WAM Global Limited (WGB) Earnings Call Transcript & Summary

Good afternoon, and thank you all for joining us for the WAM Global investors update and questions and answers webinar. Now as you're aware, this is your company, and we're only here because you allow us to be here. I am Chairman and Chief Investment Officer of Wilson Asset Management. Geoff Wilson is my name. And I'll be leading the first part of the presentation. Then I'll be asking the WAM Global team, Catriona, Nick and Will, various questions. Then we'll be opening up to broad questions from Olivia Harris, who's one of our senior corporate affairs officers. So obviously, this webinar is to report to you on the 12 months period. Now the result that we just announced recently, that's the 12 months to June 2021. And for WAM Global, it was a -- due to probably -- even though we know it's been a very difficult year, a very difficult time for a lot of people currently and over the last 12 years, from an investment perspective, it really was a vintage year for WAM Global. In terms of Catriona, Nick, Will and the team, they really had performed extremely well in a very challenging year. Now the portfolio -- now this is against the index, which is before fees, was up a little over 30%, and that outperformed the MSCI index in Australian dollars. In terms of the dividend, it was great that we could continue to increase the dividend, and it was a very healthy increase for the full 12 months, and we ended up announcing a $0.05 fully franked final dividend. That was a $0.10 for the full 12-month period. And that's a little over a 40% increase on 12 months ago. So I'm incredibly pleased, as Chairman of the company, that now that we've got a very solid profit reserve. We're paying some tax on the realized profits. So the franking is coming through. So we're really -- we're in a position that we can flow those fully franked dividends to shareholders over time. The -- as a way of effectively rewarding shareholders, WAM Global Board decided to have a bonus option issue that's -- that we gave all shareholders a free piece of paper, which is an option if they wanted to exercise and pay $2.54 and buy another WAM Global share. Now they're trading on the market. It's interesting to see, there's been about $60 million worth of those options already exercised. And I think a lot of people exercised them to get access to the last dividend. But also, there'll probably be a number of people that will exercise them over the next few months to get access to this $0.05 fully franked dividend. Now so -- and one of the other pleasing things is WAM Global had been trading below NTA. The share price had been trading below the value of the assets. Now if you look at -- yes, because all shareholders got up -- or got given one free option, then if you add an option and a share, add them together, they're actually trading at a premium to the current pretax NTA. So that's a very pleasing result. In terms of -- also the latter part of the last few months, you would have noticed that WAM Global made an announcement of a planned merger with Templeton Global Growth Fund. Now that is another very positive development from the WAM Global's Board's perspective. The -- and there has been some questions about the merger with WAM Global and Templeton, and we'll go through some of the detail in the questions and answer a little later. But at the top level, now what that does, it really catapults WAM Global from being a mid-ranked ASX-listed global fund manager to -- it actually makes us -- if WAM Global continues trading around NTA, it will make us the second largest listed global fund, and so that is very positive. And what investors would have seen, they saw Soul Pattinson has merged with Milton -- or announced the merger with Milton a couple of months ago. And you saw the Soul Pattinson's share price rally nearly 10%. And I mean since we announced the merger, we've already seen the WAM Global share price rally, which is positive. And one of the various positive benefits of the merger is scale. And a lot of people -- investors in Australia, they want to be able to get access to companies that have a reasonable amount of liquidity. And that's what we've found with our experience over the last 20-odd years in LIC space, that people will tend to pay up if you get a good manager and there's liquidity and there are various other benefits, which we can talk about later. But maybe first, why don't we -- yes, we're looking at the year-end review, the year we just had. Why don't I start off with a question for the lead Portfolio Manager, Catriona Burns. Catriona, do you just want to tell us a little bit about last year that was an outstanding year in terms of performance? How did you -- like in a very challenging difficult year, how do you position the portfolio over that period of time?

Thanks, Geoff. So yes, we're pleased with the performance of the funds through FY '21. We've -- and if we look back to the start of the financial year, we were -- certainly, we were still in the midst of those original waves of COVID-19. We've had central banks and governments around the world announced record levels of stimulus. And what we were focused on was clearly investing as per our investment process. We, already in the portfolio, had a number of longer-term structural winners. And what we did in that earlier period of COVID, we took advantage of the sell-off to increase our exposure to those investments. So that was in stocks that were geared into areas like automation, digital payments, health and wellness. But we also took a decision early in the financial year to really focus on also identifying businesses where their earnings had been hit by COVID-19, but which we thought were better positioned to come out better competitively than they've gone in. And then what we saw was with the vaccines announced in November, those were some of the stocks that did very well for us. This really continued until those last few weeks of the financial year when we did see small caps start to underperform and growth outperform as the U.S. 10-year yield fell. But I'd say, look, we're excited about the stocks that we've invested in. We're confident in the quality and the valuation upside. And so that was sort of how the year played out.

Thanks, Catriona. It looks like we might have lost Geoff for a second.

There we go.

So you're back, Geoff?

Just a little technology breakdown. I put it on mute so I didn't disturb anyone. And then, of course, I started talking, and I'm on mute. And I just -- and Catriona, that's great in terms of last year. And in terms of the yield that's already started, do you want to talk a little bit about how you've got the portfolio position and what you see in the year ahead?

Sure. So look, as I mentioned, we're optimistic about our ability to continue to find great businesses to invest in, in the coming 6 to 12 months. We do think though that the equities -- the landscape for equities is a bit more nuanced in FY '22 than it was in FY '21. If I think about the backdrop, on the positive, we do have significant amount of pent-up spending capacity given that people were locked down in their homes, that underspend is total in the trillions, they say in the U.S., over $3 trillion. And so we think that, that is a positive in terms of consumer spending capacity. We're clearly watching the Delta variant, but we think that there is a low willingness to re-lockdown in countries where the vaccinations are high, like in the U.S. We see the stimulus programs that have been announced still have a long way to go in terms of actually spending that money. However, we don't think we're going to repeat the same high levels of programs that have been announced unless, unfortunately, COVID becomes a much bigger issue again. On the central bank front, we continue to see support, but inflation is clearly a key watch point. And we've seen economic growth rebound off the lows, but we think that rate of change will slow going forward. So interest rates continue to remain low and equities -- generally, the earnings yield on equities is attractive relative to bonds. So overall, with all those factors in the backdrop, we are positive. We certainly acknowledge that markets have rallied strongly off the low. So being anchored in valuation, we think, is more important than ever. In terms of the portfolio specifically, we still own a number of those reopening stocks. But we think we've got a very good balance of longer-term structural winners and these stocks, all of which we continue to see compelling upside in. And we continue to find lots of compelling ideas, particularly in that small end of the market.

And I'd be interested in just your position because it must be strange. You're sitting here in Australia in lockdown and looking at -- and thinking of obviously, the debate is how many billions of dollars is being lost on a sort of weekly basis. And then what is occurring overseas, particularly sort of the U.K. and the U.S. And like the rest of Europe, I haven't paid that much attention. How are they coping with -- yes, the COVID and the Delta variant?

Yes. Look, it's interesting. I mean, if you look at the travel numbers, they've bounced back extremely strongly, particularly across Europe. And so -- and if you think about the U.S., when you're talking -- when we're talking daily to companies on the ground there, life is quite relatively compared to what they've gone through very normal. So they're getting back to functioning as they were before. Those U.S. vaccination rates are close to 50% and well above that. If you take out the under 18-year-olds in Europe, they're at 39% with -- that are fully vaccinated and 57% have had the first dose. So it certainly is a very different picture to how we're feeling in Sydney locked down. And it is that given where there are those higher vaccination rates, the tolerance for ongoing lockdowns, I think, is pretty low. I mean, in France, for example, very -- they've got this health pass situation that they're trying to implement where you have to show that you have been vaccinated to get into restaurants, et cetera. So there certainly are nuances between the different countries. But yes, particularly in, say, the U.S. where the vaccination rates are low, we think that propensity to and willingness to lock down is pretty low and less despite -- because I think of the fact at the moment, we are seeing with the Delta variant that it is highly transmissible but that those hospitalization rates of people that are fully vaccinated are very low, so that's a key watch point.

Now look, thanks for that. It's just a strange situation when we're in one environment and sort of globally, particularly in the U.K., they look as though they're in a totally different environment. I'm not sure which is the better. But anyway, that's speech to their own to assess. In terms of just looking at obviously the year ahead and some companies, maybe, Nick, do you want to give us a little bit of some thoughts on what you're looking at? Or maybe talk to -- yes, Nick, I'll it throw to you, and then we'll go to Will. Any particular stock you'd like?

Yes. Absolutely, Geoff. With all the talk of COVID, I'm doing this call from home at the moment. So the first stock I wanted to talk about is pretty timely in that regard. Because they certainly benefit from helping pharmaceutical companies to develop vaccines and other treatments for COVID. Bigger picture, we've talked about this a bit in the past. There's a bit of a gold rush occurring in pharmaceutical drug development, thanks to some technological breakthroughs like mRNA vaccines, which are very front of mind with COVID and with gene therapy and a few other things. And we certainly ascribed to the view that in a gold rush, it's better time the picks and shovels providers than it is to own the gold miners. Now this is not ours, and it's not new, but nevertheless, we think it's a good way to approach trying to benefit from this kind of tailwind behind drug discovery. And for that reason, we hold a company called ICON in the fund. Now they're definitely a provider of picks and shovels. They help pharmaceutical companies, big and small, to husbands their treatments through the clinical trial process, which is the process that approves drugs for use in the broader community. So this type of company is called a CRO, and the backdrop for these companies is very strong for the reasons that I've just given. And we're seeing a lot of their competitors trade at really attractive valuations well in excess of history. This is the likes of IQVIA and Medpace and Charles River. But ICON is not. It's trading below historic levels and certainly below these competitive companies. So the question is obviously why? ICON are doing a deal to acquire PRA Health to become the second largest CRO globally. Now historically speaking, when large CRO companies get together, it is a time of disruption. There's usually two key issues, which is employees tend to leave and customers tend to leave. Now we've engaged with the company extensively on this issue, and we actually form a different view than the market does. So I think importantly, there's a little customer overlap here. And the management of ICON have been extremely clear in terms of making sure that employees feel comfortable with the merged entity, making sure that they understand that this really offers them more opportunities in the future. So we see a situation where the company can avoid the traps of the historic CRO integrations and in fact, benefits pretty significantly from the merger with cost synergies and revenue synergies, where we think they'll beat their targets and significant scale and capability advantages. So the upshot of all of this is we think we found a company that we hold in the funds that not only is enjoying a strong backdrop as evidenced by how a lot of their competitors are trading, but they will have really strong earnings growth over the years to come. And whichever way you look at it, it's too cheap. And there's a clear catalyst here where as they do their earnings over the next few quarters, this merger risk will retire, and we see a significant amount of upside to the name. So the first company is ICON. I'd love to tell you about another one, which is JTC. So JTC provides kind of fund administration services to hedge funds, private equity, alternative asset managers and family offices. Now if you think that sounds a little bit boring, we would probably agree. But actually, probably because it's a borrowing space, it's a very attractive industry. Not a lot of people are trying to go into this area. And there's two key reasons we see this as an attractive industry. So there's a very big trend towards outsourcing from hedge funds and private equity shops and alternative asset managers. So if you combine the amount of assets moving into alternatives, in general, which is quite a strong tailwind, and you couple in the penetration story, we see an industry with a lot of growth tailwinds behind it. The other reason we really like JTC is with any people business, and we know this here at Wilson Asset Management, culture's key. And the CEO of JTC, Nigel Le Quesne, has been CEO for over 20 years, and he's been at the company for over 30 years. So he certainly has a long track record. And he has a pretty innovative approach of shared ownership. So he actually gives equity to all employees to make them feel like owners, not workers. And the results are pretty clear to see with average 10 years at JTC of over 10 years, whereas if you look at a normal people business, you'll often see things like 3 to 5 years as pretty common. Nigel himself owns 5% of the business, and he definitely thinks like an owner with a long-term mindset. So if I put it all together, I think with JTC, we have a superior culture, a very attractive niche with a long runway to continue to grow earnings from here. And frankly, we're excited to partner with management as they continue to grow the value of this business going forward. So from my end, that's just a couple of stocks, but we're very excited about those two as well as a lot of other names we have in the fund.

Look, thanks, Nick. And I remember when I started in the industry in the early '80s, I think 1982, I got my first job in funds management. And I remember my boss then was saying, look, exactly what you were saying. Now we're not going to buy the miners. We're going to go and buy the companies that make the picks to dig out there whatever it was, the gold, et cetera, our commodities in those days. So look, that's some great ideas. And while we flip over to William, have you got any stocks you'd like to highlight for the investors?

Yes. Sure. Thanks, Geoff. I've got two that I want to highlight. So the first one is Booking.com and the second one is Visa. So I might start with Booking.com. So Booking.com, it's the largest online travel agency. It's listed in the U.S. Our view is that there is significant pent-up demand for travel. And that's evidenced in countries such as the U.S., which have had high vaccination rates and a further along the journey of opening up. In fact, at its last quarterly result management highlighted that the U.S. had positive [ run rate ] growth versus 2019 levels, and we expect the rest of the world to follow suit. Our thesis is that Booking will emerge from the pandemic in a much stronger competitive position. We believe that the shift toward online travel booking will accelerate as traditional travel agencies have come under pressure. Further, we believe the hotel industry will become increasingly more reliant on Booking services than it did before to try and improve their own occupancy rates. We like the fact that there's significant optionality in the business. We believe the market is not fully appreciated Booking's payments business, which has just reached breakeven point. It's got an increasingly big alternative accommodation business and has initiatives around the connected trip, including airfare, travel experiences, restaurants, et cetera, which are just starting to wrap up that weren't there before the pandemic. Our view is that this attract more direct users, repeat users and more importantly, gain a larger share of consumer wallets. Finally, the company has rightsized its cost base that's focused on increasing its fixed cost efficiencies. And the longer-term aim to increase direct traffic share makes it significant and more profitable customer acquisition strategy. Management is confident that this increased loyalty -- this will translate to increased loyalty for customers who book direct. The company is extremely well run, has a net cash balance sheet. And the catalyst for reiterating, we believe, will be to continued vaccine rollout globally and the earnings beats in the quarters to come. So we remain bullish on Booking.com, and it's a buy in the WAM Global portfolio. The other name I'd like to highlight, and it's one that's very well known, is Visa. So Visa is a payments company list in the U.S. It's a beneficiary of the transition away from cash towards digital payment methods, a trend which we believe has been accelerated given the increasing prevalence of e-commerce and contactless payments post the pandemic. We are positive on the setup of Visa. Our view is that the company can deliver strong double-digit underlying revenue growth and 15% earnings per share growth over time. The company is facing really easy prior year comparisons, and we are confident that the cross-border travel will eventually come back, which will result in some high-growth quarters. Cross-border skews towards credit, where we believe the consumer is more affluent, spends more and there's a greater yield to Visa. So the economics are more attractive. If we look at the latest data, it is also highly encouraging. So Visa published its quarter-to-date volumes, which highlight a sequential improvement in both credit and debit card trends. When we spoke to management at its last quarterly result, they mentioned that consumers moved pretty fast when restrictions are removed and actually spending increases when those restrictions are removed. The company is a beneficiary of the resilient global consumer spending environment, the ongoing shift from cash to electronic payments and the broadening of merchant acceptance. We like the fact that the company continues to invest in longer-term initiatives, such as P2P, business-to-business and partnerships to expand its total addressable market to make sure it can continue growing. Visa's a high-quality business with significant barriers to entry, and we expect Visa to steadily compound earnings growth and see positive results, particularly at the resumption of international tourism comes back. It's one of our high-conviction picks and is the top 20 position in the WAM Global portfolio. So those are two names that we really like, Visa and Booking.com in the WAM Global portfolio. So those two stocks for you, Geoff.

Thanks. Thanks, Will. And all our investors see it's simple for me just to buy shares in WAM Global, which I have historically. And of course, I'll have to make a decision on what I do with the options soon. The -- in terms of -- just talking about stocks, Catriona, just before we open up to questions from all our investors and shareholders, are there any particular stocks that you're -- you'd like to highlight or you're keen on at the moment?

Yes. Thanks, Geoff. So I thought I couldn't pass up the opportunity to talk about a Japanese stock given the Olympics are on. So one of the stocks we own in the portfolio that we've owned since early 2019 and which is up over 3x since we first invested is a stock called Kobe Bussan. So why do we like the stock and what is interesting of late? So if I set the backdrop, so the Japanese supermarket industry is over JPY 15 trillion in size. It's very fragmented. The top 10 players have about 50% market share, which compares to about 87% amongst the top 4 in Australia. In Japan, we've clearly had decades of low growth and low inflation. And basically, if you look across the country, nonexistent wage growth, which has really led to a savings focus for individuals in Japan. And where Kobe Bussan comes into the equation is that they're a discount supermarket player equivalent, if you think about ALDI in Europe or in Australia. They're a relatively small player, around 2% market share. But what's interesting is that in this limited SKU count, they offer price points that are around 20% to 70% lower than competitors. And that's amongst the -- about 1,200 items, so 1,200 items. And that's significant for a consumer that's been under pressure. They operate a vertically integrated supply chain with about 23 factories in their network, and it's particularly conservatively managed with a net cash balance sheet. It has been a COVID-19 -- it was a beneficiary as people were forced to stay at home. But what's interesting of late is that the recent results show they've been able to grow even on very tough comps, which we think is particularly impressive. We think that the opportunity going forward is really to increase market share and also to roll out more stores. So they've got about 930 stores today. We think they can get to over 1,500 in Japan. And we think that they can drive margins higher as they continue to add more SKUs to that private -- more private label SKUs to their offering. In terms of catalysts, we think there's upside to the earnings forecast. We think it's an exciting growth story in a market where this can be particularly rare to find. So that's one stock that we continue to hold and to like. A second stock I'll talk about is called Concentrix. So clearly, the way companies engage with their customers is critical and consistent quality service to your clients on a global scale is not easy to deliver. The customer relationship management market, the CRM market is sort of -- is at USD 85 billion market in size. And what we're seeing is that about 25% of the market is outsourced, but this is an increasing trend. We think there's a really -- this is a really interesting way to play this. The U.S.-listed company, Concentrix, is a technology-enabled global business services company, which specializes in customer engagement and improving the business performance for some of the world's best brands. You might remember that last webinar, Nick discussed a company we'd invested in and having a still hold called Carrier, which spun out of United Technologies in the U.S. And in Australia, we have the examples of recall spinning out of Brambles, Orora out of Amcor. And spinouts tend to get -- to us to be particularly interesting because when they spin out of larger conglomerates, they get to decide how they allocate capital, how they invest to grow and really get to dictate their own future. Concentrix recently spun out of a U.S. company called SYNNEX, who were a B2B IT services business. What we think that we -- in our view, within SYNNEX, the quality of the business was not being recognized. And now that it's spun out, we've got an exciting opportunity here. So if you think about the space, the leader, the global leader is a French business called Teleperformance, who've been a consistent grower and who traded at a price to earnings multiple of about 29x. Concentrix is the #2 player globally. It's relatively fragmented. They're 1.6x bigger than the next biggest player. And what's very interesting here is that the valuation is particularly compelling. So unlike Teleperformance, which trades on a 29x price-to-earnings multiple, Concentrix trades on less than 16x. We think they offer a really innovative technology-based solution to their customers. We rate the management team. We think the earnings expectations are too low, and we expect over time that, that valuation gap to Teleperformance should close.

Now thank you, Catriona. That's great. And why don't we go over now to Olivia Harris, who's sort of coordinating all the questions that people have sent in already and/or asking questions now on the webinar. So Olivia, why don't we put it in your hands? Thank you.

Thanks very much, Geoff. The first question that I think is relevant to address is about the options issue, and this is from Debbie. She has asked if options that have been exercised recently will be entitled to the upcoming dividend.

And the answer is yes. And effectively, if you have an option and you pay the $2.54, so -- and you effectively exercise the option, then that turns into an ordinary share. And like as soon as it turns into ordinary share, then if there's a dividend on those ordinary shares, then you will get it. So anyone who has already exercised their option will get that -- will get the dividend that the Board has just announced, and that's the $0.05 fully franked. In terms of the date, actually, Olivia, if you got -- or maybe we can -- if you haven't got in your fingertips, the actual date that the options, if anyone wants to exercise the options to get the $0.05 fully franked dividend when they have to do it by, if you got that off hand or...

I believe it's around the 22nd of October. However, remember that dividend time line date is subject to being announced once the TGG merger is finalized.

Yes. Yes, exactly. So I mean we will make sure that we send everyone an e-mail just confirming that. All the details of when if you want to exercise your options, you need to do it for -- to participate in this fully franked dividend.

Thanks, Geoff. And just a follow-up question on the options. If someone doesn't exercise their options by the time that they expire in September 2022, what happens to them?

Yes, they end up becoming worthless. So effectively all shareholders that own the options, they have the opportunity to pay that $2.54 and turn it into an ordinary share. Now if they don't have the money, they can sell them on the market if they want to get $0.11 or $0.12 for them, which is around the area they're trading at the moment or if you own them and then you get to the final period. And again, about a month before they expire, we'll send a notice out, an e-mail out to all shareholders. All option holders just informing you that they're going to expire and they effectively just expire worthless. It's just some -- if people don't exercise them, then those options don't end up turning into ordinary shares.

Thanks, Geoff. And we'll flip over to Catriona now. And Catriona, we've got some questions coming through regarding the heightened valuations in the market at the moment. So are you able to speak to the heightened valuations and if that concerns you at all?

Thanks, Olivia. Yes, look, I think we are certainly aware of certain pockets of the market where it did -- the valuations do look excessive. I'd highlight particular stocks in the technology space, which there are examples of businesses trading on enormous multiples of revenue without any earnings and without any earnings in the foreseeable future. Now that's fine if you have very, very high confidence in the total addressable market and that where longer-term market shares will end up with longer-term margins, you may be able to come to a justifiable valuation. But a lot of these businesses do not have those characteristics, and forecasting the future many years out is a difficult task. Forecasting earnings a few years out is a difficult task, let alone 10 years plus, which is what you have to do to justify some of these valuations. We're -- look, these stocks, in particular, are very vulnerable to any rise in interest rates, which, look, we think, at some point, this is likely to occur. And so these are just the kind of stocks that will come under pressure in that environment. And these are not the stocks that we've invested in. And so that would be the pockets of the markets where we do see overvaluation. I'd say if we look across the market, we can still certainly find lots of interesting ideas to invest in, but we are -- yes, we're staying away from those areas. And I guess, look, it depends on the type of business that you're looking at and what the growth expectations are. If we look -- if you take a very generalistic look, say, Europe looks cheaper than the U.S., but you have to compare the growth rates, you have to think about, yes, that individual business. And certainly, we are focused -- we are very much bottom-up stock because -- and can certainly find lots of ideas at the moment.

Thanks, Catriona. And the next question is for Nick from Sebastian. And so U.S. earnings season has kicked off. Can you, Nick, talk a little bit about your expectations for WAM Global Holdings? And if any of the holdings so far have reported any strong results?

Yes. Thanks, Sebastian. Yes, absolutely correct, earnings season started in earnest last week. I suppose with quarterly earnings, it's always worth just making the note that our favorite kind of holdings are companies where we can hold them for years and continue to compound earnings and achieve outperformance. Nevertheless, quarterly is really important to just check that the thesis is holding and we're progressing towards our destination. So a few of our holdings have already put in results largely -- well, entirely to the good at this point. So Volkswagen prereleased significant profit fees, they're actually seeing really good pricing in the car market at the moment. Simply Good Foods, which was a company I actually discussed last time on the earnings call, so our view was, as mobility improved, that will certainly help this company who sell like better-for-you snack foods, and that's the way it played out. So a great result they have on the U.S. opening up. And ICON importantly result reported last week. So with ICON, as I mentioned, we're keeping an eye to make sure that there's no major customer or employee attrition as a result of this PRA deal. The result they put in certainly reassures us in that regard. No signs of that and very strong performance at both bookings and revenue lines. So in general, for the vast majority is still to come. Some of the things we're thinking about making sure that the companies have reasonable expectation sets going in, that we're okay with inflation that they're seeing. And if they are seeing inflation in their cost of goods, that they're going to be able to price it on to consumers. And that they're not going to be overly impacted by a quick return to normality. So we're keeping an eye on all these risks. As always, we're making sure that we're comfortable going in. But I would say, in general, we are very confident in our holdings coming into this earnings season, both on the reopening ideas that we have, but also on the kind of long-term structural winners. So thank you for the questions, Sebastian.

Thanks very much, Nick. And Catriona, the next question is for you from Ross. What is the currency hedging status of the fund?

Thanks for the question, Ross. So the portfolio is unhedged. As we've discussed in the past, when we launched the fund, we really listened to the shareholder feedback around the fact that most of their equity in equity market investments were Aussie stocks and that the majority of their assets were in -- denominated in Australian dollars. And so they were really seeking global equities exposure and diversification away from Aussie dollars. So the portfolio is unhedged. We have a -- we've got about 5% cash, and that's held in a basket of currencies, U.S. dollars, euros, Japanese yen and some Aussie dollars. When we're thinking about companies that we invest in, we obviously have to consider not just where they're listed. We have to consider where their earnings come from. And a number of the businesses we hold have very diversified earnings streams. So currency considerations of both transaction and translation. And so yes, but to answer your question, the portfolio is unhedged.

Thanks, Catriona. And Geoff, the next question is for you. So the profits for WAM Global is quite high. And Carl has asked, did the directors consider paying a special dividend given the level of the profit reserve? And if not, why not?

Look, thanks for the question. And at each Board meeting, obviously, in capital management, the directors, they look at what potential capital management makes sense or is in all shareholders' interest to engage in and in the company's interest. And obviously, as you pointed out, there's 50-odd cents in the -- currently in the profit reserve and which the great thing is if we're paying $0.10 this year, sale increases a little bit, $0.11 next year, $0.12 next year after at least we've got a good 4 or 5 years up our sleeve to keep paying dividends. One of the tricky things and particularly also with WAM Global is because WAM Global, how we get the ability to pay fully franked dividends is when WAM Global makes a profit and pays tax. There's no free kick for WAM Global investing in Australian companies. It paid fully franked dividends. So we can't -- we don't get that access. So effectively, WAM Global has to pay tax. And it's really, you tend to find your tax payments, they come over time because they have to be realized profits. If you to make those tax payments, they go offset it against any realized losses. So even though we've got a profit reserve of a little over $0.50, we -- today, we couldn't pay $0.50 fully franked out to our shareholders. And what our plan is to provide our shareholders a growing stream of fully franked dividends. And that's why you did see the dividends for the last 12 months increased 42-plus percent is because the profit reserve did increase. Catriona and the team did a fantastic job. And as a Board, we're able to do that. So we haven't got excess -- significant excess franking. Now if we did have excess franking, then it would be another -- it would be a different decision. So that's the logic why there's no special dividend. Now there could be a special dividend at a point in time. What we tend to prefer to do, if we could, is to -- as the franking comes in, to pay it out and have that growing stream of fully franked dividends, which we've noticed that probably, I think, 65% of our shareholders tend to be self-managed super investors. So they really value those fully franked dividends. And if we can have a growing stream of fully franked dividends, then that's significantly more powerful than something that might be significant this year and less the year after.

Thanks very much, Geoff. And Catriona, we'll go back to you for the next question. From Jane. What are your views on inflation at the moment? And how are you positioning the portfolio for that?

Thanks, Jane. So look, inflation has clearly been a very key topic in recent months. There's been huge debate as to whether the rise we've seen in inflation is transitory or will be more enduring. What we've seen is robust demand that being fueled by this very expansive fiscal and monetary policies hit bottlenecks in the supply chains and labor market constraints. If we think about the areas where we've seen a tightness in supply, it's been in areas like semiconductor chips, building materials, used cars as well as freight costs. And look, this is a -- there are numerous factors in here, including the fact that in places like the U.S., you've had these big stimulus checks handed out. So there's a reluctance while they're being handed out for people in certain jobs to go back to them because they're actually going to earn less in the job than they're getting from the stimulus checks. So these factors will ease as those stimulus checks wind down. We're seeing economies continue to reopen as those vaccine rollouts continue and more capacity is coming online. So look, we're yet to see whether it is transitory or more embedded, but certainly more capacity will come online. I mean why does it matter? It's very important because if inflation does prove to be more embedded and less transitory than the worry will be that central banks forced to raise rates faster than expected. And if we think back to history, central banks raising rates too aggressively has been the cause of many market cycles ending. So investors are hypersensitive to this kind of scenario. So that's why it does matter. From the perspective of the portfolio, it's something we really -- we have spent a lot of time considering. We've thought about the risk to all the stocks we own, where there are opportunities to benefit from it. And we've generally positioned the portfolio in businesses, which we think have strong pricing power. They've got operating leverage and the ability to manage their cost bases over time.

Thanks, Catriona. And maybe just following on from that. So you mentioned the supply chain and labor market concerns that have happened. Are there any stocks that you've sold off because of that? Is that -- maybe that's one for Will?

Yes. Thanks, Olivia. That's probably one for me. So as you've mentioned, as Catriona mentioned, the supply chain strength and inflation have been very topical in the markets of late. We had a stock called PPG Industries, which is a good example of the name. We really liked and we did very well out of, but sold due to concerns around this heightened risk. So in terms of the company, PPG Industries, they're the global leader in diversified coatings, and it's listed in the U.S. So it essentially produces paints for a wide range of end markets, including residential, automotive or industrial sectors. We like the company initially because there's the beneficiary from the rebound that we saw in global industrial production. And the company is exhibiting benefits from volume and pricing growth, which translated into really strong earnings. However, leading into the Q2 results, so we became a little bit more worried about the input costs. And we were aware that they were rising faster than what the company could pass on. And we know within that business that raw materials accounted for 70% to 80% of their cost of goods sold. So it's going to be incredibly challenging for them. Furthermore, top channel checks led us to believe that this was an industry-wide issue and that raw material availability was going to be a challenge. So because of these concerns and because we are wary of these risks, we exit our position just before the latest earnings result. We have indicated in terms of PPG subsequently missed and downgraded their full year guidance citing some of those concerns. We still like the company, and I think it's one we could potentially revisit if inflation proves to be transitory and maybe some of these raw material inflation headwinds subside. But that's probably an example where some of the macro factors influenced made us more aware of some of the risk and sort of led to some of the decision-making in the portfolio.

Thanks very much, Will. And Geoff, we have a question for you from Barry. Now Barry says he's noticed that WAM Leaders recently announced a 1-for-5 entitlement offer at $1.44. So can you explain if you are a WAM Leader shareholder, can you buy more than that 1-for-5 entitlement offer?

Thanks, Barry. Thanks for the question. Obviously, this is a WAM Global presentation. I mean -- but there is quite a bit of a crossover. I think, about the high 30s of our WAM Global shareholders are also WAM Leaders shareholders. And the unique thing about the current capital raising for WAM Leaders, it's been done at June NTA, as you said, a 1 for 5, $1.44. Now you can apply for your 1 for 5, but also you can apply for more. And if some shareholders don't take it up, then you can get more shares at that price, which we think is a very good and fair way of doing it. And the interesting thing is the issue has only been open for a couple of days, but about 50% of the shareholders that have applied for more than their entitlement. So yes, that's just an interesting twist. But Barry, yes, feel free to e-mail or contact us and we can take you through. If anyone has got any other questions about WAM Leaders issue, please contact us. Thank you.

Thanks, Geoff. And we'll stick with you. From Simon, can you explain a little bit about how the merger with TGG will work? So Simon says, he wants to know if the swap -- so Templeton shareholders can elect for a buyback less cost or swap WAM Global shares and options at NTA. Could that swap be done using the TGG NTA less cost? Or is it done at the undisturbed NTA of each company?

The best way of looking at it is -- if you're a WAM global shareholder, you don't need to do anything. Now what we're doing is we're inviting -- we're merging with Templeton Global. So we're inviting them to come along with us for the ride. And the Board is -- the WAM Global Board thinks there's a number of benefits for WAM Global in terms of our variable costs will decline because the business gets bigger. It gives Catriona, Nick and Will more money to invest, makes them a bit more relevant from a global context. And as I mentioned earlier, it makes us the second largest ASX-listed global LIC. So that's a significant positive in terms of financial planners that want to get exposure to global fund managers through the LICs. Obviously, Magellan has some listed investment trusts at which they're doing various things with at the moment. But with the LIC structure, that's -- we'll end up being the second largest. So there's a number of benefits. If you're a -- and that's the WAM Global side. If you're a Templeton Global shareholder, then you have 2 choices -- or probably 3 choices, do nothing. And if you do nothing, you'll end up becoming a WAM Global shareholder or you can consciously say, "I want to become a WAM Global shareholder," and then you do. And the other thing is you can say, "No, I'd like cash back." Now just to give you an example, obviously, the numbers. At the end of June, the WAM Global NTA was $2.73. That was a pretax NTA. And the Templeton Global NTA, pretax, was just a little bit above $1.66, and the after-tax was just a little bit above $1.55. So if you want cash and you're -- the paperwork will come out and then you'll decide what you want, then effectively, the portfolio is going to be -- the portion of people that want cash, that portion of the portfolio is going to be sold. And then the Templeton shareholders who want cash are going to get cash. Now what they're going to get is, as you quite rightly pointed out, they're going to get that after cost and after tax. So effectively, if it was June 30, it would be a little bit less or around $1.55. For those people that actually want to buy -- use the Templeton Global shareholders and they want WAM Global shares, then because there's no -- that part of the portfolio isn't going to be solved. So in theory, that's worth about 6% more. That's $1.66 or a little over that. So you'll be getting $1.66. You'll be using that NTA to get your ratio of WAM Global shares against the NTA of $2.73. So that's -- so in terms of if you're accepting cash, then you'll get the after tax, the lower Templeton Global amount if you're accepting after tax and fees. If you're accepting WAM Global shares, then you get the higher figure, and that's after costs. So yes. There'll be -- and what WAM Global will pick up is, obviously, those shareholders, and there'll probably be some -- a little bit of franking in there as well. So that's pretty much how the numbers work. So -- yes, it's -- and of course, we can't give advice, but it's in -- it's probably -- if you're happy with exposure to global equities, then obviously, you don't want to, all of a sudden, pay tax and get a lower amount. You might as well roll in at the pretax NTA the higher price in the WAM Global shares.

Thanks very much, Geoff. And I know we're getting down to the minute here, so we'll try to get through a couple more questions. Nick, from Prem. Can you talk about how defensive the portfolio is at the moment?

Yes, absolutely. Thanks, Prem. It's actually something we spend a good amount of our time thinking about as each of the individual holdings in the funds and how they'll do through certain environments. With a question like how defensive is the portfolio, the first place you would be tempted to look at is the cash levels, which, at around 5%, are relatively fully invested. However, this really, more than anything, reflects the fact that we are finding a lot of opportunities to invest in ideas that fit our process and that are undervalued growth companies. So in terms of defensiveness, I'd prefer to think of it in another -- in a different couple of ways. The first would be that a lot of companies demonstrate earnings cyclicality, if you do happen to go into a recession or a slowdown. We obviously pay a lot of attention to all of the holdings in our funds, and we are reassured by the fact that around 2/3 of our companies don't show earnings cyclicality. They tend to get through COVID or the GFC or prior or future recessions reasonably well. And the other thing we think about is you can certainly lose money if valuation retraces heavily. And as Catriona has mentioned in the call, significant parts of the market are very high valuations, concept, stock territory. So on this front, while we're not immune, it certainly reassures us that our over 2/3 of the funds is at or below the market multiple. So while we're invested in equity, and if markets move down, we will see a similar move down in our stocks. We like to think we would outperform because we see defensiveness as quite high in terms of both that cyclicality and making sure that we're not buying dangerously valued stocks. So thank you, Prem, for the question.

Thanks very much, Nick. And I know we're just down to the last minute here, but, Catriona, I'll give you one last question. This is from Harvey. What is the current geographic spread of the portfolio?

Thanks, Harvey. So just in terms of geographic spread, we've got about 60% of the portfolio in U.S. stocks; we've got about 16% in Europe; about 9% in Asia, which includes Japan; 8% in the U.K.; about 2% in Australia; and about 5% in cash. The only brief comment I'd say is that we were finding more incremental opportunities at the beginning, first half of last of the financial year in Europe. But I'd say it's more balanced now with recent ideas having been added in U.S., Japan and Europe. So yes, that's the geographic spread of the portfolio right now.

Thanks very much, Catriona. And Geoff, do you have any closing words to say? Catriona, do you want to say any closing words of thanks?

Look, yes. I'd just say thanks...

I put it on mute again. Sorry.

So you're back?

You got it, Catriona.

No, I was just going to thank everyone for attending the presentation and for their support. But back over to you, Geoff.

Yes. I've been -- with my technology, I'm trying to make sure there's no background noise. Someone put a complaint in last time. They said they could hear some dishes. So look, obviously, on behalf of all shareholders, I want to thank yourself, Catriona, Nick and William and all your team for doing such a great job. The shares, obviously, we're trading at a discount NTA 12 months ago. It's great to see them being fully reflected the true value of the assets now. I know we're very excited about merging with Templeton Global and how that will make WAM Global more significant in the Australian market. So on behalf of all shareholders, look, thank you for all that. Now I suppose then putting the other hat on as I -- at Wilson Asset Management, look, thank all the shareholders for their patience. It has been a tough couple of years. What we all know with -- when newer companies are being set up, it is very challenging. Everyone in there is working incredibly hard like the duck probably look -- came on top. But really, we're really pedaling as hard as I can underneath. And to me, it's great that, that can be realized by the market. Now we were always confident that, that would happen, but it's great now the market does that. And thank you, shareholders for doing that. It's fantastic. We're in a position where there is a strong profit reserve. So we can continue to grow that fully franked dividend and hope that the shares trade at a NTA, if not a good premium to NTA over time. So thank you. And if you have any questions, again, Olivia, thank you for running the questions. You and the -- James and the guys in the corporate affairs team do a brilliant job. But if any shareholders want to contact us and have any questions, please do. So thank you very much for your time today.