A charitable fund: Future Generations Group

This week’s Fund Manager interview is with Louise Walsh, the CEO of the Future Generations Group which was started by Wilson Asset Management about four years ago, Future Generations Investment Company and then more recently, Future Generations Global. 

Each of these are listed investment companies. They are basically charity providers. What they do is they’re funds of funds. The money is managed by other fund managers, somewhere between 15 and 20 fund managers, and they each provide their services for free and the funds, that is to say, FGX and FGG, which is their codes, pays 1% of the funds each year to charities. 

They list the charities and they keep you up to date, and if you put enough money in you get to choose a charity – but you have to put quite a lot of money into choose the charity, otherwise it just goes to the ones they choose. But I think it’s a wonderful idea, it’s been going really well. The LICs trade at a big premium to NTA. They’ve produced decent returns from inception thanks to the skills of the fund managers who actually invest the money and you not only get a decent return, you are contributing to charity at the same time. 

You’re contributing to charity without actually costing yourself any money because the returns are decent. I think it was worth talking to Louise Walsh, I’m a big supporter of them and I’m an Ambassador for one of the charities that they provide money for, which is the Australian Indigenous Education Foundation, which I’m happy to support, I think it’s a wonderful charity and they also get money off the Future Generations Group. 

Here’s Louise Walsh, the CEO of Future Generations. 

Louise, perhaps we better start – if you could just explain how Future Generations work?  You’ve got a couple of funds, but explain to us how the thing operates.

Yeah, thanks Alan.  Look, the Future Generation companies, there’s two of them and FGX is the code for the first one, that’s Future Generation Investment Company, and that’s for investors that are interested in investing in Australian equities.  The sister company, the second company, is Future Generation Global (FGG), and that’s for investors that are interested in investing in global equities.  The two of them are listed investment companies, they were founded by Geoff Wilson, the Chairman of Wilson Asset Management.  FGX was listed in 2014 when it was oversubscribed and $200 million was raised from investors.  On the back of that a lot of investors said to Geoff, ‘We’re underweight in global equities, would you be willing to do a global equivalent?’  12 months later, FGG was listed in September ’15. 

At the end of the day, very simply, they’re really a win-win-win.  They’re a win for our shareholders because firstly, what we’re doing is providing them with exposure to what we consider are the best boutique Australian and global fund managers.  Without the investor paying management or performance fees and that speaks to the generosity of the chosen fund managers who are managing some money in an existing fund of theirs without charging any fees.  They’re a win for charities because, as a result of the generosity of the fund managers who are not charging their fees, the companies both donate 1% of their net assets each year to charity. 

With FGX, we’ve chosen the cause area of youth at risk and we have 14 recipient charities.  With FGG, we have 8 recipient charities and they’re in the cause area or focus area of youth mental health.  Finally, it’s a win for the fund managers that are involved.  We have about 20 of them involved with FGX and 15 of them involved with FGG.  For these fund managers it really provides a unique opportunity to make a positive difference to Australia’s future generations.  I mean, from the fund manager’s point of view, they are seen to be giving back, they’re waiving their fees…  It’s not like we’ve asked them to do a cash sponsorship or a cash donation.  We’ve said to someone like David Paradice, ‘Would you be willing to help us invest some of the money that we’ve raised in one of your existing funds?’ 

He happens to be a fund manager in both FGX and FGG, and I think he’s got $7 billion under management so it’s not really hurting his business to do that and he’s been incredibly generous in agreeing to participate along with the other fund managers, because this wouldn’t be happening if we didn’t have the generosity of the fund managers. 

But the investors in the LICs obviously do pay fees effectively, it’s just that the fees are going to charity? 

Yes, so in very, very simple terms, from the investor’s point of view, if they invested with one or more of these fund managers they might be paying a 15% or 20% performance fee.  Here, the investor is not paying a performance fee and typically they might pay something like a 1% management fee.  Here, instead of paying a 1% management fee, we donate 1% of our assets to charity.  I don’t know if that’s simple enough but that’s how we try and sort of describe it to anyone that’s interested in investing.

That’s fine, no, I get it.  What’s the post-donation to charity return been for each of the funds?

This year, for instance, we’ve just actually announced our results for both companies.  With FGX, this year the shareholder was getting – we’ve just announced a 4.4 cents annualised fully franked dividend for FGX.  For FGG, we’ve just announced a 1 cent dividend.  I mean the dividend for FGG will never be as high as FGX and that’s because with the global equities companies, some of our fund managers are domiciled offshore.  What that actually means is they operate under a different tax legal structure to our fund managers based here in Australia.  So, we’re not actually picking up distributions from some of those fund managers, so it does tend to affect the size of the dividend for FGG. 

I mean, we’re trying to deliver a stream of fully franked dividends, obviously trying to achieve capital growth and thirdly, preserve shareholder capital.  And particularly with FGG, the investment objective of achieving capital growth tends to be number one, as opposed to the dividend, particularly for FGG.  But just as far as performance numbers, Alan, it’s interesting if you look at the two companies, if you look at say FGG, we’re certainly achieving lower volatility than the benchmark, than the index.  If you look at, for instance, the last year, we outperformed the MSCI World Index by 3.6%. 

Since inception, the investment portfolio increased 10.3% and if you look at the equivalent numbers with FGX – I mean, that’s been running for a little bit longer – but since inception we’ve outperformed the benchmark, the All Ords Index by 3.2% and something like the last year, the outperformance was 3.5%.  But the volatility with FGX was particularly strong.  The investment portfolio was 6.5% versus the index of 11%.  The investment committees are very focused on trying to achieve certainly lower volatility than the market. 

Is there a difference between the, what you call the internal performance of FGX as opposed to what the shareholders actually get or have got from share price appreciation and dividend?

Well, we’re obviously trying to outperform the index in both cases.  We’ve got solid results in that regard.  They’ve both been trading at a premium to net tangible assets in recent months.  With FGG, the investment committee would probably acknowledge that in the first year to 18 months we probably didn’t quite have the right mix of fund managers.  We’ve made some tweaking of the portfolio, we’ve removed three or four managers, we’ve got rid of some direct Asian exposure and we’re very happy now with the mix of fund managers in FGG.  With FGX, the...been solid, it’s actually been strong.  It was trading at a little bit of a discount to NTA in more recent months and that was due to a couple of significant shareholders that actually sold down their shares over about a six or seven month period. 

They’re fund of funds, the investment committee is very focused on getting the right mix of the fund managers and in both cases probably about 50% of the portfolio is in long equities and absolute bias makes up about 30% of the...as well.  The average shareholder is a self-managed super fund, it’s someone who’s bought typically 20-30,000 shares in one or both companies and we’re really trying to look after those self-managed super funds, those retirees.  30% of the shareholders are high net worth families and foundations, and about 20% of the shareholders are mum and dad investors.

With the charities, can the investors choose their own charity or do they have to go with the ones that you choose?

What we’ve done is, we’ve chosen 14 recipient charities for FGX and their children and youth at risk charities, in fact, you’re an Ambassador, as you know, for one of them, The Australian Indigenous Education Foundation, and we’re very grateful that you moderated a decision for us 12 months ago with some of those scholarship winners.  With FGG, we have eight charities that are focused in the youth mental health space.  The unique thing about the model is that every August, every shareholder if they wish has the ability to vote on where that 1% donation allocation goes.  So it doesn’t matter whether you own 5 shares or 50,000 or 5 million, you have a say in where those charitable dollars go.

This year the donation from FGX will be $4.3 million and for FGG the donation this year will be $3.6 million.  But if they shareholder owns a million shares or more, we actually allow that shareholder to direct their donation allocation to any non-profit or a charity of their choosing, as long as that charity has tax deductable status.  That ability to direct anywhere only happens if a shareholder owns a million shares or more.

Okay.  Can you run us through the charities that you look after?

Yeah.  Bear with me because there’s a bit of a list, but with FGX they’re all around Australia.  Australian Indigenous Education Foundation, Act for Kids, Kids Helpline, Raise Foundation, Giant Steps – they run schools for autistic kids, Lighthouse Foundation based in Melbourne, Youth Homelessness, United Way Australia, Debra Australia, Diabetes Kids Fund – which is actually run by Diabetes New South Wales, The Australian Children’s Music Foundation, Mirabel Foundation – they run programs to support orphaned or abandoned kids due to their parents’ drug abuse, Variety, Youth Focus – which is a youth mental health non-profit based in Perth, and Father Chris Riley’s Youth Off The Streets.

They’re the 14 initial recipients as at today.  That list might change over time.  With FGG, the current charities, and as I said earlier, they’re all focused in youth mental health.  Those charities are Beyond Blue, Black Dog Institute, The Brain and Mind Centre at Sydney University, Butterfly Foundation for eating disorders, Headspace, Orygen which is The National Centre of Excellence in Youth Mental Health, ReachOut Australia, and lastly, SANE Australia.  They’re essentially the 22 that are currently benefitting. 

Do you keep investors updated on the charities as well as the performance of the fund?

Absolutely.  Each month we obviously provide our shareholders with an investment return, an NTA report.  We also do a monthly charities newsletter as well, any interesting news that the charities might have.  We’re then on the road twice a year in May and November where we do shareholder update presentations and up on the stage Geoff Wilson and myself present updates on the companies, but we also have a couple of fund managers up on the stage with us and a couple of our charities.  So really, shareholders can hear first-hand the value of obviously the work that the fund managers are doing, but importantly what the charities are doing as well.

How many fund managers are you using in FGX and FGG?  Is it a fairly wide spread of them？

Yeah.  At the moment we’ve currently got 14 in FGG.  Last year we added Caledonia and more recently in the last few months we’ve added Munro Partners.  But there’s some big names in there, the likes of Magellan, Antipodes – as you would know, that’s Jacob Mitchell who was the number two guy at Platinum Asset Management before he left and setup Antipodes at the start of 2015.  David Paradice, I think I mentioned earlier, VGI Partners, Cooper Investors…  So there’s some more high profile names in there, plus some others.

With FGX, we currently have 20-odd fund managers in FGX and again, boutique fund managers, some of them well-known brands like the Paradice, Wilson Asset Management, Cooper Investors, Tribeca, Firetrail and QBG Capital we’ve just added in the last few months – and Firetrail are the ex-Macquarie guys that have gone out on their own.

Do they get roughly equal amounts of money or you’re sort of dolling it out according to preference?

Well, the investment committee initially said that they probably didn’t want to allocate more than about 10% of the portfolio to any one manager.  The reason for that is, if you think about it, if we gave 50% to Magellan for instance in FGG, in their global fund, which is what we’re in, it could be that fee paying investors with Magellan might start pulling their money out of there and putting it into FGG.  That probably wasn’t going to be good for business for Magellan, so effectively no one manager will have more than about 10%.  Just as a guide, with FGG, Antipodes currently has the highest percentage at 10.6%, followed by Coopers at 10% and it goes down from there. 

With FGX, similarly, we’ve currently got Bennelong Australian Equity Partners, they currently have 12%, followed by Paradice at 11.9% and then it goes from there.  The investment committee I suppose has tried to allocate where it sees fit.  I mean, they’re constantly reviewing the performance of the managers, always on the lookout for new potential managers that the committee might check out and potentially add as a manager in the future as we potentially grow bigger. 

And obviously you are growing bigger.  The other thing that’s noticeable is, particularly with FGX, the premium is enormous, 32% premium.   Has it always been that kind of premium?

Yeah, it’s been roughly in that sort of order.  We currently have just over $400 million of assets with FGG and with FGX we’ve got just over $450 million, so we’ve got about $850 million in assets across the two companies.  We started four years ago with FGX with $200 million as a result of the IPO and we started with FGG in 2015 with $300 million that we raised during the IPO.  We were very successful with options that were exercised in 2016 for FGX, 7% of the options being exercised in 2016 for FGX.  We managed to double the size of the company from $200 million to $400 million.  With FGG, last year when the options expired we weren’t as successful.  I think we had about 10% of the options exercised and it really wasn’t in the money, which is the obvious reason why the options were less exercised.  But as expected, we knew that the share price would rally once the options expired and that’s exactly what’s happened.  It’s had great performance and it’s consistently been trading at a premium to NTA since then.  But we are keen to grow the company.  I mean, last week we actually announced a capital raise for FGG, so we announced a share purchase plan and we also announced a placement for FGG.  That will enable, with the share purchase planning, existing shareholders can acquire up to $15,000 dollars’ worth of shares, a fixed price of $1.34 per share, ex dividend, no brokerage, and that closes on the 5^th of October. 

With the placement we’ve also announced a placement with FGG as well and that’s for existing FGG professional and sophisticated investors as well.  That’s at a fixed price of $1.34 per share, the same price as the share purchase plan, and that placement will occur essentially in the first week of October and it will close on the 5^th of October.  It actually is open to non-shareholders, that placement, as long as a sophisticated investor is prepared to get themselves on the share register of FGG in September. 

We’re going to have to leave it there, Louise, it’s been fascinating hearing all that, thank you very much.

Thank you, Alan.

That was Louise Walsh, the CEO of Future Generations.