I recently hosted a panel discussion at the Australian Shareholders Association gathering with Geoff Wilson, the chairman and portfolio manager of a quiver of listed investment companies.
Since the formation of their flagship fund WAM Capital in August 1999, they have outperformed what I consider to be a rather unfair index to have to beat, the All Ordinaries Accumulation Index, and they have outperformed by 9.3 per cent a year before expenses, fees and taxes. That's a compound return of 18 per cent per annum. Did I mention the fund also yields 7.3 per cent including franking.
We all know that past performance is no guarantee of future performance but when you consider that since inception, the All Ords Accumulation Index is up 272.8 per cent and the WAM Capital listed investment company's performance is up 1256.8 per cent, you have to ask: What is Geoff and his team doing that the rest of us should be doing?
Well, the answer is no secret. Wilson Asset Management publishes its investment philosophy on its website and it goes something like this.
It focuses on small to medium-sized industrial companies. In other words, it is stock pickers rather than index huggers and it adds value by analysing under-researched companies and identifying value where others are not doing the work.
Its team meets more than 1000 companies a year and boils those down to a diversified portfolio 20-60 ASX-listed "investee entities" or, to you and I, stock picks. Like all good fund managers, that includes funnelling 2000-plus listed companies on the basis of micro and macroeconomic trends into 1000 companies that they meet. They then put 250 under review and rank them.
It then narrows those 250 down to 20-60 companies by focusing on free cash flow and return on equity, after which it rates the companies on management, projected earnings growth potential, valuation and the company's position within its industry.
Then, and this is the key bit, it buys when it can identify a catalyst or event that will change the valuation the market gives to the company, either up or down.
To identify that catalyst, it researches, talks to management about the dynamics of the business and contacts competitors.
Catalysts such as changing shopping habits and the streaming of television, which will cut pay TV prices and change the landscape for free to air. That's the investment process. Having bought, it sells once the company reaches its internal valuation.
Then there's what it calls the "market-driven investment process". This is what you or I would call trading, and it calls utilising "our extensive information network in the investment community to exploit mispricing in the market".
The list of mispricing opportunities is something that perhaps only an experienced professional fund manager can exploit. It includes initial public offerings, capital raisings (being offered stock at a discount to the market), block trades (same thing), oversold positions, takeovers, a listed investment company trading at a discount to net tangible assets, earnings momentum/surprise, short selling, as well as market themes and trends.
And there's more. It also emphasises the importance of capital preservation, which may sound like a motherhood statement of little value. However, the truth is that it does something similar to myself and most self-managed super funds in that it has retained an average cash level of 34 per cent since inception and declares that it uses stop losses; not something a lot of professional fund managers would admit to but should come as some comfort to any investors that have the experience to know that investment is not all about long term and burying your head in the sand.
The biggest WAM Capital research-driven holdings are Austal, Slater & Gordon, TPG Telecom, Eclipx, Retail Food Group, Energy Developments, iSelect Mantra Group, CSG and Credit Corp.
The biggest market-driven holdings are Hunter Hall Global Value, Toll Holdings, Century Australia Investments, Mayne Pharma, Echo Entertainment, Burson Group, Fairfax Media, McMillan Shakespeare, CSR and Qantas.
It has also recently launched the Future Generation Investment Company (FGX), which provides access to the best of the best Australian fund managers who donate their services. One per cent of the assets are donated to charities supporting children at risk each year. It has grown to $210 million.
I know this reads like an ad, but it is perhaps more an example of the industry. It turns out that not all professional fund managers are BMW-driving muppets but are, in fact, highly sophisticated professionals in the true sense of the word. They make managing your own funds look, well, unprofessional.
Marcus Padley is the author of sharemarket newsletter Marcus Today. This column is not intended as financial advice.
