By Sarah Turner
Fund manager Geoff Wilson is assuming “everything will be on the table” including franking credits when the government considers how it will pay for its massive stimulus plan funded by the swelling budget deficit.
In what would be a blow for the veteran investor who led a hard-fought campaign in the lead-up to the federal election to retain refunds on excess franking credits, Mr Wilson said on Wednesday, “you can’t rule anything out.”
“Someone has to pay” for the stimulus that the government is rolling out which will amount to a staggering 10.6 per cent of GDP in six months, he said.
While Mr Wilson said dividend imputation is a “logical system which encourages companies to pay tax in Australia and employ Australians”, he appeared willing to sacrifice franking for the greater good as the country battles the COVID-19 pandemic.
“All we hope is that, if it’s done, it will be done equitably and fairly and logically,” Mr Wilson said.
The veteran investor argued that franking has encouraged Australian companies to raise equity rather than debt, with the result that they are broadly less highly geared than some global counterparts.
Lower leverage is particularly important in today’s bear market, where investors are trying to gauge who will survive the downturn and who will not.
“We’ve been adjusting the portfolio so we’ve got companies that will survive during this period. We’ve purposely adjusted to move away from companies that have significant debt that’s due in the next twelve months,” Mr Wilson said.
Some companies are raising capital to support their balance sheets.
“We saw during the GFC that over 10 per cent of the market capitalisation was raised over that period,” he said. “We are starting to see that already with equity raisings and we think there will be significantly more equity raisings.”
Mr Wilson said bear markets need special measures when it comes to portfolio positioning: “It’s really not about losing money in the bear market, it’s how quickly you make it back in the bull market,” he said.
“In the GFC, we all took a hit but it only took us a couple of years to make that money back and go above that. But the overall market on an accumulation basis took over six years to get back to where it was.”
WAM Global’s portfolio manager Catriona Burns exited LVMH in February after judging the share price was not reflecting reality.
“We sold companies where we had the smallest concerns about the balance sheet and also cyclically-exposed stocks,” including American Express, Airbus and United Technologies, she said.
The fund manager has been adding to positions in Nomad Foods, Nestle, Costco, EA, Tencent, Paypal and Visa.
WAM Leaders portfolio manager Matthew Haupt’s first step when he sensed the bear market was approaching was to remove most of the real estate investment trusts and infrastructure plays from his portfolios, which are defensive but highly-levered.
Mr Haupt also cut holdings exposed to trade and discretionary consumer names, while adding to consumer staples such as Coles and Woolworths.
Iron ore miners are another area of opportunity, Mr Haupt said. The major iron ore players are Rio Tinto, BHP and Fortescue Metals.
China is slowly getting back to normal but their customers are now sick, and Mr Haupt believes the second-largest economy in the world will turn inward to generate growth by deploying infrastructure projects that will need steel and therefore iron ore.
“This is one of the easy trades,” he said.
Mr Haupt increased his exposure to gold companies to just shy of 4 per cent, after buying up Saracen, Northern Star and Newcrest.
Finally, WAM Capital portfolio manager Oscar Oberg cut holdings in cyclical sectors such as mining services and retail.
“We have bought small positions in Cleanaway, IPH and added to TPG. We think that the earnings for these companies will be quite resilient over the next year and we think that they will beat earnings expectations going forward,” he said.
“We have been adding to agriculture – we see a very strong outlook for Elders, Graincorp and Costa over the two years.”
Mr Oberg is downbeat on the buy now, pay later companies, including Afterpay.
“They haven’t been tested in recession,” he said.