By David Rogers


WAM Leaders will boost its dividend again after significant outperformance last year.

The Australia-focused listed investment company run by Geoff Wilson chaired Wilson Asset Management will pay a fully franked final dividend of 3.25c a share, up from 3c in ­January.

The increase means WAM Leaders’ ASX-listed securities will trade on an indicative dividend yield of about 6.2 per cent, or 8.8 per cent grossed-up, at a time when interest rates are near zero and many have suspended or cut dividends during an economic slump due to the coronavirus pandemic.

The dividend boost by WAM Leaders — its fifth increase since inception in 2016 — comes after the LIC beat its benchmark S&P/ASX 200 Total Return index by 10.4 per cent in a tough year for investors.

While the benchmark fell 7.7 per cent, WAM Leaders returned 2.7 per cent in the year to June.

WAM Leaders is an active fund manager, invests in large Australian companies with compelling fundamentals, and looks for macroeconomic themes and catalysts for share price gains.

Since inception in May 2016, the WAM Leaders investment portfolio has returned 10.2 per cent per annum on an annualised basis, outperforming its benchmark by 3.7 per cent.

While WAM Leaders’ portfolio managers Matthew Haupt and John Ayoub did increase the cash reserve of the fund as the market hit a record high after the pandemic hit in January, they decided to stay mostly invested, based on their view that the economic downturn would be short lived.

Cash rose to 14.5 per cent from 8 per cent early in the year, and more recently fell to 7.5 per cent.

But most of the outperformance came from actively positioning the portfolio to take advantage of what were in many cases quite short-duration themes and macroeconomic events causing market dislocations in sectors including consumer staples, energy, gold and banks.

“It was like hand-to-hand combat for months on end,” Mr Haupt told The Australian.

“We’d be just identifying opportunities and telling each other ‘we’ve got to do this, we’ve got to do that’. It was a very intense period, because the opportunities were so short-lived.”

WAM Leaders’ exposures to the consumer staples sector saw a rapid increase in value when Australian consumers rushed the supermarkets for toilet paper and other staples in March.

Then the focus shifted to strategic moves into the gold and energy sectors, which became dislocated after a liquidity squeeze boosted the US dollar at the expense of gold prices and oil prices were pummelled by the demand disruption from the pandemic and supply disunity within OPEC.

WAM Leaders also benefited by staying long on iron ore miners including BHP, Rio Tinto and Fortescue Metals, as the iron ore price surged from about $US80 to $US105 a tonne.

“We saw China’s port inventories and the steel utilisation being maintained and then the Brazilian supply issues kicked in a bit later through the COVID-19 outbreaks there,” Mr Haupt said.

“In a world where we didn’t know the bottom, steel was one area where we had confidence.”

A lot of outperformance came from the financials sector, particularly the banks, which surged around 28 per cent in just two weeks after a couple of analysts highlighted the value in the ­sector.

“Aussie banks were trading around GFC levels — well below book value — so it was just a matter of identifying these themes and moving the portfolio around,” he said.

Among other “screaming buys” were Star Entertainment, Stockland and Scentre.

“We judged that this recession was kind of self-induced and we thought the duration would be less than previous episodes, so we were trying to stay invested,” Mr Haupt recalled.

“Normally in a recession, you’re trying to deflate an asset price bubble, but there was no bubble.

“This was a temporary halt to the economy with front-end-loaded policies followed by a gradual reopening, so there were all the ingredients for a quick recovery in asset prices.” Some major stocks have seen exceptionally strong gains after the pandemic, with Afterpay rising eight-fold from its March low, but the risk-adjusted return potential wasn’t enough for WAM Leaders.

“We don’t really play a lot in that tech space because I just can’t get my head around the valuations,” Mr Haupt said. “Afterpay is heading for the top 20 now but it just doesn’t make money.

“You had that dislocation when it fell to $8 a share … the volatility, when you don’t earn money and things go bad — there’s no bottom. Aussie banks on the other hand, with billions of dollars of earnings, were better risk-adjusted investments when they were trading so far below book value.”

Macro signals like the VIX volatility index hitting 85 per cent, and central banks going all out in asset buying, were other signs that “you could not go too far wrong buying equities”.

But now with the VIX falling back to 26 per cent and Citi’s US Economic Surprise index hitting a record high, Mr Haupt said the VIX could be giving a short-term signal in the other direction.

“You look at what’s going on in the background, and you’re probably saying risk is a little bit mispriced at the moment — you’re not paying enough for it,” he said.

“Central banks aim to suppress risk and they’ve done a great job, but under 30 (per cent on the VIX), with the backdrop we have, I become a little more uncomfortable and a bit more cautious.

“We were trading in the mid-30s about two weeks ago, and I was a lot more comfortable, but any time it gets to these sorts of levels, I start to take a bit of risk off the table.”

But when US coronavirus cases peak, Mr Haupt sees a “huge trade again” in value stocks.

“That’s the only real trade I can see at this point.”

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