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

Good morning. My name is Brendan O'Connor, CEO of Regal Partners. First, I'd like to remind you that this presentation is general in nature and does not contain any specific advice. Joining me today is Regal's Founder and Chief Investment Officer of Long Short Equities, Phil King. Phil is leading the VG1 investment team, while Rob Luciano is on a well-earned sabbatical. Also joining me today are the VG1 portfolio managers, Marco Anselmi and Simon Birrell. I'd now like to pass to Phil, who will start off with a bit of an update on the market.

Thanks, Brendan, and good morning, everyone. Whilst we're very much bottom-up stock pickers at VGI, what I will do at the start, I think, is just provide a few comments about the broader market before we focus on the stock portfolio. And there's 3 key takeaways I want to leave with people today. Equity markets are still very much being driven by movements in bond yields. Secondly, earnings have held up a lot better than most top-down predictions, but we continue to monitor these earnings results very closely. And then finally, the rise in yields have reduced and in the U.S., almost eliminated the equity risk premium, but we still think there's many opportunities outside the mega caps, both in the U.S. and in other markets. So it's been very much moving in yields that have been driving the market over the last 20 years or so. It was very much the move from 5% bond yields in 2007 to almost 0 in 2020 that drove the bull market for 15 years. And since yields have been going up, that equity markets have very much found the environment a lot tougher. This chart which we used in our recent RF1 investment webinar, just highlights that even over the last 2 years or so, bond yields are very much driving markets. It was the bear market in stocks that finished when bond yields hit their high in October '22. And once bond yields stopped going up, the pressure came off equity markets and the stock market was able to rally. But from about July this year, when yields started going up again, the pressure return to equity markets and markets have been quite weak since then. And we think it's very much important to keep an eye on yields at the moment. And whereas the first increasing yields were very much driven by higher inflationary expectations, the more recent increase in yields has been driven by an increase in the real yield. And that I think is almost more important for markets because most companies -- many companies actually we're able to pass on the cost increases caused by higher inflation. And in many cases, it actually was a positive for earnings results. As you can see here, the movement in bonds has almost wiped out the equity risk premium in the U.S.. U.S. stocks are on close to 20x P/E, which translates to an earnings yield of about 5%. And this is very much in line with a 10-year bond yield in the U.S. at the moment. So the extra risk or the reward you should receive for owning equities, which are inherently a lot more volatile than bonds is almost close to 0, which is a lot lower than it historically has been, as you can see from the chart. But there's been quite divergence in the performance of many stocks in the U.S. over recent years. And in fact, this year, all the performance in the S&P 500, which is up about 12% year-to-date, has been driven by the so-called Magnificent 7. And the rest of the market is almost down or flat for the year. And so it's in the rest of the market that we think some of the better opportunities lie. And even though the performance of the Magnificent 7 has been tremendous over recent years, we think a lot of these stocks are fully priced. Stocks like NVIDIA and Tesla have great businesses, but we think these are more than reflected in stock prices at the moment. And the only stocks in the Magnificent 7 that we own are Amazon, which has been a long-standing position for us and Meta, which we bought at good levels more recently. And so our weighting in the Magnificent 7 is around 10% or so of the portfolio, which compares to the S&P 500, where the weighting of the Magnificent 7 represents about 30%. And so looking at valuations, the rise in the stock prices of the Magnificent 7 mean that they currently trade on a multiple of around 28x, which is a very significant premium to the broader market. And so backing these stocks out of the S&P 500 means that the broader market is trading on a P/E of about 16x, which we think is actually a lot more reasonable than the market as a whole. And we've actually -- it actually means that the market has derated from where it has been in recent years. And so we think some of the best opportunities are outside these mega caps. We also think some of the best opportunities are outside the U.S. and our U.S. exposure in the global strategy on a net basis is the lowest it's been for a considerable period of time. And we have actually recently increased some of our exposure to Europe as well as Japan. We think there's interesting opportunities in both Asia and Europe at the moment. We have not seen the same increase in yields that we have seen in the U.S. and multiples remain at very attractive levels. And so we think even though the returns in the U.S. have been a lot better over the last 10 years, looking forward, there'll be much more attractive returns in some of the Asian and European markets. So looking at the portfolio as a whole, we have reduced our net exposure, mainly in the U.S., and this largely reflects what we're seeing with yields at the moment. As I highlighted, the rise in bond yields has made U.S. stocks a lot more expensive. So we're continuing to monitor yields very closely. And yes, we will obviously continue to monitor earnings very closely. But we do think that any pullback in the market will provide a good opportunity to increase exposure. And so we're looking just to identify any weakness in coming months. And across the portfolio as a whole, we have actually reduced some of the exposure we have to stock exchanges in recent years. Stock exchanges have been a very large portion of this portfolio over the last few years. And even though we're very, very positive on some of the exchanges, most importantly, probably CME and the London Stock Exchange, we have taken advantage of some of the rallies recently to decrease our exposure in this space. And the other important thing to highlight is the fact that we have actually increased our energy exposure more recently. And traditionally, the global strategy does not invest in sectors that are considered cyclical. But our view on the energy sector at the moment is that the structural changes that we're seeing on both the demand side and the supply side, make an energy exposure in the portfolio a lot more attractive going forward. And we certainly don't see it as being a cyclical as it has been in the past. Now I'm going to pass over to Simon and Marco to talk about some of the contributors to the portfolio return this year and then to talk about how the portfolio is currently positioned. Thanks, Simon?

Thanks very much, Phil, and good morning to everyone. Pleasingly, we've had a spread of contributors from a number of sectors and also across some long-held positions and also some of the newer additions to the portfolio. Amazon was a top contributor year-to-date driven by a return to profitability in the U.S. retail division and continued recognition by the market of its long-term potential as a leading cloud infrastructure provider. CME has also been a strong performer driven by the strength in trading volumes of interest rate futures. We will touch on CME and the dynamics around these markets in more detail shortly. And Rheinmetall have successfully grown their order book as NATO countries increase their defense spending, and we will also discuss our defense exposure in more detail later. I'll pass over to Marco now who will walk through Spotify and some of the short contributors.

Yes. And then we've had Spotify being a solid contributor. I mean, that stock has more than doubled just since the start of this year, have continued to add users at a very solid pace. They've brought costs under control, and we're finally starting to see that profitability in flat. In fact, just earlier this week, they delivered a very healthy result and the stock traded up 10%. Then moving on to the short portfolio. We've had a number of contributors. I think it's important to sort of note that over the last 2 years, we've actually delivered a positive return from the short portfolio, and that's in absolute terms, which sort of highlights the importance of shorting to our portfolio, not just as a risk management tool. So yes, shorting will remain a key part of the strategy. And where we've had success this year has been in consumer brands, in unprofitable tech and amongst retailers. And primarily that's been in the U.S., which as Phil touched on earlier, is where we've seen more pockets of evaluation. And we're going to touch a little bit more in more detail later on about some of the current shorts that we have in the portfolio at the moment.

This is a slide we share often and provide frameworks for the opportunities we are looking for on the long side. While the concept of investing in quality businesses has evolved in recent years to encompass an increasingly broad [ touch ], our preferred approach is to focus on businesses that we perceive as camouflaged, large, high-quality businesses. Namely, those which are initially ignored, underappreciated or distained by the broader market consensus and therefore, tend to provide far more attractive opportunities from a valuation perspective versus more traditional or overtly high-quality names. Recent market volatility, however, is providing us with opportunities to revisit some more overtly or already appreciated names, particularly as expectations for future growth have been significantly revised in the face of a new rates environment. Mr. Market is often overly optimistic or pessimistic, and we remain nimble and well prepared to deploy capital in the best opportunities as they arise. And some of the more attractive risk-adjusted returns are presenting themselves in a number of sectors where we have been able to leverage the wider Regal Partners sector expertise to supplement the traditional VGI circles of competence. Today, we will walk through some portfolio positions where these mental models apply. Royal Dutch Shell, one of the world's largest energy companies is currently undergoing a business model transition, adjusting their capital allocation framework and economic model to increase returns. Network effects are demonstrated by Meta, where the value of the product to the customer is increased by the use of the product by others and commonly creates a winner take all or winner takes most industry structure. Amazon continues to demonstrate and leverage its scale economies and create strong consumer surplus to its customers. And mispriced compounders are businesses that have traditionally been cyclical, but are starting to show less earnings volatility due to structural changes in their end markets. We are seeing these conditions in the defense sector, and we will discuss VGI's exposure to this sector later.

Yes. I might now touch on -- so liquidity pools are another example of types of businesses that we look for. And CME is a name that we've talked about in the past and it's been a core long position for us for some time. Just as a reminder, it is the largest exchange for trading interest rate futures, equity futures and various derivative instruments that span asset classes such as effects and energy as well. But really, the key driver for this business is its interest rate derivatives complex. And here, CME has effectively a monopoly. It facilitates the trading of interest rate futures across the [ full ] curve. And because we've been in a very volatile environment, unsurprisingly, the interest rate trading futures activity has been elevated, which has been the tailwind for CME. We don't think this is a one-off just for this year. I mean, if we look at that chart, we can see the outlook for the U.S. debt issuance over the coming years, and it's clearly showing -- it is clearly expected to continue rising. And this, in turn, we think, will continue to stimulate effectively bond investors to want to continue hedging interest rate risk or speculate on future interest rate movements, which again is what drives activity on the CME. Now the stocks performed well -- very well year-to-date. It's delivered a total return of 36%. Phil alluded to this earlier. We've taking a little bit of profit on the stock, but we -- it remains a core holding, and we remain bullish given the reversal that we're seeing in quantitative easing and the fact that we remain in a highly uncertain environment and volatile environment, which will remain a tailwind for CME. And because effectively, CME can facilitate high growth without growing its cost base, we expect this will all drop down through to the bottom line and surprise of the -- continued to surprise to the upside on earnings. So we remain bullish on CME.

Thanks, Marco. Amazon has been a core holding for an extended period, and we continue to see upside in Amazon. Our long-term thesis remains the same, the company continues to create exceptional customer experiences across a number of business lines with a long runway for continued investment at high rates of return. It creates these exceptional customer experiences by leveraging its scale economics to continuously improve the customer value proposition. There are times when Amazon's long-term investment horizon masks the strong return on these investments. We believe that we have been living through one of these periods recently. The COVID period and the accompanying pull forward in e-commerce activity prompted major capacity investments across the industry. Unlike many other tech companies, Amazon has invested ahead of this curve and is now going through the process of optimizing its cost base for today's environment, whilst growing into the additional capacity that it deployed. This is evident in 2 important KPIs at the company, free cash flow generation and operating margins. Free cash flow has improved considerably at Amazon this year. CapEx commitments within the North American Retail division have declined considerably whilst the company has continued to invest in the cloud computing infrastructure division, AWS. As a result, CapEx spend as a percentage of the operating cash flow has declined from over 100% in each of the last 2 years to an estimated 60% in FY '23. And we expect further improvements in free cash flow going forward. Part of this improvement comes from the inflection in margins within the retail division, after a number of loss-making periods. Management are committed to restoring the margins to pre-COVID levels and given the strong growth in high-margin areas such as advertising, we believe in time they could surpass the prior periods. AWS growth will normalize after a period of customer optimization. On top of this, it will have exposure to the infrastructure requirements of AI applications and through the continued investments Amazon is making such as the more recent investment in ANTHROPIC, Amazon will have exposure to the growth from the foundational AI models themselves. Amazon have made a number of investments over the last decade in AI, including chip company and [indiscernible] and that now forms the backbone of their efforts to innovate silicon and software available to AI customers in the AI space. I'll pass over to Marco for Meta.

Thanks, Simon. Yes, I'll touch on sort of the other mega cap tech that we own, which is Meta and which we bought more recently. And again, as a reminder, Meta owns Facebook, Instagram, WhatsApp and Messenger. So it's 1 of the 2 digital advertising global leaders. Now Meta over the last 18 months has gone through a pretty powerful turnaround. It's gone from being a completely unloved and people assuming it was effectively in terminal decline to now being on a path of accelerating revenue and earnings growth and having resonantly responded to competitors like TikTok and yet again kind of proven how sticky its user base is. The turnaround in the revenue growth has sort of been helped by the broader digital advertising market remaining healthy. But Meta itself has undertaken a number of investments that has enabled the company to improve content recommendations and in turn, monetization particularly with its reels short form video format and this is sort of just the latest example of how Meta has been able to sort of copy its competitor's -- features from its competitors, but improve them. And that's just one example of the new initiatives that Meta has been undertaking to improvement monetization, another one being monetizing its messenger and WhatsApp applications through click-to-message advertising, which again is sort of helping Meta take market share of advertising budgets. Meta has also cut costs aggressively. You can see on the chart there on the right-hand side, the total employee count has declined by 20% over the last few quarters, and this is helping drive pretty impressive operating leverage at a time when revenue growth is accelerating. And Meta has been able to achieve a lot of the success because of investments in AI and this was even before AI sort of became a buzzword because Meta is been undertaken all of these investments for quite some time. It's been investing in cloud infrastructure and recommendation engines for many years. And again, you've seen that in the kind of improvement in engagement over the last few years. And despite the share price rally that we've seen in the last 12 months, we think valuation actually remains still very cheap. Meta is actually the cheapest of the Magnificent 7 stocks, it's trading just 18x P/E. And when you don't capitalize the metaverse losses because Meta is actually still losing nearly $20 billion a year investing in metaverse and other longer science projects, if you want to call them that, the stock is actually even trading on a low teens P/E. So we think that the valuation is very compelling given the growth profile that we're seeing on the business. And one last quick note that's topical and worth mentioning is that the result came out earlier this week, and we're pleased with our results, good to see revenue growth accelerating, and that's very much in line with our thesis. We remain, again, bullish on our position on the back of that result.

Thanks, Marco. I wanted to touch on VGI's exposure to the energy sector and have a discussion here about Royal Dutch Shell. As businesses grow, they can fall into a complexity trap, whereby the competing needs of various stakeholders overwhelm the management and they lose focus on cost control and capital allocation. And there is no industry where this has been more prevalent than the energy sector and arguably no company that has suffered more from a returns perspective in these conditions than Royal Dutch Shell. Over the last decade, management at Shell have grappled with their role in the energy transition and where to invest their capital to balance the needs of all stakeholders. On the one hand, they've had some governments asking for reductions in fossil fuel exposure and aggressive renewables investment, whilst on the other hand, we have had other governments wanting security of energy supply and increased oil and gas investment. Whilst in the background, shareholders have been looking to restore capital returns. We believe that regardless of these competing concerns in the past, the collection of assets at Shell and the potential for improved capital returns makes this an ideal candidate for exposure to the energy sector. Shell is one of the cheapest energy companies in the world. In comparison to its U.S. listed peers, it trades on close to a 25% discount on most metrics. And this is despite the company generating a significant amount of its cash flow and earnings from stable businesses aligned to the energy transition. For example, Shell is one of the largest global players in the LNG market which will be a critical transition fuel as the world looks to move away from coal-fired power generation. Shell is a business simplification story. It needs to unwind a number of subpar investments and renew its capital allocation framework. The process started with divestments of refining and Shell assets and has continued with the management transition in late 2022 to new CEO, Wael Sawan, who has been very clear in shareholder and internal communications on the ruthless focus of the company going forward. In a recent meeting we held with Shell management in London, they reaffirmed the commitments we were looking for from a capital discipline perspective. Most notably, further divestments such as Singapore Chemicals, Pakistan Marketing and a more disciplined approach to renewables investments where there are clear project return hurdles and integrated benefits to the other company divisions. We believe that as the market starts to appreciate the strength of the underlying assets, Shell will be viewed as 2 distinct businesses, in LNG, renewables and marketing business with a modest dividend and strong reinvestment profile and a legacy energy business that could rationalize spend even further and ramp up returns to shareholders. When approached through this lens, combined with evidence of cost discipline, the conglomerate discount attached to Shell should fade away. And then to round out our update on the loan portfolio, we wanted to share some insights on our defense exposures and why we see a path to strong earnings growth for the sector in the coming years. The geopolitical environment has rapidly changed over the last 2 years with a number of unfortunate conflicts breaking out over several continents, coupled with increased regional tensions. Governments who have been enjoying a relative period of stability in peace, have responded to these conflicts with a major assessment of their military capabilities and this has created a renewed willingness to invest in defense capabilities and deterrence. In particular, NATO signatories are set to significantly increase their spend. In addition to this, new countries are joining NATO, notably the Nordic countries, Sweden and Finland, which will open up new opportunities for NATO suppliers. A comparison of relative defense spend is shown here. And for context, the U.S., by far the largest spender globally spends about 3.5% of annual GDP on defense. NATO expenditures have stagnated between 2014 and '18, with growth of just 0.3% in U.S. dollar terms but grew 23% in FY '22. This is being driven by major spending commitments from member countries. For example, both Spain and Italy have committed to increasing defense spend from 1.4% of GDP to 2% whilst the U.K. has committed to increasing from 2.2% to 3%. If all of the member countries pictured here spending below the 2% target were to increase to this level, it would be over a 20% increase in spend and if it moved to the even more ambitious 2.5% level, an increase of over 45%. The effect of spending increases on a domestic supplier is well demonstrated in the case of Germany and one of our portfolio holdings. In Rheinmetall's home market of Germany, the government has committed to a 2% defense spending goal by way of establishing a EUR 100 billion special fund to accelerate equipment procurement over the next 4 years. And when you drill down on this, the total prior budget was about EUR 50 billion. And of this, 60% or $30 billion was OpEx spend versus an investment budget of $20 billion. So an increase in the investment budget of $20 billion is a 100% increase on the areas that Rheinmetall is focused on. And Rheinmetall and other companies in the sector are answering the call from governments to increase capacity and have accelerated capital investments. We recently met with Rheinmetall in Munich and came away feeling very positive about the potential returns on new investment. CEO, Armin Papperger described the change in government attitudes to procurement and the certainty with which they are providing suppliers through long-term procurement contracts. Given this, Rheinmetall can confidently make investments with attractive payback periods of less than 4 years. In addition to budget growth, we are also seeing budgets shifting towards areas of strength for our portfolio companies, most notably space and air systems. 40% of L3Harris sales, for instance, are in this division, and we believe that the DoD budget for space, for example, will grow at a compound annual growth rate of 19% from FY '21 through '24.

Great. Thanks, Simon. I'll now touch quickly on what we've been doing with the short portfolio. As I briefly mentioned earlier, we've been pleased that over the last couple of years, 2 years, we've had a positive contribution from the short portfolio. So this kind of highlights what we think shorting is important and a key part of the strategy. Now we've been finding short -- attractive short opportunities, particularly in the U.S.. I mentioned this earlier, particularly in the unprofitable tech space, where we were able to take advantage of the aggressive short squeezes that we saw in June and July or early this year to really add to some of those shorts. This slightly shows the main areas that we've been focused on for shorts. In recent months, we've had -- we found the most fertile ground has been in that third category being irrational extrapolation, which really means it's where we're looking for situations where expectations have become unrealistic and have completely play diverged from fundamentals. One example of this has been fad fintech and new bank lenders. These sort of businesses view themselves as financial super apps, but in reality, remain quite unprofitable businesses that are yet to show sustainable unit economics in many cases. And not just that, but these businesses have effectively grown their businesses by lending aggressively, for instance, issuing unsecured personal loans and with looser credit standards, which we think leaves them very vulnerable in the current environment. We also had some success shorting some consumer brands. Some of these businesses were over earning after the COVID period. And so we've seen -- since seen a normalization in either demand or margins. And then we also had some shorts in what we like to call science experiments. These are things like battery technology companies or flying taxi companies, things that very much have unproven business models, but also have ongoing funding needs, which in this environment have become -- funding has become a lot more difficult to access. So that kind of gives you a brief -- give you some examples of the categories that we've been focused on with our shorts. And I'll now hand back to Phil to discuss the portfolio -- the current portfolio and the exposures at the moment.

So we're very pleased with the portfolio performance year-to-date. The net asset value has grown by about 15% and total shareholder returns are slightly better than this as the discount has closed slightly. We're still very disappointed with the discount that the share price is trading at but we think a combination of continued good portfolio performance and capital management and marketing will continue to close this discount. As you can see, we have a portfolio of very high-quality global companies, and we're very pleased with the portfolio construction at the moment and very confident about the outlook going forward. I'm going to hand over to Brendan now to take questions.

Thanks very much, Phil. I've got some questions here that people have submitted in front of me. And actually, I might start with the first one for myself. And that is, can you provide some comments on the discount between the net asset value and share price and current initiatives to address this? Absolutely. Phil was just mentioning the discount to net asset value. So firstly, we're very aware of that discount. It remains a focus of ours. And I'll remind you that we believe we've got a philosophy built upon 3 pillars to manage a successful listed investment vehicle that should seek through time to reduce that discount. First and foremost, and ultimately, in the long run, the only thing that matters is performance. Secondly, though, regular and well-coordinated investor engagement and communication programs, such as presentations like this regularly throughout the year, I think are also an important point. And thirdly, having a clearly defined capital management plan. And what that really means is an active buyback and we've been very active with the VG1 buyback. Since merger in June last year, the company has bought back 50 million shares or 13% of the issued capital. It's one of the most active buyback programs in place, and we'll continue to make sure that remains so. Secondly, a clear dividend policy with specific target payment every 6 months. You will see that we recently announced that we're upgrading the dividend to $0.05 per half. And at current prices, this would represent a 12-month yield of approximately just over 6.5% before we consider any franking benefits. So I might actually turn to some other questions here, and I'll turn it to you, Phil. Phil, can you comment on the increase in energy weighting. What is your view on the energy cycle currently?

Thanks, Brendan. Yes, VGI has had some exposure to energy over its 15 years, but that's been very small and selective. But we think now is the time to increase that exposure. We think that even though there's going to be some reduction in some forms of energy demand over the next 10 or 15 years, that supply is going to shrink a lot faster. And we think that means that the outlook for energy prices is very, very positive, and that's going to provide very good returns for shareholders of energy companies. And in fact, we think that there's been a lot of selling pressure on energy companies in recent years from investors exiting the sector. And as a result, we think there's some excellent entry points at the moment. And even though we have a long-term positive view on the sector, some of the tragic events that we've seen in the Middle East recently just highlight what can happen in the short term as prices can squeeze and the sort of optionality that we can see.

Thanks, Phil. You also mentioned during your presentation the addition of some new shorts. Does that reflect more caution on the market or just more short opportunities in the current environment?

It's actually both, Brendan. We are more cautious on the market more generally as largely a result of the increase in bond yields. And we think that makes stocks more expensive on a relative basis than they have been previously. And secondly, we're also showing more single stocks. We think we're seeing some structural changes in the market. Some of the loss-making tech, for example, that have been the big winners over the last 10 years are now heavily overvalued, and we think that the increase in bond yields could be the catalyst to mean that some of these stocks start to underperform.

The next question is perhaps a little bit unfair. It's an easy question, but hard to answer. Why don't you earn more at the Magnificent 7?

Yes, great question. And to be honest, we wish we did over the last 5 years or so. But we think where we are today -- great companies but very high stock prices. So just for the record, we do own 2, Amazon and Meta, and we have been buying a little bit of Meta recently. But certainly, we think the valuations of some of these stocks are probably too high for where we are. NVIDIA and Tesla, for example, are incredible businesses but trade on very easy multiples. And we think part of that has been the fact that we have what we call a bubble. In passive investing, there has been huge inflows into low-cost index tracking funds and this, we think, has meant that many investors are overexposed to the mega caps at the large end of the market. And even though Microsoft and Apple have got great businesses, the outlook for growth for companies like Apple, we think will be a little bit more challenging going forward than there has been in the past. So yes, look, we love the Magnificent 7, Brendan, but we'll be looking for better entry points into most of them going forward.

Okay. Great. Now shifting more to a regional theme. Historically, VG1 has had a lot of U.S. exposure and you made the point that the U.S. appears overvalued. Would you add more European and U.K. companies to the portfolio?

Yes, that's exactly what we've been doing, Brendan. We have been just very selectively adding some single stock that we've been looking at in both the U.K. and Europe. We've been following a lot of those stocks for an extended period of time. And both Simon and Marco visited Europe in recent months and met with many of these companies. And so we have been increasing our European exposure. We've been increasing our U.K. exposure. And more selectively, we've also been increasing our Japanese exposure where we think there'll be good returns going forward. We think the Japanese market, for example, has been cheap for 10 years. But what we've seen in the last couple of years is 3 catalysts to drive the stock market higher, and that's namely the depreciating yen has maybe been in the Japanese export is very good value; the inflation shock that's so negative for many other countries has actually been a positive for Japan, which has been suffering from deflation for many, many years; and finally, there's just a huge increase in the focus on shareholder returns in Japan that I think is going to be very good for investors going forward.

That's great. I might throw to Simon and Marco here for the next question. Can you talk about your thoughts on the impact from the recently released weight loss drugs. Has that been a positive or negative for the portfolio?

Yes, I'll take this one, Brendan. We've actually had no real impact as we have very small -- effectively negligible direct exposure to the thematic. Interestingly, one of our holdings, GE Healthcare has been caught up in the broad U.S. med tech sell-off. We've seen a lot of these companies have been -- will have a threat from GLP-1s, but really, GE Healthcare is very well positioned within the med tech space, and is likely to see little to no effect from low calorie consumption and the obviously focused drugs that are obviously taking off at the moment. We do have one smaller holding, which is a European flavors and fragrances business that might see some headwinds from lower calorie consumption. However, they do have a fairly well-diversified business that will also benefit as consumers shift to healthier consumption trends. So at this stage, we're not really worried about GLP-1 exposure for that security in particular or about the -- or any of the other holdings in the portfolio. But we're definitely watching some of the sharp price moves on the back of the GLP-1 news flow. And we do want to be cautious as a range of outcomes still feels very wide, but there's definitely been some share price moves that feel of it done and for some of those businesses that might end up being less impacted, might end up being potentially attractive opportunities to look at the moment.

That's great. And during the presentation, I'll stick with Marco and Simon, it was great to hear about some of the winners. Can you share some of the disappointments from the year so far?

Yes. Thanks, Brendan. Look, definitely, we've had some disappointments this year on some of the sector shorts that we had earlier in the calendar year, particularly, I would say, in semiconductors and U.S. housing. We've taken some actions to exit those positions when they weren't working. And we replaced those exposures with single stock names from other sectors where we can see some clear catalysts. And Marco discussed earlier some of the fintech names for instance, where we've had some good success and also businesses where the funding environment is much tougher in these new rates environment, and that's where we've positioned some more of those short exposures.

Yes. And I might jump in as well. We've had some drags also from -- on the long side, one, is, for instance, FDJ, Française des Jeux, which is the French lottery. That stock has fallen around 20% this year. That's been due to a range of reasons. The increasing French interest rates has been a headwind given that stock is effectively a rate-sensitive bond proxy. It's also had a bit of an overhang from a regulatory investigation and also a cycle of lower jackpots. But overall, we -- at the moment, we think the valuation is very compelling for what -- we think the risk reward feel -- it looks very skewed to the upside, the stocks growing on a 6% dividend yield and the stock that should continue growing earnings at least mid-single digits. So we're comfortable with -- we still like -- very much like the position at these levels.

Thanks, Marco. I've got a stock-specific question here. Can you provide an update on your current thoughts on Disney? And secondly, do you see the strong Netflix result as a positive or negative for Disney's streaming business?

Yes. Thanks for the question, Brendan. I'll take that one. From a returns perspective, Disney has been roughly flat this year, and we consider that a slightly disappointing outcome considering the progress that the business has made relative to our thesis. So just to recap why we like Disney and some of the catalysts from here, Disney owns a collection of really unique and highly valuable IP assets in the brands and the characters that they own. And they have multiple paths of monetization within both the media business, including the studios and streaming and also the parks division. And we believe that management have indicated they're willing to take actions to unlock the value of these assets. And so what Disney needs to do in order to grow their earnings power going forward is really reverse the losses that they've had in the streaming division or the Disney+ division as most people would know it, whilst maintaining strong performance in that parks division. And so the streaming industry collectively has really been through a period of strong customer acquisition without much concern for profitability. And Disney was definitely guilty of some irrational spending there. They had a management replacement this year when returning CEO, Bob Iger replaced Bob Chapek. And we believe that, that particular management change was a catalyst for the business to put in place some actions to fix the issues, including cost cuts and also, importantly, some price increases on the Disney+ product. Netflix recent results are very positive from an industry perspective. They have indicated that they are willing to increase prices in some of their major markets, and we think that this will allow some of the other players to follow them. Netflix have also increased and raised their margin guidance for FY '24 and are generating strong free cash flows that we think validate the streaming profitability at a strong scale. And so the streaming losses within Disney will cost about $2 in EPS this year. And if you were just to reverse those losses, that would put the shares on about a mid-teens P/E multiple. But we think the actual underlying profitability of the streaming business in the coming years will be much higher. And so we see those shares trading at a much higher level once people realize that, that's going to be the case. This is always a multiyear bet. We're happy with the actions that have been taken so far from the management perspective to address the performance, and we expect to see rapid improvement in the operating earnings over the next several years.

Thanks, Simon. There's one final question here, which I might take myself. And that is, is the fund able to fund the upgraded dividend going forward out of profit reserves. It's a good question, and we're very comfortable with the existing position. As advised in the announcement regarding the increased dividend, the company's profit reserves were over $225 million or $0.675 per share, which would have provided coverage to pay $0.10 per annum each year, obviously, for the next 7 years. I think we're in a very comfortable position, and we look forward to being able to provide further updates around the company's dividend policy going forward. On that note, I might finish with questions. Thank you for your support of VG1 when we look forward to providing you an update over the coming months.

Yes. Thanks, Brendan, and thanks, everyone, for your support of Regal and VGI.