WAM Global Limited (WGB) Earnings Call Transcript & Summary

Thank you all for joining us for the WAM Global 2023 Results Webinar. My name is Catriona Burns, and I'm the Lead Portfolio Manager for WAM Global. I want to start by thanking all of our shareholders for your ongoing support. This is your company and we're pleased to provide you with an update and the opportunity to ask us questions. I'm currently in New York and in Sydney, we have Portfolio Manager, Nick Healy; Senior Investment Analyst, William Liu; and Corporate Affairs Associate, Emiko Reed to moderate your questions. Before we begin, a disclaimer is displayed for you on the screen to read what we will discuss today is general in nature and is not financial advice. In terms of the agenda for the call, I'll begin by providing an update on the recent results we've just announced and then discuss our view on the macroeconomic backdrop markets more generally in the outlook ahead before providing an update on portfolio positioning. Nick will then provide an overview of the global reporting season, which is just concluding. And then he and Will will discuss some of the thematics that the portfolio is exposed to and some specifics around stocks in the portfolio before we turn to Emiko to moderate the Q&A. Now before I go into the detail around the full year results, I wanted to briefly recap on what we are aiming to provide for shareholders with the WAM Global fund. Now firstly, it's access to a portfolio of undervalued growth companies from around the world with the background being that before we launch the fund, we had shareholders saying they didn't have access to international stocks and they did want that diversification in their portfolios. Secondly, it's capital growth over the medium to long term using the proven Wilson Asset Management investment process. Thirdly, preservation of capital. And fourthly, a steady stream of dividends. We own a portfolio of what we judge as outstanding companies, which has strong industry positions, capable management teams and they have demonstrated earnings resilience in what is right now a very dynamic operating environment. So let's now turn to the recent results, which we announced yesterday. The results reported for the period ending 30 June, 2023. Now the WAM Global Board of Directors has declared a final fully franked dividend of $0.575 a share, bringing the full year fully franked dividend to $0.115 a share, which is an increase of 4.5%. The increased dividend represents a fully franked dividend yield of 6.2% and a grossed up yield of 8.9% on the 30 June, 2023 share price. Now this yield is significantly greater than the yield that you earn on an average for the global equity market overall, which is 2.1% and the average U.S. equity market dividend yield, which is 1.6%. Since the beginning of the fund, we've paid out $0.3575 a share in fully franked dividends and that's before this final dividend is paid. The WAM Global investment portfolio increased 19.3% during the year with an average cash holding of 6.5%. The MSCI World SMID Index over this period increased 16.5% and the MSCI World Index increased 22.4%. Total shareholder return for WAM Global for the year to 30 June was 16.7%. As at 31 July 2023, the company's profits reserve was $0.494 per share, which forms part of the NTA. Now this represents 4.3 years of dividend coverage for shareholders before the payment of the final fully franked dividend and 3.8 years after we pay that. With that, let's turn to the macroeconomic backdrop before discussing -- before I'll discuss portfolio positioning. If we reflect on the past year and what's happened, we saw inflation surge around the world as we reopened post-pandemic and as supply chains struggle to keep up with resurgent demand. In reaction, we've seen -- we saw central banks around the world globally raising rates to try and curb inflation. As you can see from the chart, the U.S. Federal Reserve benchmark rate, for example, has gone up 5.25% from 0 over a 17-month period. This is the fastest rise in rates we've seen in over 40 years and the highest rates we've seen at a individual level since 2001. Now if we look about the fear of why people fear interest rates going up, if you look at history, central banks and monetary policy has what has led economies into recession. So it isn't a unreasonable fear that everyone is concerned that the rise -- a very quick rise in interest rates will lead us to a recession. But the reality right now is that in the main, the global economy has proven itself relatively resilient up until now and inflation is now trending in the right direction. As you can see from the chart, this is U.S. inflation and the rising interest rates have had that desired effect of reducing inflation. But as you can see, the level is still sitting above the Fed's targeted 2% level. Now the next chart we've put in the pack is the Citigroup Economic Surprise Index. And Citigroup produces this index and it's representing basically the sum of the difference between official economic results and forecasts and sum over 0 means that the economic performance has generally beat market expectations and a number below 0 indicates that economic conditions have been generally worse than expected. And as you can see, the U.S. has consistently been delivering economic results that have actually been better than expectations, whereas if you look at the more recent numbers for Europe and China, we do see that most recently they have been missing expectations. So we are seeing a bit of divergence. So why has there been resilience in particular in that U.S. economy in the face of rising rates? The fact is that monetary policy does always work with a lag. So even with rates having gone up so much, it does take time for that to actually feed into the real economy. And that's particularly the case in the U.S. where most interest mortgages are actually 30-year fixed. So if you own a home, then your repayments don't actually change. It's only if you are trying to buy a property and need to get a new mortgage that you are forced to pay these higher rates, whereas in economies like Australia, we are much more variable rate market. Now typically, the lag for monetary policy can be anything from 2 to 8 quarters or 6 to 24 months. So that lag isn't unusual. It's not unusual that post rates, we will take time to feed into the real economy. But what is different this time around compared to prior interest rate raising cycles is that we came into this cycle with significant pandemic savings, stuck at home, we were unable to spend money and savings did build up both at the consumer level and at many corporates. And so it has taken time to bring down those savings and it has created a bit of a buffer for the U.S. economy, in particular. Also this time around as well as those pandemic savings, we have had incredibly supportive fiscal policy. And there is more to come. We've had the Infrastructure Investment and Jobs Act, the IRA and the CHIPS Act in the U.S., which when you put it all together, is about $2 trillion in investments that are to come in the next 10 years. So that has also supported the economy. Let's now talk about the outlook ahead. And right now the global economy is running at different speeds depending on the country. So you've got the U.S. continuing to hold up relatively well. You've got Europe, which is very mixed and you've got China that's deteriorating. If we look at the final chart on the slide, it's showing the purchasing managing indices for various geographies around the world. Now the PMI is seen as an important lead indicator for the state of an economy with readings below 50 indicating contraction and numbers above 50 indicating expansion. Now the chart shows that -- and we've only put the change from July to August. So it is only a 1-month period, but it does -- the trend is ongoing. And so we will be watching these numbers closely as each one comes out as a bit of a lead. But yet, as you can see on the chart, from July to August for all geographies, except China, where we've only been able to put in June to July because we don't have the data yet, you are seeing a deterioration and you are seeing that the U.K. and Europe are now contracting and that all companies -- countries, except Japan, are now in contract -- are all declining. And Japan is a bit of an outlay in that it has been incredibly slow to reopen properly post-COVID. So it is now benefiting from that reopening bump that other geographies got when they reopened. As we look forward, we do expect that multiple jurisdictions continue to slow as those higher interest rates impact demand with that lag that we do tend to see. So both consumers and corporates have had -- like going forward, will have to pay higher interest rates to borrow. So we do think that that will mean that they take on less borrowings, which then has a multiplier effect on the economies around them. We also have banks that are going to be likely more cautious around who they lend to, given the issues of regional banks in the U.S. or Credit Suisse demise in Europe. And we expect that the companies that will struggle from here are those that have overleveraged on that expectation that cheap rates would continue forever, or that raise rate -- raise money and we're able to get low-cost financing during a period of 0 interest rates, but actually have flawed business models or are in industries that have very low barriers to entry. And we think there will be a number of these businesses that don't exist when we look forward. When we look actually further -- when we look around the world and if you look at certain geographies like Europe, for example, the manufacturing sector is under some pressure right now which is typical in an economic slowdown. But there are green shoots, green spots in terms of energy transition areas exposed to energy transition investments. So this does soften the blow for certain companies. And even in the services areas, we can find a number of businesses that are actually continuing to perform very strongly. Inflation is coming down in Europe, although it has been very slow. Rates there did start rising after the U.S. And so we do expect that the inflation numbers will continue to tick down. And even in Europe, like the U.S., we are getting close to the end of the interest rate hiking cycle. And we think it is a market where if you pick your spots carefully, you can really -- you still find new investment opportunities and it is a market that has underperformed in terms of share price performance compared to other places like the U.S. Now one area of recent disappointment is China and it's getting a lot of media attention at the moment. The Chinese economy is under pressure currently and there's many various reasons for this. And to list a few, you've had the government in recent years crackdown on various areas of the economy, including overleveraged parts of the real estate market. You have had genuine bottlenecks with reopening and inability to get things like passports, lack of flights to enable travel out of the country, et cetera. And then there is this dynamic of deglobalization where, although it's not like companies can shut down what manufacturing they have in China, there is a definite trend for companies to want to diversify their supply chains and it has meant less CapEx investment going into China. And then to compound this, you've got demographic headwinds with the birth rate continuing to come down and high levels of youth unemployment. On the positive side, we do think the government has significant incentives, including prevention of social unrest to increase stimulus and try to drive the growth rates higher, but we do think growth rates of the past last few decades are a thing of the past. And so yes, there's going to be certain pockets that do better. You do have to have that economy change from having been more an infrastructure investment that economy to more consumption-led growth going forward. So to conclude on the macro, we do -- we are expecting an ongoing slowdown in global growth as has interest rates affect the underlying economies. We do think this will affect earnings growth of many companies, particularly cyclical businesses. But the positive is that central banks around the world are likely near the end of interest rate rises. And what we -- and one thing we do very much want to highlight and which the next chart shows is that it's always important to remember that investing in stock markets -- when investing in stock market is that the stock market isn't the economy. And so whilst we do think about macroeconomic backdrop, the reality is that equity markets themselves are forward-looking. So when we look at the portfolio, and the outlook for the companies we own, we are really optimistic. We own a portfolio of really high-quality undervalued businesses that we think will prove resilient under a range of economic outcomes. And the market always bottoms before the underlying real economy does. So with that, let me turn now to the portfolio and some information around the positioning of the portfolio. Firstly, from a geographic perspective, we continue to have a significant percentage of the portfolio in the U.S. As of the end of July, that percentage was 68%. To be clear, though and as we've discussed many times on webinars before, the companies that we own in the U.S., many of them are very multinational in nature and they source their revenue and earnings from all around the world. But the benefit of having them U.S.-listed is that we get the governance requirements placed on these companies of being domiciled in the U.S. or listed on U.S. exchanges. The next biggest exposure is the U.K. and Europe with about 20% of the portfolio there and the remaining 6% is in Japan, Hong Kong and Australia. And as at the end of July, we had 5.6% of the portfolio in cash. Now the geographic exposure is an output of the businesses we choose to invest in, not a specific goal that we target. And so what we are focused on isn't any particular geographies per se. It's about using our investment process to identify those great businesses around the world that we think have tailwinds to drive their earnings higher in the coming years and overlaying this with identifying catalysts that we think will drive the share price higher. Now secondly, in terms of portfolio exposure, we remain overweight small and mid-cap companies. And we've put a chart in here just referencing the performance of small and large cap performance indexes with the first being the chart of the longer-term performance of small cap versus large. And then the chart on the right being the more recent performance of the small mid index relative to the large cap index. Now one of the headwinds, as you can see from the chart, has been that the portfolio is faced and -- but what makes us really excited about the future is that enormous disconnect between small and large companies in terms of that performance in the last year and also since the start of the fund. So small and mid-cap companies have always been a really happy hunting ground at Wilson Asset Management with WAM Capital having focused there since its inception 24 years ago. And whilst at WAM Global, we do own companies of all sizes applying our investment process, that often does take us down the smaller end of the market. And that's because these companies do tend at the smaller end, often grow faster and tend to be more undiscovered with less broker coverage. And so over the life of the WAM Global fund, we've consistently had more than half of the fund invested in small, mid-sized companies, and that percentage is currently 55% of the fund. So over the long term, as you can see from the chart on the left, the smaller end of the market has outperformed larger companies globally. But over the past 5 years, the MSCI small mid companies are trailing 37% behind their large-cap peers. And in the U.S., it's even more dramatic at 65%. So the point being that we remain overweight, small and mid with sized companies. And whilst in many cases, the share prices may have come under pressure, we've concerned around macroeconomic backdrop. The thing is the earnings continue to hold up really well and the valuations we see is even more compelling, which sets up for strong returns going forward. In terms of -- there's a chart now just in terms of small and mid valuations versus large. And when you look at small and mid versus large, they're at levels globally right now not seen since the global financial process and in the U.S. at levels not seen since the dot-com crash in 2001. And interestingly, if you look at what happened to small and mid-cap companies from that dot-com period up to the GFC, they significantly outperformed their larger cap peers. In terms of valuations on a forward price to earnings basis, global small and mid caps have traded at an average 15% premium to large caps as the chart shows over the last 20 years, but as of 30 -- at the end of June, they were trading at a 10% discount. And during similar periods in the last 20 years, small caps have gone on to outperform over the following 12 months. So with that, put some context around our geographic and size of company exposure, let me hand over to Nick, who will run through what we saw at global the last earnings season and some context for how we use the earnings season in our investment process. Then Nick and Will will discuss thematics and do some more detailed introductions on some of the stocks that are in the portfolio.

Absolutely. Thank you, Catriona. So we are just approaching the conclusion of the second quarter earnings season at the moment with most companies around the world having reported. So we thought it was a good time to take you through some of the things we're seeing as well as how we use the earnings season as part of our process. So at the high level, this was a relatively resilient earnings season with 2/3 of companies beating expectations with clear pockets of strength in areas like consumer services, travel and with AI hardware beneficiaries, namely NVIDIA, having very strong results. There were also pockets of weakness. The -- Catriona touched on the weakness that's coming out of China and Europe. There was also weakness in consumer discretionary areas and delinquencies as highlighted by the results from Target and Macy's. So if we think through what these results mean for how we're updating our view of the world, we do think there's increasing evidence that higher interest rates, although it has taken a long time, are starting to impact the consumer. We expect excess savings built up during the pandemic to be exhausted this quarter, so we would expect headwinds to the consumer over the coming period. But that highlights the benefit of our investment process. So because we're able to be active bottom-up stock-pickers, we're able to position the fund to be exposed to more of the pockets of strength that we're seeing in the world and to avoid the weaknesses. Will and I will go into more depth in the thematics, but some of the areas that we're exposed to that are performing well include infrastructure, insurance, financial exchanges, health care and AI beneficiaries. Earnings season is also great because after companies report, they exit blackout and are available for meetings. We talk to hundreds of companies around the world every year and find that talking to management teams is invaluable as part of our process. We're currently talking to our existing holdings and potential new investments, and the team is traveling in September to the U.S. and Europe, where we are talking to companies from a range of industries and we look forward to updating you on our learnings from that trip afterwards. Now turning to thematics. So although we are bottoms-up stock-pickers and we are always looking for undervalued growth companies with the catalyst, when we look at the portfolio as a whole, there are a number of thematics that will drive it -- structurally drive it for years to come. Just mentioning 3 of those today, we're going to cover health and wellness, data and analytics and infrastructure under-build. Will and I will each give you 2 stocks from each of the thematics just to illustrate how we're thinking about things. So in health and wellness, we do strongly believe that demographics are destiny and we think there's 2 data points that drive the strength in health and wellness over the years to come. The first is we know that populations are clearly aging. In fact, by 2050, the cohort of over 60-year-olds is set to double to more than 2 billion. We also know that as people age, they do tend to spend a lot more on health care with the NHS in the NIH in the U.S. estimating that the over 65 cohort spends on average 4x more per year than a 40-year-old. So we think these 2 facts are reasons to believe that health care will have a very strong tailwind behind it in coming years. 2 companies that we hold in the fund amongst others that are exposed to health care include ICON and Edwards. ICON is the leading clinical research organization in the world. They conduct trials and undertake drug discovery on behalf of pharmaceutical firms. This range is from small biotechs, all the way up to the very large global pharmaceutical companies and trials are increasingly complex and global today. What this means is pharmaceutical firms are looking for partners with global scale and with the capability to do any drug discovery vertical. ICON is certainly benefiting from this given their leading global scale and they are taking share of smaller rivals. At the same time, the biotech market has been facing headwinds over the past year as they digest higher rates. But ICON have performed really well through this environment, as evidenced by their most recent results, where they grew earnings 9% and potentially more importantly, increase their backlog by 9%. Management were upbeat about both how the business is being operated and the trends they see that will drive the business in the future. Really importantly for ICON, they enjoy a $22 billion backlog that will drive the -- that provides visibility to drive the company's growth for years to come. Now ICON trades at under a 20x forward price-to-earnings multiple, which we think does not reflect the high-quality management, that very strong backlog and just the strong results that they're putting out. Our expectation is continued strong results will drive an appreciation in the market for the quality of this company. The second company I'd like to talk about today is Edwards. They're the leading player in structural heart repair technologies and they were founded in 1958 and actually co-developed the first successful heart valve replacement. More recently, they've been a pioneer in the minimally invasive aortic heart valve market, where today they hold 50% to 60% market share. This is a market that's set to double over the next 5 years to $10 billion, which we think provides Edwards with the opportunity to grow that core business at over 10% revenue rates. Additionally, Edwards have been investing in adjacent technologies, so tricuspid and mitral valve solutions. These parts of the business are really firing at the moment and although small, grew over 60% in the most recent quarter and we foresee growth for years to come. So we think that's quite additive to Edwards' ability to grow and we see a path to grow earnings strong double digits for multiple years. Edwards is also a fantastic chance to talk about how we think about the quality of a business. There are many ways to approach quality, but one of the things we like to see in a business is high cost of failure. Now as you might understand, heart valves are an extremely high cost of failure space with both the patient and the doctor having a huge drive to select the best and most trusted product on the market. This benefits Edwards. They have years of industry-leading -- they have years of leading the industry, which has built up a lot of trust with the surgeon community and they're approaching $1 billion in annual R&D spend, which they allocate to make sure that they maintain the best-in-class solutions on the market. This creates a lot of stickiness and switching costs, which is one of the primary reasons we see Edwards as a very high-quality company. We also see Edwards as very undervalued by the market today, but double-digit revenue growth for the years to come is a very attractive quality as well as how high quality the management are and how well-run the business is, we think there's a clear catalyst to drive growth of the share price from here with hospital staffing improving this year, unlocking the ability to grow at pre-COVID levels, which we think will drive the stock upwards. So that's just 2 companies, ICON and Edwards, amongst others that are exposed to health and wellness in the fund. I'll now pass over to Will to take us through another couple of things.

Thanks, Nick. The theme I want to touch on today is data and analytics. So we've had this long-held belief that value of data and analytics are increasingly valuable assets. This has been validated with the recent surge in popularity for artificial intelligence with high-quality data being a key input into generative life language models. Matching the right data set with the right model is key for generative AI. As a result, we think there will be significant monetization opportunities from the structural opportunity and I'll talk to you through [indiscernible], which we think will be poised to benefit. The first name I want to talk about is Adobe. Adobe is a global diversified software company with leading market positions in digital media and digital experience. In fact, the company is mission-critical for its customers and has become industry standard, which leads to network effects where professionals and consumers are proficient in its software. Its strong pricing power and its scale of distribution has meant that it's been very successful in capturing an increasing value of the -- increasing share of the value that they generate for its customers. We believe generative AI will be a significant monetization opportunity for Adobe. Adobe recently launched its Adobe Firefly product, which has been the most successful beta launch in the company's history. Adobe Firefly is a family of generative AI models initially focused on image and text creation. And we believe this will change creative workflow and communications and result in productivity and efficiency gains. The key differentiator for Adobe versus its competitors is that it has a unique data and content library that is built in a completely commercially safe way. We believe enterprises will tend towards this product as they do not want to infringe on copyright issues. We expect to see improved user conversion, increased new user acquisition and opportunity to cross-sell its content and data packages, which will result in significant earnings potential in the coming quarters. Adobe has an incredibly attractive financial profile and consistently delivers 90% gross profit margins and 45% operating margins, showcasing the inherent leverage -- operating leverage in its business. The company is currently on 30x price-to-earnings ratio for a long runway of double-digit revenue and earnings growth and we believe this is highly attractive. The catalyst here is that we expect the take-up of Adobe Firefly to come in the upcoming quarterly results and we expect investors to understand the monetization opportunity as a result. The second company I want to talk about is SAP and they are also exposed to this data and analytics thematic. SAP is a global leader in enterprise application software. The company is in the later stages of transitioning away from this traditional license-based revenues towards a recurring cloud-based revenues. And we believe this is underappreciated by the market, particularly the earnings potential that it unlocks. SAP is poised to become a leader in business AI. Imagine a trusted layer of data across the business, which AI can readily pull in a matter of seconds. SAP is in a unique position to capture this opportunity because of the unique business data they can access, the unique business context that they can access. So it's all about making sure they claim the right data and implementing it in the right life language model for generative AI. In fact, at its recent Investor Day, SAP mentioned the potential for business AI to double its total addressable market from roughly $500 billion in 2023 to over $1 trillion in 2028 and this is highly attractive. Already you're seeing AI implemented in their capabilities SAP cloud customers who use SAP S/4HANA finance intelligent processing solutions. They've already seen the time between invoice and collection reduce by 10% and that showcases the efficiency and productivity gains that SAP could potentially unlock. So we believe irrespective of generative AI, we believe SAP's core is performing extremely well. SAP is well on track to achieve its midterm guidance and deliver sustainable double-digit operating earnings growth. The company is trading at 21x. And with the recent divestiture of its Qualtrics business, we expect share buybacks to underpin the share price and be a positive catalyst for the name. So that's another example of a company that is leveraged to the data and analytics thematic and we're constructive on. The second thematic I want to touch on today is the global infrastructure under-built. We are seeing the rise of electric vehicles, renewable energy, grid modernization result in significant investment, as [indiscernible] mentioned earlier and this will result in significant earnings potential for a number of our portfolio holdings, including Quanta Services and [ app cost ]. So Quanta Services is a leading North American infrastructure solutions provider with key businesses in energy transition, renewable energy, electric grid modernization, connectivity. So they have deep relationships with its customers and a lot of this spend is nondiscretionary in nature, which gives you a great sense of the earnings resilience of the business. Importantly, Quanta is a key enabler of the North American energy transition. The Inflation Reduction Act signed by President Joe Biden last year will create tailwinds for our business considering the significant amount of investments going into energy security, our renewable energy and clean energy transition. Already Quanta is seeing strong demand across its businesses in grid modernization, system hardening, in renewable energy integration and generation. And that is despite these tailwinds from the regulatory policies to come through. If we look at [indiscernible], Quanta reported a record backlog of $27 billion, which is up 35% on the prior year. And again, this touches on the point where we have great earnings visibility for this business. The company trades at 24x price-to-earnings, and we believe there is a sustainable path for double-digit revenue growth and earnings per share growth and we believe they are well on track to beat the midterm ambition set out at the Investor Day targets and this will act as a positive catalyst. The other name I want to talk about on today is Applus. It's a testing, inspection and certification business based in Spain. The company generally has quite resilient revenue earnings trends as well. Generally, a lot of its revenues are tied to regulated services. So Applus, we think the market is misunderstanding the portfolio transition that management has undertaken, particularly within its energy and industry segment. At its time of IPO in 2014, oil and gas capital expenditure revenues represented 24% of their revenues and we're facing some structural pressures at the time. We saw lower spending from their customers on oil and gas CapEx. We saw lower oil prices. And that segment of the business generally was underperforming in terms of revenue and margin expectations. And this has changed with the new management team. Firstly, oil and gas capital expenditure markets have largely stabilized. And secondly and more importantly, the management has transitioned the business away from oil and gas capital expenditure revenues towards long-term stable growth end markets including in renewable energy, infrastructure solutions and connectivity and oil and gas capital expenditure revenues represent only 5% of their revenues today. We believe that exposure to long-term thematic trends, including the digitization, renewable energy and the clean energy transition and this will create tailwinds for their business going forward. Applus is trading at 9.5x price-to-earnings ratio, which is meaningfully below its peers for a company delivering mid-single-digit organic revenue growth and improving its operating margins. Further, the company has deleveraged its balance sheet and has been repurchasing shares on market, which is a positive sign for shareholders. More recently, there's been private equity interest. We've uphold our equity in an all-cash bid for the business. We would not be surprised to see other interested parties. And we will get a premium for this asset. We think the market is clearly underappreciated free cash flow generation, the turnaround in asset quality and the valuation of this business and we expect positive catalysts yet to come. So I'll touch on data and analytics and the global infrastructure under-build and some examples of companies in both thematics, and I'll pass it back to Nick.

Thanks, Will. While only 6 companies that we hold in the portfolio, we do think those are representative of the types of things we look to hold. Great industry structures, great management teams running companies well that are providing results that give us confidence. And if we zoom out more broadly, we are very confident in the holdings that we have in the WAM Global Fund. We continue to stick to our process, which is to talk to a lot of management teams, turn over a lot of stones to make sure that we have the best possible undervalued growth companies with the catalyst in the fund for you, our investors. As always, we really appreciate the engagement and the time you've given us in turning in today. And I'll now pass the call over to Emiko, who will open it up for the question-and-answer portion of the call.

Thanks, Nick and the team for your insights, and thank you to everyone for joining the webinar today. We've received quite a few questions from the audience. Catriona, we'll start with you for the first question. This one is from [ Grace ]. Can you please clarify the current dividend yield and profits reserve? Why not increase the dividend more given the strong profits reserve?

Thanks for the question, Grace. So in terms of the current dividend yield, in the formal part of my presentation, I referred to the dividend yield as at 30 June share price. On the share price -- closing share price yesterday, the equivalent dividend yield is that $0.115 on the $198.5 share price, which is a 5.8% dividend yield and gross stuff that's 8.3%. In terms of the profit reserve, as at the end of July, we did have $0.494 in the profit reserve and that's 4.3 years of dividend coverage before that payment of the final fully franked dividend and 3.8 years coverage after payment of that final dividend. In terms of why not increase the dividend more given that strong profit reserve. Firstly, I guess, as dividends are a Board decision. So -- but in terms of -- I don't want to speak to the Board, but I'll give my view. I think that in terms of why not to increase, we do so far in terms of those $0.3575 in dividends that we have paid, they have been fully franked. So one of the issues with not increasing the dividend more is that we have to accumulate franking over time if we want to keep fully franking those dividends. And so as at 30 June, we had $0.062 in the franking account balance. So we do need to accumulate -- pay more tax as an Australian company taxpayer to accumulate more cents in that franking account balance. Already, the dividend is at that 5.8% yield, which we think is a very solid return for shareholders and that's before the capital growth and increase in NTA. So we think that is actually quite high. And with that franking grossing that up at 8.3% even higher. So look, it's a Board decision. The policy has been -- our theory has been that we wanted to increase dividends gradually over time. But yes, with that restraint of the franking would limit the ability to fully frank if we went more aggressively.

Thank you, Catriona. We'll stick with you. This question is from [ Lee ]. Can you please clarify the comments around franking credits and WAM Global's ability to pay fully franked dividends going forward?

Sure. So thanks, Lee. In terms of the franking, as Grace was just asking about in terms of that franking account balance, as at 30 June, we had $0.062 in the franking account balance. Our preference is to pay to fully franked dividends to the maximum extent we can. In the interim and the final results media releases, we do highlight that the ability to continue to fully frank dividends will be dependent on generating additional franking credits, which is through -- that which we generate through paying tax to the ATO given we're an Australian-listed company. So right now, that's $0.062, then we can add up -- we, in July, the portfolio was up $0.024, and we topped up the franking account by about another $0.0155 per share. So we are adding to that franking account balance to enable us to, hopefully, fully frank the next dividend, but it will be subject -- the franking will be subject to ability to keep generating and adding to that franking account balance.

Great. Thank you, Catriona. Nick, we'll turn to you now. We have received a number of questions on AI from [ James ], [ Susan ] and [ Peter ]. Combining them, what is the WAM Global's team view on the winners and losers from AI? How will this affect society more broadly? And finally, does the WAM Global team use AI in stock selection?

Yes. Thank you for the question, James, Susan and Peter. We did expect questions on AI. So not surprised. It is certainly a very important part of the market today. I think in the bigger picture, societal sense, we do have the view that AI is a truly generational technological advancement and it will drive productivity gains over time. These things usually occur over years, not months. So we would expect that to occur over time, but we do think it's real. And I really like the framing of thinking of AI in terms of winners and losers. Our view on the winners are that we are seeing clearly that AI hardware provider NVIDIA will be a significant winner of this shift. But we also think that what happens with prior technologies and what will happen with this technology is that will broaden out. I think Will did a very good job of discussing the fact that we think data will become only more valuable and important. And we also think those technology platforms will have a big role to play. So Will mentioned SAP and Adobe. We -- I mean we also hold others. We hold Intuit whose results last week -- Intuit provide accounting, tax, finance, marketing for small businesses and consumers. Their results last Friday was just really strong in terms of them making very clear they have the distribution, they have the data and they have the technology to be clear winners in AI as they roll out copilot products over the next few years. So I think the winners we see is initially hardware, but broadening into data and platforms. On the loser side, which we think is also very important from an investing perspective, we got the first clear loser coming out last quarter's earnings education software company, Chegg, talked about the fact that students are already using Chat GPT to improve their homework and test-taking. So they're a clear loser. We think more broadly, it's any situation where a low value-add, quite manual, quite rote process is in place. That's where you should be alert to the potential for disruption. So the end markets we're thinking about is potentially being disrupted. So video game development, marketing, potentially coding is going to get a lot easier. So those would be areas where you just have to be cautious about the disruptive approach. But we do think AI is an important conversation and it will continue to be an important conversation going forward. With fund itself, we're quite happy that we have quite a bit of exposure both in terms of the data and the technology platforms. So we think it will be helpful to the fund.

Thanks so much, Nick. This question is from [ Pauline ]. How likely is it that we will be in a recession later this year or in 2024? And can you also please comment on what the impact will be on the portfolio?

Great. And I'll take the how likely are we to be in a recession. I'll add some thoughts and then I think Will could maybe step through some of the companies in the portfolio. I think our approach to kind of macroeconomic forecasting is just to be a little cautious because it is a very, very difficult thing to predict. However, we think it is definitely the case that you can kind of look at the environment you're in and get a sense for the likely probabilities of things going forward. I guess I flagged the things Catriona mentioned, high interest rates, China and Europe are starting to soften and the consumer looks like they'll face headwinds. So we probably think there is a heightened probability of a slowdown from here. Importantly, we won't put all our eggs in that basket. We want to be sure that we own companies that can benefit in either the recessionary or the non-recessionary state of the world. But I think generally we do think it's probably of a heightened probability. I'll pass over to you, Will, to give some thoughts on the portfolio.

Yes. Thanks, Nick. I guess the focus for us is where fundamental bottom-up stock-pickers and we're really looking for earnings resiliency across our companies that we invest in. So we touched on structural growth thematics. There are dynamics where they can grow irregardless of the macroeconomic environment because we have the visibility in terms of investment spend and the industry growth rates. Other areas, if you look at our top 20 positions which we have on our slides, you can see that there should be a sense that there is a earnings resilience attribute towards it. So for example, if you look at mission-critical software that is deeply embedded into customer workflows, I think of Adobe, I think of TransUnion, Dun & Bradstreet, Intuit. We also have financial exchanges, which tend to do better in terms of volatility as trading volumes go up. Intercontinental Exchange, CME Group comes to mind. Health care, which is like in nondiscretionary spend, HCA Healthcare, Avantor, ICON, key beneficiaries. So I think across the portfolio, you can see that there's very stock-specific stories. There's a focus on long-term compound earnings for it because, in turn, we think that drives share price movement and that will lead to the best returns for our investors.

Thank you very much, guys. Catriona, this question is from [ Jeremy ], [ Mike ] and [ Bill ]. They wanted to see what measures or alternative structures the Board has considered to address the persistent discount NTA. They would think our long-term shareholders would welcome the opportunity to exit at NTA by an off-market buyback. [ Roberts ] also asked about whether you are considering buying back shares and the advantages and disadvantages of that.

Thank you. Thanks for the questions. So now whilst the underlying investment returns to the fund was strong in the past year and the TSR itself, we, as shareholders, also ourselves are disappointed that the shares are trading at a discount to NTA. And that discount is approximately 14% to the last reported NTA. And fortunately, the reality is that almost all the global legs are trading at discounts with the market more generally having been volatile globally in the last few years and constant noise around pandemics, Ukraine wars, inflation, recession risks, et cetera, the global legs have pretty much all traded at discounts. We think that over time, as we get past the current economic uncertainty that the discount will narrow, if not close. Specifically at WAM, we are very focused on delivering on that combination of investment returns and continued shareholder engagement that the business prides itself on to narrow that discount. I mean, Geoff and I also did a webinar a couple of weeks ago, and Geoff had in their slide pack, the chart of WAM Capital over the life of 24 years in existence. And you will see even WAM Capital has traded at various points at a discount. And if you look at WAM leaders, it traded at a discount, initially, Wilson Investment Fund traded at a discount for 7 years and both of those are now at premiums. So it does take time to tighten up the register and then we have had that overlay of just economic uncertainty and constant noise. But we think over time, we will be able to -- the register will continue to tighten up and that discount will narrow and hopefully close over time. Regarding the structure and LIC versus alternative structure, we do think that the Board thinks that the LIC structure is the preferable one for shareholders. One of the advantages of the LIC structure is that unlike other structures and like open-ended funds, where you often see that in -- at just the wrong time, all the money gets pulled out in redemptions, et cetera, which then has a liquidity issue for the fund, it means that the value of the assets for other shareholders gets pulled down. LICs don't have that issue because the capital is closed in. And so the manager can focus on their investment strategy underserved by those inflows and outflows. And so we do think that is an advantage of the LIC structure. The other advantage is that the majority of our shareholders are self-managed super funds and these shareholders benefit from those fully franked dividends and our shareholders tend to like consistent dividends over time. Whereas in a trust structure, every time you make profit, it gets paid out immediately as in a pretax state. And so in 1 year, you might get a large distribution and the next year you might get nothing. So the advantage of the LIC structure is that we can fully frank the dividend while we have the franking and that we can provide a consistent stream of those dividends that we pay from that profit reserve over time. So yes, that's what we think about the structure. And then lastly, in terms of the buyback question, Geoff has spoken about buybacks many times before in these webinars and also at our presentations and road shows. Our -- what we've seen over time is that whilst buying back shares at a discount in theory stacks up from a numbers perspective, what you actually see in reality in the Australian market for LICs is that it tends just to put a floor under the discount and doesn't actually make significant strides in closing that discount. So as a shareholder, when a company is buying back its own shares, you build the perception that there's no better use of that capital instead of putting it to use in the investment portfolio that fund managers is happy to hand it back. And so it may create a floor, but doesn't close the discount. So our belief is that buybacks don't work. And so we don't see that as a strategy for the fund. Also just a final point, I know this is a very longwinded answer, but I think it's an important one and one that we are -- all of these questions are very relevant and fair. The other thing that is happening at the moment is this recent legislation that's been introduced to parliament that hasn't yet been passed, but just around on and off market buybacks and off-market buybacks will potentially lose a portion of their franking account balance going forward if the legislation is passed, which would obviously negatively impact shareholders. So there's some consideration there in terms of the legislation changes that are coming.

Thank you very much, Catriona. Nick, we'll turn to you. This question is from [ Adam ]. Could you please give us an example of when you have sold a position and the philosophy around when to sell a stock?

Yes, absolutely, Adam. Thank you for the question. I guess -- well, I guess, just maybe some illustrative examples because we are always buying and selling positions and new investments. Actually, over the last year, we've held a position in a couple of the merger take-up companies. This includes Activision and Black Knight. Now this is a very special situation for us. We saw that these mergers were trading at a significant discount to the takeout price. And we think that was a reflection of a lot of the fear in the market over the regulators taking an aggressive approach. However, when we did the work and we did the thinking, we thought that these deals were unlikely to breach concentration issues. And historically, the regulators have had a very, very unsuccessful track record with vertical merger blocks. So we took positions in both of those. They both had relatively good news over the past few months. And we don't like to overstay our welcome and trade at too small of a spread. So as the spread closed, we sold those positions. Maybe a more normal one is so we hold a Booz Allen in the funds. We think Booz Allen is doing fantastically well. We think the results were really strong, double-digit revenue growth, really upbeat commentary from management and we think conservatism built into the guide. And yet, we trimmed the position recently just a little bit. And that's kind of a reflection of the fact that we do think markets get quite optimistic at times and quite pessimistic at other times. And so we're just happy to kind of take a bit off the top. And then our expectation is at some point in the future, the market might get too pessimistic at which point we'd be happy to kind of add back to the position. And that's just us taking advantage of the kind of emotions at the market. Booz Allen remains a very healthy position today, but that's just an example of some of the trimming we do in the funds.

Great. Thank you so much, Nick. This question is for Catriona and it's from [ David ] in [ Chaparral ]. Are you invested in India? Given India's significant economic growth, are you planning to look for prospects in India?

Thanks for the question. Yes. So we do see India as an incredibly interesting market in terms of the growth opportunity that's ahead of it, the young population compared to China, et cetera. Right now we are exposed to India through our multinational companies rather than directly invested there. I have spent a lot of time in my prior role traveling around India, seeing Indian companies, know many of them well. Traditionally, a lot of the issue with investing there is that many of the companies, the very high-quality ones, have traded at very high valuations and you've had to go down the areas of the market like the banks, IT services where there's millions of them to get both the combination of growth and undervaluation, so valuation support. That's not to say we can -- that we will not invest in India. We absolutely think about it as a market for looking for potential investments, but it's got to be that combination of us identifying undervaluation and significant growth opportunity. It will be -- I mean, it's an incredible place. There is huge infrastructure development needed and we don't think it will be as seamless as China has been over the last few decades. But absolutely, it's an important market. It's providing significant, like, growth to many of the multinationals that we have. But right now we don't have direct investments there.

Thanks very much, Catriona. This one is for Nick and it's from [ Han ]. Given the Japanese economy has only just reopened and is benefiting from the current post-pandemic bounce, should we expect WAM Global to widen its position on Japanese corporations? Have you already increased your exposure to this market? And if not, why not?

Thank you, Han, for the question. That's a very good one. I think there are similarities to some degree between what Catriona was just mentioning about India and what I think about Japan, primarily around the valuation levels that we've seen in the past. Japan was a market potentially because of a very low Bank of Japan interest rate. But where we did tend to see good companies, they certainly exist there, but they traded at multiples that we just -- or valuation levels that we just found didn't meet our process. So I think historically, that's meant that we haven't had a significant exposure there, although we've always had investments in Japan. Now we took a trip to Japan in February, Catriona and I, and that was really useful in terms of getting a feel for the opening up that is certainly occurring, the opportunity set that that brings. But also I think Japan is an extremely important market to get the investments correct. So we talked to a lot of companies over there. And some of the most helpful conversations were actually the negative ones where we would talk to a management team that was facing difficulties and at times, get a sense that they weren't going to take the actions required to put the company in a good place. So I think often with Japan, it's about making sure that you invest and you be careful in selecting your investments. That being said, I think there have been some significant falls in share prices of some of the good companies in Japan, some of the high-quality ones. So we certainly see the potential to increase the exposure to Japan going forward. We do think the opening up will provide tailwinds and it's just about maintaining that process and that valuation discipline.

Thanks, Nick. Will, we'll go to you. This question is from [ Stan ]. Is there much measure in acquisition activity happening amongst overseas companies right now? What do you expect going forward? And have you benefited from this?

Yes. Thanks for the question. Nick touched on this a little bit with the merger opportunity in Activision and Black Knight, which the fund benefited from. As a general comment, we're starting -- we're seeing merger acquisition activity, particularly in the small and mid-cap space, just given partly due to disconnecting valuations between large cap and SMID cap companies. And a lot of the times, good quality businesses which are generating strong free cash flow are very undervalued for their assets. So Applus is another name I talked about earlier, which is being bid for by Apollo. We actually think the bid was a little bit low, and we wouldn't be surprised if a bigger premium came through from another PLR, so that could potentially be an interesting opportunity. And by and large, I guess, our investment process, we're looking for undervalued growth companies and that naturally lends itself towards companies which tend to get acquired or tend to be able to fit into a larger company in quite a good way. So it is a balance because on one side, you have equity and debt capital markets with rising interest rates a little bit harder to raise money. But on the other side, good businesses are trading at discounted valuations and that's where we see the opportunity. So we do expect more activity. And whilst we're not investing in companies for the sake of them being taken out, it is a positive catalyst and a nice optionality to have in our investments.

Thank you, Will. Catriona, we'll turn to you. This question is from [ Janine ]. I'm interested in how the U.S. dollar and the euro affects the price of WAM Global on the ASX. I think if the Australian dollar goes down compared to the U.S. dollar or euro, it should cause a rise in the WAM Global share price on the ASX. Is this correct? And adding on to that from [ Greg ], would you consider hedging?

Thanks for both of those questions. So regarding the currency movement, so when the Aussie dollar goes down relative to the U.S. dollar or euro, for example, that does cause the value of our investments, which are held in U.S. dollars or euro to go up, which means that when we translate them back to -- for the NTA in Australian dollars, the value of the NTA goes up. Now relating the NTA to the share price is what I was referring to earlier regarding the discount or premium. So we don't necessarily -- like the movement in NTA does then drive the share price, but the amount will depend on the level of the discount premium to NTA at the time. So it's not directly the impact of the Aussie dollar going down translating straightaway into the share price, but it does directly translate into the NTA. Sorry, last bit of the question. What was -- pardon? The hedging. So in terms of the hedging. So look, we can hedge. We haven't hedged since the start of the fund at absolute extremes that you saw in the GFC, et cetera, where the Aussie dollar absolutely crated, we could hedge. We think at the kind of 65 level we're at now, it's not on an extreme -- there's lots of reasons the Aussie dollar moves around. But right now we do have that interest rate differential versus the U.S., for example, where U.S. rates are at a higher level than the Aussie cash rate. So at the 65 level, we're not looking to hedge. Our general policy around hedging was that our shareholders wanted both diversification in terms of access to global companies, but also in terms of diversifying outside the Aussie dollar. So our general policy is not to hedge. But as I said, at absolute extremes, we could look to do that. But at this 65 level, we don't think that is an extreme level.

Thank you, Catriona. And since we have been receiving quite a few questions from the audience, we will be running the webinar 15 minutes over. So we'll go to Nick for the next question. This is from [ Michael ]. Markets are up sharply this year. Have they run too fast?

Yes. Thanks, Michael. So we love debating markets and we -- I guess we debate this quite a lot internally as well. I think market price is changing is often a great way to get a sense for what the market expects to happen in the future. Certainly, last year there was markets being priced for a lot of pessimism with regards to the growth outlooks and how the economies would evolve. I think markets going up this rapidly does suggest that markets are starting to take a more optimistic or benign approach to the expectations for the economy going forward. So we think that we would probably take the kind of softer side of that, just given the headwinds that we've kind of discussed on this call. I do think the other really important thing with the markets being up this year is that it's that kind of -- it's that idea Catriona mentioned earlier that the markets are not the economy. And I think at the last road shows, Geoff mentioned that it's time in the market, not timing the market. And so it's just an idea that it is generally better to stay invested, have exposure to the opportunity set from equities over time versus trying to kind of aggressively get in or out. We think -- as we've talked about in other questions and during the prepared part, we do think we've positioned the fund for kind of a range of outcomes. However, I guess, circling back to the original question, it does seem quite fast and quite optimistic, the price changes that have been happening.

Thank you Nick. Catriona, we'll go to you. This question is from [ Ian ] and it's regarding China. How concerned are you? And why are you invested there?

Thanks for the question. So look, in terms of China, we do think that the growth that we've seen since, what, 1978 when they entered -- really entered back into the global economy has been extraordinary. And the country has gone from about 1/10 of the size of the U.S. to 3/4 of the size of the U.S. So we do think that that growth of the past -- that growth in the past is a thing of the past. We won't grow at the same rates. We've got a much bigger base now for China. And the recent slowing, as I mentioned in the prepared remarks, there are -- it is multifaceted. And so in terms of level of concern, we think that the government does have significant incentives to increase the stimulus from here. But it does seem like right now they're doing this piecemeal approach of slightly reducing reserve requirements. They don't want to give a big bang to the economy right now. That could certainly change. And so we do think that growth -- the growth rates as we look forward will look a bit -- will look slower and the prior rates are a thing of the past. More generally, in terms of the opportunity for China, it is to change from that GDP growth having been led by infrastructure to more consumption-led GDP growth in the U.S., 70% of GDP growth is from consumption, whereas in China, it's 40%. And you do have an enormous population that if they start consuming could drive a huge amount of demand for many different products and services. But the government right now has been relatively reluctant to do this. So look, we think you've got to pick your spots in China. And in terms of why we are invested there, we've got 1.4% of the portfolio there. So quite a small percentage, but -- and the reason is that it's the specific stocks that were invested in there that we think are compelling. But why don't I turn to Will, you can talk through the actual stocks that we have. But yes, in terms of my level of concern, it is -- I do think we are slowing, but I do think the stocks that we have, have very compelling valuations and that the market there has been aggressively sold off. So that's created the opportunity.

Yes. And I'll jump in, Catriona, I think that's exactly right. We've taken a cautious approach, Tencent and Alibaba together, our portfolio position, they represent 1.4% of the portfolio. As Catriona mentioned, we are seeing green shoots, but not necessarily at the pace that investors were hoping for. But from our perspective, that we've passed some of the regulatory crackdown issues. And our investment thesis is very built on the company-specific point of view. If you have a look at the business, you're seeing positive earnings momentum, a focus on profitable growth and returning capital to shareholders and that's vastly different versus the prior couple of years. If we look at Tencent specifically, the company is trading at 17x price-to-earnings ratio delivering double-digit revenue growth. It's got a strong pipeline of gains that have been approved by the government and its short-form video advertising business is going extremely well and we think that will drive the narrative going forward. In a similar vein, Alibaba, trading at 10x price-to-earnings. So again, incredibly cheap for double-digit revenue growth. The positive catalysts to realize value here is that management has signaled that they're going to split the business into 6 separate groups. And we think that will realize value for investors. So that's the positive [ case ] that we're looking for in our position there. But cautiously optimistic on China and Tencent, Alibaba, 1.4% of the portfolio.

Thank you, Will. Catriona, this is from David. Of the 19.3% investment portfolio performance, how much of this performance is due to realized and unrealized foreign exchange gains?

Thanks for the question. So the impact of FX positively contributed to the performance of the financial assets by 4.3% and foreign currency by 0.3%. The currencies that contributed to the FX gain included the USD, which was 3%; euro, 1.2% and GBP, British pound, 0.5%, partially offset by an FX loss of 0.1% from Japanese yen. But in terms of this, the index also benefits -- gets an FX benefit to though. So yes, that's the answer there.

Thank you so much, Catriona. And I think that's all we have time for today. I'll pass it back to you for any closing remarks.

Sure. Thank you very much, Emiko, for facilitating the Q&A. And thank you to everyone for joining us and to Nick and Will for your -- for joining me today. A big thank you to our shareholders for your support. As I said at the outset, we're really excited about the portfolio of companies that we own and the returns that we expect them to generate over time. And we look forward to updating you again soon. A recording of the call will be uploaded to the website shortly and we will get back to you if we didn't get to answer your questions. I'm sorry, we did have a bit of an overload today. So anything that's not answered, we will get back to you. But please do get in touch by phone or e-mail at any time with any questions or feedback that you have. Thank you.