WAM Vault: On waging WAR, winning themes and stunning small caps

Whether mobilising forces in a battle for franking credits or declaring “WAR” on LIC discounts, Geoff Wilson AO is also the mastermind and founder of Wilson Asset Management. Each year, Wilson corrals the portfolio managers from his eight “WAM family” units for a series of insight-driven interviews known as WAM Vault.

WAM Vault this year is one for the ages, after a whipsaw 2020-2021 that saw markets dive faster and quicker than ever before and then hit decade highs a little over 12 months later. 

In the following wire, I reflect on what stock-pickers from the following LICs think, own, sold and believe lies ahead for investors:

• WAM Leaders (ASX: WLE)
• WAM Global (ASX: WGB)
• WAM Alternative Assets (ASX: WMA)
• WAM Capital (ASX: WAM)
• WAM Microcap (ASX: WMI)
• WAM Research (ASX: WAX)
• WAM Active (ASX: WAA)

No blushing violet, Wilson himself fronted the cameras to discuss his firm’s latest initiative, the WAM Strategic Value (ASX: WAR) LIC. He put himself in the “hot seat” in other ways too, tipping in $5 million of his own cash as seed capital for the fund, which is targeting $225 million, including $125 million from the WAM family of 100,000 shareholders and supporters of its other LICs.

These deep pockets will fund the purchase of some of the many Australian LICs that are trading at persistent discounts to their net tangible assets, WAR’s raison d’etre being to “simplify choices for people,” says Wilson.

“We’re buying a $1 of assets for 80 cents. Of course, we would love to pay 50 cents if we can,” he says.

“It is really an undervalued asset play. It is going to be what we have done for the last 20 years, buying assets cheaply, but the focus of WAM Strategic Value is mainly on listed investment companies and listed investment trusts.”

This year’s WAM Vault is notable also for occurring after a period when holding a decent index fund would’ve earned you a 35% return. And when some of the best active funds, particularly small and micro-caps, delivered returns of 50%, 70% and even triple-digits in a rare few cases.

China’s debt monster, “self-help” miners

From a fundie who’s been extraordinarily successful picking inflection points, when WAM Leaders portfolio manager John Ayoub names China’s credit situation as a theme to watch, it pays to listen.

Equities

Positioning for inflection points in Australian large-caps

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“Everyone is really bullish on commodity prices at the moment. We are a bit more cautious on those bulks, iron ore in particular. I think that is a big inflection point this year,” he says.

Ayoub believes the calls of a "commodities supercycle" are largely unfounded. “They have had a really quick re-rating, particularly stocks on the back of what people have been calling the supercycle, which we probably have a slightly different view on,” says Ayoub.

While suggesting the best of iron ore stock prices are behind them, he sees opportunity in “forgotten” commodities like alumina, aluminium and manganese. One pick here is the BHP spin-off South32 (ASX: S32), “which has its own self-help from a capital management perspective”.

On a market-wide basis, Ayoub believes valuations are getting very toppy, so is being increasingly selective. Companies like CSL Limited (ASX: CSL) and Qantas (ASX: QAN) still pass WAM’s screens, but many others don’t.

And in resources, Ayoub is constructive on LNG and its role as a crossover fuel in the hydrocarbons-to-renewables transition. But he still sees value in some of the traditional E&P companies like Oilsearch (ASX: OSH) and Santos (ASX: STO).

"Cheap cyclicals" for the win?

In the spotlight for WAM Capital, WAM Microcap, WAM Research and WAM Active Oscar Oberg and Tobias Yao revealed where they’re seeing the best upside – in financials, mining, travel and traditional media sectors. Looking at what they describe as “a golden period” in small caps, they singled out 15 Australian companies they hold, after a deep dive into their time-honoured portfolio construction process.

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Small and mid-caps leveraged to the Australian economic rebound

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Oberg emphasises its approach rhymes with that of last year, despite a market that is “very volatile, changing every week and every day swinging from growth to value.”

Oberg is very bullish on housing, reeling off a handful of big holdings in building materials and mortgages that they’re backing right now. Travel also gets a look-in, despite – or perhaps because of – the hammer blow that COVID landed on the sector.

His WAM Capital co-pilot, Tobias Yao highlighted another sector that might surprise many (while warming the heart of this ex-journalist Livewire staffer). Declaring he’s bullish on traditional media stocks, Yao dropped a few big-name holdings here including Seven West Media (ASX: SWM).

Some other hidden gems of related and extraneous categories also rate a mention, including a Sydney-based IVF company that went global, Virtus Health (ASX: VRT) and international theme park owner Ardent Leisure (ASX: ALG).

Grab the suitcases, travel's (nearly) back

Shifting gear, Catriona Burns and Nick Healy, portfolio managers of WAM Global, pointed out structural themes they believe will spin up winning global stocks over the next couple of years.

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Short and long-term trades in global markets

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For structural themes, Burns nominates three areas that are humming: health and wellness, the digitisation of payments, and automation, while Healy believes the recent American earnings season has reinforced the thesis of buying companies that are well-positioned for the re-opening trade.

As an aside, what do we mean here by “structural”? In the world of investing, if a trend is structural, it’s solid and near-immovable – something like the foundations and framework of a large building. A structural trend’s lifespan is measured in decades, not months, weeks days or even hours (cryptocurrency, anyone?)

Echoing some of their colleagues’ views, travel and housing feature strongly, including some sleepers including a Spain-listed hotel booking software firm, Amadeus and early online US travel company Booking.com. 

Healthy yields in straitened times

Last, but certainly not least in this wrap-up is the WAM Alternative Assets LIC, headed up by portfolio manager Dania Zinurova.

Investment Theme

Revitalising the WAM Alternative Assets portfolio

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Spun out of Wilson’s acquisition of the controversial Blue Sky Alternative Investments, which it nabbed in mid-2020, Zinurova took the helm of the rebranded WAM vehicle a little over six months ago.

In terms of headline structural themes she's watching closely, Zinurova calls out digitalisation of economies and society as a whole, ageing populations, climate change and rising food demand.

How does WAM Alternative Assets play such themes? Zinurova highlights the fund's commitment to the Palisade Diversified Infrastructure Fund and the Barwon Institutional Healthcare Fund. She also alludes, in general terms only, to a more recent private equity and mid-market buy out strategy in Australia.

Interestingly, Zinurova refers to a dynamic that investors all too often overlook: when to exit. In talking about her optimistic outlook, she says the fund 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," she says.

In these straitened times of rock-bottom interest rates, anaemic inflation and barely-breathing bond yields, Zinurova’s insights make compelling viewing. Her insights on where the team finds dependable yields of around 5% and 7% in private equity, infrastructure and listed property assets are something from which all investors can learn. 

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