Funds manager Wilson Asset Management has developed a new investment strategy it will unveil within weeks to invest in large-capitalised ASX-listed companies.
The investment firm is understood to have settled on a closed-end listed company structure to house the fund that will join its existing family of listed investment companies, which include WAM Capital, WAM Research and WAM Active.
The fund could look to raise up to $100 million although Wilson Asset Management founder Geoff Wilson would not comment specifically on the size or specific structure at this early stage.
Led by Mr Wilson, the firm will ask potential new investors to stump up capital after a difficult year for the larger end of the market, weighed down by poor performance of banks and mining stocks.
“I admit it sounds a bit contrarian to launch a large caps-focused fund now when everyone is saying you want to be looking in small- and mid-caps industrials for returns, but usually when everyone one is telling you to do something one way in this game, it’s usually a good idea to go the other way,” Mr Wilson said.
Mr Wilson started the firm’s first unlisted fund in January 1998 which has returned 23.1 per cent per annum before fees compared to the All Ordinaries Accumulation Index which returned 8.4 per cent over the period.
First foray into large caps
But this will be the first time the manager has tested its process specifically targeted at the larger capitalised end of the market.
All WAM’s existing funds use the same process to rank companies, based on a combination of earnings growth potential and a relative assessment of valuation multiples.
“Our process has been skewed towards identifying opportunities that can grow earnings faster than the rest of the market, which has naturally led us to investing in the smaller and medium-sized companies… This fund will lower the growth thresholds so we can include more larger-capitalised companies,” Mr Wilson said.
With a mandate to invest in the S&P/ASX200, the new WAM Leaders fund, as it will be known, will seek to invest in companies with the ability to achieve double-digit earnings growth at a reasonable valuation multiple.
Mr Wilson said he liked the look of the big four banks at current valuation multiples. All four banks’ share prices have traded down in the last year.
“It’s not easy in the current market to find these types of stocks. Most of the companies with strong earnings have been bid up quite a lot,” Matthew Haupt, WAM portfolio manager, said.
Catalyst for earnings growth
Mr Haupt said the fund would try to find companies with strong earnings as well as a potential catalyst to future earnings the market may not have already recognised.
Within this category Mr Haupt mentioned drug company, Mayne Pharma Group, Super Retail Group; pokies manufacturer Aristocrat Leisure and wine maker Treasury Wine Estates. All of these companies will have a place in the WAM Leaders portfolio, he revealed to The Australian Financial Review.
The fund will look to invest in companies with a valuation to growth ratio of between 1.5 per cent to 2 per cent, meaning it invests in companies with the ability to increase earnings up to twice as fast as its valuation multiple has priced in.
Mr Haupt highlighted Mayne Pharma and the company’s acquisition of the US business of antibiotic drug maker, Doryx, as an example of potential earnings growth not yet factored in by the market.
He added that investing in highly sought-after earnings growth carried its fair share of risk given the high valuation multiples attached to these types of companies at the moment.
The WAM Leaders fund will position itself to capture the investment dollars of self-directed superannuation funds, many of which have invested directly in shares of the larger capitalised companies but might have seen returns in these companies go backwards in the past year.