By Cliona O’Dowd
Out-of-control inflation and interest rates climbing higher and faster than expected are the big risks Geoff Wilson is watching this year.
And after posting investment returns of between 13 and 25 per cent across his listed investment companies over 2021, the Wilson Asset Management chairman isn’t fazed about the increasingly challenging market outlook or its impact on return prospects.
“All markets climb a wall of worry and on the worrying side this year is inflation: is inflation going to get out of control and are record-low interest rates finally going to start increasing at a greater rate,” Mr Wilson told The Australian.
“For me, the biggest risk for the market is not earnings growth because as economies continue to open up and people continue to work out how to live with coronavirus, that will be positive for earnings.
“Rather the big risk to the market is higher interest rates leading to a P/E contraction. And that could be significant if interest rates increase at a greater rate than the market is anticipating. If that happens you could see P/Es decline by 20 or 30 per cent.”
Mr Wilson, who manages $5.5bn across eight listed investment companies, was speaking after the release of the funds’ performance numbers to the end of December.
The WAM Microcap fund was the clear outperformer and has now returned 24.6 per cent per year since inception, double the 12 per cent the benchmark Small Ordinaries Accumulation Index returned over the same period.
Trading at a premium to its net tangible assets, a fifth of the LIC’s holdings are in the consumer discretionary sector, while IT and communications make up a further 12 per cent each, followed by industrials and financials at 11 and 8 per cent. Its top holdings include Aussie Broadband, Capitol Health, Iris Energy and MyState.
Mr Wilson’s flagship fund, WAM Capital, which also trades at a premium to NTA, has returned 16.4 per cent each year since inception, again beating the benchmark’s 8.7 per cent return.
“For the 21 years since WAM Capital has been going, the challenge (to top the prior year’s returns) has gotten bigger. We plan for the worst and hope for the best. We’re trying to buy undervalued growth companies … and we’ll continue with that methodology,” Mr Wilson said.
“The great thing about the market is it’s always dynamic – it’s always changing.”
WAM Capital’s top holdings as at December 31 included Australian Clinical Labs, Brickworks, Carsales.com, Estia Health, PEXA and TPG.
Virtus Health and Australian Clinical Labs were “significant contributors” to the portfolio in December, Wilson Asset Management said in an update to the market on Friday.
ACL’s shares got a boost in the month after it upgraded its first-half profit expectations, while Virtus shares spiked after BGH Capital lobbed a bid for the IVF provider.
Navigating a rising interest rate environment meant staying away from companies that were now looking riskier, Mr Wilson said.
“The high P/E companies, the companies that don’t have strong fundamentals, you’re taking a lot of risk there. And we’ve already seen that in recent weeks with the derating of the tech companies, which has been quite savage.
“That’s really about the backing up of interest rates and the expectation of that continuing.
“Globally, people are talking about the market performing through the first two or three interest rate increases because that’s a signal of the strong growth coming. But from that the higher interest rates start having a negative impact on economic activity.”
Despite the uncertain market outlook, the economy would continue to benefit from the world learning to live with Covid-19, Mr Wilson said.
“As economies continue to open up and the various supply-chain problems work through the system, which they will, people will adjust over the next 12 months and that will be a positive.
“So it’s about having companies whose earnings will benefit from the further opening up of economies and that are on relatively low P/Es, while staying away from those that are negatively impacted by increasing interest rates.”
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