By James Thomson
The stockpicker in charge of Wilson Asset Management’s WAM Leaders listed investment company says investors need to stay nimble in an environment where markets are gyrating from bullish to bearish almost daily, and where glimpses of stress in credit markets are becoming more frequent.
WAM Leaders reported an impressive return of 9.7 per cent for the year ended June 30, 16.2 per cent above its benchmark, the ASX 200 Accumulation Index, which dropped 6.5 per cent. The LIC’s results on Wednesday also said it will pay a full-year dividend of 8¢, up 14.3 per cent on the prior year.
But the WAM Leaders investment team, led by portfolio manager Matt Haupt, had to work hard to deliver this return in exceptionally choppy markets, with the LIC’s $1.5 billion portfolio turning over more than three times over the course of the year.
Several calls were key to delivering the strong performance. Haupt says WAM Leaders picked the rise of inflation late in calendar 2021 and so had no exposure to the high-growth stocks that have been smashed over the last nine months.
On the plus side, Haupt says exposure to financial stocks that benefited from rising interest rates was a key driver of returns, with large stakes in National Australia Bank and a recovering QBE among the best picks.
WAM Leaders also moved early into energy stocks and resources, although exposure to the latter was trimmed a few months ago in anticipation that commodity prices had probably peaked. Haupt is now buying the mining sector after the recent commodity price fall.
The way WAM Leaders has adjusted its exposure to commodity prices – first up, then down, now up again – is a good example of what Geoff Wilson calls the “dynamic investing” style of the LIC, which on average was 96.4 per cent invested in equities during the 2022 financial year.
Far from pick and stick
Haupt rejects suggestions this is more like trading than investing, arguing that at its essence, investing is about gathering data points and adjusting your view on companies, sectors and markets accordingly. He describes WAM Leaders as investing “in the tails” of markets, where sentiment is swinging from bullish to bearish much quicker than it usually does; as such, the LIC wants to be able to shift from being defensive to aggressive quickly as appropriate.
“There’s such a wide dispersion of potential outcomes at the moment. so we’re having to be increasingly nimble,” Haupt says. “We’re getting data points daily, which change the probability of those events happening, so we’re responding. Our job is to respond to the environment.”
This approach is obviously different to the pick-and-stick style that many of the country’s LIC managers take. But given the frequency with which fund managers miss their benchmark, and the research that suggests this is in large part due to their inability to change their investment strategy as market trends shift, Haupt’s willingness to be flexible will rightly find admirers.
And he also points out WAM Leaders has several long-term bets in its portfolio too, including insurer IAG (which Haupt expects will re-rate over time), Treasury Wines Estates (Haupt is a big fan of how CEO Tim Ford is navigating the shift away from China) and Telstra.
The latest data point for Haupt to digest is the Reserve Bank’s 0.5 percentage point interest rise on Tuesday, and the slightly more dovish tone to governor Philip Lowe’s statement.
How the banking sector responds to this is important to Haupt’s holdings in NAB and Commonwealth Bank. WAM Leaders is tactically overweight on the banks at present, and Haupt expects CBA to post an impressive full-year profit result with improving margins next week. But he is wary of how hard the RBA, and indeed other central banks, will raise rates in a slowing economy.
“Policymakers are on a collision course with economic growth to fight inflation,” he says. “If they keep going the way they’re going, they’re going to cause carnage across risk assets.”
Not surprisingly then, WAM Leaders portfolio has a defensive stance at present, although cash accounted for just 2.9 per cent of the portfolio. Haupt says this is pretty typical; WAM Leaders only moves heavily to cash when it can see a major credit shock on the environment.
Haupt isn’t seeing one yet, but he’s watchful given what he describes as glimpses of credit market stress, including inverted bond yields, the strong US dollar, and poor conditions in the European repo market. Add depressed bond market liquidity to this list, too.
“The problem is if people don’t trust other people’s collateral, then you get a liquidity crunch and that’s what happened during the GFC. So there is a possibility, and the odds are increasing every day, but they’re still fairly low at this point.”
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