Geoff Wilson: Hello, good morning everyone. It’s Geoff Wilson speaking. Thank you very much for calling in. We had a shareholder call two weeks ago and actually had a record number of shareholders calling in. Because of the heightened volatility and how the market has moved, well, how the whole economy has moved significantly over the last couple of weeks, we thought it made sense that we had another call. We’ve had a lot of shareholders calling in and we really thought it was an opportunity to communicate effectively with everyone. There’s myself on the call and the other Lead PMs: Catriona Burns, Matt Haupt, Oscar Oberg. James McNamara who runs and guides the shareholder engagement and communications area, he’s on the call. And of course, thank you everyone for sending the questions in, we’ll try to cover them all. It’s quite strange thinking back two weeks ago when we had the call. We were all in the office and Catriona was in Paris. Obviously since then she’s come back. For the last couple of weeks, soon after that call, we’ve all been working out of the office. In terms of how we’ve been working out of the office, it takes a day or two or a period of time to adjust. Luckily we had already tested that out before we had been working out of the office. On a consistent basis, what we do is each morning is on Skype Business, we have a video call with the investment team.
Each of the areas of the organization have continued video communication with each of the teams on a regular basis. Once a week, well actually that’s this afternoon, just after four o’clock each week, we have the 34 odd employees, historically we’ve been using Skype Business and today we’re use using Zoom, so we can see each other and communicate.
In terms of the current market environment, obviously it’s challenging on a number of levels. Normally an equity market that’s falling, a bear market, I’m incredibly excited about from an investment perspective, and I still am from an investment perspective. I think the tougher thing in this current environment is not only the economic pain, but the human pain and disaster that’s occurring because of this virus. What we do know is we will get to the other side of it. There will be vaccine developed and herd immunity will increase. In a couple of years’ time, or at some point in time, this whole process will not be as daunting as it currently feels at the moment. From an investment perspective, in terms of the various email questions that people came in with, a lot of them were saying ‘what is your current NTA’, ‘your cash levels’, ‘profit reserves’? If you go to slide six, which we’ve announced to the market, you’ll see the NTA as of last night effectively of the various funds. We’ve also shown you the cash levels. Now, you’d see there that WAM Capital, the companies that are exposed to the medium and smaller companies, there’s less liquidity in those companies. And there’s probably a bit more volatility.
So, the cash level has been increased there. You’ll see in [WAM] Global and [WAM] Leaders, they have lower cash levels than say, WAM Capital, WAM Micro, WAM Research and WAM Active. And that’s really a function of, their portfolios are highly liquid side so they can change them from day to day. You’ll see [WAM] Leaders as of yesterday had a little over 7% in cash. If you went back just less than a week ago, it was 15% plus in cash. Matt’s ability to move that cash around is a lot quicker, where Oscar and his team with mids and smalls, it takes a period of time. And also when there’s been a big adjustment, when you’re changing the portfolio and Oscar, Matt and Catriona will talk about that a little latter, it does take quite a lot of effort. And there’s just in these periods where there is a lot of change and you’re restructuring the portfolio, there’s a lot of work that goes into that. In terms of the dividends, there were a number of questions about what’s happening with the dividends. You’ll see on slide seven that all the dividends that we have announced will be paid and you’ll see the dates there. That was for the period, the six months earlier. In terms of our ability to continue to paying dividends, that’s really a function of profit reserve, profit we end up making and also tax we pay with franking. In terms of how the profit reserve works, I mean, with the current volatility in the market, who knows what the market will do? But assuming the market stays around these levels until June, then the profit reserve, our ability to put profit into the profit reserve starts again from the 1st of July. So that just gives you a bit of feeling of what we’ve got there. We have the ability to put money in the profit reserve or to increase the profit reserve on a monthly basis and as I mentioned, it re-sets on the 1st of July each year.
Why don’t we now go to Catriona, Matt and Oscar and just talk a little bit about how they’ve adjusted their portfolios over the last little period. Before I go there, what are we looking at from an investment perspective? And I suppose where are we? Matt circulated internally to us, which we put in the slide pack, a very nice cycle of market emotions. When Matt flipped it around to us last week, we felt as though we were in the “desperation”/”panic” area. Now we’re probably just in the “fear” and “desperation” area, we didn’t think we’re in total “panic”. So we currently think we’re still in that area. In terms of the market, what you’re really seeing is the battle between the market in terms of adjusting to the significant economic impact that the coronavirus, the fact that there’s been a shutdown of significant parts of commerce globally and the impact that’ll have on corporate profitability and companies. We’ve been adjusting the portfolios so we’ve got companies that will survive during this period where we’ve purposely adjusted the portfolio moving away from companies that have significant debt in the skew of the next 12 months. Because we saw that in the GFC, those companies tend to be at high risk, and to companies that we believe will come out of this a lot stronger. We’ve also positioned the portfolios to benefit from the capital that will be raised over the next six to 12 months. We saw during the GFC it was over 10% of the market capitalisation was raised over that period in terms of re-capitalisation, recapping a number of companies and we’re starting to see that already with some equity raisings. We think there’ll be significantly more equity raisings over the next period of time. We want a portfolio that’s incredibly well positioned that when we do get to the bottom of this bear market, then we can really perform on the way up. Really what I believe in investing, the X factor that creates a bear market, it’s very hard to forecast those or see them. It’s really to adjust the portfolio. It’s really not about losing money in the bear markets. It’s how quickly you make it back in the bull market. During the GFC we all took a bit of a hit in the bear market. But it only took us a couple of years to make that money back and go above that when the overall market on an accumulation basis took over six years to get back to where it was.
The team has been adjusting the portfolio to have the stocks that we want. They’ve also done a detailed list of companies that we want to be exposed to when we have a bit more confidence that the market has bottomed. In terms of going back to the market, we’ve really got the battle between the impact on the economy and the impact that has on corporates globally. And on the other side you’ve got the monetary authorities, the fiscal authorities being incredibly responsive to try to create a bridge over this period. Whether they’ll succeed or not the question is out: how long will this period be? The question is still out on that. So why don’t I go to the lead PMs, and start off with Catriona in terms of how you’ve adjusted your portfolio?
Catriona Burns: Yes, thanks Geoff. So on the call earlier in March, we talked about how we’d increased the cash level from around 5% in December 2019 to about 10.5% by the end of February. We’re now sitting with cash at about 19%. Whilst we have held various full positions, we’ve been actively adjusting the portfolio since coronavirus occurred. In our view, we think there will be long-term consequences of coronavirus and really how people live their lives. We expect more automation, more diversified supply chains, more online shopping, more working from home with faster moves to the ‘cloud’ and more use of video conferencing and the increased thriftiness as the unemployed have to get through what will be a tougher period. As such, we’ve adjusted the portfolio to take advantage of these thematics and the new reality that we’re all living in.
Back in February we quickly moved to reduce the exposure to areas such as travel, outdoor entertainment and retail, which we thought would be significantly affected by the coronavirus. We sold names such as CTS Eventim, Booking.com and LVMH. While these are really high quality businesses, our view was that their share prices at the time were not reflecting the new reality they were facing. They have since seen significant falls, which means we can now look at them with fresh eyes and decide whether we think the downside risk is now priced in or not. We’ve increased the liquidity and added some larger stocks that we thought could potentially benefit from the shutdowns or which were well placed to weather an economic downturn. We sold stocks where we had even the smallest concerns on balance sheet and cyclically exposed stocks such as American Express, Airbus and United Technology.
What we’ve done is we’ve added to positions in stocks that we thought would do well in this operating environment. These include certain FMCG companies like Nomad Foods and Nestle, food retailers like Kobe Bussan out of Japan and Costco in the US. We’ve taken the view that indoor entertainment businesses should do well in this environment. And we’ve added positions in global gaming businesses such as Activision, EA and we already owned Ubisoft. We also already own Tencent out of China, but we’ve added to this holding. We think the payments space is one with structural tailwinds and the push this virus provides to online shopping will help this transition occur more quickly. So we’ve used the sell off to add positions in PayPal, FIS and Visa. Finally, we’ve added positions in companies that we think are relatively recession resilient, such as Dollar General, Lowe’s, and AutoZone.
Geoff Wilson: Thanks Catriona. Matt, do you want to just give a bit of a feel of how you are dealing with this volatility with the market and how you’ve adjusted the portfolio?
Matthew Haupt: Thanks Geoff. Good morning everyone, I hope everyone is doing okay in their isolation. The way we manage the profile in [WAM] Leaders for this crisis, and it has been a crisis, this has been the quickest crash we’re seeing in history. So the changes we made immediately were removing a lot of the REITs, the real estate companies and the infrastructure companies. These are predominantly seen as defensive companies, but the concern we had was they’re highly leveraged and we hadn’t seen them stress-tested through a recession for a long period of time. A lot of these companies, which are classed as defensives, are very economic sensitive. So we removed a lot of those companies very quickly, which has worked in our favour. Like Catriona, we pulled out a lot of the cyclical companies which are exposed to economic trade. The reason why we did this is because the world is going into a recession and you just don’t need to be in these companies at this point in the cycle. They will become incredibly cheap and they’re getting cheaper by the day, but it’s still a little bit too early to play in this space. Also, consumer discretionary, again, it’s pretty tough to be in that space too. So a lot of those consumer discretionary names we pulled out of as well. On the plus side, you see our cash is not as high as WAM Capital. We’ve tried to invest through this cycle as well as we’ve flexed our cash up and down a fair bit. As Geoff mentioned, we’ve been hovering around that eight to nine percent, flexing up to over 15%. The reason why we are staying a little bit invested is there’s opportunities in this market.
So consumer staples, we were quite early on the trade buying Woolworths and Coles. You would have seen the pictures on the news and you would have experienced this, sales are up between 20-30%, over a period for these guys. The benefit here has been dramatic. The alcohol sales, which is another interesting point has skyrocketed too. There’s reports of Dan Murphy’s up 30 to 40% over a period too. So there is some businesses that benefit in this situation. The other sector we’ve been active in is in the iron ore markets. China have come out of this looking pretty good. They have stopped the spread, they’re slowly getting back to normal activity, they are just shy but they’re probably running around 90% of normal economic activity at the moment. One of the things they’re doing is because the rest of the world is so slow, they need to work out how they can grow. And the way they’re going to grow is by launching infrastructure projects. One of the key components of infrastructure is steel and iron ore is a product that goes into the steel making process. For us, this was one of the easier trades. We’re expecting iron ore demand to be around 1.1 billion tonnes run rate between April and December. That’s why we’ve invested in these companies because there can’t be a supply side response from iron ore in the short term. So this has been a good trade and we continue to hold these stocks. We’re just watching of course, like everyone else, the impact ex-China and the impact it could have on these. Cash will wound up and down a fair bit. As Geoff said, we’re running around just over 7%. We just took a big line in the Wesfarmers’ Coles sell-down. So that’s dropped our cash a little bit, but I expect cash to haul around 9-10% over the next few weeks, barring unforeseen circumstances. The other thing we’ve put into the portfolio is we’ve upped our gold weighting. Gold has gone up just shy of 4% of the funding in gold equity stock. These include Saracen, Northern Star and Newcrest. We bought gold after, you would’ve seen gold really fell away during the crash. The reason why this happened was the race for US dollars. US dollars was a safe haven and everyone was trying to get their money into US dollars and get US dollar liquidity by raising money. What we’re seeing is gold got sold off heavily and we took that opportunity to purchase some of these gold names, which have done well for us. What happened in the GFC as well was gold initially in the liquidity event get sold, but then post that does really well. As Geoff mentioned, there’s so much fiscal policy and monetary policy out there that gold should be in a pretty good spot if they can get control of this US dollar shortage which is a liquidity problem. We think we’re almost there. The Fed even last night came out with repo operations for all central banks. Even Australia can access the Fed market through repo. That’s a way of getting short term money. You put some collateral to the Federal Reserve and they give you some US dollars. So again, they’re really trying to get a handle on this. The portfolio is, I guess the overarching theme of the portfolio is high quality, good balance sheets and we’re just trying and picking the best of breed at the moment just finding these companies that have some optimism in a pretty dire position at the moment. So pretty well positioned but just to watch that cash will fluctuate around a fair bit. Thanks Geoff.
Geoff Wilson: Thanks Matt. Oscar, do you want to give the guys a bit of a rundown of what you’ve been doing with the portfolio?
Oscar Oberg: Yeah, thanks Geoff. Look, very similar to Matt and Catriona. There’s been a big focus on quality here at WAM Capital. As we talked about a few weeks ago, we immediately reduced our exposure to the cyclical sectors such as mining services and retail. I guess given a pessimistic view on the economy going forward, and most importantly we sold some of our, very early, sold some of our less liquid companies or very small companies within the portfolio. As Geoff said earlier, liquidity can really dry up and this prevents your ability to sell these companies in periods such as this. At the time when we last spoke, our cash was sitting at 34%, the average just over 40% for the month of March and currently sitting at 38% today. So over the course of the month, we have actually seen some opportunities with companies with some high quality, larger companies, trading at depressed valuation. We’ve bought small positions in Cleanaway, IPH Holdings and added to our TPG Telecom holding. These companies fit our investment process, and like Catriona said earlier, we think the earnings of these companies will be quite resilient over the next few years and we think they will actually beat earnings expectations going forward. I’m actually sitting here in Yass in country New South Wales and you think we’re stressed watching the market, you should see farmers. My parents, I don’t think have slept the last few nights and the reason is there’s a bucket load of rain coming over the next few days and here in Yass we haven’t got the rain that northern New South Wales and southern Queensland have had over the last couple of months. And it’s booming up there. The drought has certainly broken. And for these reasons we’ve been adding to our agricultural sector holdings within the portfolio. We see a very strong outlook for Elders, GrainCorp and Costa Group over the next few years. It’s very important to talk about liquidity within WAM Capital at the moment. Within our top 20 holdings, the market capitalisation over the last month has actually increased by 30%. In fact, we could, if things deteriorate further, sell 70% of our equities within the next 10 days if things do worsen. While we’re sitting at 38% cash, the liquidity of the portfolio of our equity exposure has increased. We’re well prepared if things worsened from here. I think overall we’re cautious, but we are seeing opportunities to buy some quality small-cap companies as Geoff talked about. We do see some opportunities of discounted capital risings and placements that could potentially be occurring in the future.
Geoff Wilson: Thanks Oscar. Thanks anyone that sent their questions in. If we don’t cover them today or in this conversation, then we’ll come back to you, even ones that are asked today and answer them. Why don’t I just go through a couple of the questions? Initially for you Catriona, there was a question from Graeme Pennycuick and that is, “what is the current hedging of currencies in the [WAM] Global portfolio, and what effect on the portfolio will this have if the Aussie dollar rises all falls”?
Catriona Burns: Thanks Geoff. So the Global portfolio is unhedged. We do have the ability to hedge but when we launched the fund, we really listened to the feedback that the shareholders gave around wanting global shares for diversification for their portfolios, which were at that point, largely in Australian dollar denominated assets. The Australian dollar since we launched the fund relative to the US dollar for example, has fallen, which has benefited our holdings, which are basically 99% outside Australia. But we have a variety of currencies because each company, like depending on whether it’s a German or a French business will be denominated in Euro, and then we have obviously a wide number of US stocks. So we have a variety of currency exposures. We consider both the individual stocks that we want to invest in and the currency exposure when we are adding a position. But the portfolio is unhedged and does provide diversification for the shareholders, but will be impacted as the Aussie dollar rises or falls on the translation effect.
Geoff Wilson: Matt, there was a question from Bob Hawtree. His question is “what trading activity has occurred during the price oscillations over the last couple of weeks in the [WAM] Leaders portfolio”?
Matthew Haupt: Thanks Geoff and Bob. The trading has been elevated over the last few weeks and this market is presenting a lot of opportunities. Some of the trades we’ve been putting on is stocks in the same sector having a wide variance. For example, you might be looking in the REIT sector and you could see Goodman Group could be up 3%, and then another stock in the same sector could be down 5-7%. As funds or people become distressed, they start selling some of their holding. Some of the things we’ve been doing is doing a lot of these trades within sectors on a relative basis during the day. These are very short term trades, but again, just some of the opportunities you can do in this market. Also, some of the other trades is there’s a very weird thing that happens in the Australian market at the moment. If the market is up or down by three o’clock in the afternoon, there’ll be a big sell off or a big jump up in the index depending on if it’s up or down. If it’s down, it will sell off into the close and then on the match it’ll get sold off a lot. And then if it’s up post three o’clock, it goes on a huge rally and then matches up in the match at the end of the day. There’s all these little things you can take advantage of. Our trading activity is a lot higher than it would normally be as we try to make money in this market. It’s very volatile, it’s very hard to trade outright early in the morning. What we’ve been doing is sitting out for the first hour to see how it settles and then we might trade around between 11 and two o’clock and then wait for three o’clock to see the direction. So very short term focused, but that’s what you need to do in these markets. Trading activity is high and there’s all these little peculiar intricacies in the market at the moment. So we’re trying to take advantage of those for our shareholders.
Geoff Wilson: Just trying to pick up a dollar here and there. Just on that Matt, do you think that’s the passive money, like the ETFs going one way or the other, or the passive money flowing in and out of the market?
Matthew Haupt: I think it is. In these markets, no one really knows until after the effect. Everyone has their best guess of trying what it is, but it appears to me it looks like passive because it’s matching up and matches aggressively. To me it’s offshore passive. I’ve been watching the Australian dollar. The Australian dollar as we all know has fallen off a cliff. That really protected our market. You can basically work out, if the Australian dollar is up, our market is going to be soft generally which is funny because the Australian dollar is normally a risk-on currency so our market should go up. But there’s all these little weird things. I think its offshore passive because it seems to move in line with the Australian dollar and then this gets amplified into the close. So into the close, it just feels like passive to me.
Geoff Wilson: Thanks Matt. Oscar, your question was from John Benger and it’s “how solid are the balance sheets of the companies in which we, being WAM Capital, etc. have a substantial holding in”?
Oscar Oberg: Thanks Geoff and thanks John. I think the first thing I’ll point out to our shareholders on the call is that the substantial shareholdings that you see on the ASX, when we go 5% in a company aren’t necessarily the substantial shareholdings within WAM Capital. I’ll give you an example. Myer is our 40th largest company in WAM Capital. It has a weighting of 0.5%, so it’s very, very small. But I guess in these uncertain the best you can do, and Matt touched on this earlier, is to really assess the quality of the companies that you own in terms of their balance sheet. Over the course of the month, the team has done extensive sensitivity analysis, looking at debt and cash levels of the various companies we own just to determine how long these companies can survive if you have a period of time such as a retailer where you might not have any sales or revenue for say six months.
Now for those companies that have a bad balance sheet and low levels of liquidity, we’ve sold out of those positions. Those companies that have a very strong balance sheet, we’ve held onto these companies and in some instances we’ve actually increased because we think they’ll do better coming out of this downturn. To give you some granularity around that, we had to look at our top 20 holdings within WAM Capital yesterday. 25% of these holdings are net cash, which means they have more cash on the balance sheet than the debt outstanding. The remaining 75% have a leverage ratio of 1.3 times. The standard bank covenant for leverage ratio is around three times, which means that if these companies were to breach covenants they would need their earnings to fall by 50% or more. We’re very confident on the larger companies that we own in terms of their balance sheets and we think these companies will come out of this much stronger.
Geoff Wilson: Thanks Oscar. Just before we open up to general questions, there were a lot of questions about our ability to pay the current dividends, which we are paying. Then potential future dividends. In terms of the companies’ abilities to pay the future dividends, then obviously they need profits. For them to be franked there needs to be a level of franking credits. The question is, everyone wants to know what will the final dividend be? This will be announced in August this year. That is incredibly difficult to say what it will be at this point in time because it really depends on what the market’s done over that period of time and also the level of the profit reserves, whether those profit reserves are being topped up by the performance of the portfolios in July and August this year. The decisions on dividends, they’re all Board decisions and for each listed investment company, obviously there’s different Boards. What we try to do is give a consistent dividend. We understand this is sort of an unprecedented period. And it really depends on how the portfolio has performed when we get to August this year. It’s nearly impossible to guess because of what’s happening with the market. So that’s just sort of the commentary on dividends. Now James, do you want to run through any specific questions we’ve got?
James McNamara: Thanks Geoff. The first question is from Ray Cupido. And it’s a question for Matthew. “For income focused investors, how concerned should we be about dividends being cut across Australian corporates? How broad will the cuts be and how long will it take for companies to commence repaying dividends?”
Matthew Haupt: Thanks, Ray. Incredibly difficult question to answer, but let’s have a go at it. Companies are in survival protection mode at the moment. We’ve touched on trying to preserve balance sheets. Dividend cuts are coming. The quantum, I think they’ll be in the range of 20-30% at a guess on where corporate profits are going to be, and I think a lot will be suspended as well. We’ve already seen companies with balance sheet issues suspend their dividends. If they’re not suspended, they’re probably in a better space, and I’d be expecting dividend cuts of 20-30%. Obviously it’s a function of how long the shutdowns go on for. But let’s say the economy does a stage recovery after June, I would’ve thought it would be at least second half of the calendar year in 2021 before dividends would be back to where they would be normally or where they were previous and that’s probably being optimistic. So I think you really got to bank on over a year and a bit before you get dividends back to levels where they were because there’s going to be a lot of pain in the short term. It’s just really a function of the virus containment and when the economy is opened back up. These are the two crucial things you need to watch there. Dividends, if not suspended, are definitely being cut.
James McNamara: Thank you Matt. The next is from Eli Greenblat at The Australian. “Geoff, do you think that due to the massive blowout in government spending and a spike in our debt, there will be a renewed attack on franking credits and a fresh call for franking credits to end as the government looks to cut spending?”
Geoff Wilson: Thanks Eli. The fascinating thing, Matt was doing some numbers the other day and it looks like that the government’s going to spend the equivalent of 10.6% of GDP over a six month period and that is unprecedented spending. Someone has to pay for that, whether it’s higher taxes later on. It has to be paid for in the future at some point in time. Where should that money come from? Our view on franking has always been that it is a logical system which encourages companies to pay tax in Australia, employ Australians and it encourages people to invest in Australian companies and it encourages companies to raise equity rather than debt. And we’ll see during this adjustment period how Australian companies perform versus globally more highly geared companies and I think you’ll find they’ll perform well. Our major concern with franking was the inequitable nature of the Labor proposal where you could have five individuals that were all the same age in retirement and getting five different outcomes. I would assume from the government’s perspective, everything would be on the table. My view is the franking system encourages the right behaviours and that’s what you need. Whether they look at it, I’d assume everything would be on the table in terms of how is this going to be funded. It could rule it in or out. All we hope, is if anything is done, it’s done equitably and logically. So to me, the previous proposal was encouraging people to invest, taking money offshore. Like encouraging Australian companies to invest offshore, encouraging individuals to invest offshore. Like to me that is just illogical. In these times when things are difficult, you want capital. You want the money to be invested a) in Australian companies and b) you want Australian companies to employ Australian workers and pay tax in Australia. To me it is a very logical system.
James McNamara: Thank you Geoff. The next question is for Oscar from Paul Kearnan. “Do you think companies like Afterpay face the prospect of high defaults from clients, higher than expected perhaps?”
Oscar Oberg: Hi Paul. Thanks so much for your question. My answer would be yes, I do. That’s one of the reasons why we don’t own Afterpay. In fact, we don’t own any of the buy-now-pay-later players across the market. I think the key for these guys is they haven’t been tested in a serious recession. If you look at their clientele they’re mainly millennials and unfortunately, this is the cohort of the workforce that are going to be impacted the most. I was looking the other day, I think one in 13 people are employed in the travel industry, I think it’s a pretty similar number for hospitality and the vast majority of these would be millennials. We’re concerned about Afterpay. Certainly the government stimulus announced in terms of salaries and so forth and the support from Morrison government will assist. But these are stocks we’re staying clear of at the moment particularly with the likelihood that unemployment is going to be well over 10%.
Geoff Wilson: It’s an interesting comment you made Oscar. The one thing as investors that’s worthwhile paying attention is the significant structural changes that will happen when things do get better when we do reach the other side of this very difficult period. With millennials, I would assume you’ll find millennials, and maybe even more so the generation below them, will change their behaviour. Historically millennials probably spent most of their money on experiences or most of the money they earnt, they spent it. When I started in the industry in 1980, I remember the savings right in Australia was 20%. And that was because we’d just gone through a difficult period. So I think the younger generation will be more risk averse. They’ll probably have a higher savings rate than they previously did. They’ll probably spend less money on experiences. I’ve even found that I’ve been drawn online where historically I’d jump in the car, drive up somewhere and buy something. Now because that’s sort of off the agenda, I’m going a lot more online and it wouldn’t surprise me if the online participation is a permanent shift. Also for rental, what we’re finding is just a little microcosm – our own organisation – how efficient we can be with whether it’s Skype Business or Zoom, in communicating with each other. I’d assume companies, a lot of companies will look at permanent reductions in rental. I was talking to someone yesterday and they were estimating it could mean 10 to 15% of rental space becomes surplus. As Matt said that has a flow on effect with property trusts, REITs, et cetera, et cetera. To me, what we’re spending a lot of time doing, not only making sure we’ve got a good portfolio to weather this difficult period, we’ve got a portfolio that we want in terms of exposure when the market picks up and that’s obviously the quality companies, the first leg of the market bouncing is usually the financials and the leverage financials, things like Macquarie, you’d want to be long at that point in time and other quality companies that’ll benefit in that first leg up. Also those companies that will find some permanent changes. So they’re the number of areas that we’ve been spending quite a bit of time looking at.
James McNamara: And next one for you, Oscar. “If a company has high quality but low liquidity, would you sell it or conversely, does low liquidity prevent you from buying a high quality business?”
Oscar Oberg: Thanks James. That’s an excellent question. I think, firstly the low liquidity definitely doesn’t provide us, it doesn’t stop us from buying a business. I’ll give you an example. It’s probably the best way to do it I think. City Chic, which I talked about at the investor presentations back in November, we first bought in WAM Capital at around 40 or 50 cents and no one liked the company. It wasn’t liquid at all and at the end of February it hit $3.50. Over the course of time, the company went from say $50 million market capitalisation to around $350 million market capitalisation. That’s still fairly illiquid stock within WAM Capital. In that time it became a more popular stock. And so it meant that all our competitors own the company. As soon as COVID-19 hit, the stock dropped quite sharply. I remember there was a buyer out there, we own sort of close to 5% of the company, there was a big buyer where we took the liquidity because it was in retail. We still think it’s a high quality business but we knew that if everyone else started selling and all the competitors were going to go to safety, they were also going to sell their positions, go to cash. City Chic has been a very successful business for a number of years. They’re happy to take profits so there could be a lot of downside. What we’ve seen over the last three weeks as the stock hit the lows of 80 cents just over a week ago. We’ve actually been buying shares back quite extensively in that period. So that hopefully that gives you a flavor as to why you need to sell some of your less liquid names early because you want to beat the herd effectively, which is all your competitors.
James McNamara: Thank you Oscar. And Catriona, the next one is from Chen Yu. “Why was LVMH sold by WAM Global?”
Catriona Burns: We sold LVMH back in February. That was when at that point we knew China was obviously being impacted considerably by coronavirus. At that point the stock had barely sold off despite the fact that over 40% of their sales are to a Chinese consumer. We knew that stores in China were being shut down and that the Chinese were not going to be travelling. So the sales come from the stores that are actually in China and then from the Chinese travelling to multiple places around the world. We thought there was going to be a significant impact on earnings from the coronavirus. We spoke to both the company and other players in the space such as Kering, which owns Gucci and Moncler. They were saying that foot traffic in China was off over 80% and yet the stock hadn’t moved. It was trading on a peak multiple, so the highest multiple, PE multiple it ever traded on at 28 times. Historically it’s traded on around 18 times and in the GFC got to as low as 10 times. So we thought it was a great opportunity to sell the stock. We still think it’s a very high quality business and we’ve actually just started nibbling a little bit given it has fallen. It fell from 420 to below 300. We thought it was a good opportunity given the stock price hadn’t moved, it was trading on peak valuation and there was significant earnings risk. It gives us the opportunity to re-look at it now at a much lower share price.
James McNamara: Thanks Catriona. The next one is from Dan Rath and this will be the final webinar question before we open the lines for our telephone listeners. “How are you positioned in exchange businesses and will some of them thrive in this environment?”
Catriona Burns: We own CME Group and ICE, two exchange businesses. CME is the world’s largest derivatives exchange offering last place services, financial derivatives on interest rates, equities, energy, commodities, et cetera. And these are just the kind of businesses that benefit from greater volatility given that market participants use derivatives to protect against uncertainty. As such, the volumes at the moment are going through the roof so they are very much benefiting from the volatility in markets. We think they’re a good place to be in this kind of environment.
James McNamara: Thanks Catriona. We’ll now hand over to the operator to connect the callers.
Tim: It’s Tim Monckton here. Would the unprecedented fiscal stimulus which the Australian government has done, which effectively is about 10% of GDP, and you’ve seen the RBA over the last eight days buy $27 billion worth of bonds and the economy is going to get the benefit of the oil price collapse, which is about 1% of GDP. How do you lot feel in terms of the recovery going forward? Do you envisage a V-shaped recovery, an L-shaped recovery or a U-shaped recovery?
Geoff Wilson: Matt, you said something interesting on that other day, do you want to have a go at that?
Matthew Haupt: Thanks Tim. Good question. Monetary policy just makes it easier for companies to transact at lower levels. Fiscal policies address the income hole we’re experiencing. We will work out roughly 43 to 46% of the economy is effectively shut down daily and this is for a lot of the services. The big thing we’re missing at the moment is consumption. Again, if you look at GDP, it is around 68% of the Australian economy. The way you’ve got to frame how we come out of this recovery is how we come out of this virus. If you think it will be, we hit June and then it’s just every restriction is lifted, then it’s going to be a V-shape. Reading a lot of material globally in the experience back in the Spanish flu was, they lifted restrictions too early and you had a second wave. So all of the papers are saying now you’ve got to implement a staged recovery, or a staged lifting up the ban. That says it’s going to be more like a U-shape. But I agree with you, the recovery in the economy will be U-shaped, but the recovery in the shares will be V-shaped. That’s how I’d frame it because the policy you’ve seen is so bullish for risk assets, but the risk asset recovery moves a lot faster than the economic recovery. So I think the two will vary.
Marcus: Hello, Marcus Baker here from Melbourne. Just a question for Catriona. I think the global market is down 30-40% across the board, yet the Wilson Global NTA seems to only fallen around 15-20% percent, how has this been achieved, is this down to the currency movements or is there more to it?
Catriona Burns: In terms of the MSCI fall, the fall has been balanced by the fact that the Australian dollar has fallen considerably. So I think in the month to date, the MSCI is down about 12-13% relative to most of the significant falls when you factor in the Aussie dollar. Small caps are down about 7% more than that. We’ve fallen commensurate with the large cap index, despite having a lot of small caps. That’s because we’ve had that cash in the portfolio. So yes, that difference is significantly the Aussie dollar moves.
George: Hello, my name is George. I have been selectively buying in the various Wilson funds as the market’s been dropping a little bit here, a little bit there, so dollar cost averaging I guess if you like. Usually I’ll take my cue from buying in the LICs when Geoff or some of the other people there are actually buying themselves. I noticed there hasn’t actually been any buying as yet by anyone. So that makes me slightly nervous. Is that something that you’re looking at, actually topping up your own holdings from the various listed investment companies?
Geoff Wilson: Thanks George. The one that’s exceptional value is WAM Global at the moment in terms of the discount NTA. And you can see the numbers on page six. The difficult part is first of all, if we take a step back, we knew at some point in time we were going to get a bear market. In theory, at various points in time, over last couple of years we were thinking, it’ll be coming soon, it’ll be coming soon. And now the bear market started. One thing I suppose we’re all grappling with is what Matt said. If there wasn’t the phenomenal monetary and fiscal stimulus, then the market would definitely be a lot lower. And it would probably be like a more normal bear market where in the GFC I think the market fell 54%. In the 87 crash I think the market fell 50%. To me, we’re trying to work out how long will the economies be shut down? What impact does that have on effectively corporate profitability and earnings and how much of the hole is being filled in by effectively the fiscal policies? And also superimposed on that is if this is sort of a more normal bear market, which it doesn’t appear it is at this point in time, but it may end up playing out, then bear markets do go for more than a month. We could be exceptionally lucky and we might have seen the bottom, but that would be incredibly unusual. On top of the longest bull market ever in the US, it would be the quickest bear market ever. Personally I’ve got limited resources, I’ve got X amount of cash. I already have a large exposure to the various LICs. I suppose instead of dollar cost averaging, like someone asked me the other day, a young person who had 100 grand and wanted to invest, I said, look, who knows where the bottom is? Why don’t you just spend $10,000 a month for the next 10 months? I’m sure it would have been in there somewhere. So I suppose I’m trying to be a little tricky. I was incredibly tempted to buy WAM Global, particularly when I looked at it the other day and it was around that $1.40 level and it was effectively trading at a 30% discount. I know it’s slightly less than that at the moment. So in theory, if the market was a normal bear market and did fall another 30%, you’re buying at the bottom of that bear market. I was going to buy something but it was the end of the day. It was $1.40 and then of course, the next day it was up. So I thought I’m not going to buy it today because I could have bought it yesterday. The next day it was up again, so I held off. That’s where I personally am. I’m definitely prepared to commit more money. Because there are so many uncertainties on the length of the lockdown or the shutdown and trying to get a bit more visibility on that. There was a webinar question that got sent in: the markets rallied over the last week or so. Is this a dead cat bounce or a bear market rally? It could well be. I actually think the bear market needs time to create its bottom. I think it’s too early if we already had the bottom. Back in the GFC, I think the Dow had two 20% rallies and after the tech wreck, in the early 2000s, I think in the bear market there, there were two 20% rallies. I suppose from my perspective, I’m just trying to be a bit cute. I’m trying to get a bit more confidence that we have hit a bottom before I’m going to commit capital.
Geoff Wilson: Thank you for all your questions. Anyone else who has questions, please send them in, we’re very happy to answer them. Remember, you own the companies and we do this, we have this opportunity because you let us do it. Even though recently there’s been an enormous amount of stress, both from a market’s perspective. I think everyone’s feeling a lot of personal stress in terms of what’s happening. We do love what we do. The last month has been brutal in a number of ways. For us, when you’re adjusting the portfolios, it takes time to adjust the portfolios. We’re all happy where the portfolios are now and we think we’re well positioned to take any advantage. We’re pretty confident that things will continue to improve. The big uncertainty is how long this economic black hole going to go for. Is it two months, is it three months? We think as Matt said that when things do open up, it’ll be slow. International travel will be slow and there’ll be a number of other things, but the market tends to look through all those. That’s what we’re all trying to grapple with at the moment. What is the market looking through? Everyone loses money in bear markets and a good manager can make that money back at the start of the bull market a lot quicker than the rest of the market. So that’s our big challenge. Thank you for your support and please send any other questions in to us. Everyone be safe. Thank you.