For Geoff Wilson, the veteran fund manager and chairman of Wilson’s Asset Management, everything comes in cycles.
Whether it’s the shift from small caps to ASX heavyweights or from equities to cash, the philosophy appears to guide his responses to Fairfax Media‘s questions.
The rise of passive investing – which has seen billions worth of assets flow out of the funds of active managers such as Wilson’s and into passive, small-fee funds that track the broader market – is similarly, to his mind, a bit of a phase. The relative performance of active and passive funds has flipped as often as market conditions have, he says. And what’s in the press can be a contrarian indicator as to what’s coming next.
“If the front page of the paper is talking about passive investing, it must be the time to give your money to active investors,” he said. “It’s just cyclical.”
That doesn’t mean the cycle is without cost.
“Of course it’s having an impact on the various participants in the industry,” Mr Wilson said.
“Active managers are adjusting their fees as passive managers have their time in the sun.”
If active managers aren’t delivering out-performance, including fees, of course investors shouldn’t invest with them, he said. But the risk in choosing an active manager can seem unusually high at a time when Wall Street is on its third-longest bull run.
“In a constantly rising bull market, it makes sense – all you have to do to make returns is put your money with the passive managers. But the reality is volatility is at a record low. So to me, everything points to the market getting close to some type of adjustment.”
Once this happens, money should flow back to active managers, who are able to pick the stocks that prosper through a downturn.
Mr Wilson said he’s not alone in thinking a turning point is coming. He spoke to the Financial Review from Los Angeles International Airport on his way back from the SOHN investment conference in New York and the Berkshire Hathaway annual general meeting in Omaha.
“Here’s what I noticed. They were all value investors that were speaking … And everyone was holding high cash levels,” he said.
“They were all really nervous that equity risk wasn’t being correctly priced. Which is really what we’ve been thinking. We’ve been holding high cash levels. We think the market is fairly fully valued.”
Given this, perhaps it’s no surprise WAM’s newest fund is to focus on micro-caps, with a market capitalisation of $300 million or less. Its first and only funding round opens on Monday. Mr Wilson wants to keep it small, because if it gets too big, he fears it won’t remain as flexible as he wants it to be.
It’s a return to familiar ground for the fund manager, who started his career in the small-cap space. That fund, which focused on the smaller end of the market, has delivered outperformance of 17.2 per cent returns per annum against the index when averaged since its inception.
A year ago, at a time when small caps were roaring ahead and large caps were languishing, he bucked the trend in starting a “Market Leaders” fund, which aims to invest in the ASX’s 200 biggest companies without investing in the top 20 stocks.
It was good timing, as Australian large caps as a whole went on to outperform the small cap index in the past year. But Mr Wilson believes that cycle has played through.
“There’s been a lot of money taken out of the mid and small-cap sector over the last six to nine months,” he said. “So from a big-picture view, you’d rather be investing in that area, given it’s been underperforming.
“We’ve always looked for undervalued growth companies. When I started the business nearly 20 years ago, because we were so small, we spent a lot of our time in the mids and smalls and the microcaps. And as our funds have grown, we’ve added other areas as in the large caps. But we still spend a lot of our time in mid and small-cap industrials.”
The fund will raise $154 million, which Mr Wilson is confident will be easily met. “There has been incredibly strong interest. I’d assume we’d be oversubscribed,” he said.
When he launched Market Leaders a year ago, speculation was that some traders were front-running his trades, buying up the stocks in the fund’s prospectus before the fund started operating to make a quick buck. Mr Wilson is circumspect when asked what areas or stocks he’s keen on this time. He said he doesn’t plan to look at particular sectors or stocks, but instead monitor his favourites until the timing is right.
“We’re trying to find undervalued growth companies, [but] we’ll sit on the cash until we find a catalyst that will change the market’s valuation of that company,” he said.
“The WAM Capital fund has been going for 18 and a bit years, and that’s averaged around 34 per cent cash. It’s how we manage our money.
“We manage it as if it’s my own money, so rule number one is don’t lose money, and rules number 2 and 3 are the same. So we’ll sit on cash … and only bite when we see a catalyst that’ll change the situation. It might be a management change, a structural change – anything that’ll re-rate the company.”
“It’s an area we specialise in,” he said of the small cap space. “And it’s a good time to position ourselves there.”