How you can turn life challenges into great investments

It may not feel like headline inflation figures are dropping when you hit the grocery checkout, and that’s with good reason.

Wilson Asset Management’s Dania Zinurova has been watching the costs.

“Last year an average Australian family was spending $160 per week on grocery shopping, this year it’s $168, so a 5% increase,” she says, noting that the headline inflation figure of 3.8% doesn’t show that food prices keep rising.

While the ACCC is suing Woolworths and Coles over allegations of 'illusory' discounts on common products, Zinurova also points out the trend to higher food costs is more than just a matter of commercial practises and is unlikely to reverse. Particularly when you factor growing demand and growing populations competing for scarce resources. 

It's an opportunity for investors, though steering clear of the supermarkets at this point and focusing on real assets instead can offer an inflation hedge and alternative exposure to this trend.

She discussed this at last year's Livewire Live and you can read more here.

Growing demand for food is one of four trends that Zinurova focuses on in the WAM Alternative Assets portfolio (ASX: WMA). The others include digitalisation, the energy transition and aging populations.

Those very same concerns that matter in our daily lives can equally be valuable investments - with a range of benefits such as portfolio diversification and yield.

In this Rapid Fire interview, Zinurova discusses the four themes she invests in, misconceptions about investing in alternatives and the unexpected opportunity that the distressed real estate sector presents.

What macro concerns are you monitoring and have you changed your positioning for these?

The key macroeconomic concerns we are currently observing are inflation and the corresponding trajectory of interest rates, availability of debt and impact on consumer sentiment. Taking into account some broader structural shifts such as emergence of AI, its potential impact on the economy and society, a more pronounced geopolitical tension globally brings a lot of uncertainty. This makes it harder to assess factors such as inflation and monetary policy from a traditional economic cycle perspective.

One of the benefits of investing in alternative assets is the ability to perform throughout macroeconomic cycles. We have positioned our portfolio to ensure extensive diversification of the underlying investment exposures. For instance, infrastructure assets often act as an inflation protection, given much of the revenues are earned through inflation-linked contracts, while private debt benefits from rising interest rates as the returns are structured to be a margin over a floating base. 

The growth part of the WMA portfolio is invested predominantly in private equity like investment opportunities, which can take advantage of attractively priced assets in a market downturn to provide outsized returns. 

Private equity strategies in the WMA portfolio include growth, buy-out, transformation and carve out. We focus on investing in privately owned assets and businesses that are more likely to be resilient throughout economic cycles. We achieve this by making investments in fundamentally high-quality businesses with appropriate levels of leverage and extensive analysis of downside scenarios during investment due diligence. We have been investing mainly in Australian private equity opportunities underpinned by strong investment themes with long tailwinds – digitalisation, growing ageing population, growing demand for food and energy transition. 

From private capital perspective it is a good time to deploy the available capital as valuations are relatively attractive. However, the volume of the M&A transactions have been lower and overall we observed less transactions. Focusing on quality and risk assessment is very important in the current environment.

What are some of the top misconceptions about investing in alternatives and how do you counter these?

One of primary misconceptions of alternative assets is that they are all inherently very risky.

The reality is that there is a plethora of different asset classes and strategies within the alternatives space that each represent different risk-return characteristics. 

We define alternative assets as privately owned assets and businesses, or investments that are backed by tangible assets: private equity, infrastructure, private debt, real assets, real estate. 

While there are higher risk/return strategies, such as venture capital, there are also defensive assets such as infrastructure, which provide essential services to our societies and economies, typically have a monopoly position and predominately contracted revenue streams and are therefore highly defensive assets. 

Another misconception is that all private equity strategies have venture capital like characteristic – high correlation to listed equity markets and high information inefficiency. 

All of our realised exits in private equity part of the portfolio were private transactions and the results demonstrated that there is a disconnect (or lower correlation) to the listed equity markets). We, as investors have a good visibility on the business operations, financial position, management teams etc... while this information is not available to public. 

What needs to be noted is that investments in private markets require robust investment due diligence. Those are illiquid investments and therefore cannot be easily traded out of and must be structured appropriately to ensure the necessary protections and mitigation of downside risk can be achieved. 

Thus, it is crucial to partner with high quality investment partners who are experts in a particular asset class or strategy when investing in private market opportunities.

Last year at Livewire Live, you discussed your view that food inflation was here to stay and you were investing in this space. Can you provide an update on this?

I am glad you asked me this question because I have closely monitored the cost of grocery shopping this year. 

Last year an average Australian family was spending $160 per week on grocery shopping, this year it’s $168, so a 5% increase. I always look beyond the headline numbers as the current inflation figure of 3.8% does not show us the fact that the food prices in Australia continue rising. 

While the headline inflation has been rising at a slower rate this year compared to last year, prices were still up across most food categories. So, I maintain my view that growing demand for food is an attractive long-term trend from the investment perspective.

What are some of the other global themes that you invest in and can you share some of the ways you have exposure to these themes?

We tend to focus on four themes: Growing Demand for Food, Energy Transition, Digitalisation and Aging Populations. There are a variety of ways we have gained exposure to these trends, both across asset classes and strategies. 

A recent example of how we gained exposure to the Aging Populations thematic is via our private equity investment in Healthcare Australia (HCA). HCA is the largest provider of agency (temporary, short notice) nurses in Australia. The merits of this investment represent exposure to the supply side of a chronic shortage in the sector – the availability of nurses. 

An example of an investment we made with regards to the Digitalisation thematic, is our private equity investment in The Energy Network (TEN). TEN is the leading Australian supplier of technical products to the electricity transmission and distribution markets, which will benefit from the need to reconfigure and expand our electric grids as the electrification of our economy continues. 

An example of an investment exposed to the Energy Transition thematic is our investment in Intera Renewables, which is a 1GW portfolio of renewable energy assets, comprising a utility-scale a solar farm and numerous utility-scale wind farms.

Your portfolio’s largest exposure is to Real Assets, can you discuss why you prefer this space?

Real Asset investments offer the potential to gain exposure to trends such as Growing Demand for Food by investing into the inputs required for agricultural production. Furthermore, they have multiple benefits from a portfolio management perspective. 

One benefit is that real assets tend to have little to no correlation with other asset classes, thereby adding more diversification to a portfolio. For example, the income generated by holdings of water entitlements tend to be correlated to weather conditions, which are uncorrelated with the economic cycle. 

Additionally, many real asset investments have some degree of natural inflation hedge. For instance, historical data demonstrates that farmland asset values tend to increase at their highest rates during periods of inflation. 

Some of our real assets investments will be maturing next year so the portfolio composition will be changing and we will be reinvesting the capital in new opportunities.

You recently mentioned in the portfolio update that you will continue to deploy into private equity. What opportunities do you see in this space and what portion of the portfolio do you anticipate this to be in coming years?

The best performing private equity investments are usually those that are made during the times of economic uncertainty or economic downturn. During these times there are more opportunities to transact at attractive valuations. There are also opportunities to pursue public to private transactions, when a listed business is taken private due to the relative attractiveness of valuations. 

We also expect there will be a better deal flow for private equity investors focusing on transformation and turnaround strategies which is quite a specific area within private equity. We anticipate that the private equity part of the portfolio will continue growing substantially.

What is one area of the market that has huge potential but no one is paying attention to?

There is a lot of attention around the current distress in the real estate sector, however such market distress can be also present incredible investment opportunities. 

WMA recently committed to Wentworth Real Estate Private Equity Fund I, which is a sector-agnostic private equity real estate investment strategy focused on taking advantage of market mispricing opportunities in the real estate sector. 

As interest rates continue to linger at elevated rates, the opportunities to acquire assets at favourable prices will continue to increase. These assets can then be repurposed and repositioned into better use, which can drive substantial returns when they are ultimately exited. 

Such an involved, active management approach can only be taken through majority ownership in private assets, so having access to private markets is crucial to gain exposure to such opportunities. WMA is the only listed investment company on the Australian Securities Exchange which invests in a diversified pool of private market assets, thereby giving shareholders rare exposure to such opportunities.

Fun question: What’s the strangest thing you’ve learnt about an investment across your career?

The most obvious fact to me that the higher a promised or target investment return is, the higher the risk attached to it. 

What I have seen throughout my career that investors often just focus on the return potential and only when they lose capital, they ask questions about the risks. It is one of the strangest things I still observe in my career. 

Risk in private markets is a great thing to take on but it needs to be understood, measured and managed.

Access alternatives in one click

WAM Alternative Assets (ASX: WMA) is the only listed investment company on the ASX that offers investors access to a diversified portfolio of alternative assets, typically accessible only by institutional investors. It aims to deliver absolute returns through a combination of dividend yield and capital growth, while providing diversification benefits. Find out more here.