The highest quality information wins
Geoff and Kate discuss Wilson Asset Management’s role in the consolidation of the listed investment company sector, the importance of maintaining a focus on shareholders and the benefits of high-quality information as we expand our offering to shareholders.
Kate Thorley: It looks like Trump is out of the White House. What does that mean for the market?
Geoff Wilson: Assuming Biden wins, which seems like a foregone conclusion now, even though there will be some legal wranglings, eventually sanity will prevail. So we will have a Democrat in the White House, and historically, Democrats have been good for equity markets, which is a little bit counterintuitive. They are big on spending, so to me it is interesting that the Democrats will not get control of the Senate. That puts a nice check and balance. It could inhibit a lot of what Biden wants to do, so the big spending part of the Democrats might be controlled to a degree. I see it as positive. To have someone else running the free world, I actually believe is significantly positive for society.
Kate Thorley: Here in Australia, obviously interest rates are at record lows. Do you think rates will be lower for longer? What does that mean for equities here domestically?
Geoff Wilson: It looks like it. And the comments from the Reserve Bank of Australia (RBA) about their quantitative easing strategies and dropping interest rates to 0.10% really means that real assets will be highly sought after. Globally, the flooding of liquidity into the system has to be positive for real assets and obviously beneficial for equities.
Kate Thorley: Geoff, thinking about Wilson Asset Management over the last two decades, it is obviously grown a lot. What’s changed in that time?
Geoff Wilson: In terms of investing, what has been important to us all the way through is having that interaction with management so we can really understand how a company makes money and then we value a company. We then find a catalyst that we believe will change the value of that company for the positive. Effectively we are looking for undervalued growth companies with a catalyst, and that becomes modified in terms of what lens we are using. We started off focusing on areas that we knew. When I started in the fund management industry in 1980, we were focused on small and mid-cap industrial companies.
As time has gone on, we have been able to add to that level of expertise. We have Oscar who is the Lead Portfolio Manager on that area. We have Matt, who really had expertise in looking at larger companies and a fantastic ability to look at macro trends and was very interested in setting up a large-cap company, which is WAM Leaders (ASX: WLE). We went from WAM Capital (ASX: WAM) and the various entities to WAM Leaders and that was highly positive for the business because now there are three people there, focusing purely on the larger companies and getting access to high quality information that everyone in the organisation can use.
Catriona had worked with us in the early days, then she came back from overseas, wanted to set up a global fund and joined us. Now we have WAM Global (ASX: WGB) which again is another level of information we receive. As you know Kate however other people might not, we all sit in an open plan office. It has been a challenge with coronavirus although everyone hs coped exceptionally well in terms of how we can communicate. It is really about sharing that information.
Recently, we had the opportunity to takeover Blue Sky Alternatives Access Fund (ASX: BAF), which is now WAM Alternative Assets (ASX: WMA) and Dania, who is a high quality individual in that alternative asset space, has joined us. Again, that gives the whole organisation access to another high level quality of information. In our game, it is the highest quality information that tends to win. What we have been able to do is, in a logical manner, add these areas of expertise which feed on the whole organisation. Some people say: “You’re doing a lot!” It is all very logically planned out and actually, it benefits everyone. Personally, as an investor who virtually had no money in offshore assets, to put money in WAM Global, and people will see I have been buying WAM Global shares more recently because they are trading at a discounted net tangible asset (NTA), which is a great opportunity. WAM Alternative Assets is another way of getting exposure to another asset class which does not work like equities. Therefore, it provides a nice level of diversification. I have been buying shares in WAM Alternative Assets because they are trading at a discount.
I believe we have a really good group of individuals who very much feed on each other in terms of providing high quality information and adding value to each other.
Kate Thorley: WAM Alternative Assets is the newest addition to the listed investment company (LIC) stable and the business has grown a lot. We often receive questions from investors around that growth and we are always adding new members to the team. Can you talk to me a little bit about that Geoff?
Geoff Wilson: Over the last twelve months, we have increased the team by about 15% in terms of personnel. I feel flattered that when I talk to people that say: “Oh Geoff you are doing so much”. Hey I am the old guy – I do very little. It is everyone else in the organisation is that doing a lot, and we have enormous depth. The area I tend to focus on would be more activism. Maybe that is why they think that I am doing a lot, and if you think I have done a lot and have been doing a lot over the last few months, what I was doing last year, was virtually nothing. To me, I tend to look at listed investment companies, the ones trading at discounts, and try to work out whether there are any opportunities for us there.
Kate Thorley: On listed investment companies, you have spoken before about the golden decade of listed investment companies. They have been around for over one hundred years. We are now in what you have described as a consolidation phase. What do you mean by that?
Geoff Wilson: With most industries, you will go through a strong growth phase and then after that you will go through a consolidation period or a consolidation phase. That is where the strong get stronger and the weak either get absorbed by the strong players or fall by the wayside, and it is how industries tend to develop over time. Now with listed investment companies, there was another period back in 2003 to 2004 which was a strong growth period for them. I think there were 20 plus new initial public offerings (IPOs) in a nine month period, really a short period of time. Then three or four years later, they went through a consolidation phase where some were taken over. We took one over, or some decided that the structure was not right for them. I think a lot of people think: “Oh we want to have a listed investment company”. To me, I think listed investment companies are the holy grail of investing because you get an opportunity to buy a dollar of assets for potentially eighty cents. To me, it is nearly unbelievable that that could be the case. And the reverse is, with most of ours, you are paying more than a dollar. They are trading at a premium to NTAs.
Our two entities that are trading at discounts are WAM Global and WAM Alternative Assets and we are pretty convinced that over time they will go to NTA, if not a premium. However, there is a great opportunity and what happens is when people list the listed investment company they think they got to the grand final. However that is just the start of pre-season and there is a lot of work you need to do once you are listed. And therefore, people think, oh, great structure. The fund manager thinks: “I am going to get a pool of capital, that he believes is permanent, which it is not, because it is the shareholders’ capital so it can be taken away at any point in time and they have to perform.
We have made two takeover bids recently for listed investment companies that we bought a dollar of assets at eighty cents and then something had happened that we believed was not in shareholders’ interests. We took that opportunity to make takeover bids for them. I believe you will see the number of listed investment companies shrink. What I have noticed over the last little period is that, even though a year or so ago the discounts were quite large, the discounts are narrowing, because they are great investment vehicles. And over time they perform. A lot of the studies show how a closed-end pool of capital performs better. A listed investment company performs better than other types of funds.
Kate Thorley: On listed investment companies what do you need for a listed investment company to be successful?
Geoff Wilson: Yes, well the first thing is performance. The second thing is the structure. Listed investment companies have the ability to pay dividends to shareholders over time so you can deliver a growing stream of fully franked dividends.
I believe everyone at Wilson Asset Management is incredibly pleased that in this period where companies are cutting their dividends we have been able to increase our dividends. In WAM Capital we maintained it at a very high level, however most of our other listed investment companies, we have been able increase and give people dividend guidance that we think we will be able to continue increasing. The second is being able to give shareholders a growing stream of fully franked dividends. The third is treat shareholders with respect and that is when you are raising money. Do it so it is in all shareholders’ interests.
One of the companies we bid for recently had a capital raising at a big discount, which was incredibly unfair for all shareholders. That was the catalyst for us to bid for that company. The fourth thing is to have a good shareholder engagement, communication and marketing strategy. To me, they are the four things, and a lot of people miss out on the third and the fourth one.
Kate Thorley: Geoff, you talked about how listed investment companies can trade at premiums and discounts. Can you give me some examples of where perhaps one of our LICs has moved through that cycle?
Geoff Wilson: Well the first one we floated, WAM Capital, in the first two years, we did an IPO, raised the money at a dollar, and the first two years we paid significant fully franked dividends. I think it was 12 cents the first year fully franked and 14 cents the second year fully franked and performed very well. We were still trading at a discount to NTA and you tend to find it takes a period of time for the share registers to tighten up.
Once you are listed on the stock market, for some reason, people that bought in the IPO change their mind or they decide to sell and it takes a little while to effectively get your tribe and the people that realise they want to invest in what you’re doing and that really took two and a half years for WAM Capital. In the first period we were trading at a twenty percent discount. So over time the share register tightened up and probably two and a half to three years out we went to NTA and then went to a premium, a 20 odd percent premium. I know now we’re trading at a higher premium than that so the share register is probably a bit tight from that perspective.
More recently, WAM Leaders which was our second most recent IPO took a little period of time, the good performance from the guys, the increase in dividends, and then you tend to find the share register tightening. A year ago it was trading at a 10 per cent discount, now it’s trading at a premium and you would assume the premium will slowly increase as they continue to perform. I suppose the more recent one, our more recent IPO, which is WAM Global, that’s going through the exact same process.
We have started the dividend. At our recent Board Meeting for WAM Global we were just talking about how pleased we are in terms of that big profit reserve we have got there so we have got to look at whether we give shareholders guidance and a plan on growing that dividend over time, so you will find WAM Global is trading at a discount now. I would assume in the next period of time that will go to NTA, if not a premium. The more recent member of our family which is WAM Alternative Assets, we took that over. When everyone knew that we were coming in the managers were trading at about a 30% discount to its assets. It is trading at around a 10% discount now. I would assume as we get our feet under the table and people realise how good Dania is, our Portfolio Manager who is responsible for that, that will get to NTA if not a premium. It is a process and you have to be aware of it. As you know, you have been with me for 15 years. We have done it before. We know how to do it, and that is what we will be able to deliver.
The problem is a number of other people that decide to float listed investment companies are not prepared to really commit significant resources in terms of that shareholder engagement and communication team. We put a couple of million dollars plus a year into that, and that is a cost to us as the manager, however a benefit to shareholders, that they can get a true reflection of the value of their assets.
Kate Thorley: It is interesting. I am reading a book at the moment about building good habits and about doing all the small things over a long period of time. We have always loved engaging with them and it is all those little things. It is ensuring shareholders can say: “I called the office and Geoff did call me back, or I spoke to you Kate at one of the roadshows if you remember I have a question”, and to be able to give them our time and to be able to give them an opportunity to ask questions, provide feedback, take that feedback on board.
As you said earlier, the Corporate Affairs team, we are continually adding people to that team. They are very high quality professionals who take great pride in how we communicate with our investors. Whether it is the stock stories and views on the market or writing submissions to Government, there are so many different ways that we think to engage with our investors. It is so important is it not?
Geoff Wilson: One hundred percent. To me, effectively, it is so fundamental and so logical. Where so many Boards they think they are on a different plane to the shareholders is where we understand that we are shareholders like them, and they are investing in the market like we are. The difference is we spend every hour of every day thinking about it, and they might not spend that amount of time. I am sure a lot of our shareholders, if they spent every hour of every day looking at investing, they would be probably better than us!
Kate Thorley: On WAM Alternative Assets there are about 3,000 new shareholders to the Wilson Asset Management family. What would you like to say to them?
Geoff Wilson: Well first of all, welcome. I enjoy engaging with new shareholders. I remember a story. Soon after the Global Financial Crisis, when we made a takeover bid for Premium, another listed investment company that was finding things tough at that time, I was ringing the top 20 shareholders. I rang one of the shareholders and said: “It is Geoff, I am Chairman of WAM Capital that has made a takeover bid”. He was incredibly sceptical. Why was I ringing him? Am I trying to persuade him? And I said: “Look your choice, you can either accept cash and leave, or you can become a WAM Capital shareholder. It is totally your choice”. And he was highly suspicious. I said to him: “When has the Chairman of another company rung you?” And he said: “Never”. I said: “Well, so you have to give me some points for that”. And with all the new shareholders, the 3,000, it will be a journey with us and them.
First of all we have to perform. We need to be able to make money so we can provide a stream of dividends. Obviously we need to treat them fairly and with respect, we need to engage with them and really we hope that they give us an opportunity because we believe that over time that we will be able to really deliver some good returns for them.
Kate Thorley: In terms of growth opportunities in the business, obviously WAM Alternative Assets is a big growth opportunity. Where else do you see the business growing?
Geoff Wilson: To me the great thing about the market and any business, is you need to be growing. If you are not, you are going backwards. That is what everyone tells me. In terms of opportunities, it is dynamic. And we are opportunistic, by nature. And flexible. What I have always learnt in investing is that flexibility is one of the most important things.
We think the WAM Leaders area, Matt and his team there have done an exceptional job, we believe that can continue to grow. As Catriona continues to perform with WAM Global, that is an area that can grow. Alternative Assets, that is an area that can grow. And if we can get really good, high quality individuals that can add value to the whole organisation – as you know Kate, we are always looking for those – we can provide opportunities for them. When I am doing interviews with people, I am more interested in what they want to achieve, and trying to work out what their drivers are, because to me the beautiful thing, the phenomenal opportunity we have, is that we can create whatever we want. Effectively, we can paint whatever picture we want. To me, we really have a phenomenal opportunity to change.
Kate Thorley: Geoff, it has been great chatting to you and I am looking forward to the next few decades at Wilson Asset Management and seeing how we continue to grow and evolve during that time, so thank you.
Geoff Wilson: Thank you Kate. Before we leave, I would like to ask you a question now. You have been with Wilson Asset Management for 15 years. You are CEO, and as you have been CEO, the organisation has grown and prospered. Tell me, what is the secret?
Kate Thorley: Look, it is the people. We are all on the same path. We are all wanting to make a difference. We have, I always say, we have the best shareholders. We have talked about a number of stories this morning and as you said, it is painting that picture of giving people opportunities to perhaps do a new product or list a new company. It is really exciting. I believe in fostering a really healthy culture of teamwork, staying focused on our shareholders and treating them fairly, standing up for them where we can and continuously looking at better ways to communicate and engage with them. I believe they are all the parts that make it a great company and it is exciting. The next few decades will continue to be an exciting time for us.