Opportunities in alternative assets

James Marlay: Could you tell me and shareholders a little bit about your own background and your philosophy for investing?

Dania Zinurova: I am a strong believer in a more holistic approach when it comes to investing in alternative asset classes. What I mean by this, is rather than building a portfolio that has very specific sleeves, like real estate, infrastructure, agriculture, timber, etc. with very specific allocation targets, I think about alternative assets portfolio as a very flexible portfolio. Yes, you need to have a strategy, you need to have long term targets, however as the market is changing, the opportunity set is changing and valuations are changing, you need to be very flexible and assess the relative value of different sub-asset classes within alternatives.

For example three or four years ago, more traditional infrastructure looked really expensive. We observed certain transactions in particular sectors like airports and ports happening at the highest historical levels in terms of the equity multiples. Where do you allocate your capital during this time? If you have a portfolio that has a specific target to infrastructure you will be forced to continue buying these assets regardless of the price. However, if you have more flexibility within the portfolio construction then you are able to look at other sectors. Looking at real estate, private debt, private equity, and see where there is the ability to find more attractive opportunities in terms of the entry price. That is how I think about building a portfolio. It is important to have a bigger picture, understand the driving fundamentals across sub-asset classes and understand the megatrends that are driving those asset classes.

James Marlay: You have talked about a few different asset classes that sit within alternatives. For people that are getting exposure for the first time, could you talk through the sorts of asset classes that you will be looking to invest in?

Dania Zinurova: Let us think about alternative assets. It is a very broad universe, a very broad term as well, used differently by many investors. Alternative assets are tangible assets. Most of them are tangible assets that have substance, and this substance has value. Asset classes that have very specific investment characteristics that define them from other asset classes like inflation hedge, very strong income return potential, capital appreciation potential, very strong diversification benefits, however also something that gives you access to unique trends in terms of the macro economic shifts.

The way we see it, alternative assets include asset classes like real estate, infrastructure, private equity, venture capital, private debt, real estate debt and real assets. Real assets are agriculture, water rights, timber, etc. A very broad universe and within the current portfolio. We already have exposure to private equity, venture capital, real assets and a little real estate in the portfolio. Going forward, we will be looking to expand into new asset classes like private debt. Private debt has been an asset class over the last two years that has attracted a lot of attention from investors, as banks both in Australia and globally face increased regulatory pressures and are responding, by increasingly stepping back, in terms of providing lending opportunities to businesses. We do see more private lenders coming in, both on the business side like small medium size enterprises, however also on the real estate side.

James Marlay: In terms of the framework that you use for identifying opportunities I think you talk about trying to identify megatrends or super trends. Could you just talk to me a little bit more about that framework? You talked about infrastructure. Explain that process that you use for finding opportunities?

Dania Zinurova: The investment process for us is a mix of this top down approach and bottom up. A very common phrase. When you talk to equity investors they use a very similar term. In terms of the top down it is all about understanding the macro fundamentals and understanding the megatrends. I use this word a lot, megatrends.

James Marlay: It is popular.

Dania Zinurova: It is popular. It sounds very exciting and it is exciting. These are the major macro shifts that have very strong tailwinds. In our current environment those megatrends would be aging population, increasing demand for food on the back of the growing global population. Trends like digitalisation of our economy, of our society, innovation and climate change. An aging population concerns many economists and many governments therefore we start seeing more and more of this trend translating into investment strategies. Real estate is a good example. If we think about real estate in Australia, traditionally you would consider asset sectors like office, retail, logistics, industrial, etc. There are other sectors that are less traditional and they are supported by those strong tailwinds. One of the sectors is healthcare real estate. I am not talking about buying a hospital and operating this hospital. This is something different. This is more of an infrastructure strategy.

I am discussing the asset itself, actual property. While office, retail and logistics are going through major structural changes, particularly on the back of coronavirus, changing the universe, it is changing how investors are seeing those sectors, it is changing the income and capital appreciation, profile. It changes the risk profile. A sector like healthcare real estate continues to thrive even through this economic downturn we are experiencing. Why is it happening, as these are essential services that people have been using, are currently using and will continue to use in the future. We have an aging population in Australia. In 2013, based on data published by the Australian Bureau of Statistics, I believe we had a population of about 14% of the total population aged sixty-five years and over. They project that by 2050 this will reach 21% of the total population. This places a lot of pressure on the healthcare system and a lot of pressure on governments. There is a lot of support to healthcare service providers to improve and expand their services. Where do they do this, they do this in hospitals, and hospitals are property assets. Therefore a strategy here is to go and find those assets or develop them and then lease them to an operator. Operators like Ramsay Health Care etc, with large names and good brands. Another example is you have young kids and you take them to the GP, where do you go, you visit a medical centre. Again this is a property asset. Or you need to do a blood test and you visit a lab. This is a property asset. The strategy here is to build a portfolio of property assets and lease them to operators. The attraction being that those leases are incredibly long term. We are talking about ten to fifteen year leases. Leases are structured in a way that rents have annual fixed increases and you are receiving this stable income return that is growing over time. Simultaneously, you are receiving fairly respectable capital appreciation as there is restricted supply on these assets. This puts healthcare real estate as a very attractive asset class versus more traditional sectors within real estate. We have a strong relationship with one investment team in Australia that is now implementing the strategy and building the portfolio.

James Marlay: I was wondering if you could explain to people the role that alternative asset plays within a broader portfolio. I think for a lot of investors accessing these opportunities has not been easy in the past. If you could talk about why people might not have had exposure to alternatives before?

Dania Zinurova: Alternative asset classes form a very big part of an investment portfolio. You previously mentioned institutional investors, at an average super fund you will observe 20% to 25% of the total portfolio invested in alternative assets. It is a very important asset class for institutional investors, and I would add for any investor, as it provides very strong diversification benefits. Alternate assets classes have reduced and in some cases negative correlation to equities. They are capable of providing certain investment characteristics that are not easily accessible in other asset classes, for example an inflation hedge.

When we discuss infrastructure, real estate and other asset classes they all offer a very strong inflation hedge and include a compelling income return component. However, select assets, for example a private equity strategy, are predominantly focused on capital growth and capital appreciation. Real estate, infrastructure, agriculture, water rights they are primarily delivering income return over time. These are the asset classes where you can access trends that are generally not accessible in equity markets. When discussing private equity and public equity markets, I really enjoy examples of opportunities that do not reach equity markets, for example Facebook or Uber initially they were venture capital investments. The same applies to Spotify, an application used on your iPhone for music, it never really went through a conventional Initial Public Offering (IPO) as it had been extremely successful raising capital from private investors. As an investor, to obtain access to those growth opportunities, it is important to add alternatives to your overall portfolio.

You previously asked; “Why historically it has not been easy to access this asset class?” There are several reasons for this. One includes this asset class requires scale when building a portfolio. The scale observed on a quality institutional offering, would require a minimum ticket size usually starting from $5 to $10 million. Therefore, you need to have scale to build a diversified portfolio. A very strong network is another requirement, with very strong relationships with the investment teams in order to access the offering, as the capacity is limited.

James Marlay: You have named a broad universe of investment opportunities, as we sit here today where are you seeing value?

Dania Zinurova: Value. The question for me, is where I see the opportunity. It is a very exciting time, as many areas within global economies are changing both in Australia and our society. I am focusing on opportunities that are supported by strong tailwinds. Dynamics including an aging population, increasing demand for food on the back of the growing global population, digitalisation of our economy, of our society and innovation, these are all trends I am concentrating on. Then within each of those trends I select strategies that are implementable in alternative asset classes.

James Marlay: You have been with Wilson Asset Management for a relatively short time, how has that experience been?

Dania Zinurova: It has been excellent. Absolutely fantastic. I am very excited to work alongside people like Geoff and Kate and the rest of the team. I believe the team has strong integrity, specifically when I observe the interaction between the investment team and shareholders, I am able to view the strong and deep trust. The relationships have been spanning over many years and the shareholders are very loyal to Wilson Asset Management. I also really like that it is in line with my beliefs, because when I manage capital on an individual’s behalf I have a fiduciary duty to advocate on behalf of my investors, on behalf of my shareholders. Wilson Asset Management is excellent when it comes to this. They are advocating on behalf of the shareholders. They are prepared to fight through for any regulatory changes that might not be beneficial for the investors, for shareholders. They are innovative in the way the investment strategies are structured or the investment offerings are structured. They are forward thinking. WAM Alternative Assets joining the business is an example of forward thinking. It is an example of vision because alternative asset classes have a very strong future.

James Marlay: A final message on a personal note, an opportunity say something to Wilson Asset Management investors, what would you like to say to them at a personal level?

Dania Zinurova: At a personal level, I would like to inform the shareholders that, I am truly passionate about this asset class. I really believe it can make a significant difference to the investment outcome of the overall investment portfolio. I am excited to be working together with the Wilson Asset Management team because their way of operating, their way of working with shareholders is very much in line with my personal beliefs. I am looking forward to working together with the shareholders, advocating on their behalf, and delivering the financial outcomes that will support their financial wellbeing over long-term.

James Marlay: Great. It was lovely to meet you today. Thank you very much for hosting us.

Dania Zinurova: Thank you.

James Marlay: Best of luck in your new role.