Wilson Asset Management

Geoff Wilson has been on the road selling his new listed investment company WAM Global. We mentioned it in the newsletter yesterday – the offer opened yesterday and will close on 8 June. It is expected to list on 22 June with the code WGB.

Here is the objective of WAM Global used in their marketing:

“WAM Global’s investment objectives are to provide capital growth over the medium-to-long term, deliver a stream of fully franked dividends and preserve capital while providing shareholders with exposure to global equities. WAM Global will focus on undervalued international growth companies with a bias to small-to-medium-sized entities, utilise a portfolio based and index unaware investment methodology and preserve shareholders’ capital.”

They are raising $330 million with the facility to take up to $550 million if they get oversubscribed, which they almost certainly will. The feedback from the brokers to the issue is that they already have it pretty much put away helped by a fully subscribed $165 million priority allocation to the “Wilson Asset Management Family”, in other words to the existing holders of their other listed investment companies – WAM ($1.6bn), WLE ($790m), WAX ($285m), WMI ($198m), WAA ($47m). Applications for broker firm stock are expected to be scaled back.

The fund manager of the WAM Global LIC will be Catriona Burns. Catriona is interestingly charged with applying the Wilson Asset Management investment process on a global scale, which means, in a fund benchmarked to the MSCI World Index (AUD), they have a massive $40 trillion universe to go looking for stocks, most of which will be in the mid and small Industrial space. 5% of the MSCI World Index is U.S.-based, with 35% in Japan. Despite having a benchmark, Catriona says they will be “benchmark unaware”. They have been running a model portfolio (hypothetical portfolio) in preparation for the cash arriving, and it currently contains 58 stocks and has 22% cash. They will also invest in emerging markets.

On the roadshow, my colleague Alex Garuccio and I sat down with Geoff and Catriona and heard the pitch. When we met Catriona had recently returned to Australia after a long (exhausting!) tour through Europe, Asia and the US meeting companies. But I spent the hour and a half meeting doing my best to extract the “Golden bits” out of the Wilson Asset Management investment process.

THE WILSON ASSET MANAGEMENT INVESTMENT PROCESS

You can read quotes from Geoff like “Rule number one, don’t lose money. Rule number two, don’t lose money. Rule number three…you get the picture”. And I like the way he talks about investing money as if it was your own, which, in the case the Wilson LICs, quite a lot of it is. Geoff Wilson holds 7.08 million FGX shares (current price 119c). Geoff also holds 5.11m WLE – share price 112c, 4.86m shares in WAX – share price 151c, 120,000 WAM – share price 239c, 1m WMI – share price 141c, and 1.11m WAA – share price 114c.

Let’s start with their published investment process:

“Our unique investment methodology. A research-driven process focused on identifying undervalued growth companies; and a market-driven process that takes advantage of market mispricing opportunities.”

They use this graphic to explain the two parts, research-driven investment and market-driven investment.

“Research-driven investing.”

“This investment process involves diligent and deep research that focuses on free cash flow, return on equity and the quality of a company. Each company is carefully rated with respect to management, earnings growth potential, valuation and industry position. Under this process, our investment team will only ever invest in a security once we can identify a catalyst or event that we expect will change the market’s valuation of the company.”

They have a focus on small to medium-sized industrial companies. Undervalued growth companies only. In other words, they are stock pickers rather than index huggers, and they add value by researching under-researched companies and identifying value where others are not doing the work.

As evidence of that, they meet over 1,000 companies a year and boil those down to a diversified portfolio 20-60 ASX listed ‘investee entities’ or, to you and I, stock picks. Like all good fund managers that have a process that includes funnelling 2000 plus listed companies on the basis of micro and macro economic trends into 1,000 companies that they meet, after which they put 250 under review and rank them.

They then narrow those 250 down to 20-60 companies by focussing on free cash flow and return on equity after which they rate the companies on management, projected earnings growth potential, valuation and the company’s position within its industry. Then, and this is the key bit, they buy when they can identify a catalyst or event that will change the valuation the market gives to the company, either up or down. The most common catalyst is the expectation of a positive earnings surprise.

To identify that catalyst they research available information, talk to management about the dynamics of the business and contact competitors. Catalysts they identified in recent years included the idea that we will not be shopping so much at Coles and Woolworths in years to come and the streaming of television which would and did significantly change the landscape for free to air. That’s the investment process. Having bought, they sell once the company reaches their internal valuation.

“Market-driven investing.”

“This investment process takes advantage of short-term mispricing opportunities in the Australian equity market. This part of the investment portfolio is actively traded, and as such, opportunities are derived from initial public offerings, placements, block trades, rights issues, corporate transactions (such as takeovers, mergers, schemes of arrangements, corporate spin-offs and restructures), arbitrage opportunities, LIC discount arbitrages, short-selling and trading market themes and trends.”

This is what you or I would perhaps call trading, and they call utilizing ‘our extensive information network in the investment community to exploit mispricing in the market’. The list of mispricing opportunities is something that perhaps only an experienced and well serviced professional fund manager can exploit, and it includes IPOs (initial public offerings), capital raisings (being offered stock at a discount to the market), block trades (same thing), oversold positions, takeovers, a listed investment company trading at a discount to NTA, earnings momentum/surprise, short selling as well as market themes and trends.

Some of my take-outs from the meeting:

• They look for under-valued growth companies only.
• Most companies they invest in are industrials.
• They like companies that make things.
• Companies are generally medium-sized or small in the stock market context.
• An ideal target might be a company on a PE of 12-15x growing at 20%. Undervalued in other words.
• They focus on earnings per share growth saying it is “King”.
• Return on equity and free cash flow are the other two key measures.
• They only buy when they can make money, which sounds like a stupid thing to say, but what it means is that they don’t care about relative performance so do not sit in stocks that are going down even if they are going down less than the market.
• They emphasise capital preservation which may sound like a motherhood statement as well, but the truth is that they do something very similar to myself and most self-managed super funds, they care about losing money. The net result is that they have had 34% cash in their WAM Capital fund since inception in 1999, that’s over 19 years, and they have outperformed in 16 of those 19 years.
• They value companies and having come up with a valuation look for companies that are undervalued for some reason. This part of the process is a traditional Buffett-esque value analysis approach.
• They are prepared to sell. It should come as some comfort to any of their investors that have the experience to know that investment is not all about being long-term and burying your head in the sand.
• Management is a big factor. They have taken lessons in body language, ask questions they know the answers to to see the management’s reactions, and look for consistency in the story, something ABC Learning notably failed to maintain prompting them to sell it before it went wrong. Geoff jokingly says that he wishes he could pioneer the use of lie detectors as standard in management meetings. He considers management to be understandably biased to optimism although he says the CFO it is often better to talk to than the CEO because they tend to be more conservative. They also like to ask the same question of a CFO that they have already asked the CEO and see if they get a consistent story. Wilson can also spot the CEO that has been trained in body language; they give no hints. These are often the biggest liars.
• Geoff has a quote “The best quality information wins”, and he says you can only get that by talking to people, not just management, but industry, and industry competitors.

THE CATALYST

They look for a “Catalyst” for an undervalued stock to be re-rated.

• The most obvious catalyst is that the company is likely to have a positive earnings surprise.
• Management changes.
• Structural changes in the industry.
• Ugly ducklings (companies in a sentiment hole).

Catalysts can come from anywhere depending on the stock and the share price.

OTHER

They also recently launched the Future Generation Investment Company (FGX – $417m) which provides access to the best of the best Australian fund managers who donate their services, and 1% of the assets are donated to charities supporting children at risk each year.

With around $2 billion under management, if they earn say 1%, then Wilson Asset Management has about $20 million to spend on the investment process. You have to ask, do you think they’ll do a better job than you?

I know this reads like an Ad, but it is perhaps more an example of the industry. It turns out that not all professional fund managers are BMW driving Muppets but are in fact highly sophisticated professionals in the true sense of the word. They make managing your own SMSF look, well, unprofessional.

You can read the WAM Global Prospectus here.

From Wilson’s announcements:

To participate in the offer, investors can apply online at https://www.wilsonassetmanagement.com.au/global or request a mailed prospectus by calling Boardroom on 1300 737 760. Alternatively, investors can contact their financial planner, stock broker or the Joint Lead Managers Hamish Nairn, Taylor Collison on (08) 8217 3908, Philip Lee, Morgans Financial on (07) 3334 4888, Nicholas Chaplin, NAB on (02) 9237 9518 or Ross Baildon, Ord Minnett on (07) 3214 5509. Frequently asked questions about the offer are available here.