One year of WAM Alternative Assets

Olivia Harris: Thank you so much for joining us today for our next instalment of WAM Vault. I’m joined today by the WAM Alternative Assets (ASX: WMA) Portfolio Manager Dania Zinurova. Dania, it’s great to speak with you today.

Dania Zinurova: Thank you Olivia.

Olivia Harris: We recently marked one entire year of WAM Alternative Assets. What have been some of your biggest achievements as the Portfolio Manager since your appointment in October?

Dania Zinurova: It has been a big year. I was really pleased to see WAM Alternative Assets’ strong financial results during FY2021. The Board also made an important decision on the dividend policy to equalise the dividends and pay a fully franked final dividend of 2.0 cents per share. The Board also provided a FY2022 interim dividend guidance to shareholders of 2.0 cents per share.

The engagement with the market and strengthening our WAM Alternative Assets brand was an important part of our work this year. This enabled us to attract and source new investment opportunities.

The feedback from the broader Wilson Asset Management shareholder base, which now exceeds 120,000 shareholders, was that they want to learn more about alternative assets and how to invest in those asset classes. We launched an educational series which was well received and we plan to continue the series next year.

At the end of the day, we want to make sure our shareholders are confident and comfortable with investing in alternative asset classes. We want to take everyone on the journey with us as the WAM Alternative Assets portfolio grows and evolves.

Olivia Harris: Can you talk us through what has happened within the portfolio during the year? Maybe you can discuss some of the exits and also new investments that you have made?

Dania Zinurova: Of course. When I think about the overall portfolio, the underlying investments proved to be resilient and those in particular with exposure to the digitalisation theme performed really well.

In terms of the exits, I will first take a step back and explain the concept of an exit. In the alternative asset classes, when we talk about illiquid investments, we usually think about a timeframe. Depending on the asset class, such as private equity, venture capital, infrastructure, real estate, etcetera, the duration of the investment holding period can range from somewhere between 3 years to 7 to 8 years. The idea is that an investor buys an asset, then implements their strategy to add value to an asset, and then when the time comes they sell the asset and realise capital gain. This period is what we call “exit”.

We had a few exits this year. One was earlier this calendar year in our private equity part of the portfolio. One of our investment partners, Fortitude Investment Partners, invested in a portfolio of six medical clinics in South Australia back in 2017.  Fortitude is a private equity growth fund manager. They implemented their growth strategy in this portfolio and expanded it to 36 clinics across Queensland, Tasmania and Victoria. The company opened up its investment to bidding and received attractive offers, deciding to exit the asset. They achieved a solid return of approximately 17% to investors on this exit.

Another exit was in our real assets portfolio with our investment partner Argyle Capital Partners. Back in 2015, Argyle Capital Partners invested in irrigated citrus orchards in the Hillstone area of New South Wales. They implemented their strategy to redevelop the asset and improve the quality of the orchards. This year has been a really strong year for citrus orchards so we saw some very strong bids in the market. Argyle Capital assessed the market, ran a competitive bidding process and decided to exit the asset. We received proceeds in August this year and this capital will be reinvested in new investment opportunities.

The portfolio had a very good level of cash at the beginning of the year so we committed about two-thirds of this cash into new investment opportunities: Palisade Diversified Infrastructure Fund, Barwon Institutional Healthcare Fund, and Adamantem Private Equity Fund II.

Olivia Harris: What does the current opportunity set look like today within the WAM Alternative Assets investment portfolio?

Dania Zinurova: I am sure our shareholders are already familiar with the megatrends we are following, and they really shape the opportunity set for us at the moment. These are growing ageing population, digitalisation or technological evolution, climate change and increasing demand for food.

I really like the digitalisation theme. I think it translates well. Seeing this theme playing out in asset classes such as venture capital proves that it is a very attractive story for investors. This year, we saw approximately $1 billion of capital inflows in Australian venture capital which exceeds the previous years. So definitely quite a few new names coming to the market. Within the WAM Alternative Assets portfolio, venture capital was one of the top performers.

In private equity growth, I do believe the underlying businesses that we have within the portfolio have proven to be very resilient, despite a challenging environment on the back of the coronavirus. This is due to the fact that most of them had very healthy balance sheets and were very conservative with the use of debt. Asset classes such as infrastructure continued to attract a lot of capital. In the first half of this financial year we saw just over $1 billion capital raised for Australian-focused strategies and infrastructure. In this calendar year we have already started seeing more capital inflows into Australian based infrastructure fund managers who invest globally in infrastructure.

The area where I probably saw more capital inflows was around renewable energy. This was on the back of both Australian investors and offshore investors willing to invest in well-regulated and transparent sector but also increase their exposure to environmental, social and governance (ESG) related strategies, so very interesting dynamic in this sector.

The fact that the Australian government is very committed to the further development of infrastructure as a sector gives investors more confidence and we have started seeing more capital inflow. Real estate remains one of the major asset classes for investors and I think if we talk numbers it is about $29 billion of assets under management just in real estate.  What was interesting this year is the fact that real estate equity strategists saw less demand or less interest from investors, because everyone was waiting on how the valuations and the market will correct post coronavirus, so there was a bit of a pause on that front. On the other hand, what we saw with real estate debt was capital increasingly flowing into real estate. This puts more pressure on investment returns.

If I look on yields, from real estate debt strategists now versus two years ago, of course their returns compressed quite significantly. What I think will be interesting to observe later this year and next year is how those new real estate equity strategists will come to the market and target more opportunistic strategies. But this will only happen when we see correction in prices or correction in valuations.

We do hold some real estate in the WAM Alternative Assets Portfolio. We have two industrial assets in Australia and the industrial sector continues performing really well.

Finally, real assets. I love this asset class because it is so diverse but it is also seen as a very strong diversifier in any investment portfolio. It has low-to-negative correlation to other asset classes. It has the capacity to provide more yield to investors at the same time as capital appreciation. It is often seen as a natural inflation hedge as well. We have quite a material exposure to real assets within our portfolio and real assets again was one of the top performers within WAM Alternative Assets for the financial year. There have been interesting dynamics within the portfolio and I am very excited to see exits next year. I expect to see some really strong exits across the portfolio.

Olivia Harris: That’s fascinating. You mentioned briefly that WAM Alternative Assets is focused on these longer term megatrends. Can you talk about one megatrend that you find particularly compelling, and how you are incorporating that into the investment portfolio?

Dania Zinurova: Earlier I outlined the four megatrends we follow. I always say they are very long-term trends with strong tail winds. At the moment I am really focused on digitalisation because I really see this trend is accelerating investment opportunities. It is accelerating the growth overall of the tech-based businesses. In a recent report published by the Department of Industry, Services, Energy and Resources, they quoted that the improvements to all sectors and new opportunities that would be driven by technological innovation would bring around $350 billion to the Australian economy over the next decade. To me, looking at these numbers and thinking about the macro fundamentals is a big indication that the opportunity set will continue expanding and will bring more opportunities for us.

We all probably know and are familiar with Australian success stories of start-ups.  Thinking about our portfolio, we invested in a company through our investment partner January Capital. We invested in a Brisbane based company that provides online education, Go1 which was founded as a start-up in 2015. It is now valued at over $1 billion after the last successful financing round of $200 million. Those stories are not constrained to tech-based industries. It really translates into all sectors including health and retail. Wherever we look we see these technological advances. So that definitely opens up lots of doors for us and I have been discussing new potential investments for WAM Alternative Assets with a number of players in the market.

Olivia Harris: That is great Dania. It has been a really long time since we last saw our shareholders. Is there a message that you would like to leave with everybody?

Dania Zinurova: Thank you Olivia. I would like to thank our shareholders for their support, for their feedback and their engagement. I know last year has been a very challenging and volatile environment for everyone. I would say for the shareholders who look for less volatility, at least in their investment portfolios, WAM Alternative Assets will definitely serve the purpose.

Olivia Harris: Thanks Dania.