Revitalising the WAM Alternative Assets portfolio

It’s no secret that more investors are seeking alternatives as historically low interest rates and emergency levels of stimulus spending are making stocks and bonds look increasingly expensive – and vulnerable – in the context of higher inflation.

While our equity managers remain bullish on shares, an allocation to alternatives may dampen a portfolio’s overall level of volatility during market dislocations, whilst providing a source of absolute returns. That’s the goal of WAM Alternative Assets, which Wilson Asset Management acquired and rebranded from Blue Sky less than a year ago, and appointed Dania Zinurova to turn around.

“We look at bringing in investments that could provide a yield of 5% to 7% per annum, which is very realistic in alternative asset classes. We also look at opportunities that provide very good strong capital appreciation. This would be private equity or higher risk-return strategies within infrastructure and real estate.”

In this interview, Zinurova discusses major steps we’ve taken to revitalise our Alternative Assets portfolio, recent transactions undertaken by the fund, and new investment opportunities on the horizon.

This video is part of the WAM Vault series filmed in June 2021. Click here to access interviews covering Aussie large caps, small caps, and global shares.

Discussion points

• A refreshed approach to portfolio construction
• Attractive opportunities in the alternatives space
• How the fund generates returns, including recent transactions undertaken

Transcript

James Marlay: Hello and welcome to another instalment of WAM Vault. My name is James Marlay, I am your host today. I am joined by Dania Zinurova, who is the Portfolio Manager of WAM Alternative Assets (ASX: WMA). Dania, great to see you again.

Dania Zinurova: Hi James, good to see you too.

James Marlay: We caught up six months ago, when you had just inherited the portfolio for WAM Alternative Assets. I would love to hear what you have been doing in that time?

Dania Zinurova: It has been a very busy six months for me. The first step was to do the strategy review on the portfolio to rethink how we construct the portfolio and grow it going forward. Rather than having very fixed strategic asset allocation targets, I adopted a more holistic portfolio construction approach. I also reviewed the maturity profile of the portfolio. Most of the illiquid assets that we inherited, they have very clear exit strategies. Over the next two-to-four years, we will be exiting those opportunities. By 2025, I expect that most of them will be exited.

We will keep recycling capital into new investment opportunities. This year, we already had one very good exit from one of our private equity investments and it delivered strong returns. I expect there will be more exits happening this year.

Thirdly, there are the new commitments I have done so far. It was great to come into the role and have a good level of cash. I had some room to go and select the opportunities and commit capital to those opportunities. We have done three new commitments so far. Finally, a very important component I am focusing on is valuation of the underlying investments.

I have monthly update calls with our investment partners where we discuss the investment, discuss any progress that has been made and how valuations are changing month to month (if they change). We also do a very robust valuation assessment every six months, when we prepare the report for auditors. That includes reviewing the current valuation approaches for the investments and understanding why those were chosen. It is a very thorough process that I think does add a lot of value to the portfolio management.

James Marlay: Could you explain the holistic portfolio construction process that you mentioned earlier and tell me about some of the exciting opportunities you are seeing?

Dania Zinurova: A holistic portfolio construction approach is very much in line with total portfolio allocation. It is about starting with a bigger picture and looking at the macro trends with strong tailwinds. That is a huge value add to any portfolio, identifying those themes that have sustainable strong tailwinds.

For me, in the current market environment, it is about digitalisation of our economy and society, it is about the growing ageing population, climate change and increasing demand for food. However, there are also other trends coming up to the market. So, from reviewing the market fundamentals, then it becomes more apparent where those trends can be played better from the timing perspective, from the relative valuation perspective.

The examples of how it is actually implemented are our commitments: one to Palisade Diversified Infrastructure Fund; second Barwon Institutional Healthcare Fund; and a more recent private equity and mid-market buy out strategy in Australia.

If we take Barwon for example, it fits nicely into this growing ageing population theme and it can be played across. You can tap into this theme by investing in private equity, venture capital, real estate, infrastructure. How do you choose? It is very important to look at the actual market fundamentals. Where are the valuations, what is the competition, how big is the opportunity set currently in terms of availability of new investments? Then, from there, make a decision on which asset class to pursue, then go into a more top-down investment approach.

James Marlay: How do you generate returns in the portfolio?

Dania Zinurova: We talk a lot about capital appreciation and yield and the combination of these two. For WAM Alternative Assets, my focus is really bringing a more balanced mix in terms of capital appreciation opportunities and income. It is also driven by the fact that the portfolio is structured as a listed investment company. So, we need to think about regular, fairly reliable income returns in order to keep paying dividends and grow our profit reserves.

We look at bringing in investments that could provide a yield of 5% to 7% per annum, which is very realistic in alternative asset classes. We also look at opportunities that provide very good strong capital appreciation. This would be private equity or higher risk-return strategies within infrastructure and real estate. 

Also, capital appreciation can be different. As an example, with our recent exit in the private equity portfolio, Better Medical Fund was invested in 2017. Since inception, the fund or the portfolio company grew from six clinics or medical centres to 35 clinics or medical centres. These type of private equity strategies, called growth strategies, they are focused on identifying and acquiring portfolio companies with this strong growth potential, including either expansion geographically or expansion into sub-sectors. The investment team would then, once the transaction is complete, fund this growth and work closely with the management teams on how to expand.

The return that we achieved was over 17% IRR, which is a very good return in this current market environment. Those assets they are in high demand. So we had a very good strategic buyer who was acquiring this portfolio and another portfolio at the same time. It was quite a substantial transaction.

James Marlay: Finally, what message would you like to give to shareholders in WAM Alternative Assets?

Dania Zinurova: Alternative asset classes represent a very attractive opportunity set in the current environment. In the last 18 months, I have been seeing a shift even among institutional and retail investors from more traditional asset classes into alternatives as they continue searching for yield, given what is happening in the fixed income world, and also as continually looking for diversification benefits and capital appreciation over time.

James Marlay: Dania, great to catch up again.

Dania Zinurova: Thank you James.