Oscar Oberg
Lead Portfolio Manager, WAM Capital (ASX: WAM), WAM Microcap (ASX: WMI), WAM Active (ASX: WAA), WAM Research (ASX: WAX)

Will Deer
Investment Specialist, Wilson Asset Management


Will Deer: Hello, my name is Will Deer and I’m an investment specialist at Wilson Asset Management. I’m joined today by Oscar Oberg, who is the Lead Portfolio Manager of WAM Capital, WAM Active, WAM Research and WAM Microcap.

We’ve recently raised $90 million from existing shareholders in WAM Microcap. Can you talk about how you’re deploying that? Have you started to deploy it and are you still seeing opportunities?

Oscar Oberg: We are overwhelmed by the support of our shareholders. I really appreciate the fact you’ve supported us with that capital raise because it did come at a time when the markets were a bit wobbly. In terms of deploying the proceeds, the $90 million, we’re taking our time. The market is a little bit uncertain at the moment. There’s definitely no rush, but if I had to put a number to it, we’re probably deployed around a third of that money to date. We have higher cash levels than what we normally do.

Will Deer: You have spoken previously about this disparity in valuation in small caps, and you have been quoted saying small caps are back. How are things going currently with regards to that?

Oscar Oberg: They were back. It’s interesting, the tide can turn pretty quickly these days. We had a really good February – March period coming out of reporting season, I think small-cap industrials at that point in time were outperforming the broader market financial year-to-date by around 4%, and now they’re underperforming by 1%. If that continues, it’ll be the third financial year in a row where a small industrials index has been the worst index in the market. Now, for us, while it is a negative and small-caps have had a tough time of late, it is bringing up lots and lots of opportunities, in particular in the microcap space where we’re seeing a number of companies trading at big discounts to the net tangible assets. We see a lot of companies with very strong balance sheets and because they’re a liquid they are getting sold off quickly. From the micro-cap perspective, exciting times ahead and we just need the markets to effectively just stabilise. We don’t necessarily need interest rate cuts, we just need the perception of the interest rate increases to normalise and the stock picking will come through, which is what we’ve seen with all the funds really this financial year so far.

Will Deer: Do you think we’ll get more clarity on interest rates? I know it’s not an important input in your process, but it’s clearly important for sentiment around small caps.

Oscar Oberg: It is definitely important for sentiment, and what you have always got to remember with the small-cap market is the way overall index or the benchmark looks these days in the small -ordinaries index, because a lot of the retailers and the automotive companies have, their market caps have fallen, they’re actually in our index, so it is a big part of our index. It’s around 30 to 35 %, is in companies exposed to the consumer and sectors such as retail, auto, housing, etc. So, you do need that stability or confidence on interest rates. Are we there yet? I don’t think so. I think the positive thing, so while small caps have been weak through this period and certainly there have been a number of updates, particularly we saw that through the Macquarie Conference, it does feel and we have the luxury of meeting a lot of companies, and we see a lot of companies, we do thousands of meetings every year.

The overall sentiment in the last probably six weeks or so has shifted downwards. In terms of what that means for Australia, it feels like the path we’re on at the moment, feels about right. There have been some CPI increases, a bit higher than what people thought, but when we see companies at the moment, particularly those exposed to consumer, it is getting a bit tougher, which ultimately, while it’s negative for near-term earnings, it’s probably positive from an interest rate perspective as we look forward.

Will Deer: Have you stuck with your winners or are you trimming the winners and the ones that have had some phenomenal performance? Are you tending to stay with those that have delivered or is it now time to take profits and move on to other opportunities?

Oscar Oberg: If I look at all the portfolios really, they haven’t really changed that much over the last six to 12 months. Part of the Wilson Asset Management process is that we are an active fund manager. Every day we are buying and selling shares depending on where our view on the valuation is or the current share price versus expectations.

There have been a few changes. The biggest change to the portfolio, and this is consistent across all of them, was around February, March, we did have a very good period and as I was sitting there looking at the portfolio and speaking to the team, we did realise, we’re quite overweight the consumer sector. And that had been a key overweight for us really since around April, May of 2023. So, it was a trade that lasted probably nine months or so. We did sell a lot of those companies through that period which ultimately looks like it was the right call but I’m not going to say we got out of all them, we’re still getting hurt by some of the ones that we still have, but when it comes down to it we are still very confident the long-term projections of the company it just you know might have a tougher period over the next few months or so.

Will Deer: Is it fair to say that the portfolio is more defensive where you could take that cyclicality out you’ve made it slightly more defensive for this environment?

Oscar Oberg: Not particularly. I think the interesting thing, the dynamic that you have at the moment is you have a, and I hate talking macro because I’m not macro, I’m around stock picking, but interestingly enough, if you thought that the perception was that interest rates would be increasing or inflation increasing, you wouldn’t have thought the tech industry would be doing so well but it is still going well. If we were being defensive a lot of those tech names would probably have been sold quite down quite heavily but we’ve actually held a good weight in those companies. Definitely sold down our consumer discretionary exposure which has been good but again as I said companies like Nick Scali (ASX: NCK), Premier (ASX: PMV), Universal (ASX: UNI) and Beacon Lighting (ASX: BLX). We have a very positive view of those businesses over the medium to longer term so we’re happy to hold those positions through this current weakness. So, I wouldn’t say the portfolio is defensive, I just think it’s very much what we’re good at which is stock picking.

Will Deer: A clear differentiator for Wilson Asset Management is the importance of catalysts, identifying catalysts to effectively avoid value traps, essentially. Can you give us some examples of catalysts that you look for in different companies in different sectors?

Oscar Oberg: A catalyst is anything that changes the perception of the share price. Catalysts could be an earnings upgrade, it could be an acquisition, it could be a divestment or something like that.

The best example is Sigma Pharmaceuticals (ASX: SIG), which has done the Chemist Warehouse transaction. We’ve been in the company for around two years, we own around just under 5% of the company. At the time we were buying the shares, HomeCo (ASX: HMC) were buying the shares and having done work on HomeCo, there was a family interest, let’s call it with the Chemist Warehouse guy. You are sort of questioning at that time whether something was going on there but in the end, we liked the new CEO of Sigma Pharmaceuticals. We thought they would beat earnings, which they did. We thought they would win the Chemist Warehouse contract because they had newer facilities, and they needed the contract much more than their competitors so they were willing to discount their price. When they won the contract, there was a significant catalyst for the company. And then after they won the contract, you kept hearing news reports saying things about Chemist Warehouse and so forth and we held on to the shares and lo and behold, the Chemist Warehouse merger occurred in November. At that point, you think the shares have gone up, what’s the next catalyst? Well, the next catalyst was actually Sigma entering the ISX200 and that sent the shares from about $1 to $1.30. As you talked about previously, that was a massive weight in the portfolio which we’ve progressively sold down over the last six months into profits, but it’s probably been our most successful stock over the last year or so.

Will Deer: In terms of things that have gone well and that you’re really pleased about, can you give an example of a stock that had a pretty big impact? Maybe underperformance, but you’ve stuck with it and it’s come good?

Oscar Oberg: I’ll say sector, because we’ve gone from one of the stocks that got taken over and just as soon as it got taken over, we just bought the peer, it was the aged care sector, and so Estia Health, were lucky enough to have that. We had around 10% of the company, the biggest weight in the portfolio, probably the biggest takeover we’ve ever had in my time at Wilson Asset Management, in terms of the weighting of the portfolio. And that got taken over by Bain in May of last year. And fortuitously, when we got the cash from Estia, because we’ve done all the work on Estia, and then Regis (ASX: REG), their competitor, which actually has higher quality aged care sector than Estia, was just sitting there. And we took the money from Estia and just put it into Regis and the shares have more than doubled over the last year. And that’s been a function of a lot of the work we’ve done, understanding the problems in Australia with aged care and the fact that the government needs to fund a lot of the wage increases and to allow the industry to, following the Royal Commission, to actually turn a profit and actually get new investments. So, you see a very favorable industry dynamic emerging with the industry, and that’s now come through with Estia and Regis. We always have stocks like that, you’re sitting there for a rainy day, waiting for them to finally come good and when you’re big fund like us, you’ve got to take early bets. So that’s certainly part of the process of what we do.

Will Deer: Are you expecting continued M&A activity? It sounds as though valuation can be your catalyst. Good quality businesses don’t stay cheap forever. Are you expecting that to continue as a theme in the Australian market?

Oscar Oberg: Definitely. That six -month period from September last year to the end of March was nuts. There was something every Monday. There was a day where Adelaide Brighton, Link and Pacific Smiles, the dental roll-up, all got done on one day. I’ve never seen that before. Now the macro environment has changed a little bit now. There is some uncertainty around interest rates, there’s a bit of uncertainty around the economy. You know the small-cap market has underperformed the large-cap market, so I think there is I think we’ll see that pause for a little bit.

Now in saying that though on the micro-cap side I mean there’s just so many companies out there that are trading at ridiculous valuations and because there’s no liquidity and there’s just no demand for the shares.

I can still see some of those companies being taken over. I just don’t think we’ll see the same quantity that was seen over the last six-month period, which to be frank has been, I think it’s a decade high in terms of what we’ve seen. It’ll be interesting to see how it pans out.

Will Deer: You’ve said previously that when other fund managers start to move down the market cap spectrum, that you’ll start to see a lot of these small caps re-rate. What do you think those fund managers need to see before they start adding to their weight since small caps?

Oscar Oberg: It’s simple. I think it’s stability in the macroeconomic environment. If you’re a large-cap fund manager and you say, “Oh, I need to own a retailer,” you can either buy Wesfarmers (ASX: WES), or if you want to go defensive go Woolworths (ASX: WOW) and Coles (ASX: COL), but you know when you buy those businesses, you’ve got an exit in case it doesn’t work out. Now, if you take that portion of money and you start going, “Okay, I’m going to buy Premier or Nick Scali,” and you want to buy 5% of the company, if you get it wrong, it’s going to be very difficult to come out.

I think liquidity is at a premium in markets, such as what we’re in at the moment, and certainly what we’ve seen over the last six weeks. Small caps have underperformed the market, but the large cap companies keep getting stronger. Like Wes Farmers, for instance, had a look at the other day, and it’s a great company, isn’t it? You know, amazing story, Kmart, Bunnings, etc. but it’s trading on a price that is multiple of close to 30 times earnings. You need risk, effectively, you need risk appetite to increase, and I think that happens when the macroeconomic environment stabilises. We saw an example of that happening from around November to March, and it was a great period for small caps. It was not very long period so we are hoping that at some point in the next year or two, you will get an extended period like that because the underperformance of small and large is still, it’s actually getting wider.

Will Deer: So, it sounds like there’s huge opportunities out there, but one needs to be patient.

Oscar Oberg: Exactly, exactly right.

Will Deer: Thanks very much, Oscar. Great to chat.


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