An investment that pays consistent dividends and changes the world

Note: This interview was filmed on Tuesday 12 March 2024.

Fund Profile

• Name of the fund and ASX ticker: Future Generation Australia (ASX: FGX) and Future Generation Global (ASX: FGG)
• Asset Class: Local and global equities
• Investment objective: Providing investors with diversified exposure to selected Australian and Global fund managers while supporting Australian charities.
• Link to fund page: (VIEW LINK)

As cost-of-living pressures hit Australians, social impact and ESG investing have fallen by the wayside. 

However, positive returns and philanthropy are not necessarily mutually exclusive. It does require an innovative approach, which is where Future Generation comes in.

The business has recently garnered media attention after the announcement that the former RBA governor Philip Lowe would join the team as Chair of Future Generation Australia. Consider that one of the indications of the depth of experience here – ex-RBA chiefs, high calibre research houses and high-quality fund managers working pro-bono.

A unique structure with best-of-breed exposures

Caroline Gurney, CEO of Future Generation, describes the Future Generation LICs as being effectively fund-of-funds structures with allocations set by an investment committee from Morningstar, Zenith and JANA.

“We have a range of different strategies. We have long equities, market neutral, and absolute bias,” says Gurney, noting that they offer two LICs - one which provides investors with exposure to several global equity managers and the other, fund managers with an Australian equity focus.  

“A lot of these funds you can’t get into because they’re closed or the minimum investment is too high,” she says.

Currently, you can find the likes of Ellerston Capital, Martin Currie, Munro Partners and Plato Investment Management, amongst other high-quality experienced managers in the line-up for the fund.

“There are no management fees or performance fees from all of our amazing pro bono fund managers. Plus the board works free of charge,” Gurney says.

This is where the idea of social impact comes in.

Because all of Future Generation’s fund managers work pro bono, they do not charge their usual management and performance fees. This allows Future Generation to donate 1% of the total assets to 24 not-for-profits focused on youth at risk and the prevention of mental health issues for young people. Effectively, the fund managers are donating the fees you would’ve had to pay in another structure.

“We’ve got more than $1 billion under management between the two vehicles now, and we have given more than $75 million since inception to not-for-profits,” Gurney says.

Some of the not-for-profits Future Generation has been able to support include the Australian Indigenous Education Foundation, the Lighthouse Foundation for Youth and Father Chris Riley’s Youth Off The Streets.

This is no set-and-forget strategy – it's a highly active approach

While fund managers work pro bono for Future Generation, there’s no guarantee they’ll continue to be part of the allocation mix in the future. The investment committee will adjust allocations based on volatility and market concerns – which may also see them change out fund managers.

“For example, with Future Generation Global, we had a big turnover of our fund managers about 12-18 months ago. We had to re-evaluate because the volatility in global markets was unexpected. We had a turnover, and we brought in five new fund managers,” Gurney says.

The funds have an absolute return bias and are using market-neutral strategies as part of the mix to manage the volatility in the market at the moment.

Consistent and growing dividends

Whether you are a growth investor or an income investor, chances are dividends are an important part of your portfolio.

Gurney notes that the LIC structure allows the funds to pay consistent dividends to investors.

Both funds target fully franked dividends, capital growth and the preservation of shareholder capital. In an environment where we have seen companies start to look at dividend cuts, you might wonder what this will mean for Future Generation.

“We have a profits reserve, which allows us to make sure we can continue to give [investors] dividends over time,” Gurney says.

Why is now the time to think about social impact within your investment portfolio?

In a tough environment, it can be difficult to find the headspace to think about charitable support. This is why Gurney thinks now is the time to consider investments that help investors combine purpose with profits. 

“We don’t have a social impact ourselves. We give to not-for-profits who have the social impact, which I think is an important distinction," Gurney says. 

"I think the reason why so many shareholders like us and we want to encourage more to invest is the important thing is there are no fees."

If social impact is one of your personal goals, it might just be worth a closer look.

Closing the NTA gap

Currently, Future Generation Australia (ASX: FGX) and Future Generation Global (ASX: FGG) are trading at 15% and 18% discounts to net tangible assets (NTA) respectively. Buying shares in a listed company at a discount to NTA means you get the company's net underlying assets or investments for less than what they are worth. 

This can be a great strategy if you are confident that the company can close this discount over time - but it can also be a value trap if the discount worsens or if it continues to trade below NTA.