One of the doyens of small-cap investing in Australia, WAM Capital chairman Geoff Wilson, says bear market conditions will prevail on the Australian Securities Exchange until late this year and has warned that “things will get worse in the short term before they get better’’.
WAM, which has a market valuation of $1 billion, holds more than 40 per cent of its portfolio in cash, and Mr Wilson said its managers were “keeping their powder dry’’ until the latter part of the year before moving back strongly into long-only positions in equities.
Earlier this month WAM Capital unveiled a half-year net profit of $74.6m — more than triple its earnings in 2014 — underpinned by investments in the likes of vitamin manufacturer Blackmores and infant formula maker a2 Milk.
But Mr Wilson said he was now wary of the space.
“What concerns me in terms of a potential bubble is the China grey market consumer plays — Bellamy’s, a2 Milk, Blackmores etc. The risk is that some point in time legislation will change and there could be significant readjustments in valuations,’’ he said.
Shares in Bellamy’s fell strongly on Friday after it failed to give a profit forecast for the year ahead despite posting a 325 per cent lift in half-year net profits.
Mr Willson said one area of interest for WAM later in the year would be the embattled mining services sector.
“We are getting closer to extremely good opportunities. One area we are looking at closely that has been totally beaten up is mining services. But it is a bit early — that is a latter part of 2016 proposition,’’ he said.
“The average bear market in Australia since the 1930s has gone for 17 months. This one started in April. So it will only bottom in August … In the short term things are going to get worse before they get better.’’
Last year, WAM set up the Future Generation Global Investment Company — a LIC aimed at giving investors exposure to global equities while donating 1 per cent of its assets each year to charities. It will release its results to the ASX this morning.
Mr Wilson said in the four months of operations to last December , the FGGIC had deployed most of the $302m raised last year with 18 global equity fund managers.
The company was 53.7 per cent long equities, 35 per cent absolute bias, 6.5 per cent quantitative strategies and 4.8 per cent cash as at December 31 and its managers outperformed the global index by just under 1 per cent over the four-month period. “The asset allocation was put together taking a five to ten year view. It is a robust asset allocation structure for the medium to long term,’’ Mr Wilson said.
“This is a solid performance. There has been very strong demand for the shares — they continue to trade above NTA ($1.04).’’ The shares closed 1.3 per cent higher at $1.13 on Friday.