By Grace Lagan
Nick Kelly is the portfolio manager for WAM Alternative Assets (WMA) based in Sydney. Wilson Asset Management oversees $6 billion in assets.
The WAM Alternative Assets’ LIC appears to be trading at a discount. Do you expect it to move to a premium any time soon?
The discount largely reflects that alternative assets aren’t yet as well understood by the broader market compared to more traditional listed equity exposures. The retail market is becoming more aware of the diversification benefits of alternatives, but is yet to fully appreciate the time that it takes for new investments in these asset classes to start performing strongly, which is often three or more years.
Our team has gone through the patient process of reshaping WMA into a diversified and resilient portfolio, and we are now seeing performance improve as investments made several years ago are hitting their stride.
Seven of the firm’s nine LICs currently trade at close to NTA parity or at a premium. We believe WMA will get there, as the market sees the evidence of what we’ve been educating them on these past years; stronger performance that’s resilient in market downturns and uncorrelated to listed equities, growing franked dividends and investor communications and education.
The portfolio has private credit investments; what do you make of the
recent concern about the sector?
Honestly, we’ve been expecting the scrutiny for a while, given how much capital has poured into the sector in the last few years and not all of it has been deployed sensibly. Our own exposure is corporate lending only and is less than 10 per cent of our alternatives portfolio.
We have little to no exposure to real estate debt, although it’s an area we would consider in the future if the stress beginning to emerge in the sector deepens, leading to distressed opportunities.
We look for three key things in private credit. One: workout experience is critical – writing a loan is one thing but successfully working through a restructuring or recovery when things go pear-shaped is an entirely different skill set.
Two: prudent valuation – we want to see managers appropriately mark loans that are underperforming or impaired. When an entire portfolio continues to be marked at par despite obvious signs of stress, it’s a red flag.
Three: transparency – clear disclosure around fees, including the treatment of origination, is essential.
How are you positioning the portfolio for an economic downturn?
We don’t position the portfolio around a single macro-outcome. Instead, we’re looking to build a diversified portfolio that’s resilient across cycles while maintaining flexibility to capitalise on any dislocations.
Our recent recommitment to Allegro’s Fund V is a good example, given their strong track record in turnarounds and operational improvement in private equity taking advantage of idiosyncratic opportunities as they arise.
Within real estate, our exposure is minimal. The portfolio is primarily invested in commercial office, where improved leasing and limited new supply are supportive, industrial which continues to benefit from resilient tenant demand, and finally life sciences and healthcare real estate which are less economically sensitive and supported by strong thematic tailwinds.
Water is 12.5 per cent of the portfolio; is that designed to make the most
of the oncoming El Nino?
Yes absolutely, but it’s broader than this. Water entitlements sit in a capped, finite market, and the government buyback program is expected to continue at scale through to 2027, further tightening supply of entitlements in an already supply constrained market.
Combine this with the return of drier conditions through the regions where we hold water entitlements, and you’ve got real upward pressure on water pricing. Water remains one of the best diversifying assets an investor can hold within a broader portfolio.
What’s the most frustrating position in the portfolio?
A legacy agricultural holding which is a citrus farm in north-west NSW. It’s a
genuinely high-quality asset but the agri sector is under pressure given cost inflation, supply chain challenges, and oversupply. It’s not a particularly deep or liquid market even for great assets which makes it difficult to exit.
What’s one thing that has influenced your approach to investing?
In 2020, I lost my late wife Nicole to a rare cancer at the age of 34 when our son was two years old. This experience has taught me empathy, perspective and resilience. Navigating life after this sort of experience takes a particular kind of emotional endurance, and I think that same endurance is what drives the discipline you need to manage multi-year market cycles. Perspective is a beautiful thing.
Are there any books, podcast or TV shows that you’d recommend?
I always recommend When Breath Becomes Air by Paul Kalanithi. It’s a lesson in how to live and a genuine testament to finding grace, love and real purpose in life. And of course my wife’s [Nikki Shah] The Big C Podcast which is onto its third season!
What is your favourite local bar/restaurant?
Pilu in Freshwater. A magic restaurant which takes me back to the beaches where I grew up.
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