Edited Transcript of FGG.AX earnings conference call or presentation 12-Mar-20 10:59am GMT

Now importantly, for the Future Generation companies, what we’re aiming to do is provide exposure, as I said earlier, to these leading managers employing a variety of investment strategies which provides shareholders with outperformance in down months and portfolio diversification. We really want to stress those 2 points in particular here. And it’s interesting that since inception, the investment portfolios have both outperformed during the Index’ down months. There were 24 of those for FGX. And for FGG, there were 22 down months. We certainly believe that with the significant and swift market falls and the return of the volatility that we’ve seen, obviously, in very recent times that they highlight that these companies belong in every investment portfolio, which we’re stressing here today.

So moving on, just to briefly touch on the social returns. The slide there, we’ve donated to date $30.6 million in the 5 years that we’ve been in existence. And importantly, the total fees that have been forgone by our managers and our service providers is $56.5 million. So that well and truly outweighs the donation to charity. And in 2019, those fees that we’ve forgone were $15.3 million versus the $9.5 million that was donated to charity.

Next, the — just to mention the charities that we support, there’s 22 in total, between the 2 cause areas of children and youth at risk and also youth mental health. And we’d also like to definitely acknowledge the service providers, the businesses behind the scenes that have supported Future Generation to date. And it would be remiss of me not to thank our wonderful pro bono fund managers, all 30 of them, across the 2 companies that had supported us. Without their generosity, we wouldn’t be here today, and we can’t thank them enough. I’d also just mention Sage Capital who joined us last year as a manager — a new manager in FGX. And that’s Sean Fenton who previously was with Firetrail.

So what I might do now is hand over to Geoff Wilson, the Founder and Director, who’s also the Chairman of the Investment Committee at FGX, and he sits on the Investment Committee of FGG to really drill down and talk to you in more detail about the investment portfolio performance. Thank you, Geoff.

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Geoffrey Wilson;Futura Generation;Founder, Director, [2]

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Great. Look, thanks, Louise. And in terms of just so everyone understands how these both Investment Committees, FGG and FGX, have put these, what we believe, is Australia’s best domestic fund managers and also our global fund managers together and combine them is, broadly, we’re trying to have about 50% of the portfolio, giving that money to managers that are long equities, effectively have got most of their money in the equity market. And the other 50% is a combination of managers that some may be absolute, and that’s when they can hold cash — high cash levels, some may be market neutral — and you’re going to hear from Blake a little later. But Firetrail, one of the FGX products that we’ve got in there, is an absolute return product, which has some of those market-neutral characteristics.

So what we’ve tried to do is put that portfolio together like that. So even though there will be volatility in the market — and we all know the equity market provides a good return over time. But times like now, when we’re incredibly — everyone’s incredibly fearful, it’s good having that diversification. It doesn’t stop you from losing money, but what it does do, it balances out the performance. And as Louise pointed out, that both FGX and FGG have outperformed since they’ve been operating in periods where the market has fallen. And so you’ll see that — well, we hope that continues to play out over the next little period.

In terms of the performance of the 2 portfolios — and it’s actually quite interesting. You see the FGX portfolio performance, a little bit below the market, and that is, again, because of the various managers, how the investment committees put the portfolio together of those managers. Some of them were more focused on capital protection, so — which we should see the benefit of that come through over the next little period. And in terms of — you’ll see there we’ve got the measure of sort of risk, which is the measure of volatility. Since inception with FGX, the market’s averaged about 10.7%. But the FGX portfolio, because of how it’s been put together, has been about 7.3%.

In the last 12 months, the benchmark — the volatility of the whole market has declined. It was less volatile. That was the 12 months to December. Obviously, this 12-month period is going to be a lot more volatile. But the average market volatility was 7.1%, and FGX was 5.8%. So what we’re trying to do is give you an exposure to the equity market and not being as extreme a move as the overall market. Obviously, when things are going down, everyone’s impacted to an extent. One of the good things with FGX and FGG is it will give you a bit more diversity than someone just purely exposed — 100% exposed to the equity market.

In terms of FGX, you’ll see the various managers there, and I can’t thank them enough for all the work they’re doing on a pro bono basis. And we’ve picked what we believe are the best managers, and we’re happy to include managers and remove them at various points in time. I think Louise, is it — we’ve had 10 in?

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Louise Walsh;Futue Generation;Chief Executive Officer, [3]

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11 in, 10 out.

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Geoffrey Wilson;Futura Generation;Founder, Director, [4]

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11 in and 10 out. Yes, this is between the 2 funds. So — and the managers — look, this is all professional, the Investment Committee’s professional, the managers are professional. They understand if the Investment Committee makes an asset allocation or decides to change a manager for various reasons. And it tends to be personnel changes. It tends to be performance that we can understand. That’s either outperformance or underperformance over a reasonable period of time and/or if they start managing the money differently to how we’ve expected them to manage the money. They tend to be the groups. And also, we have — as the investment’s good, you’d expect, we have a sort of a reserve bench of managers that we’re looking at consistently, and we’ll make decisions if, at any point in time, we believe they should be added to these portfolios.

And the interesting thing is you look at FGG, the performance there, and that’s on Slide 12. Again, it wasn’t — it hasn’t performed as well in terms of the absolute number as the MSCI in Australian dollars. And that’s, again, because it’s got a bit more diversity. And you’ll see — I think you’ll see with the FGG numbers that comes out in the next couple of days of how it performed last month versus the market. The — and in terms of the FGG managers, again, we’ve got, really, what we believe, are some of the best global managers that we can find. And obviously, a number of them are based here in Australia.

Do I pass over to you now, Louise, or we go back — yes.

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Louise Walsh;Futue Generation;Chief Executive Officer, [5]

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Yes. Yes. No, that would be great. Thank you very much. Thank you for that. And I’d now like to invite Blake and Chris to the conference call. So we’re going to have a short Q&A with both of them, have any conversation. And I might start with you, Blake. The first question is really your view on the market and reporting season. So if you could share that with us, that would be ideal.

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Blake Henricks;Firetrail Investments;Deputy Managing Director, Portfolio Manager, [6]

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Yes. So well, thanks very much for having me. And thanks to you guys at Future Generation as well for everything you do. It’s greatly appreciated. I think reporting season was blown out of the water by coronavirus, to be honest. I mean companies that had good results could be falling. It was — it looked a little bit random in there. But I think overall, the key thing we are focused on at the moment in terms of the market is balance sheet. No one knows when this is going to end. I’ll have a pretty big bet that in 2 or 3 years’ time, we won’t be talking about it as much as we are now. So really, what you want to do when you think about investing and what we do for our investors is really focus on balance sheet and how they’re looking.

And if you sort of go sector by sector, you look at the miners, they’re in rude health on the balance sheet. You take Rio Tinto as an example that have got $2 billion of debt. And last year, they produced $20 billion of EBITDA, so a very, very different place to where they were in 2015 when commodity prices were falling and balance sheets were stretched. If you then go to the banks, the banks are, I would say, capitalized okay. I mean they’re clearly sensitive to bad debts, and that’s something we’re watching out for. But the biggest headwind for the banks at the moment is really around lower net interest margins as a result of interest rates going closer and closer towards 0. So you should expect some dividend pressure over the next little while out of the banks.

And then finally on industrials, they’re not too bad either. There’s not as many big pockets of really stretched balance sheets as we saw, as an example, through the GFC, just part of the GFC. So a lot of managers and CEOs these days have learned a lot of lessons from that, and they’re in much better position to withstand what’s going on. Now the caveat is that if things really slow down, certain businesses are going to be very, very affected. But I would say the rule, balance sheets are pretty good. And so we feel pretty comfortable the Australian equity market can navigate fairly well out of this.

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Louise Walsh;Futue Generation;Chief Executive Officer, [7]

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Very good. Thank you. And Chris, what about your view on the market and reporting season?

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Christopher Dixon, Cooper Investors Pty Limited – Portfolio Manager [8]

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Yes. Thanks, Louise. Thanks again for the partnership and for the great charities you guys support. It’s wonderful to be involved. Look, at CI, we operate on the principle of observation, not prediction, so not going to suggest where we go from here but just a little bit about what we’ve seen. I guess this one-two punch of events, the virus and the oil shock, they’re both unknown in duration and will have a real but sort of uncertain impact on GDP and corporate earnings. So we know markets hate uncertainty. We’ve seen 20% off the highs. I guess, in the context of where we’ve come from, markets at all-time highs, volatility near all-time lows. We’ve seen 4 20% drawdowns in the last 20 years, sort of a once-every-5-year move. We had one as recently as Q4 2018. So I guess what we’re seeing is this is infrequent, but it’s far from unprecedented. What has been unusual is the speed of the drop. So it’s taking, what, 13 trading sessions for the S&P to drop 20%. I think there has been significant levels of sort of passive indexing building up in the markets in recent years, which means concentrated amounts of money can move in and out of assets in sizes probably none of us have ever seen before. So we’re seeing that play out now.

I guess, in terms of companies, I mean, they’re doing the best they can. They’re restricting nonessential business travel. We’re seeing events like exhibitions and trade fairs being canceled. Clearly, this is going to hurt the earnings of those guys exposed to travel and live entertainment, airlines, et cetera, so that’s where we’ve seen some of the sharpest falls in share prices globally. Beyond that, it’s still sort of business as usual. So people are working from home. There’s a lot of video conferencing happening, laptop sales in Europe are going through the roof. Even in Italy, which is pretty much in full lockdown, I mean, the B2B economy is still operating. So we own an Italian industrial business in the global fund, they tell us that people are still going to work. They fortunately have no cases in their business and sort of there’s been no major change in industrial output. So I think people are operating as best as they can and trying to be positive.

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Louise Walsh;Futue Generation;Chief Executive Officer, [9]

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Right. Well, thank you. Thank you. Now we might — Blake, I might turn to you. And you’ve got a couple of stock picks that you’d like to share with our audience.

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Blake Henricks;Firetrail Investments;Deputy Managing Director, Portfolio Manager, [10]

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Absolutely.

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Louise Walsh;Futue Generation;Chief Executive Officer, [11]

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Thank you.

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Blake Henricks;Firetrail Investments;Deputy Managing Director, Portfolio Manager, [12]

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I’ve got a bit of a barbell for you today. So the first one, you might have to reach for your airline sick bag because many of you have gone with a bit of risk, and that is Qantas. So it’s not for the fainthearted, but in the Firetrail portfolios, we own Qantas. And there’s a reason we own it because when you look at the business, 80% of the valuation — or actually more than 100% of the valuation today is the loyalty business and the domestic airline business. And we’ve recently seen in Europe, as an example, many — a lot of stress in airlines. Flybe recently went into administration.

And people would say, well, owning Qantas would be very risky. And I do agree, it’s not without risk. But it really is in a win-win investment scenario as we see right now, and I’ll tell you why. The first scenario is that things eventually recover, in which case, earnings will recover and also people will feel more comfortable owning Qantas again, whereas today, they’re very fearful. So that’s probably the base case for most people. But the second case, and you can’t rule this out, is it gets worse. And people are saying, is Qantas going to make it, what’s going to happen.

In the Australian domestic airline business, there’s 2 players, Qantas and Virgin. Now if you look at Virgin, they’re geared at roughly 5x net debt-to-EBITDA as at the end of December. And you can imagine that’s getting worse by the day. They recently issued some bonds, which are trading at 8% or $100 face value. They’re now trading at closer to $0.60. So there’s a lot of stress there. And so if this does get worse, we would expect Qantas to take some very material market share from Virgin, which would actually have the impact of increasing earnings and creating a bit of business on the other side. So that’s why we’ve said, at the moment, these prices is a win-win because it either gets better, and that’s good, or it gets worse and there’s some serious share taken from Virgin. So you need to be sort of second-level thinking, but that’s our position at the moment on Qantas.

The second one is a bit more defensive — a lot more defensive, I would say, and it’s Medibank, they’re Australia’s leading private health insurer. The company, in terms of its balance sheet, has excess capital over and above its regulatory minimum to the tune of about $150 million. So the balance sheet is rock solid at a time of stress, and their end markets are fairly unaffected at the moment by what’s going on out there. The other interesting part of Medibank, the investment thesis is that many of its small competitors — now there’s 37 private health insurers in Australia. There’s 3 large ones which are Medibank, Bupa and NIB. But it’s a long tail, and so in total, there’s 37 players. When we look at some of the data from some of the smaller players, many of them are really struggling to make money. APRA has now put them in their sights, citing risk with the system of having those players. And so we believe Medibank can actually take quite a bit of market share over the next 3 years. They’ve got a strong balance sheet, a very robust business in a time of uncertainty and a market share opportunity. So there’s the barbell, Qantas and Medibank.

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Louise Walsh;Futue Generation;Chief Executive Officer, [13]

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Yes, very good. Thanks very much, Blake, for that. And Chris, what about you?

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Christopher Dixon, Cooper Investors Pty Limited – Portfolio Manager [14]

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Yes. So the first stock I want to talk about is a company called Eurofins Scientific listed in France, domiciled in Luxembourg with about an $8 billion market cap. It’s the world’s largest and leading food and pharma testing company, so quite topical today. It runs over 800 laboratories worldwide and is a key service provider for big food and big drug companies. So you think about a bar of chocolate or some vitamin tablets going down at a production line in a factory, they have to have all manner of samples taken, check there’s no contamination, check purity, quality, and so very important aspects for the brand but also increasingly, mandated by the regulators, so really, really strong industry tailwinds.

We love businesses where management exhibit proprietorial behaviors. So Eurofins is 30% owned by its founder, Gilles Martin, who pretty much started the company in his bedroom about 30 years ago and has built up today to a company doing almost EUR 5 billion sales. So we expect Eurofins can grow its top line at sort of 10% a year from both organic sales growth plus bolt-on M&A. But the real juice here is the free cash flow growth. So we think that probably doubles over the next 2 to 3 years as margins rise and as CapEx and M&A decline from their prior peak levels. It’s also, by the way, one of several companies we own in the portfolio which have diagnostics businesses who have recently developed coronavirus tests that can provide results quicker than those currently available. So pretty topical positive net benefit to society by those guys.

The second stock is very different. It’s called Ferguson. It’s actually the #1 wholesale distributor of plumbing supplies in the U.S. So think of it as, I guess, the American Reece. Specialty distributors in the U.S. like Watsco, POOLCORP trade on significantly high multiples than Ferguson, 5 to 10 turns of EPS. And that’s really an example — or a result of kind of a messy history in corporate structure. So Ferguson is actually listed and domiciled in the U.K. It used to be known as Wolseley plc. But now 95% of its earnings come from the U.S. So there’s a clear pathway here for the stock to shift to a primary U.S. listing. We have been advocating this. Other activists have as well, and they’re actually consulting shareholders on this whereas, a year ago, they sort of weren’t really keen to entertain the idea. The CEO, Kevin Murphy, is U.S.-based, great guy, been running the business 20 years, and they’ve recently seen a new Chairman come in, a guy called Geoff Drabble who’s the former CEO of Ashtead Group, which is another U.K.-listed company, which is predominantly a U.S. business, and that’s actually been one of the best performing stocks in the FTSE 100 over the past decade.

So look, we know there’s a cyclical element to this. Ferguson actually is a significant repair and remodeling player. So it typically grows 2% to 4% above the market. It’s got a strong balance sheet to keep buying independents, and it probably returns 5% a year in cash to shareholders through a combination of dividends and buybacks. So there’s a lot of ways here for management to exploit these latencies and keep growing shareholder value.

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Louise Walsh;Futue Generation;Chief Executive Officer, [15]

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Thank you very much, Chris. Thanks to both of you for those. So look, just a final question, and this will be a different question for each of you. Blake, first with you, I mean oil prices have more than halved in the last, what, 1.5 months. I mean is it sustainable? What’s your view on oil prices?

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Blake Henricks;Firetrail Investments;Deputy Managing Director, Portfolio Manager, [16]

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Yes. So you’re right, Louise. The oil price has fallen very rapidly. It has got up to around $70 last year. And then today, you’re sitting around $35. So a halving, and it’s fallen very rapidly just in the past month alone. We know demand has been weak. Airlines are weak, so demand has been down. And typically, OPEC would step in and cut production to try and balance the market. So OPEC+, which is OPEC plus Russia, proposed some cuts. Russia didn’t agree to them. So instead of not — just cutting, Saudi Arabia were quite upset about this and decided to increase production, and that’s something they’re doing at the moment. So instead of actually cutting supply, we’re now seeing increasing supply. And when supply exceeds demand, the price goes down. So that’s where we are today.

But the key question you need to ask yourself is, is $35 sustainable? And I absolutely believe, and all the research our team has done, is that it’s not sustainable. It’s tears everywhere. At $35 U.S. tight oil, it’s variable, probably needs around $50 a barrel. Saudi Arabia needs around $78 just to balance their fiscal budget. And even Russia probably needs around $50 a barrel to balance their fiscal budget. So there’s 2 things that happen here. Either Russia comes back to the table and OPEC+ decides to rein it in a little bit or the market needs to rebalance on its own. If it needs to rebalance on its own, you could see $20 to $40 a barrel for, say, 18 months. The U.S. will have to give away. But either way, you shouldn’t capitalize $35 forever. So it’s not a sustainable price for the industry.

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Louise Walsh;Futue Generation;Chief Executive Officer, [17]

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Not surprised by that. Look, thank you. And Chris, just a very different question to you. I mean what do you think about the trend of ESG investing today?

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Christopher Dixon, Cooper Investors Pty Limited – Portfolio Manager [18]

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Yes. Look, I think this is something that’s been very much integrated into our process at Cooper Investors for a long time. We prefer to sort of think of it more holistically in terms of responsible investing. I think ESG and the whole industry that’s sprung up around it in terms of ratings agencies, different standards, compliance organizations is probably, a, far too complicated and, over time, we need to sort of see a trend towards the standardized set of language and standards, if you like. And secondly, people are very focused around the negatives of what companies are doing, exclusion lists and so forth. So often, that’s largely an issue of reporting and disclosure. Our view is that companies that are good companies, run well and in sustainable industries can actually grow the pie for all stakeholders. So this is not about taking from the shareholders and sort of giving it to the other stakeholders. The focus should be on growing all stakeholder returns, both financial and otherwise. And we can do that by investing in businesses where you can clearly see a net benefit to society.

Just a final point is that our view is the only thing you can do is kind of investing well at arm’s length using screens, all those exclusion lists. A lot of the data coming out at the moment is inconsistent. A lot of the ratings agencies disagree with each other even on the same topic. So this is just sort of subjective and hard to measure. We think you need to be close with the companies, meeting them frequently, face-to-face, having sort of authentic conversations around these topics rather than relying on kind of high-level screen-scrape report. So that’s the way we’re tackling it.

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Louise Walsh;Futue Generation;Chief Executive Officer, [19]

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Right. Well, thank you very much for that. And look, just a quick update on our comms. I mean shareholder communication is extremely important to us. And we do this, I think, as most people know, through our monthly newsletter, our monthly NTA reports. And the next one will be due out tomorrow for both companies: our half and full year financial results, our website, media, independent research and, of course, investor calls like we’re doing today. Considering the risks posed by the virus, we will video Future Generations’ May 2020 shareholder presentation and also the investment forum rather than conduct a national road show like we normally do in May each year. We will be sharing more information in relation to that in the coming weeks. The AGMs of both companies will run as originally planned, on the afternoon of the 21st of May. And more details of those will be available soon as well. If you or someone you know would like to sign up to our monthly newsletter, news from the network, Slide 17 has the details or alternatively, you can jump on our website where you can subscribe from there.

So now I’d like to open up the call to questions. I’ve got myself, Geoff, Blake and Chris here to answer any questions you may have. We’ll endeavor to answer as many as we can in the time provided. And if we run out of time for any reason, we’ll contact you after the call. All right.

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Questions and Answers

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Operator [1]

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We got the first questions from webcast. Can we get a view on bank stocks, please. This question is from James Thomson from AFR.

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Blake Henricks;Firetrail Investments;Deputy Managing Director, Portfolio Manager, [2]

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Yes, sure. So the question was some comments on bank stocks? Okay. I mean banks as a rule don’t really like low interest rates. So it puts pressure on earnings, and that’s what we’re seeing at the moment. That’s why the banks have been underperforming in the past little while. I mean the biggest question out of what’s going on out there is how we’re going to see bad debts trending. One area we are seeing is the governments being a lot more active in terms of trying to head this off at the pass rather than let it get out of hand. Now you can say, oh, they should have acted earlier, but at any rate, things are going on to try and ease the liquidity crunch that is happening across supply chains in the many small businesses. So overall, low rates are pressuring the banks. Bad debt is something we’re watching, and that’s all we can do at the moment.

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Operator [3]

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The second question is from [Tony Miller], what is the profit reserve?

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Louise Walsh;Futue Generation;Chief Executive Officer, [4]

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Now I think I actually mentioned that earlier, but I will actually repeat that. So firstly, for FGX, the profits reserve is $0.087 per share and for FGG, it’s $0.037 per share. We like to have some in reserve, at least — probably at least a couple of years at the current rate. In case of downturn, as a CEO, I don’t like to be in a position where I’ve got to make a call to a shareholder to inform them we’re cutting in dividends, so it tends to be our policy to do that. But that’s the current profit reserves for both companies.

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Geoffrey Wilson;Futura Generation;Founder, Director, [5]

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Yes. And you’ve got to remember what we’ve done here is, both FGX and FGG, they’ve invested in the fund managers — in their funds. And so there’s distributions that come each June, so both those profit reserves will be topped up by the amount of realized profit. And you tend to find — the last couple of years — basically last year, the distribution, even though it was a great year for the market, wasn’t that great. And that’s probably more a factor that Blake was talking about is — and I mentioned earlier about the volatility. There was less volatility in the market. You’d tend to find there’s more volatility than there’s probably more trading. So you actually could find the actual realized profits are greater. So I think we’ll have to wait and see in June. But I would assume there’ll be reasonable distributions.

And in terms of what is a profit reserve, it’s effectively the profit that the companies make. It’s included in the NTA. It’s part of the NTA. And it’s sort of an official thing where the Board decides to allocate some profit to a special reserve, which allows — then that profit reserve is effectively quarantined, so therefore, a dividend can be paid out of that because you actually have to have a profit to pay a dividend. And this is sort of a way of giving shareholders dividends — effectively dividends over time. So that’s where the profit reserve fits in.

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Operator [6]

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And the next question is from [David Ingalls], why do you hold any cash when you have the option of a market-neutral fund?

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Geoffrey Wilson;Futura Generation;Founder, Director, [7]

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Yes. The — both FGX and FGG hold cash levels, but you’ll see at the moment, they’re both under 10%. What historically, the — these are Board decisions, Investment Committees and then Board decisions. That’s how — with the money that we give to the various managers, what we tend to do is when they have distributions, we actually don’t take the cash distributions, we just — we keep that money, let it keep accumulating inside — in the fund. So we take more units in the funds. Any fees that they would normally charge us and rebate us, we again take more units in the funds. So we actually use the cash that’s on the balance sheet to pay the distributions — or sorry, the dividends and the charitable distribution. So effectively, the cash will decline by — with FGX, yes, it’s — what is it yielding, about 4%? A little over 4% now. So the cash over the next 12 months will decline by 4%. And also the 1% that goes to the charities. And with FGG, it’s, again, 1% to the charities and the dividend, so it will decline by a little less.

So at any point in time, we can take cash from the fund managers, but we’ve been generally sort of running that cash level down. I mean we do have money in the market-neutral managers. And I think if you’ve gone back 2 months ago, everyone was probably — people would have said, look, why have you got money in market-neutral managers. And the market-neutral guys that — when there’s periods of dislocation, effectively, cash you’ve taken the risk off the table, you do still have risk with the market-neutral managers. You actually have — from a risk perspective, you have double the amount of risk because, say, the market-neutral managers, say he’s got $100 million, he’s — he holds $100 million, he invests $100 million in the market and he shorts $100 million worth of stock and then holds $100 million of cash. But if the shares that he shorts — what we’re hoping is the shares that he shorts go down and the shares that he owns go up and we make money that way, but that may not be the case. So you’re actually taking double the leverage. So it’s really the Investment Committees, they’re looking at all the risk we’ve got and trying to balance them, with also being able to continue the — provide cash as — for the dividends and the charitable distributions.

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Operator [8]

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And the next question is from [Sam Brendel], have you considered adding tail risk strategies to the portfolio?

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Geoffrey Wilson;Futura Generation;Founder, Director, [9]

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Yes. Just on the sort of trying to — well, sorry, the answer is that both Investment Committees, we’ve gone with these — what we’d like to do is we’d like the managers to make the decisions. So we’ve picked the best managers either in equities or market neutral or absolute that we think can achieve those results. And we let them make the decisions inside the portfolios. Let me just take it just a little bit to one side. But with FGG, in the first couple of years, we actually had — we were a bit more specific in our asset allocation, and we had an overweight to Asia. And what we decided is we pulled out of all those managers, and we decided, look, we’ll just go into the global manager and let them make the asset allocation decisions. So we’ve — what we see ourselves is our job as the Investment Committees and the Board is to select the best managers to put a portfolio that gives you the market return, if not better, with less volatility or less risk in the market. And we haven’t put any overlays ourselves where — we’ll let the individual managers make those decisions.

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Operator [10]

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And the following question is from [Daniel McCullough], what steps are being taken to address the current NTA discount for FGG and FGX?

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Louise Walsh;Futue Generation;Chief Executive Officer, [11]

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Okay. Well, look, I’ll start on that. I mean just to explain why they’ve come about. I mean it’s interesting, with the background, I mean people will be aware who are our investors. We did a capital raise for both companies at the end of 2018. And when we did that capital raise, we — you typically have, with a capital raise like that, churn of anything between 30%, even 40%. And there are some new shareholders who came in via the placement for both companies who haven’t been stayers. So unfortunately, they’ve sold out. And particularly in the last sort of 4 or 5 months, we’ve had some of those selling down, particularly some of those larger shareholders. So that’s been — unfortunately, that does happen though with these sort of placements. So that’s really what’s caused the discounts.

We do have a plan. We have a very detailed plan of how to close those discounts. And part of that absolutely involves engaging with our shareholders. The end of last year, it was calling our shareholder base. I’m now calling our top shareholders with — in relation to the results. So it is about updating them, getting feedback from them. And what we’re trying to do here is stimulate more buying in both companies. We’ve had a larger discount in more recent times from FGG than FGX, and that’s because we raised a larger amount through the placement of FGG. Geoff has a lot of experience in closing discounts through his role with Wilson Asset Management. And there has been some good work done at Wilson Asset Management with closing the discounts or — in that area with a couple of the LICs there, particularly WAM Leaders and WAM Global. And what we’re doing here is stimulating more buying.

Now it’s more presentations. It’s more talks. It’s increasing our communication plan. We brought on a couple of resources in that space. They’re being funded by WAM, not Future Generation, which is good for our shareholders. But we’re trying to do more work with planners, with research houses to stimulate more buying. We’re confident that we can close the discounts. I mean, obviously, with what’s happening with the market, that’s going to affect the timing of doing that. So it’s going to be a longer haul than probably we’d envisaged if we were looking at this late last year. But Geoff, I don’t know if you want to add something there?

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Geoffrey Wilson;Futura Generation;Founder, Director, [12]

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Yes. I mean look, to me, the great thing is that listed investment companies do trade at discounts and premiums. And to me, that’s — one of the sort of the holy grails of them is you can buy $1 of asset for $0.80. And you’ll — if you’ve been a shareholder for a period of time, you’ll be aware that FGX started its life at a bit of a discount, even though the — it’s quite bizarre, the capital raising, we raised $200 million for FGX, and I think we had about $300 million of demand. But it started its life trading at a bit of a discount. And then once the sort of the equilibrium had been reached, had moved back to NTA and then went to a premium. And where FGG, where we actually — it wasn’t oversubscribed. So it’s the classic — effectively, I think it was FOMO in FGX. So it was oversubscribed, and everyone tipped up because it was oversubscribed. FGG, which wasn’t oversubscribed, out of the blocks, in a very short period of time, went to a premium.

And then, as Louise said, we — to me, the bizarre thing is we raised money a year or so ago at NTA, people put money in. And for various reasons, they’re begging you to get an allocation, and these are some people I know that are highly intelligent investors and for various reasons, they’re now selling at a discount. And to me, that just provides the opportunity. And as Louise said, look, with WAM Capital — when we floated WAM Capital, it traded — now 20-odd years ago, it traded at a — first 2 years, it traded at a 20%-plus discount. And in the third year, it started going to a premium. And it trades at discounts and premiums over time. So to me, I’m incredibly confident both FGX and FGG will trade at NTA, if not a premium again.

Obviously, this period we’re in is a period driven by fear. And so sanity sort of gets thrown out the window. When will that sort of fear or panic finish, I don’t think it’ll be in the short term because volatility creates another level of fear. And also with the noise we’re hearing, particularly sort of the under — what’s happening in the U.S., it’s taking time for that sort of really the testing to be undertaken properly. And we’re sort of in that — the potential lockdown period, which makes people more fearful. And at some point in time, we’ll get to normalization. And I was talking to someone this morning and I — if every morning, you wake up, they announced how many people have got the flu and how many people have died from the flu, of course, we’d probably be a lot more fearful about the flu.

Now 350,000 to 650,000 people die a year from the flu. Now I’m not trying to minimize CV and the impact that it could have. But what we do know is that they — let’s assume a vaccine will occur, will be found and/or let’s assume herd immunization occurs, one or the other, in a couple of years’ time, it’ll just be — I was talking to a doctor this morning. He’s an investor in our funds, and he was just saying there are a lot of coronaviruses. It will just be something else we’ll deal with as we deal with everything else. The unfortunate thing is we’re in that sort of fear and panic stage. So sanity gets thrown out the window, and that’s — the question is, effectively, how long will that last? But yes, we’re confident that they’ll get back to NTA. And that will just — yes, it’s — yes, we know what levers you need to pull to get that as well.

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Operator [13]

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The next question is from [Jared Frank], are the quoted performance figures before or after the 1% charitable donation?

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Geoffrey Wilson;Futura Generation;Founder, Director, [14]

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They’re before.

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Louise Walsh;Futue Generation;Chief Executive Officer, [15]

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Yes.

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Operator [16]

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And the following question is for Blake, and it’s from [Malhar R.], can you please comment on Downer and whether its balance sheet is stretched?

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Blake Henricks;Firetrail Investments;Deputy Managing Director, Portfolio Manager, [17]

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Yes, sure. So Downer is one of — well, it is Australia’s leading engineering firm. They build a lot of roads, work on a lot of hospitals and they’ve got a lot of engineers behind them. So they do that kind of nitty-gritty work. It’s not sexy, but it’s pretty recurring. I think around 60% of their work comes from state and federal government. So it’s quite a good business. Downer’s been underperforming recently, and I’ll put that down to 2 things. The first was some problem contracts that they had. One was in a mine, Carrapateena with OZ Minerals. Another one was an Orbost Gas Plant. It’s a very small part of the business. It makes up well less than 5% of revenue. But they had some problem projects with it, and so there were some one-off write-downs associated with problems on those projects. So clearly, the market doesn’t like that.

But Downer is transitioning to a services-based business, so much more of that state government roadwork, hospitals and those kind of things. So we think they can easily get through that. At the same time, they’re also looking to sell 2 assets: one is a mining business, and the other one is a laundries business. Now clearly, with everything going on in the market, it’s going to be a little bit harder to sell those. But you’ve got to keep in mind that the sale of those assets is not about the balance sheet. It’s much more about focusing the business. And both of those processes have been ongoing, including the mining, for about 18 months. So the stock’s trading like it’s got a balance sheet issue because these asset sales may not go through. But our very strong opinion is the balance sheet is rock solid.

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Geoffrey Wilson;Futura Generation;Founder, Director, [18]

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And what you find is, in these times, where — whether it’s GFC or — yes, in these difficult times, and that was — I find interesting, yes, Blake’s comment about Qantas. The — and interestingly, you’re talking about Qantas and Virgin, you’re better off — you’re investing in — if you invest in the stronger companies, they’re the ones that actually they prosper. I know it might seem bizarre, but they’re the ones that prosper in these periods of significant dislocation. Even though it’s painful when you’re going through the dislocation, they’re the ones that come out the other side and actually, you end up creating more value.

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Operator [19]

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And now we will open the line up to phone questions. (Operator Instructions) And it appears there are no — I apologize, we do have a phone question in queue.

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Unidentified Analyst, [20]

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Yes. I’m just curious, out of the — with the banks, the way they’ve been and what have you, can you just give me an opinion on which of the banks you think is doing better at the moment?

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Blake Henricks;Firetrail Investments;Deputy Managing Director, Portfolio Manager, [21]

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Yes, sure. So Blake Henricks here, thanks for the question. I mean as Geoff said, the biggest — the best companies usually come out the other side of these kind of things a lot better, and in that is Commonwealth Bank. They are the best capitalized. They’ve got the strongest retail franchise and a lot of the remediation and a lot of the issues going through the banking system at the moment, Commonwealth Bank actually dealt with a few years ago. So it’s definitely not the cheapest bank. But if capital preservation and risk is one of your key concerns and the strength of the dividend, I’d say Commonwealth Bank is probably best placed to ride out what’s going to happen.

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Geoffrey Wilson;Futura Generation;Founder, Director, [22]

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Actually, just internally, we’re talking about the banks yesterday. Matt Haupt who runs our Leaders fund, he gave me the statistic. I can’t remember exactly what it was, but it’s like from the — since the GFC, I think you’ve made — these numbers are wrong, but it’s something like 20% in NAB, and you made 2.5x your money, 230% in CommBank or something like that. And to me, that’s the classic example, isn’t it?

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Blake Henricks;Firetrail Investments;Deputy Managing Director, Portfolio Manager, [23]

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Yes.

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Geoffrey Wilson;Futura Generation;Founder, Director, [24]

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That the high-quality companies end up — if you can take a medium, long-term view, I mean the incredible thing is, as I said earlier, in a few years’ time, yes, this will be, oh, that happened in that period. Yes, we’ll be all over that. It will be everything’s back to normal. And it’s those companies that you’ll get the better, yes, performance from.

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Operator [25]

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And we are back to the webcast questions. So the following question is from [John Bjorkman], do you see a repeat of 1973, 1987 or 2007 where the market falls greater than 50%? We have seen the debt cap bounce, so is it downhill from here?

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Louise Walsh;Futue Generation;Chief Executive Officer, [26]

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I think that’s one for Geoff.

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Geoffrey Wilson;Futura Generation;Founder, Director, [27]

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No, no, no. Hey, I like the observation. I like Chris’, we just observe, not predict. Probably, with our shareholders, they want us to predict as well. We’re always wrong. Now I’ve been bearish for 3 years, I think. The — yes, we’re doing a lot of analysis on it. So what do we got? We got ’73, ’87. The interesting thing is — what does this feel like most to me is — well, ’87 was incredibly painful, but that was very quick. And the good thing about the ’87 pain — and ’73, sorry, I was at uni in ’73, all I remember in ’73 with the oil shock is — I was brought up in Melbourne, and I remember we were talking about it at uni about how everyone was selling their big cars. Luckily, I had a little Mazda 1200. And they said, all the property are down in the Mornington Peninsula. It was all falling because people wouldn’t be able to afford the petrol to drive down to the Mornington Peninsula. Anyway, that was a great buying opportunity then. So that’s all I can remember in ‘ 73.

’87, obviously, was very swift. And that was the Dow fell 508 points on Monday, the 18th of October, and that was 22-and-a-bit percent fall in the market. The interesting thing is 2 years later, the Dow was actually above its — above the ’87 high. Now that didn’t happen in Australia because Australia had had a — that’s when we had the entrepreneurs. The market had gone up significantly. I think I said jokingly to a journo the other day that he quoted me strangely, 1st of October ’87, the ASX created an entrepreneurs index, which was 10% of market by capitalization. Six months later, it was nothing. And see, what happened in Australia is we actually lost. Like a lot of those entrepreneurs went under. So we actually lost 10% of our market capitalization. So it’s sort of the weak disappearing where the strong came back. And that’s why it took Australia about 6-odd — 6 or 7 years to get to its previous high in ’87.

But this, to me, volatility — and there was a lot of volatility before the ’87 crash. So volatility scares people. The — to me, this is a — this period is a combination of ’87, the GFC, in terms of how it feels. Like the GFC, I remember that January where I think I took the first couple of weeks of, and I came back into the office about the 15th. But I think the market have fallen every day. Those first 15 days, that had fallen 1% or 2%. And I remember saying in the office, I said, look, it’s got to bounce. And I think it fell for the next 10 or 12 days every day. So yes, we are waiting for that debt cap bounce which never occurred. I mean what we do know — well, officially, the Dow’s — actually, the S&P didn’t get there, but the Dow’s in a bear market, and the Australian market’s in a bear market. Yes, we do know the U.S. was the longest bull market ever. And so therefore — well, one of the — yes, so we’re in a bear market. How long will the bear market last? The average bear market, I think, since 1900 has been — I think it’s been about 1.5 years, and I think the average fall is about 35%. We’re actually doing some work at the moment on the different types of bear markets. [James], what were the 3 types? It was…

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Unidentified Company Representative, [28]

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Events, cyclical and structural.

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Geoffrey Wilson;Futura Generation;Founder, Director, [29]

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Yes, events, cyclical and structural, and you get different results. And what — and effectively, the — I think it means it’s not as painful. So to me — again, it’s a guess. Doesn’t mean, will this — well, actually, a builder I know texted me yesterday and said, “Hey, look, all my friends are saying buy the market. Do I buy?” I said, “Hey, keep building. Keep building and make your money out of building,” because…

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Louise Walsh;Futue Generation;Chief Executive Officer, [30]

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Good advice.

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Geoffrey Wilson;Futura Generation;Founder, Director, [31]

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That might be — like things might get a bit tough there in the next little period. But we do know the market’s a predictor. The market’s fallen. The market is predicting the economy is going to slow down or go into recession. Yes, that’s all — in theory, that’s what the market does. And there will be a great buying opportunity. Do I think it’s here? I think we’re just a bit early. I’d like potentially to see if there’s going to be more pain, to see if we do go into this sort of — if the lockdowns are a bit more significant, when people are trying to flatten out the CV growth, which they talk about spreading. So to me, yes, if I had spare money, I’d be keeping it in my pocket at the moment. But again, I’d be waiting for this to be a great buying opportunity. I remember, during the GFC, I think in one of our Chairman’s addresses, I said this will be the greatest buying opportunity in my lifetime. That was back then. So to me, it’s just a little bit early in terms of the pain, if you don’t have to invest.

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Louise Walsh;Futue Generation;Chief Executive Officer, [32]

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Okay. Thank you.

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Geoffrey Wilson;Futura Generation;Founder, Director, [33]

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And what does Peter Lynch say about getting — what’s that great quote? That more money has been lost trying to forecast the market. That’s why in sort of Chris’ comment about it’s better observing and not predicting because, yes, with your predictions, you’re always wrong.

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Louise Walsh;Futue Generation;Chief Executive Officer, [34]

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All right. Well, look, thank you. Thanks, Geoff. And on that note, thanks again to everyone for dialing in. I know it’s 12:00 now, and we did promise you we’d be finished by then. I particularly want to thank our pro bono fund managers, Blake Henricks and Chris Dixon, for joining us and for their words of wisdom. The recording of the call will be available, we think, tomorrow. And it will also — I think there’ll be a link actually in our NTA, our investment report that’s coming out tomorrow as well and also will be on our website. Please also dial in this afternoon at 4:00, 4 to 5, for the WAM investor call if that’s of interest to you as well. And please enjoy the rest of your day. Thank you, everyone.

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Geoffrey Wilson;Futura Generation;Founder, Director, [35]

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Yes. And also just on the toilet paper, I was talking to someone about that, to me — isn’t it fascinating? So we’ve got one of the most competitive toilet paper industries, I think, in Australia. Because I think we’ve got 3 producers here and most other countries sort of have 1, how — to me, they’ll be rubbing their hands. But I just got a little text from my daughter that’s — who’s working in New York, and they’ve been a little bit behind the curve in terms of the panic. But she just texted me and she said — she works for a little sort of a little technology company, a really small one, and working from home has just been applied to their office.

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Louise Walsh;Futue Generation;Chief Executive Officer, [36]

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Oh, there you go.

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Geoffrey Wilson;Futura Generation;Founder, Director, [37]

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So and — she’s not at Google. She’s at — there’s only 30 staff members, and they work — they’re down in the East Village. So in terms of the fear and panic…

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Louise Walsh;Futue Generation;Chief Executive Officer, [38]

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I think it’s just starting out there. Hopefully, she’s not stealing the toilet paper from work.

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Geoffrey Wilson;Futura Generation;Founder, Director, [39]

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No. No. No. She went to the — like things were only sold out yesterday, I think, over there. Like they did take — because a lot of people are believing the Trump — believing Trump, I think.

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Blake Henricks;Firetrail Investments;Deputy Managing Director, Portfolio Manager, [40]

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Well, Geoff, I know you’ve — we’ve gone a little bit over. But I’ve got to tell my toilet paper story because it’s clearly running out. It’s off the shelves. But people have been buying a company, AHY, Asaleo, because they’ve been the owner of Sorbent brand, and so people saw that as a good way. Now if you think about it, short today, will probably be long toilet paper tomorrow. So over a 6-month period, it’s probably not that good. But here’s the rub: 18 months ago, they sold the toilet paper business, and yet the stock was still up 20%, so the world has gone absolutely mad.

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Geoffrey Wilson;Futura Generation;Founder, Director, [41]

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I’m interested. Okay, both Blake and Chris, obviously, did well with the offer on the toilet paper. It is the — do you think, like if I were the producer of toilet paper, like you’ll actually want FOMO? Like do you think they’re holding back supplies because, in theory, you want people to overbuy. And I was trying to think, okay, to what extent does toilet paper become redundant? Now — no, no, because in terms of storing it — because in theory, that’s what you want. You want them to overbuy and then run out of time because of that. But I was thinking that maybe if they put it — it depends where they keep it. Yes, maybe it’s in the garage. It gets a bit wet. It gets a bit moldy. I mean in theory, that’s what you want. You want people to overbuy now so there’s some — so some of what they purchase doesn’t take from their future sales.

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Blake Henricks;Firetrail Investments;Deputy Managing Director, Portfolio Manager, [42]

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Yes. Higher inventory. Permanent.

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Geoffrey Wilson;Futura Generation;Founder, Director, [43]

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Correct. Yes, it could be permanent.

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Louise Walsh;Futue Generation;Chief Executive Officer, [44]

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Well, absolutely.

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Geoffrey Wilson;Futura Generation;Founder, Director, [45]

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Anyway — hey, Chris, have you got any toilet paper stories?

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Christopher Dixon, Cooper Investors Pty Limited – Portfolio Manager [46]

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Well, we own a Japanese company called Unicharm, Geoff, that produces baby nappies and female sanitary towels, and they’re pretty much running 24/7 full production lines. And I think they’ve sold about a full year’s worth in the first couple of months of this year. So it’s small for them, but it’s going to start actually having a material impact on earnings to some of these guys. So yes, it’s funny, isn’t it, how you think food and medicine will be the thing that’s sold out, but people are more interested in what’s happening in the dunny.

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Louise Walsh;Futue Generation;Chief Executive Officer, [47]

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Well, on that note, I paid $9 for 6 rolls yesterday. It was double length and organic, but I paid $9 because I couldn’t get it anywhere else.

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Geoffrey Wilson;Futura Generation;Founder, Director, [48]

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Have you been at Double Bay? They are all going to Double Bay. I’ve got to check every day just out of curiosity, I was back in Double Bay this afternoon.

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Louise Walsh;Futue Generation;Chief Executive Officer, [49]

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I know. I think the supplies are good at Double Bay, I’ve heard. All right. Well, look, I think we better sign off. I think everyone on the call has probably got a toilet paper story. So thank you again, everyone, and we’ll see you soon.

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Blake Henricks;Firetrail Investments;Deputy Managing Director, Portfolio Manager, [50]

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Thank you.

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Geoffrey Wilson;Futura Generation;Founder, Director, [51]

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Thanks.