Future Generation Global Limited (FGG) Earnings Call Transcript

It's 40% below the value of their assets. So if they are liquidated...

40% of the book value, Let alone the mark-up and adding on top. So there is extraordinary value out there, in my opinion. But just one wants to touch it because we Up until now, it's been too easy to make money in our AI, but where is the catalyst. And the market these days I don't think it looks really more than 3 months, 3 weeks ahead -- so I do think there's opportunities there. We've been slowly buying a few of our businesses with those qualities, but we haven't made a huge portfolio reallocation just yet. But we're certainly looking at a lot of prospects, and we've got our list ready for when and if we do move bigger.

We always like to ask about market outlook, but as you just said, in about a 3-week kind of cycle at the moment. So maybe that's a bit of an reasonable request?

I was having a chat to my colleague before I came here, what's the outlook for the market, and we both agreed there wasn't much of 1 that you could confidently your hat on that. Look, all I'd say is the recent sell-down we've had in AI has been historic. It's been a -- on some measures a 1 in 50-year event. So we've had the momentum factor, the U.S. tech momentum factor, has fallen in the last month, the most that have fallen in its history, more than in the tech rack more than any other period. And so you ask me what my outlook is. And I'll tell you that the market looks 3 weeks ahead, but history tells me that when you have a dislocation that big or a movement that big, then generally, there's opportunities there. And I suspect that's an area that may recover given we've just had our 1 come out this morning spectacular results. We've had Microsoft day before or 2 days before, equally great results. So I suspect near term, the market starts to tentatively look back at AI. But then outside of that no, we're in a circumstance right now where EPS growth in the U.S. is really good. We've got the highest EPS growth in a number of years. And that EPS growth is quite broad. One of the challenges of the U.S. market over years has been there's good EPS growth, but it's 7 companies at the top that are accounting for 80% of the EPS growth, whereas now we're in a situation where that growth is now broadening out, and there's a lot of reason to actually be on the MAG 7 and other companies. So the industrial measures like the ISM and things that measure manufacturing activity are all very healthy. yet manufacturing-related real economy stocks haven't really moved too much. They've done in the K. I mean, the Dow is at a very attractive level. But you haven't really seen the market gravitate towards them in a big way. So look, I think the market needs to pick off or part of this AI mini meltdown that we've had on fairly of the view that AI is a multiyear investment cycle, and we are going to get many, many more years of AI, unfortunately or fortunately dominating narratives depending on how you're placed. But then outside of that, we've got a real underlying recovery in the U.S. economy as well. At the same time that a lot of other global economies are relatively weak still. So I think the lesson there is that, for me at least, is that you see EPS broadened out and so your portfolio holdings maybe should broaden out as well.

And probably the final kind of unreasonable question on this, could you name names? Could you tell us that you're particularly excited about and think has a great opportunity at the moment?

I'll give you 1 stock in a basket of other stocks. So the -- I'll give you a really nice boring white bread, easy-to-eat kind of stock, which is Corpay. Corpay is a U.S. payments company. Corpay, CPAY is the ticker. It's the largest stock in our portfolio, it's effectively, as the name might suggest, it's a closed loop payments business and then they have an FX , a global FX side or cross-border FX side as well. Just to give you some stats on this company, it's found a lead. The CEO or the Chair, Ron Clark, has been there for 25 years, still owns a lot of the business. The company has grown EPS, earnings per share, by 18% over 20 years or 25 years, and that puts it in 1 of, I think, 2% of the S&P 500 that's actually managed to do that. So this business has great pedigree. It's an elite business in that earnings compounding earnings sense. Why I like it today is for a lot of reasons, but one is that the EPS growth is still very strong. They're still doing 20% EPS growth. They've got a core payments business that they use cash from that to buy a lot of other businesses, particularly in the cross-border side, which is growing very strongly, and they're a small player in that, so they can continue to expand. So they've got plenty of growth runway from an acquisition standpoint, from an organic growth standpoint, but also from their own shares. They are cannibals of their own stock. They're buying back around 5% to 8% of their stock a year. And they're only on 13x piece.

So what's the market over there?

Probably closer to 20%. So you've got a business that has beaten 98% of the market over 20 years. trading at nearly half of the market with EPS growth at twice the market. So it's just an example, I think, of a business that has sat in a relatively unloved sector. People haven't like payments the last months because AI has been more exciting, and there's been other narratives around disruption in payments, which just haven't come true. -- you've got a business that is just still doing what it's been doing for 25 years. while buying back stock and doing the right thing by shareholders. So I think something like that is -- I would imagine it would be very difficult to lose on that over on a 3-year view. I think you're going to be quite happy owning that over that time frame. On the other side, the flip side on maybe a more short-term basis on a more looking for short-term disruptions that maybe have gone too far. We've seen a lot of stocks wash out in the AI stack over the last 4 weeks. Not all of those stocks are created equal. There's a lot of AI stocks that have the incredibly expensive valuations and you're getting high earnings growth for that. or maybe their earnings growth isn't very sustainable because they're inherently cyclical businesses. What we are looking for in that AI trade today what we consider to be structurally well-positioned businesses with a unique asset and contracted long-duration cash flows. And we think the AI -- the listed AI data center space is exactly that. So these companies have all fallen 30%, 40%, 50% over the last month. Part of the reason for the -- how much they fall and there's been a lot of hedge fund liquidations and those hedge funds own those stocks. And so there's been for selling in those businesses, often a great time to be looking at stocks when you've got a force seller who owns a lot of the stock. But these companies have all one thing in common, which we really love, and that is access to power. The #1 shortage in the AI trade today is power, but you can always make more GPUs, you can source more memory or make more memory. You cannot just create power overnight. Creating power is a very, very difficult long-term thing. So these data centers or data center prospects all have access to fire. That goes back to their history as Bitcoin miners when they all go up power on the cheap, almost for free in Texas. But they now have power and the #1 thing everyone needs is power. So these guys have power. A lot of them also have contracts. So these aren't just pieces of land with the power line. They're actually companies that have already signed contracts with Tier 1 clients, hyperscalers with major semiconductor companies. And so you've got companies today that have -- they've got existing power in the -- we got an existing portfolio of land assets and power. They've got existing contracts that they've already signed and then they've got a land bank and powerbank for future growth as well. And what's happened in the last 4 weeks is A lot of these companies have actually traded below the value of their already signed contracts. So you could consider them to be trading at a discount in the their core NPV, however you want to phrase it, but they've got enormous growth on top of them as well. So one in particular that we like is called Core Scientific, CORZ is the ticker. Just to give you some numbers, you'd say 10 billion market cap company fully diluted. And it's going to do around $1 billion of free cash flow per year in 3 years' time, all contracted with high-quality customers. So you're getting a 10% free cash flow yield on that. And then they can actually triple that business in the future as well based on existing power and not signed contracts, but agreements with customers as well. So I think there are very lopsided opportunities now where you can actually buy real businesses, hard assets. difficult to replace assets. We've signed contracts and all the growth as well and you're not really paying much either, frankly. So I think there's a lot of hunting to be done in the AI space, but the data center side, I think, is particularly interesting.

Good to hear there's some opportunities out there. We've asked you all of the questions there, Nick, I'm going to go to the ones that are coming through. So if anyone has questions, please do submit them through the website, and we'll try and get to them. Maybe to give Nick a rest, there's a few that are probably appropriate for you here, Geoff. I'll bucket them together. But Marian, Garth and others are asking about the CGT changes will have a detrimental impact on investment levels in the fund, particularly for retail investors, how do you see ways around that, how does the tax work one of the impacts. So do you mind maybe giving a quick overview?

Okay. Yes. So let's -- in terms of Future Generation, the impact, the only impact it has on FGG is positive. Now why do I say that is because the well, maybe we take a -- let's take a step back. So the capital gains tax, which has been bought in has been legislated and bought in the budget. -- impacts all assets in Australia. Now we all thought it was only going to be property. But then unfortunately, it's Australian shares and Australian businesses. And when, Nick, you were talking about in the U.S., how the big tech companies, 100% of their earnings, they're plowing back into CapEx. Unfortunately, with this new legislation, that will never happen in Australia. Because what they're doing is they're forcing companies that make money in Australia, whether it's private companies, 1 of the 2.7 million private companies or a lot of a couple of thousand listed companies. It's in those companies' interests to -- like if they make, say, $100, they pay $30 tax, they have $70. They're better off paying at $70 of fully franked dividend, particularly if you're a 0 taxpayer a young student or a retired person because you get the refund back. So you'll get that $400. If you -- if it stays in the company and so they pay $30 tax and the value of the company goes up by $70, and then you sell the shares, you're paying another if you're a student or a pension at your tax payer, you're paying another 30% tax on at $70. So you're paying 51% tax of its capital. If you're a maximum 47% tax payer, you're paying 62.9% if the money is held in the company. So no, it's not -- in an Australian company, they're incentivized with this new legislation to pay out 100% of their earnings, not to invest back into the business, not to invest in their staff. It's just like to me, it's a disaster in terms of the negative impact it's going to have on the Australian economy. So in terms of -- and in terms of how people's behavior change, now like the 7.7 million Australians that shares outside their super. I'm sure people have seen or if they haven't seen the -- there's been a number of articles talking about if your the asymmetry of returns, you -- if you have a portfolio of say, well, they use -- I think someone used the 4 banks. If you owned them over 10 years. Commbank has performed exceptionally well and the others haven't performed as well. And so in real terms, Commbank has made a lot of money for you adjusted for inflation, but those others haven't. So you haven't lost money in absolute terms, but you haven't made money in real terms. So if you sold the whole portfolio, I think your average tax rate will be 60% or 70%. I guess just because the actor on return. So it's actually in no one's interest to have a portfolio of shares. So that's where a listed investment company or an ETF, you're better off having your money in a pool structure. And that's why like [ Jim Charmers ], unfortunately, as gas lighting all Australians when he put on LinkedIn or Twitter how or how fantastic it was in June that we had record number of companies being established, 43,000, but they are established for 2 reasons. One is because if you have more than $50 million of revenue, you only paid 25% tax in your company. Two reasons. And the 2 reasons are, if you're an investor, you're probably nearly better off. You can do it in a listed investment company or you can do it an unlisted investment company, and you only pay 25% tax. They're not real operating businesses. And with the trust structures, you're paying at least 30% tax, and it's actually -- there's double taxation in the trust. You're better off having a company structure. That's why unfortunately, the company structures. But in terms -- from an investing perspective, and it's going to skew people -- so if you're looking at getting a 10% return in Australia in the old days, well, how you wanted that 10% return is capital. because if you're a 0 tax payer, what's half your marginal tax rate, 0. So you make it all, you pay no tax. And if you're a 47% tax payer, if you're getting all the return in the old days in the old regime as capital, you're only paying 23.5% tax. But now what do you want? You actually want it say inflation in Australia is 3% or 3.5%. You want the capital growth to be at 3.5%, then you pay no tax on the capital growth and you want through other would be 10%, you're on the other 6.5% or 7% to be as a fully franked dividend. And so everyone is going for yield. So like, to me, Future Gen all listed investment companies or ETFS, well, listed investment companies are probably in the best position because we're giving people a 5% fully franked yield, which sort of grossed up at 7.1% or something like that. So yes. So to me, it's actually very positive. And to the extent where one of our funds WAM -- this is 1 of the Wilson Asset Management funds, WAM income maximizes that. We've had -- since the budget, we had a lot of brokers and financial planners ring us and say, "Look, can you raise some money and we sort of just increase the size by 1/3, raised $170 million in, was oversubscribed time demand. So to me, Future Gen Global is beautifully positioned. And I think psychologically, I actually think I was chatting with Nick before we started. I think psychologically, Australian investors will be looking at like in theory, we're going to make the big money in growth. And so you've got companies that will -- they are investing for growth, as you're saying, they're putting 100% of their cash flow in to grow their business. We're in Australia. -- the new tax regime means they should spend 0 of that cash. Yes, just yield. So to me, that's -- to me, I think there'll be a skew of people in Australia looking for sort of low growth, they'll skew to the big companies, yes, the top 10, top 20, low-growth, high income paying and there'll be a lot of people skewing -- looking for global equities. And in terms of where do you put your money, you probably -- obviously, your home is not taxed at the moment. your principal place is, I'd assume so. They're going through everything and superannuation and like super still, your capital gains tax, even if you're on the top right, it's only 26260 percent. That's if you are paying -- if it's over $10 million. So I think you say under $3 million in super, keep putting it into super. And -- but then in terms of how -- the money in super, what are you going to do with that? Like I know personally, now I'm putting all my risk in the superfan because I want growth because I'm paying a lower tax on growth in a super fund. No. So my name I want yield. In my super fund, I want high risk that how bizarre is that you look at broadly the message you're sending to people. And also if you're a person earning less than $225,000, that's what -- $225,000 in Australia is when your average tax rate, it's 30%. But if you're earning less than that, you're better off not being an investor. You're better off being a trader because if you're a trader, then you're paying tax at that marginal tax rate. If you're a student don't buy and hold it for a year because you're an investor there, then you got to pay a minimum of 30% tax or a pension up, just trade it. And what a weird psychology we're trying to tell people.

Sounds like the winners are accountants.

Yes, and valuers.

There's a few sort of market-related ones as well for you, Nick here one, this kind of topical at the moment is that a hedge fund just collapsed with some holdings that overlapped with yours. How has that affected the share price of some of those? How do you look at that?

Yes. So we -- a lot of our AI holdings had crossover each fund that collapsed and got liquidated last night. Look, the last 3 weeks have been...

And what was it -- like was it a 24-year old or so?

Yes, he was a young kid who worked at OpenAI, which is one of the big large language models. He left at OpenAI, started to fund and did incredibly well. He did 1,200% returns over 2 years and then a bit of risk there, collapsed in 4 weeks. And so what we found out after fact he was 4x leverage. And here Shawbrook was not within the same factor. It was not where it should have been. So what we've seen is a huge unwind of his book. He wasn't small. He was running USD 40 billion. That was then crossed up 4x. you've seen over $100 billion, I think, coming out of the AI stack or ecosystem. So the Gearbox, we earned a lot of similar stocks. So the last couple of weeks has been a bit painful in that sense. But he was -- his portfolio was bought by Citadel last night. It was announced. And a lot of the stocks that have been under pressure actually went up 20%, 30% last night because the mechanical selling pressure of getting margin called each day was just gone. So I think that's partly why and also more broadly for AI. You've just had a huge amount of liquidity just get washed out and we've now had the liquidations, I think. I think maybe there's 1 or 2 to come, but certainly is big. So that's why I think coupled with good results from the hyperscalers, I think people are looking to tip it to back in again. But it's been an uncomfortable month, but I think it looks like it's stabilizing, if not improving again.

Another one1 here from James, who I think knows your portfolio quite well saying, you invested in Sharon AI via convertible note. Do you still hold that? Is it incompatible now or listed equity?

Obviously, he's done the work.

Yes, exactly. I thought I should ask that one. So we still own Sharon AI, I share on yes. we participated in the convertible note. The price of the convertible note, I think, at the time was around $13, $14. And I think around say it's $45, $50. So it's been a good investment. We still hold the convertible notes. From what we understand, the convertible notes will convert into equity sometime soon in the next month or 2. But I don't have a specific time line on that other than the are going to convert imminently in the next -- now we started the funding before they listed. Correct, yes.

There's one here from Jennifer, which makes me worried that it's Jennifer Westacott, the Chair of Future General Global. Then if it is, I'm going to ask you. Future generation is now trading at a small premium. How is the discount closed? What have you done to achieve this?

Yes. You can talk to that.

You tell me what to do.

No, no. Well, I mean, to me, the funny thing about listed investment companies is a sort of first year economics. And I know I shouldn't -- I suppose we're talking about capital gains tax, I only did first year economics. So I learn about supply and demand. Unfortunately, our current treasury didn't do first your economics. The -- but anyway, so I'm not myself a balance -- the question is, how do you -- how -- where does it -- where should a list investment company trade what is equilibrium Equilibrium is actually NTA. It's the value of the assets. Now how do you get something to equilibrium in theory, more supply -- sorry, more demand than supply. And when we're trying to go back a year or 2 when we're trading at quite big discounts, then obviously, people were prepared to sell at below what the value of the assets were. Now why do they want to sell at that price? Like who knows? -- there might have been liquidity problems, who knows. But we didn't have enough buying for them to be trading at NTA. And so there was more selling than buying. Eventually, I mean, one of the reasons why we brought [indiscernible] as Chief Investment Officer, was another set of really good quality hands to be communicating with shareholders, so they truly understand what they're investing like all of us as professional investors, the more you understand the company you invest in, the more comfortable you are with the decisions you make around investing in that. And you might buy and sell it. it doesn't mean you're going to own it forever, but the more you know about the company. And so what we've been building, Liz has been onboard, more recently with Bonnie, replacing Caroline, is to make sure that we're really communicating clearly with our shareholders. So they know exactly what they've invested in. We expect -- we meet their expectations or exceed them. and you effectively tighten up the register. You actually reduce the selling pressure by getting more buying. It eventually goes to NTA and at the moment, I think it's a 4% or 5% premium above NTA. So now people are saying we're prepared to pay more than the NTA. Actually, the interesting thing is Future Gen Global and Future Gen Australia I actually think their equilibrium is an NTA. I actually think it's a premium because, as you pointed out early on, like it's a win-win-win for everyone. The big winner, I think, in this is the investor or the shareholder because they're getting access to you nearly at half price, not quite like you talked about $175 million of costs and $100 million. The managers haven't taken their fees, et cetera, and $100 million go to charity. So that on a $75 million, which is sort of 40% of it goes -- is going to the investor. So to me, you could argue, if you did a net present value of that, you probably get a 6% or 7% premium should be the embedded premium in FGX and FGG.

There's a few here that I might just quickly answer. One is from David, we paid -- normally paid 2 dividends per financial year. Last year, we paid $3 million will you pay 2 or 3 this year? Or will it revert to 2 dividends as per the past years? Maybe, you can...

We on the board, I would assume the reason we pay the special was really -- the fact that we had traded at a bit of a discount, it was to reward shareholders, we end access banking -- we've got lots of -- we've got probably a couple of years of franking up our sleeve. So if the market does wobble, we can keep paying the growing stream of fully franked dividends. But yes, I would say just assume to, and interment final, we did a special was just a one-off. There could be another special at some point but that was the plan.

Another question here about naming a manager that's no longer part of the group and whether FGG is actively considering new funds for the portfolio. I might just comment on that. But we're very fortunate that there are a number of fund managers in Australia who are really came to be part of the future generation family. So we're always able to maintain a bench of managers that we think we could introduce if they fitted into our portfolio at a point in time. So managers do come in and out of the portfolio. They come in and out for lots of different reasons, but one of them is just how they fit with the other managers that are in there to make sure that we've got a complementary mix and a bunch of people managing the money. So yet, we do actively manage it both with a number of -- and who the managers are in the portfolio, but also around the tolerances and the weights within the portfolio. That's all managed in conjunction with the investment committees. They're all super highly credentialed people. and we use a lot of institutional tools in order to optimize the portfolios. There's a good couple here to sort of maybe finish on, one for you. Nick, about why you do it, why you're working for us for free.

I mean it's a pretty easy one to answer. I've got 4 kids. I'll have the youth orientation to all of the charity partners. A few years ago, 1 of my kids became quite real. We spent a lot of time in hospital. And fortunately, we were -- had all the resources and everything to get through it. But -- there were a lot of people around us who didn't I saw firsthand the impact of charities through the hospital system. So I think it's just an unbelievable cause. And from my perspective, from professionally, it's really quite easy for me to incrementally manage these and give my time, talk to you guys occasionally. So I think it's a nice win-win for me. And I can't remember who it was from now, but someone's asked why you started future generation at the start of this whole process, presumably easy.

No, I happen to be in the U.K. by was -- so we were -- yes, I was over there. I was reading FT and there was an article to you about a guy, Tom Henderson his name was he'd come from a hedge fund and his -- I think his great grand fabs up Henderson Asset Management. But he said they gave all the money away, but I got here to make his own money, but he set up a structure like this, where it was called a battle against cancer Investment Trust. And so they're 1%, most of it went to the Institute of Cancer Research in the U.K. And part you also spread it to, I think, 13 other charities. But I just -- he used the listener -- well, they're calling him Mr. Investment Trust over there, which is the same as a listed investment company here. And to use that structure, and I'm reading about a whole wow, like we can do this back in Australia because that's most of our business are listed investment companies. And so come back and then it's like you socialize it, you talk to people about it and then try to find -- well, we actually didn't believe we could raise much money. So we actually found that shell, Australia -- AIF, the Australian Infrastructure Fund, we and the Melbourne Airport was a great fund, but it got sort of attacked we could have been the GFC yet. I think it got attacked during the GFC by some hedge funds. And unfortunately, the board wasn't strong enough and so they rolled over and so assets that had gave what were money back into was just a little. There was -- I think there was $6 million left in it. And then we thought, if we're lucky, we'll raise $20 million. And then that was FTX and we had a prospective of 200 million raise 200. But yes, that was the market. And why do it? It's because I think my experience and just Nick sort of parallel it is we're all human beings. We've been incredibly fortunate in our lives from a working perspective -- and the financial services industry, like this is -- you've got to take that off to everyone in the financial services industry. It's the fund managers, but the ASX doesn't charge us listing fees. -- like the service providers do it pro bono, the lawyers, et cetera. The brokers when we raised the money, they did at pro bono like everyone is in an it, and it's an opportunity to really give back. And that's -- I think that's where it sort of -- it works well.

Yes. Well said. And yes, it's because of all those partners that it kind of works. Thanks very much, Nick, for coming in on a Friday afternoon. It's very interesting to hear how you've navigated these markets yes, good luck for the future. Geoff, thanks for joining us. Thanks, everyone, for joining. There's a survey will appear in a moment on the screen. Would be really grateful that you we're able to give us some feedback and ask any other questions. I know there's probably a couple of other questions I missed. We will endeavor to get back to you on those next week. And as I said earlier, we'll be hosting a social impact whether or not in September. Invites for that will go out fairly soon. That's going to be hosted by Bonnie, my colleague and also Jennifer Westacott, who is the Chair of Future Generation Global. But until we see you next time, thanks very much for joining.