Alan Kohler here, and I’m talking to Geoff Wilson AO, the chairman and chief investment officer of Wilson Asset Management, a veteran asset manager, and he’s just launching a new fund called the WAM Income Maximiser. It’s a monthly income fund that’s open at the moment and he talks about that in the interview, but also obviously for most of it we talk about what’s going on in the markets and what he thinks is likely to happen and how he’s playing it. What’s he doing, which I thought might be useful to you.
So here he is, Geoff Wilson AO, chairman and chief investment officer of Wilson Asset Management.
Well Geoff, how are you handling the current sort of turmoil of the markets? Are you sitting it out or are you looking for opportunities now?
Yeah, well, I mean you’ve probably got to put it into perspective. The Australian market’s off a little, a fraction over 10 per cent, so it still is, it hasn’t come back that much, even though the NASDAQ and the US market’s come back a bit further. I mean, one of the interesting things about the market is just short term in the US last night, I noticed that the put volumes are at record levels, so you’d assume there’ll be some short covering over the next week or two that could be a quite strong rally in the market. I suppose the thing that concerns us medium term is obviously what’s going to happen to the biggest growth driver globally, is the US economy, and that’s sort of the million dollar question. In terms of what we’re doing in terms of investing, again, like every investor, when things become a little cheaper, then you want to buy and really it’s just we’ve got various levels of cash and we’re just selectively buying.
Interesting. I noticed that your global fund, WAM Global, is two thirds invested in the US and a very low amount of cash, 2.3 per cent cash. So does that look a bit exposed to you?
Yes, but just to put it into perspective, where a lot of the pain has come is that magnificent seven that had led to the bulk of the performance last year in the US and we’ve virtually got really small exposure to them. I think it’s the maximum, I think it’s about 4 per cent of the overall portfolio. So I mean, Alan, I remember back in the early 80s when you were a senior and I was junior, but I remember when I was taught my first job in funds management that half the performance of the underlying stock is the market and the other half of the performance is the fundamentals of the company. Even though the market might come under pressure, if you’ve got good well-managed companies that are fairly valued, then over the medium long term you’ll do really well.
Have you stopped trying to time the market as you’ve got older?
Very good. I don’t know if you remember a conversation we had a number of years ago, I used to spend an enormous amount of time thinking it was timing of the market. And as I have got older and realised that it’s really time in the market, and to me a beautiful statistic I like to now talk about, if you look at the last 20 years, if you missed just 20 days, that’s the best day of the performance of the market over the last 20 years, then your performance would be about zero. You’d make no money. If you had your money in the market over that period of time, then you’d be getting close to 10 per cent performance per annum. So what I have learnt over that time is it’s really time in the market, even though things feel bad at the moment and they could well get worse with this uncertainty, you probably want to be, if you’ve got any cash, you want to be gently employing it.
I suppose the best thing to do would to be in the market on those 20 days and no others.
100 per cent. Yeah, that’s right actually.
But that’s not possible, is it?
Unfortunately, that’s right. Unfortunately, even though we spend our life analysing the market, it’s still, the market always surprises and it always has an ability to humble you as well.
To what extent do you think the rally in the market up, the last couple of years, both in Australia in the big caps of banks and also in the US and the magnificent seven, is due to passive investing and ETFs? To what extent is that playing that?
Yeah, significant. And that’s probably why the market probably has a little bit more risk than if it was just pure fundamentals and it was active money. Obviously, markets don’t go up forever. We know we’ve got bull markets and bear markets. The thing that we haven’t seen is the magnitude of money that’s gone into ETFs and passive investing and things like we’ve called out, a number of people called it out, the valuations on say, Commonwealth Bank trading at three and a half times book value, which is unheard of globally and domestically as well, and that’s been a lot of the passive money. And probably, again, a big question is when that passive money, if the herd starts running the other way and the money starts coming out of equities in size, then to what extent does that make a significant impact?
What do you think about that, Geoff? Do you think it’ll work in reverse?
Yeah, unfortunately I think it can. Do I think that’s where we are at the moment, not necessarily. To me, I think it’s going to be, if it looks like the US is going to go into a recession, which is an extreme call, and no one’s saying that at the moment, to me then that could be part of a bit of the unwind of that passive money.
What were you doing in the ’87 crash? Were you investing then?
Well, I was actually in New York in ’87, so yeah, I remember…
Because a lot of that was due to stop loss, I think. It wasn’t passive investing, it was stop loss, but that was a sort of form of passive investing, wasn’t it?
100 per cent and it was actually, you could actually insure your portfolios and it was the portfolio insurance, which really put enormous pressure on the market where all of a sudden people have insured their portfolios, the market starts falling and they’re trying to find liquidity levels and the market just kept falling because there was very little buying and that was one of the main reasons besides interest rates had backed up a lot as well. To me, it was multifactorial, but that was definitely one of the factors, and that is the risk of passive money. The good thing about active money is that there’s someone making a decision at the end. With passive money, it’s just if money’s flowing out then everyone, then they’re all net sellers. It’s probably like a herd of animals running for a really skinny gate. So it could be, that is a risk.
What’s your view about Trump and the potential impact on the US economy? Are you bearish on the US economy or don’t know, or what, where are you?
Well, yeah, I think one of the interesting things about you look at globally, what’s happening is I think even the professionals, it is nearly don’t know, no one, there’s enormous disparity with opinions. In terms of what Trump’s doing in terms of his strategy, there are some positive parts in terms of the economy, tax cuts, et cetera. But what he’s done initially in his first couple of months is he’s definitely come out with all the negatives. Now the risk is there’s no doubt that tariffs have to be inflationary, so interest rates aren’t going to fall as much as everyone thought. We all know that. And also the money that he’s taken out of the system in terms of aid, et cetera, has to be negative. And also, you remember Alan, we had this, when the Cold War/wall came down, we had this enormous peace dividend where economies globally didn’t have to spend as much money on Defence. Now we’re actually getting the reverse of that. So for global economic growth, that’s a negative. So yeah, to me, if I was an investor, and had cash, then selectively buy, but keep some powder dry because there’s a small possibility that it could be a pretty challenging year.
Do you feel a bit underweight Europe and Japan?
Oh no, no. I mean to me the outlook, there’s no doubt from a global perspective, the global fund and of the money we manage of the $6 billion, 5 billion invests in Australian undervalued growth companies. But in terms of, there’s no doubt the US I think will still be a growth engine. It’s the biggest consumer in the world. And some of Trump’s policies, they are all US-centric in terms of trying to improve the position of the US economy. So you’d assume particularly and with the tax cuts, that there will be some positive things coming through for the US economy over the next 12, 18 months.
Right, so that’s the thing you’re looking to really…
Yes.
You think that there will be some good buying of US stocks?
Yeah, well of any market as we were talking before, the more fear that’s out there, the greater the opportunity.
Yep. Okay. And so you’ve got a new fund launching at the moment, the Income Maximiser Fund.
Yes.
Tell us about that.
Yeah, well I mean for a number of years we’ve been asked by our investors, we’re like most of our money that we manage is in listed investment companies that are listed on the stock market and we pay six monthly dividends, fully franked dividends. And our investors for years have been asking, look, can you provide a product that gives us monthly income? And then this is where income, WAM Income Maximiser comes from. And we’d really been looking at what’s the best way of doing that really to take the minimum amount of risk and give people the maximum amount of return and give them that monthly franked or fully franked income. And the structure we’ve ended up with was, and it was a blank sheet of paper, so we could have been a hundred per cent equities, a hundred per cent debt, any of those. What we ended up going with was a structure that can have, it’s really a hybrid structure, it’s equity and it’s debt. It’s high-quality equity companies and in terms of the debt, the debt is investment grade debt.
So from our perspective, it’s just a great product and it’s going to be yielding, I think initially at a gross level, about 6 per cent paid monthly. The first dividend comes in August, and then the plan is to increase that dividend and to have it as franked as possible. And so we just think it’s a great structure and say if we’re nervous about the market, we can increase the investment grade debt. We could be 70, 80 per cent of that and only 20 or 30 per cent in equity, or we could be 70, 80 per cent equities and less in the debt. So we have those levers we can pull, which really gives us a lot of flexibility.
What level of franking will you go for?
Oh, we’d like to be a hundred per cent franked, obviously our franking…
How can you be a hundred per cent franked if you’ve got some of it in debt?
Debt, yeah. Well, because our franking comes from – the equity part obviously comes from the fully frank dividends we get. We’ll mainly be investing in the top 300 companies. And then obviously with the debt side, you don’t necessarily get the franking there. What we’ll do is any profit we make, obviously we’ll pay tax on that. So that gives us the ability, we not only get the flow through franking from the dividends we get, but we pay tax on profit we make.
Oh, I see.
So that’s how we get it fully franked.
Right. I was just noticing that your WAM Capital, I think that’s your main fund, isn’t it? WAM Capital?
WAM Capital and WAM Leaders, they’re about just $2 billion.
Yeah, so the dividend yield on the WAM Capital is 9.4 per cent grossed up to 11.8 per cent…
Yeah.
…60 per cent franked, crikey. I mean your Income Maximiser is going to be struggling to match that.
Well, see what happened there is it’s really about sustainability of continuing to pay it with WAM Capital, well actually probably take a step back, we’d like to get there. We’d like to be a hundred per cent franked and get there at some point in time with Income Maximiser with WAM Capital is during the start of COVID, when a lot of companies were cutting their dividends, we kept ours and we probably kept it at too high a level and that’s why we’ve actually run out of franking.
And so it’s only 60 per cent franked. That’s the problem, right?
Correct. Yeah, that’s the problem. Yeah. So I mean with the new one, Income Maximiser, we start with a clean sheet of paper. So we’re targeting 2.5 per cent above bank bills, which is about a little over 6 per cent at the moment. And the plan would be for that to increase, and obviously it increases by performance of what we make in the equities by investing in the equity part of the portfolio. And if we make capital gains in debt and with the debt, we do have quite a bit of flexibility. It will be Australian both investing in Australia and it’ll be investment grade.
And what’ll the fee be?
Oh fee, the management fee is 0.88 of a percent. So normally we charge 1 per cent, so we did the 60-40, the management fee on the debt and the management fee on the equity, but it actually is 0.88. And then assuming we outperform, then the investors get 80 per cent of the outperformance and we get 20 per cent. And in terms of outperformance, we’ve got to outperform the equity market and then also…
You mean the ASX 200 or the All Ordinaries?
Yeah, we’re going for the ASX 300, that’ll be the main one we’re investing in. And then also, again, on a 60-40 ratio with the debt, we’ve got to outperform the Bank Bill index plus 1 per cent. So that’s sort of the plan.
And is the ASX 300 benchmark total return?
100 per cent. Yeah. Yeah. But it is just total return. I mean, there’s other products that pay monthly income that gross up the dividend and do that, but ours are just the pure index, it’s our performance not grossed up against the index, not grossed up. To me, we thought that was the fairest way.
And what do you have to do to maintain a monthly dividend cheque? How does that work?
Well, because it’s going to be the combination of the debt and equity, it’s pretty much covered by the flow through of the yield on the debt and the yield on the equity. So we just pay it through, yeah.
Yeah.
But the income we get in from the fully franked dividends plus the interest we’re getting on our investment grade debt.
Very good.
And one of the interesting things is the hybrid, for some crazy reason, APRA has got rid of bank hybrids, which we rallied against. We’ve put a submission into APRA. We just think it’s really, it’s illogical. And the hybrid market’s, what $44 billion, half of it we think is retail investors, 22 billion and that over the next, was it seven years, that’s going to be phased out. I think this year it’s close to $5 billion where the hybrids are going to expire next year, another $5 billion worth of hybrids. So there’ll be a lot of people looking for investing in regular income products. And the interesting thing is, even with that blank sheet of paper, when we’re looking to put a monthly income product to the market, we actually came up, the structure we came up with was a hybrid structure being hybrid part equity and part debt.
So are you going to try and have this thing perform like a bank hybrid, behave like a bank hybrid?
We’d hope we’d do better. I mean, obviously the bank hybrid gives the regular income, but because we’ve got more equity exposure, so we’re taking more risk, what you expect is if you’re take more risk, you want more return. So that’s what we’d would be hoping to do, is do better than the bank hybrids.
Yep. Very good. Well great to talk to you Geoff, by the way I love the way you campaign against things like the tax on superannuation, unrealized gains in superannuation and also you campaign against the hybrids.
Yeah, and the franking. Yeah, back in 18/19 about the franking credits. To me, I think we’re in a unique position. Well, you and everyone on the journalist side are in exceptional positions and you do amazing jobs as well. And to me, the disappointing part is there’s not enough people on the corporate side that stand up for…
Yeah.
…what they believe in and we’ve got 130,000 shareholders. We’re trying to make a difference in terms of perform for them, but we also want to make a difference to stand up for what we believe is fair and logical. And as you pointed out, the taxing unrealized gains, it was a mistake that they ended up doing it because the big industry funds couldn’t work out what the realised gains were on a per investor basis. So the next day they changed to unrealized gains and the unintended consequences for the small business people, the farmers, that people have put their money in the super fund. It’s really unacceptable the government can do that. So yeah, we are very happy to stand up if we need to, but I appreciate that, Andrew…
Alan!
Alan, yeah, sorry. Yeah, I appreciate that, Alan. Thank you very much.
That’s all right, Jim!
Yeah, that’s right. Sorry. Sorry. It’s been a tough week. The volatility in the market, plus we’re on the road marketing the new product, and that’s open, the prospectus is lodged and it’s open until the end of the, I think the 11th of April. So yeah, I’ll probably be… Thank you, Alan.
Well, good on you, and thanks for talking to us, Geoff.
Right. Good to chat. Thank you.
That was Geoff Wilson AO, the chairman and chief investment officer of Wilson Asset Management.
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