantage will take mediocre management and have high-quality industry structure and sustainable competitive advantage. High-quality management with a lousy business, typically, is not a good combination. So that's just a side point. In terms of other factors, I think we would always look for a business that has a superior return on capital. Return on capital employed is something that we tend to focus on. And something that we tend to talk about as a team is a margin of safety. Now that's separate to the characteristic of a great business, but that's the characteristic of when you get a great investment opportunity. We want to try and get a margin of safety. Now sometimes, that margin of safety may not appear prima facie. It may not be because of a low multiple or some obvious criteria. Many years ago, if we used a low multiple, we would have never have bought Amazon. And one of our big contributors so far this year has been Palantir. The statistics aren't as obvious on that business and even perhaps with Spotify, which has been a big performer, but that's where you've got to try and take a view over the next 5 to 10 years on what that business can do in terms of economic profits. So I think that perhaps sums up how we're approaching things and I guess how we've always approached things since 2008 and the time that Marco and I have spent together. And certainly, it's consistent with how Simon's analyzed companies in both his private equity career but also more recently at a firm that had a very similar approach to us.

Perhaps it's a great place to start talking about the broader economic environment. We've received a lot of questions on the broader economic environment, in particular, how you're seeing that and in particular, how you positioned the VG1 portfolio in that context.

Okay. Well, look, I think the first point is we're stock pickers. We're fundamental investors. So we tend to observe the macro as opposed to try and delve into the detail or build a portfolio driven by macro. Having said that, we're very mindful of it. Our portfolio would reflect certain settings and observations. But I think it's -- we're in a position now where Marco and Simon have spent a fair bit of time thinking about this with me. We've put some slides together, and I think we'll take everybody through it. So I might hand over to Simon and then to Marco to take everybody through that in particular.

Thanks, Rob. Given the more recent turbulence in the macro environment, we wanted to remind investors of how these factors shape our investment process. First and foremost, we do not base our investment decisions upon an ability to predict macroeconomic variables. We observe rather than predict the environment. But that doesn't mean we are not aware of the range of likely future scenarios. And we construct that portfolio and size the positions to protect capital in a range of economic outcomes. And how that portfolio behaves when we are wrong is just as important than when we are right. And quality companies, where we focus the bulk of our research efforts, characteristically are able to thrive in most economic environments. The last few years have taught the investment community not to extrapolate unsustainable trends. And we want to ensure that we are not mistaking temporary factors for structural changes and vice versa. We wanted to take a few moments to frame the environment that we are observing and how that influences the portfolio construction and some of the risks that we are considering. And we will use the U.S. market, our largest geographical portfolio allocation, as a backdrop for this. The decade preceding the COVID-19 outbreak would, in retrospect, best be described as a friendly investment environment. Financial assets and real estate saw major gains as the concept of TINA, there is no alternative, became prevalent in the search for yield. Bonds provided anemic returns and allocators weren't searching elsewhere. Discount rates contracted and multiples expanded on equities. The S&P 500 returned over 13.5% annualized in the period pictured with a substantial amount of those gains a result of multiple expansion as opposed to earnings growth. But our lives and global economies were upended with the onset of COVID-19 and the resulting economic interventions by governments around the world.

And Brendan, I might add to that, what we've been seeing from a macro perspective is that -- what that led to was a massive spike in consumer savings, particularly during '20 and 2021. And if -- and that was combined with a low interest rate environment firstly. Secondly, we saw the shutdown of the service-based economy. And then thirdly, we saw capacity constraint from the supply chain side. Now what that led to was massive market distortions. So what we saw, for instance, you can see on the slide here, was a big step-up in consumer goods consumption. So here, you can see demand rising for things like jewelry and watches, furniture and recreational vehicles are clearly well above historical trends. Yes. And Brendan, I might add a couple of more points. What we saw since then was a massive wave of stimulus flowing to consumers, which, you can see on this chart here, resulted in personal savings skyrocketing between 2020 and 2021 and reaching record levels. Now this was combined with a low interest rate environment, firstly; secondly, the shutdown of many service-based elements of the economy; and thirdly, we had supply chain disruption and capacity constraints. Now moving to the next chart, we can see that this led to some market distortions such as excess demand flowing into consumer goods. For example, we had jewelry and watch demand growing well above trend. And this was the same for furniture, recreational vehicles and many other categories. In turn, what this led to was a massive spike in inflation, not just in the U.S. but also here in Australia and other economies. Now since then, well, initially, central banks were slow to react and viewed the environment -- the inflationary environment as transitory. But since then, they've had to rise. They have had to increase interest rates sharply, which has led to a shock to the system. For instance, one of the -- we've seen some early signs of -- some early indicators that the economy is cooling. One of the things we can see here is that trucking indicators have started to slow, but we've also seen this across manufacturing and service PMIs as well as consumer discretionary spending starting to slow. Anecdotally, we saw last week a couple of our consumer reporting -- consumer companies report earnings and report very weak results, particularly among the low-end consumer. We saw this amongst dollar stores and discount stores, where they're all calling out a shift from -- from sorry, discretionary spending to staples, which is not a good sign. And typically, these are businesses that should be benefiting from the trade-down effect.

Yes. And one thing that's also happening at the moment, Brendan, is that you're seeing some leading indicators suggest that there could be a U.S. recession coming very soon. So the senior loan officer survey and also the conference board leading economic indicator are really suggesting that there's going to be a recession in the next 12 months. And whilst we don't have any firm view on the exact timing or severity of the next recession, we do understand and appreciate that it's created a tough backdrop for our investors. So on top of that inflationary environment, Brendan, investors now have to contend with geopolitical tensions, including a war in Europe. You've had recent bank failures in the U.S., and you have the rapid rise and still uncertain path of global interest rates. So the prior economic environment would best be described, I think, as accommodating. You had declining real interest rates, and that created a rising tide that lifted all boats. However, we feel we are now in a period of increased volatility and dispersion. And this creates an environment where fundamental stock picking is going to matter far more to the achievement of strong returns. And the characteristics of quality companies, sustainable competitive advantage, strong management and strong balance sheets, will also matter far more. And in this environment, structurally challenged companies with stretched balance sheets, so-called zombie companies, that up until this point have been able to survive far longer than they normally would have, are going to suffer. As a result, we expect short selling around individual securities will be -- prove to be an alpha-generating activity once again. And VG1 is well equipped for this new environment. We're evolving our process in the face of increased volatility. We're being disciplined around valuation. And we're taking advantage of stock market gyrations to reposition the holdings and their weights when the fundamentals of the business have not changed but the price has. Examination of our priors has highlighted a reluctance to act swiftly when the operating metrics of the portfolio business have started to change. And our constant red teaming process and the healthy competition for capital within the portfolio ensures that we are looking to upgrade the holdings at all times. And where we are investing in a business with a wide range of future outcomes, despite our conviction in that idea, we're sizing those positions appropriately. And we think some of those refinements have already started to reflect in the positive performance year-to-date.

Thanks very much, Simon. Rob, as you said, performance has been strong, up over 17% year-to-date. Can you give me a little bit of color as to what's been driving that?

Okay. All right. Thank you. Well, look, we are pleased with the portfolio return. We're up over 17% net year-to-date. That's been driven by our long portfolio. In terms of the longer-term return series, we are disappointed. The return for 2022 has certainly impacted the returns since inception. We're all collectively working very hard to rectify that, and we think the year-to-date return is a good start. In terms of key contributors, well, they're listed on the slide here. Amazon has been a key driver, along with a number of others, Palantir, Spotify, Qualtrics, which was taken over. We're slightly disappointed Qualtrics was taken over because it was at a price well below that we thought it was worth. Clearly, Silver Lake thought the same. But also GE Healthcare has been a key contributor. In terms of shorts, shorting overall has been a drag, but we've had some substantial positive contribution, even particularly lately in U.S. consumer and retail stocks and earlier in the year in loss-making software.

Thanks, Rob. That's great. Next question. Can you remind the audience as to what you're looking for in a long position?

Okay. Look, as I said in the beginning, we're looking and have consistently looked for what we think are high-quality situations. As I said in the start, that can be covert and that can be overt. And the slide that we've got here, well, covert or camouflaged quality. Overt is obvious quality, which I think the broader market can pick up on. Each have different characteristics, but I'd say the overarching point in terms of really what we're looking for to get it into those 2 buckets is we're looking for a high-quality industry structure, something that we think can become a high-quality industry structure. And we're looking for businesses that we think have some source of sustainable competitive advantage, whether that be network effects, patents, trademarks or other unique characteristics. In terms of the camouflaged quality, which is something that we spend a fair bit of time talking about, we had really since inception, that could include a variety of situations. You can have hidden assets, you can have demutualizations, spin-offs, and other key areas where people misunderstand the most important attributes of the business and, therefore, it creates a mispricing. Quality, well, I think that's relatively well understood. Sometimes, there are points where you can pick up a variant perception. A network effect is a good example, liquidity pools, which we see in exchanges and other type of social media models. But then there are also other aspects that we've invested in really since 2008, which is dominant consumer brands. That's an area where we have considerable expertise, but it's an area that we've shied away from more lately. But what I will do is I'm going to hand over to Simon, and he'll take us through perhaps some more detail on what we're looking for in these criteria, particularly camouflaged quality. Simon, over to you.

Thanks, Rob. So we wanted to highlight some of examples of these mental models and how we've applied them to our current and prior portfolio investments. At VGI's date of initial investment, Amazon was considered by many a low-margin, capital-intensive online retailer, but they developed an internal cloud computing system that would eventually become Amazon Web Services. An early recognition by investors of this hidden asset provided substantial returns over time as the rest of the market came to appreciate its value. The emerging digital advertising and AI chips businesses could provide additional hidden value to current Amazon shareholders. Similarly, the McGraw Hill Company was once considered an education and publishing business before the unlock of value from Standard & Poor's and the other financial markets assets. The investment in FDJ is an example of a demutualization. In these situations, we are looking for corporate restructuring that puts in place an entrepreneurial culture and a management to drive this. We're also looking for growth opportunities for that business in this new structure. And often, these businesses have monopoly infrastructure characteristics. Other prominent VGI examples of this model are our holdings in the exchange assets. We love situations where the quality and growth of the business can be masked by legacy assets. A misleading company name can be enough for investors to ignore an opportunity that otherwise would warrant investigation. Richemont is a prominent example of this, a conglomerate that was eventually appreciated as a high-end luxury business. And we believe that one of our more recent positions, the London Stock Exchange Group, is another example where there is a misunderstanding of the key business drivers.

Yes, I might jump in and give some more context as to our London Stock Exchange Group investment, which many still associate with the old London Stock Exchange cash equities business, whereas the reality is that, that only accounts for 3% of the revenues today. The business has transformed into a much bigger data and analytics group, which is now 2/3 of the revenue base with a much more recurring revenue profile. And that's happened particularly since the 2021 acquisition of Refinitiv. And this chart here shows that evolution over the last 15 years. We followed the stock for some time and actually met them when we were in Europe last year for a trip. And we walked away impressed with the sense that the business was changing for the better. But we decided to wait patiently until valuation looked attractive, coupled with evidence that revenue was accelerating. This chart here shows how, in recent quarters, we've seen that revenue growth acceleration and what we think has driven that is that after many years of the Refinitiv assets being starved of investment, LSEG has put more resource behind it and has allowed it to become a one-stop shop for multi-asset customers in financial markets and with offering that spans data, workflow and indices. On top of accelerated revenue growth, we also think that the current earnings price is depressed because of some one-off investments from, one, the Refinitiv integration; and two, a large partnership with Microsoft which LSEG has undertaken to modernize its back-end technology. And in exchange, Microsoft has actually taken a 4% stake in London Stock Exchange Group. So we think effectively margins are currently depressed and have quite an attractive runway to improve from the current base. Moving on to valuation, we think valuation is very compelling at current levels. With a more recurring revenue profile, we believe the stock warrants a rerating and narrow that clear discount with data and analytics peers that you can see on this slide here. Another positive for valuation is that the original Refinitiv vendors, which are Blackstone and Thomson Reuters, have been reducing their stake, and therefore, that's removing evaluation overhang that's been in place now for over 18 months. So we think LSEG has been flying under the radar over the last -- call it, over the last 12 months plus, but we think that's starting to change. For instance, we saw LSEG pitched at the recent U.S. Sohn conference a few weeks ago. And we think we'll continue to see more line. The narrative changed positively, particularly with the upcoming Investor Day, where management will lay out new financial targets. So to wrap it up, we think that the outlook for accelerating revenue growth and improving margins will lead to a meaningful acceleration in free cash flow generation and other stocks very attractively priced at current levels.

There remains continued opportunities for VGI investments in the world of corporate divestments and spin-offs. We look for a number of characteristics in an attractive spin-off. We look for a diamond in the rough business whose quality has been masked by a larger corporate structure. This is often a business starved of investment within a conglomerate, but it has incremental investment opportunities at a high return on invested capital. We look for high-quality and well-aligned management to lead that business, and we look for catalysts to a re-rating. And VGI has successfully identified a number of price spin-outs, including Zoetis, the animal health business spun out of Pfizer; and Otis, the elevator business that was housed within United Technologies up until early 2020. Otis is a high-quality business in a consolidated industry structure. It has a recurring revenue model but it suffered from poor execution whilst trapped within a large conglomerate. The business was spun out at a highly attractive valuation, and VGI was able to take advantage after having extensively studied the elevator industry. And after 18 months, when the market fully appreciated the quality of that business and the price reflected this, VGI exited this stake at a 50% gain. We continue to look for other spin-out opportunities, and we are currently addressing a high-growth technology business recently divested from a slow growth corporate and a number of other corporate simplification opportunities. A more recent investment we have made is the spinoff of GE Healthcare, the medical technology business that was spun out of General Electric. And I'll pass over to Marco to give us more detail on this.

Yes. So GE Healthcare was a great situation for us for a number of reasons. Firstly, we'd actually owned GE prior to COVID, so we were familiar with that asset. Secondly, we came close to making an investment in GE Healthcare's closest competitor, which is Siemens Healthineers back when it was spun out in 2018. And then thirdly, we've been ramping up on the med tech space in recent years and have had successful investments in Olympus and Intuitive Surgical. So broadly, we like the space. So moving on to GE Healthcare, the situation. It reminds us a lot of the Otis spinoff actually, a leader in an oligopolistic industry with a razor and razor blade business model, a large install base and a significant margin opportunity. Now to give a brief overview of GE Healthcare, the business, 3/4 of the revenues come from imaging and ultrasound. And that means making machines for PET scans, CT scans, ultrasounds, x-rays and MRIs. And importantly, 50% of the revenues are recurring, things from machine servicing, spare parts and consumables. So it's got an attractive revenue profile. Now we also like the industry and the industry structure because it's very consolidated, and GE is typically #1 or #2 usually to either Siemens or Philips. Importantly, imaging is one of, if not the most important revenue-driving category for GE's customers, which are the hospitals. And so it's an investment area that typically tends to prioritize by hospitals. Now where we think the opportunity is for GE Healthcare is on the margins, and that's where the market, we think, is under-appreciating. And we often see this with spin-offs, right, a hidden asset with a renewed focus on capturing market share; two, a bloated cost structure that can be better run and optimized; and three, a newly independent and aligned management team. And we think all of these are in place at GE. As you can see on the chart here, the margin opportunity looks very compelling at GE relative to its main competitor, Siemens Healthineers within imaging. And our diligence with the industry players suggest that there's no structural reason that there should be this big margin differential. We just think that GE, under the old GE -- under the old conglomerate structure, was run poorly and the focus was much more on GE's aerospace business. So we think this margin gap will close over time, supporting earnings growth -- material earnings growth and surprise to the upside. On top of this, an important tailwind for margins will be the adoption of digital tools within imaging, which GE has been investing heavily behind. And we think this will support growth, better service attach rates similar to the Otis example and ultimately better margins. Then touching on valuation, we think it's very attractive at current levels, particularly as we forecast quite a meaningful improvement in free cash flow generation over the next couple of years. On current metrics, which we actually think reflects still a fairly depressed earnings base, the stock is trading at a discount to most med tech peers, which we think is unwarranted given the quality of the franchise. On a more normalized basis, we think the free cash flow yield of the stock here is over 6%. And obviously, we think that's got a lot of upside if Siemens Healthineers valuation metrics are anything to go by.

Rob earlier described concentration as one of the core tenets of the VGI investment philosophy. As a result, the [indiscernible] to include something into our concentrated portfolio is very high. We look for great companies with specific characteristics in our holdings. And we plan on multiyear holding periods at the time of our initial investment. There are some situations where we sell a holding, and we wanted to share a framework we use to make these decisions. Generally, it will be where at least 2 of either the valuation, moat deterioration or market expectations have been flagged. When we make investments, we are purchasing companies of what we consider to be a discount to their intrinsic value. And as part of that process, we generate a range for the fair value of the company based on a number of future scenarios. And when the stock trades within this fair value range, we reexamine the underlying assumptions versus the market expectations. We ensure that we have not missed anything, and then we weigh up the return profile and quality of this company versus alternatives we have available. And there are many stocks where our valuation range increases over time as a result of further confirming evidence during our holding period. For Amazon and Mastercard, as an example, this has been the case over a number of years. Moat deterioration can reveal itself in a number of different ways. And a simple question you can ask yourself in regards to a moat is, what will make this business easier in the next 18 to 24 months? And if we're struggling to find an answer, then it necessitates further analysis. Some common signs of moat deterioration: a new entrant is entering a market; an increase in the competition; a change in the industry structure, particularly consolidation of the underlying customers; or management making an acquisition intended to drive or mask slowing growth. The strategic change that we didn't anticipate in our investment case is also a flag. Assessing the market expectations around the company requires us to understand the underlying psychology in relation to the key value drivers for an investment. This could be revenue growth, margin expansion or cash flow generation. And we compare these to expectations to a range of reasonable scenarios that we've used in our investment case. And where we feel the consensus expectations are too high, we consider this a trigger to sell. Assessing market expectations is also an important part of the short selling process, whereby we may be looking for situations where the market has extrapolated a set of temporary factors and is overly optimistic on a company's future prospects.

Great. So a couple of recent divestments have been SAP, Richemont and Mastercard. Look, all these are great businesses, don't get us wrong, and they've been strong performers for the fund. But in each case, we either thought the thesis have played out or the valuation have become less appealing. So in the case of SAP, for example, the business had simplified by selling off Qualtrics, which was a catalyst that we were waiting for. And that led to a rerating and a valuation approaching a level where we saw limited upside. The business has also been transitioning from on-premise licenses to cloud subscriptions. And we think we're seeing some early evidence that this may have opened up the door to some competition. And so we've decided to sell the position at a profitable -- after a profitable holding period. Richemont is a second position that we think the thesis has played out. Again, another great business, but we think the market has come to fully appreciate that Cartier and the jewelry is the core driver, whereas previously, it had been perhaps masked by the broader holding group structure. Richemont has also sold its online business, Yoox Net-a-Porter, which was previously depressing. Because it was loss-making, it was depressing earnings. And we think that's another catalyst that's played out and led to the valuation re-rating. Therefore, we felt the margin of safety was not nearly as attractive as when we bought in 2019 and decided to move on. But to be clear, software, in the case of SAP, and luxury in Richemont, are both areas where we think there are great businesses and continue to be on our watch list because we think we'll find more investments in that space in the future.

One of the more recent exits from the portfolio has been Mastercard, a position we have held for many years. Whilst we still see Mastercard as a great business, we saw limited valuation upside. And based on the continued migration to digital commerce, we are seeing new competitors in the payments ecosystem. Companies such as Apple, Stripe and Adyen have started to emerge. In summary, we think the strength of competitive moats within the payment space are becoming less and less certain. Mastercard remains on our bench watch list, and we will continue to monitor developments closely, and we are always open-minded to a reinstatement of the position based on a change in the facts.

Thank you. That covers the long side. How do you think about the short side of the portfolio?

First, I think it's important to highlight that we think shorting will be a much more useful tool going forward. So as Simon highlighted a bit earlier, we've just come out of a period of 10 years with persistently low interest rates and one that's not been that kind to short selling. However, we think going forward, the current environment is much more favorable for our type of fundamental short selling and will remain a core part of the strategy. We really continue to focus on 3 areas to identify shorts. One, structural losers where businesses look impaired or unlikely to turn around; two, red flags in companies that appear to be massaging earnings or using aggressive accounting; and three, situations where there is irrational extrapolation, where the market has gone ahead of itself and -- and expectations are far too high, and we think there are catalysts they potentially miss expectations. So some examples of recent shorts that have been good return generators for the portfolio include 2 consumer discretionary companies, as Rob mentioned earlier, one in the apparel space and one in cosmetics. Both fell into the bucket of irrational extrapolation, where we believe the market was overestimating the ability to both continue growing revenues and also protect margins. And we view the range of outcomes as skewed significantly to the downside. One proceeded to miss earnings, while the other saw a meaningful share price correction as kind of everyone else in the space started to turn down expectations. Another example is in the enterprise SaaS space in a business that was facing growing competition and, therefore, fell in that structural loser category. We saw the market start -- the company reported earnings and started to miss expectations. And while the stock has fallen 30% since then, we remain -- we continue to hold a short position because we think we only saw the first of multiple growth downgrades. And as we show up share price moves, we've also become quicker to act, particularly when the thesis is not playing out. Last year, we talked about U.S. housing and home building as a short thematic. However, we've been surprised at how well housing activity has held up. And therefore, we've reduced short exposure to that space. We constantly reevaluate shorts and re-underwrite the thesis and make sure that the risk reward remains appealing, and it's something that the whole team here continuously discusses.

Okay. Thank you very much. That's a very thorough update. Before we move on to Q&A, I might turn back to Rob. It's obviously been a very busy last 12 months. We're coming up to the 1-year anniversary of the merger with Regal. How are you feeling?

Yes, well, look, I'm feeling really good about the team, and I'm feeling good about the portfolio. In terms of team, you see by this presentation, Marco and Simon have a thorough and very deep understanding of the portfolio, particularly the core long and short investments, the way that we go about investing, and specifically our long-held philosophy. And that's a very pleasing situation, particularly given the turbulence of the last couple of years in the team. In terms of the integration, well, the integration is largely complete. It's allowed the investment team, all of us, to have a series of pressures taken off us but also particularly for me. And we're now in a situation where we have access to a much larger group, some sector specialists, highly capable trading platform in New York. And that, again, gives us substantial capability and also allows us to leverage off a very substantial infrastructure which the Regal Group has. In terms of the portfolio, well, we've gone through this presentation. I'm very happy with where the portfolio is. It's been pleasing in terms of the performance. The constituents of that performance, I think, is something that we're all pleased by. It's been through -- generated through a series of longer-held investments we've had, some new ones, and it hasn't been a consensus return. Not that we're happy with return regardless of where it's sourced, but we feel like our hard efforts and hard work, and uncovering hidden gems, and I think someone used the term a rough diamond, that's been particularly pleasing. And in terms of personally, well, it's been a -- it's no secret, it's been a tough period. The last couple of years have been pretty difficult, for me personally. And it's something that does take a toll on you. So I'm pleased that I've been able to manage the portfolios and transition the group into Regal Partners. That, I believe, is a great outcome for our investors, a great outcome for our staff and a great outcome for shareholders. And so I feel like now is the right time for me to be able to take a break, go on a sabbatical for a period, spend some time with my family as opposed to with these great guys all the time. And I'm looking forward to seeing how the group evolves going forward and under the stewardship of yourself and Phil and the broader team.

That's great, Rob. Well-deserved break, all the best for it. Why don't we turn now to some Q&A to the broader team? We've received a number of questions. A number of those have been on the gap between the share price and the NTA. So notwithstanding the fact that NTA performance has been strong, there's still a gap to the share price. I might take that first question myself. Since the last 12 months since the merger, I'm pleased to say that the performance of the NTA has been up just under 12%, and the share price has been up just over 15%. So we believe that there are 3 key pillars to ensuring that that gap closes, and I'm very confident will close over time. Undoubtedly, investment performance matters. And I think as you've seen today, the investment team are well underway to actually generating strong investment performance for the clients of VG1. Two, I think there needs to be a very regular communication program, comprehensively updating our clients as to the portfolio and how the portfolio is responding to changes in the broader environment. And hopefully, today's webinar has helped in that regard. But three, we think a key part of that is also around capital management. Now capital management is not only a very effective buyback, and VG1 has bought back a number of stock shares since -- over the last 12 months at discounts towards NTA, providing not only liquidity to continuing -- to exiting investors, but also accretion to continuing investors, but also a very clearly articulated distribution policy. Now the Board of VG1 has committed to a distribution policy of $0.045. That reflects the manager's own conviction in future performance, and I'm pleased to see that we can project that distribution guidance with confidence going forward. So next question, and I might throw to the team here. Rob, can you remind me of how you think about currency risk?

Currency risk is something we've thought about since inception. It's a pretty integral component, especially if you're an Australian investor investing internationally. The reason for that is the Australian dollar is a commodity currency and tends to trade in a very wide range through the cycle, typically experiences through standard deviation events. And if you're an Australian investor, you can take advantage of that. In terms of specifically for the portfolio, the portfolio is fully hedged to the Australian dollar. So at the moment, it's incurring 0 FX risk. Having said that, if the facts change and we believe the Australian dollar starts to look substantially overvalued, well, we can change the positioning accordingly, and that will be to the benefit of the portfolio as returns.

Thanks, Rob. The next question is, how is the portfolio positioned for either a hard or soft landing?

Thanks, Brendan. I'll take that one. It's probably a good opportunity to talk about some of the risks that we see in the portfolio and how we construct the portfolio to take account of that. So we look at a lot of different risk buckets when we're thinking about the portfolio. Some of them would be familiar to everyone, be it stock liquidity or industry classification. And then there are some things that are probably proprietary to VGI. And more recently, we've been through the portfolio, and we've tagged each of the positions with a number of unique risks that we are considering, and some of those things are in light of the economic environment. So the exposure to consumer discretionary spending is one of the things that we're considering. We also, earlier in the year, had thought a lot about our China exposure and which stocks would suffer in an inflationary environment. So those are some of the sorts of things that we're thinking about. And obviously, with a potential hard or soft landing in the U.S., our portfolio and the weight it has towards consumer discretionary from a net perspective, the longs minus the shorts, is a particular concern we have.

Yes. And I might just add a couple of things, Brendan. We're cognizant that on the long side, for instance, we've got exposure to the U.S. or global consumer that in a hard landing would suffer, right? So Amazon's retail business, for instance, would suffer if consumer spending comes back. Disney's theme parks business is likely to come under pressure in that scenario, even Spotify subscriptions, which are actually a more defensive consumer Internet space, we think, at least. So we're cognizant of that. And I suppose the way we think about constructing the portfolio is that because we can short, and as I touched on earlier, we have been shorting things in the consumer discretionary space, we think that the portfolio is well balanced. And I think it's important to mention that on the short side, those consumer discretionary names tend to be a lot more leveraged to have bad balance sheets, albeit just much poor-quality businesses. And so if a hard landing does ensue, we think that those consumer discretionary shorts will suffer a lot more than our consumer discretionary longs. So that's an example of how we think more broadly about portfolio construction.

Okay. Getting to a little bit more detail. Next question is, how do you think about Amazon? When would you sell it?

Okay. Well, I'll start with that one. Amazon, we've owned since about 2013, 2014. Stock has appreciated considerably over that period. In terms of the position size, it has been cut many times. And particularly in '21 when the stock hit all-time highs, we substantially reduced the position. More recently, we've slightly reduced it. But in order to exit the position, something would have to change in the fact pattern. So our thesis would have to look incorrect. So something would have to materially impact our thesis or the business would have to trade at a substantial premium to fair value. But I think I'll pass that over to Simon as well.

Yes. Thanks, Rob. I think just in terms of the framework we laid out before, we'd be making sure that there's still upside to the valuation. We can still see some upside to the valuation here. We'll be checking for the moat deterioration. And if I think about that consumer business, it looks like the moat might be increasing based on the consumer surplus that they're adding with the Prime subscription and a number of other additional features there. And then the other thing would just be the market expectations. And we thought a lot about how the market's thinking around AWS and the growth rates, and we've got comfortable here. Now if we were to sell or trim the position in Amazon, that might just be a reflection of a competing idea that deserves some allocation in the portfolio versus perhaps losing faith in Amazon. So that's the only thing I'd say on that.

Thank you very much. Next question relates to something that's very popular at the moment, artificial intelligence. How are you thinking about the impact of artificial intelligence on the portfolio?

Yes, Brendan, that's something that we've discussed and happy to touch on. It's definitely something we spend a lot of time thinking about. I think you can't, given how prevailing it is in the narrative today. But look, so I think firstly, I think our largest position, Amazon, which we've just spent a long time talking about, we think that's effectively providing the picks and shovels for cloud computing, which, in turn, enables artificial intelligence. We think that artificial intelligence will drive greater workloads into the cloud. It will drive intensity of usage. And all those things are big tailwinds for cloud computing. And cloud computing has consolidated into effectively a 3-player market. And so we think AWS, which got 1/3 of that market, is perfectly placed to benefit from the trend. I think perhaps another example actually of a beneficiary that's perhaps less obvious in the portfolio, a beneficiary of AI, is actually GE Healthcare, which we talked about earlier. In the imaging space, what's happening is that a lot of these machines are embedding artificial intelligence and a lot more software to analyze, for instance, and read images. So when you go to get an MRI scan, instead of the doctor standing there and spending 20 minutes looking at where you might have some problems in the scan, AI is effectively cutting that down to a few minutes. And so those are examples that are driving real life world solutions because we know hospitals have got staffing problems. They've got cost pressures. And so we think that there's a lot of demand by GE's customers for these solutions. And GE, like I mentioned earlier, they've been investing heavily behind these machines. Just last week, they signed a big contract with St. Luke's network of hospitals and clinics. And one of the reasons that they selected GE Healthcare was because of their digital and AI solutions. So we are definitely seeing this across the portfolio. And we believe we own a number of beneficiaries. Equally, you asked about the risks. It's something that we're mindful of and thinking about. I don't think -- we believe we don't have anything that's directly exposed as a threat, a disruptive threat to AI, but it's definitely something that we evaluate constantly because the space is changing so rapidly that every couple of weeks, it appears that there's new applications that are being developed for AI. And so yes, it's a constant arc. It's something that we're constantly debating internally.

Thank you, Marco and Rob and Simon. I'll now call an end to questions there. If we haven't got to your question, one of our Investor Relations teams will respond to you shortly. Thank you to everyone who did submit a question. And importantly, thank you for supporting VG1. We look forward to providing you with further updates on the portfolio in due course. Have a good day.