by David Rogers

Geoff Wilson has flagged a more challenging year ahead for his WAM Capital, after strong investment returns underpinned a big jump in its profit and dividend for the financial year.

The investment company Wilson chairs reported a record $166.9 million operating profit before tax for the year to June 30, a jump of 87.6 per cent on the previous year, and a record after-tax profit of $125.4m.

WAM Capital will pay a fully franked dividend of 15.5 cents per share, an increase of 3.3 per cent on the previous year.

Based on yesterday’s closing price of $2.47, WAM shares were trading on a net dividend yield of more than 6 per cent, versus 4 per cent for the S&P/ASX 200 share index.

Underpinning the results was a 15 per cent increase in the value of the investment portfolio that outperformed a 13.7 per cent rise in the S&P/ASX All Ordinaries Accumulation Index.

WAM Capital’s strong investment performance was achieved with an average of just 70.1 per cent of its funds invested in the sharemarket and significantly lower volatility than the benchmark.

“The driver of the investment portfolio’s performance during the year was the sound stock selection from the investment team, led by chief investment officer Chris Stott and lead portfolio managers Oscar Oberg and Martin Hickson,” Mr Wilson said.

“These investment decisions were made against a background of heightened volatility across global equity markets.

“We are approaching the end of the current cycle, the second-longest bull market in the United States’ history.

“Rising global interest rates coupled with the potential trade wars will increase volatility and while the global economy is strong, domestic growth remains sluggish.”

But the combination of a strong global economy and healthy corporate balance sheets in Australia means private equity firms are seeking acquisitions rather than divestments, according to Mr Wilson.

The top contributors to the investment portfolio’s performance during the period were Seven Group, Nine Entertainment, Afterpay, Emeco and Bravura Solutions.

But the year ahead is likely to be more difficult for the sharemarket, according to Mr Wilson.

“This will be a challenging year,” he said. “We are incredibly well positioned in terms of our ability to move our cash levels up and down and we have certainly done that to take advantage of opportunities in the August reporting season.

“We held high levels of cash on average over the year and that’s a function of the maturity of the bull market and therefore the amount of risk that we were prepared to take.

“Where we differ from a lot of fund managers is that our number one focus is not to lose money, so we tend to sit in cash unless we believe an investment will deliver a positive return.”

Having recently bought shares in companies that are expected to deliver strong results, Mr Wilson’s $1.66bn WAM Capital reduced its cash reserve to 17 per cent, down from 29 per cent as of June 30.

But Mr Wilson said he would be looking to increase that to around 35 per cent in the weeks ahead.

“More from a short-term tactical perspective, we have increased our equity weighting over the last month,” Mr Wilson told The Australian in an exclusive interview this week.

“We’ve deployed it into companies that we think will deliver above expectation results in this reporting season. Short term, we’re more bullish. Medium to long term, we’re still very nervous.

“Over the year some of the sectors that had been neglected by the market, whether in oversold media or retail stocks, provided some very good opportunities.

“We buy undervalued growth companies when there’s a catalyst to rerate. With Nine (which is now pursuing a merger with Fairfax Media) we bought it when we thought its ratings turned around and there was a string of earnings surprises that rerated the company. But as that catalyst plays out we will move on to other growth companies where we can identify positive catalysts.”

WAM Capital has recently taken some profits on Afterpay, which has risen more than fivefold since the company was floated in mid-2017.