When veteran Sydney fund manager Geoff Wilson this week launched a new listed investment company, he defied volatile markets and ignored an entrenched bear trend in the top 200 stocks.
Also, he thumbed his nose at the exponential growth in passively managed funds which have threatened to push traditional active equity managers to the sidelines.
To get an idea of the imbalance between passive and active in Australia, you only need look at the inflow numbers prepared by Morningstar.
In the 2015 calendar year, passive Australian equity funds gathered inflows of about $733 million, as opposed to outflows from active funds of $1.2 billion. In terms of asset base, Morningstar said passive Australian equity funds rose $1.7 billion, or 9 per cent, on a year earlier, while active funds increased by $363 million (0.3 per cent) over the same period.
To put the passive funds phenomenon in context, the total assets in exchange traded products in Australia across all asset classes grew 40 per cent, from $15 billion in 2014 to $21 billion in 2015.
While not all exchange-traded products are passive, the majority of them are.
Wilson, a former stockbroker, has a philosophy that is the antithesis of passive management. In fact, he boasts that WAM Leaders listed investment company (LIC) won’t own any of the bank stocks which form a large part of the portfolios of every S&P/ASX 200 index fund.
Even active managers have strategies which hug the index. They just go underweight or overweight relative to the index.
Wilson’s new LIC will have a flexible mandate that allows large holdings of cash for long periods as well as being able to short-sell stocks which he thinks are on the nose and headed for a fall.
Despite the negativity in markets, including the 13 per cent fall in the top 200 shares over the past year, Wilson is finding strong demand among financial planners and stockbrokers for his new LIC.
He originally planned to raise about $220 million in WAM Leaders Ltd. But by the time the LIC’s prospectus was released on Monday, it was seeking to raise $330 million, including $165 million in oversubscriptions. On Friday, Wilson told Chanticleer the raising would probably come in at about $370 million or $400 million.
Cynics will say that financial planners and brokers are supporting WAM Leaders because it pays an upfront commission of 1.5 per cent at a time when there is not much new product around.
But that would fail to give credit to Wilson’s impressive track record in funds management since he started in 1999. His flagship LIC, called WAM Capital, has achieved an annual return of 17.9 per cent since inception, beating the S&P/ASX All Ordinaries Accumulation Index by 10 per cent per annum over that period.
Wilson’s success in building a funds management business based on LICs means he now has considerable fire power. Wilson Asset Management now has about $1 billion in funds under management.
Implications for boards
The combination of significant funds under management and an activist approach to equity investment could have significant implications for boards of directors. Wilson made his name investing in small to midcap stocks.
He could now start to ginger up poorly performing companies. One caveat is that it will take some time for him to build the WAM Leaders performance numbers.
His success with WAM Capital could slightly backfire. It is trading at a 16 per cent premium and security holders might liquidate that to buy into WAM Leaders at a discount.
Wilson is not the only active manager winning the support of the financial planners. Four active managers are ranked in the list of unlisted equity funds with the most net fund inflows in 2015.
The funds and the amounts are Fidelity Wholesale Australian Equities, $508 million; Perpetual Wholesale Fund (long short fund), $363.5 million; Vanguard Australian Shares Index, $211.8 million; Pengana Capital Australian Equities Fund, $202 million; and Hyperion Asset Management Australian Growth Companies, $186 million. Data from PlanforLife on wholesale flows supports the view that there are less wholesale flows going into passive fund managers such as Vanguard and State Street Global Advisors. It shows that Vanguard and SSGA’s combined market share was 14.2 per cent in 2015, down from 17.2 per cent, 17.7 per cent, 18.3 per cent and 16.9 per cent in the previous four years.
This data is based on gross flows rather than net flows, it excludes flows from institutional clients and excludes exchange-traded funds.
The support for active fund managers from financial planners, who usually work through investment platforms, is possibly because the markets are considered more inefficient these days. That means bottom-up active managers have a better opportunity to outperform.
Another reason is that outperformance is more valued when benchmark returns are expected to be lower.
Financial planners, who are the guardians of money flows, have become wary of the financial and commodities heavy nature of the S&P/ASX 200 index. Banks and resources are 60 per cent of the index, with 46.5 per cent financials and 13 per cent commodities related at March 31.
“Researchers and planners these days have more confidence in selecting who the best active managers are because they have proven themselves in plunging, soaring and sideways markets,” says Nick McDowell, head of wholesale sales at Fidelity International.
“Financial planners and investors in general recognise that 2 per cent to 3 per cent of outperformance compounded can make a significant difference to their retirement nest egg.”