Five months of WAM Strategic Value

Philip Lee: My name is Philip Lee and I am with Morgans Financial. It is my pleasure to bring this edition of WAM Vault to you from Brisbane. I am delighted to have with me a man who needs little introduction, Geoff Wilson AO, the Chairman and Chief Investment Officer at Wilson Asset Management. Geoff, welcome to Morgans today.

Geoff Wilson: Thank you.

Philip Lee: This edition of WAM Vault focuses on the recently listed WAM Strategic Value  (ASX: WAR), after a really successful $225 million capital raising. Geoff, for over four decades, you have focused on identifying and investing in discounted investment opportunities, in particular in the listed investment company (LIC) and listed investment trust (LIT) sector. This year, you consolidated all your activities into WAM Strategic Value. What prompted you to do that and what have you been able to achieve since bringing it together and listing?

Geoff Wilson: I suppose the interesting thing is, like yourself and like everyone who is an investor, we all like to buy a dollar of assets as cheaply as we can, being value investors. Whether you can buy a dollar for 50 cents is exceptional. In the listed investment trust and company space, occasionally you can buy a dollar of assets for 80 cents or 85 cents. As the business has grown, we thought it just made sense that we allow people to have direct exposure to undervalued assets. That is why we created WAM Strategic Value which trades under the ASX code WAR.

Philip Lee: Fantastic. There are over a hundred LICs and LITs, and other closed ended funds listed on the ASX with a combined market cap of over $50 billion. It is a sizeable sector. What is the current landscape of that sector and what are you seeing at the moment?

Geoff Wilson: When we talked about floating WAM Strategic Value, there was quite a bit of interest in the whole sector and the discounts narrowed. More recently, there have been some discounts that have opened up again.

We are very happy with our portfolio. We are holding about a high 20% of the portfolio currently in cash as we look for some very specific strategic opportunities. I do think there will be further rationalisation in that sector over the next 12 months. We will be involved in that.

Philip Lee: Can you give us any examples of what you have done recently?

Geoff Wilson: Companies that we are looking at buying are the listed investment companies that trade cheaply. One that we have been buying recently is VGI Partners Global Investments (ASX: VG1). We were buying it the other day at a 16% discount to its net tangible assets (NTA). You are getting exposure to that fund manager. The professional investors are paying a dollar, and we are paying say 84 cents which to me is exceptional value.

Philip Lee: Fantastic. What about the consolidation of the sector? Do you think there are too many LICs?

Geoff Wilson: There are definitely not too many listed investment companies. The number of listed investment companies has probably doubled in the last four or five years. They will continue to grow. It is a great sector. There is a lot of demand for these types of products because there is transparency. You have a Board of Directors that are accountable, the investment manager is accountable, and that is what has resulted in some of the changes in structures more recently. For investors, you are getting exposure to a growing stream of fully franked dividends and 60% to 65% of our investors are self-managed super investors. It is a very attractive investment vehicle.

Philip Lee: Is the ability to deliver a steady stream of income to these investors is critical?

Geoff Wilson: That is right. First of all, the fund manager has to perform. Secondly, when they perform then they can provide a growing stream of fully franked dividends. Like everyone that run companies, they have to treat shareholders with respect. The fourth thing that a lot of newer participants in the space do not realise is they really have to have a very detailed shareholder engagement, communication and marketing strategy. That is where a lot of people fail. We try to do that and we also understand that myself being the Chairman of the company and being on the Boards, we are only there to represent shareholders. The shareholders that own shares in the company, they own the company. It is very important that they communicate to us what they see, what they want us to do. Unfortunately, these days, a number of Boards of big companies, the Directors think they are there because the other Directors put them on there. They are there to perform on behalf of all shareholders. That is something that people have to realise.

Philip Lee: Of course. Now, you talked about the growth of the LIC and the LIC sector. The other sector that has grown strongly has been the exchange traded fund or the exchange traded fund (ETF) sector. What is the key difference and why would people invest in a LIC or a LIT with Wilson Asset Management as opposed to getting an exposure through an ETF?

Geoff Wilson: Looking at the ETFs versus the LICs or LITs, ETFs will always grow at a significantly greater rate, because they are an open ended pool of capital. One of LIC’s or LIT’s big positives is that they are a closed end pool of capital. Once they have done their initial public offering (IPO), then they start with X amount of capital and they have to invest that. They do not have money coming in or going out at various points in time, whereas an ETF is open ended. If people want to put money into an ETF then it grows significantly.

The ETF also is a trust structure while the LICs are a company structure. With the company structure, that is where you can get a growing stream of fully franked dividends, which is very appealing to people that want that growing stream of fully franked dividends over time and self-managed superfunds. With the ETF, you are getting distributions, and they have all different tax consequences. I know the ETFs have been embraced by millennials. I was talking to someone the other day and they said there is starting to be a little bit of pushback because the millennials thought they were investing in an ETF and that was it. Then, all of a sudden, they get a complex tax distribution. Also, Boards are accountable in a LIC, while an ETF is just another trust and there is a responsible entity (RE).

Philip Lee: Fantastic. As we approach the end of 2021, have any of your views on the equity markets changed? We have had very strong overseas markets. We are seeing a big part of our economy about to reopen coming out of lockdown. But we are also seeing early signs of interest rates rising and particularly with commentary out of the Reserve Bank of Australia (RBA). How are you seeing things from Wilson Asset Management’s perspective?

Geoff Wilson: I think what surprised everyone was when coronavirus hit how quickly the market bounced back. I remember I was doing a presentation in February the year that coronavirus hit and in that presentation, we talked about things going back to normal eventually, that they will normalise. And that is where we are. We are in the process of the economies getting back to normal. Obviously there has been a lot of pent-up demand that will fuel the growth in those economies. We are aware of that and we are seeing that.

As you mentioned, we have had record interest rates. The risk is that now we are starting to see a little bit of inflation and interest rates starting to increase. What does worry me is we have had a very, very strong equity market. I was taught in the early 80’s when I started working in the equity market that you make your money in the second bull market. I did not understand what that meant initially. What it means is on the first bull market whatever money you make you lose, because you have taken nothing off the table, and it is really your second bull market that you realise that when markets have been strong for a long period of time, you have to make sure you have taken some off the table.

We had a very strong equity market over a period of time. Last year, I think the Australian market had its best performance in 34 years. This year, it has been a strong start to the equity markets as well. There is a lot more risk than there was on the table. It is really about making sure you have your portfolio positioned so if the market was down 20% or 30% overnight then you could sleep at night. No-one knows where the market top is, all I know is the market has been very strong. It looks like it will continue to go up, but there are some signs of excess.

Philip Lee: Signs to be cautious about. Finally, Geoff, it has been great to talk with you. What can we expect from the Wilson Asset Management team as we look forward to 2022?

Geoff Wilson: The Wilson Asset Management team led by Kate Thorley our Chief Executive Officer does an exceptional job on the investment side. You have Oscar Oberg, Catriona Burns and Matt Haupt running the various teams. Their performance in 2021 has just been first class. They have all performed. More recently, Dania Zinurova joined us on the alternative space and has really done a good job with WAM Alternative Assets (ASX: WMA). Going forward, over the next 12 months, with a bit of luck with a bit of experience, I just hope they continue to perform as they did last year because as a shareholder in all the entities and on behalf of all shareholders, I am sure we would all like to thank them for doing an exceptional job.

Philip Lee: That is well put. Geoff, thank you for joining us today. Congratulations on a very successful and well-timed issue. Raising $225 million for WAR has been a testament to you and your following. Congratulations. Thanks for your comments today.

Geoff Wilson: Thank you.