"Long term, culture is enormous in terms of one business doing better than another." Paul Black, WCM Investment Management
Culture counts. And sometimes it’s the most important competitive advantage a business has. And unlike other forms of competitive advantage, it can be almost impossible to replicate.
One fund manager that places a specific focus on culture is US investment firm WCM Investment Management (WCM). And it’s paid dividends. The fund manager has significantly outperformed its benchmark MSCI All-Country index for more than ten years, in fact by more than 5% pa.
"Seemingly small annual return differences, compounded over long periods of time, will result in significant differences in the amount of money at the end of the period. There can be a very large payoff from selecting a manager and a strategy that provide value above the index return over the long run." William Browne
WCM was founded in 1976 and are based in Laguna Beach, California. Kurt Winrich and Paul Black are the two co-CEOs and their firm manages in excess of A$40bn in global equities.
At WCM, they look for good corporate cultures; cultures which are aligned with a business’ competitive advantage. The other key requirement for a portfolio holding is that the business has a competitive advantage that is improving. Or in the parlance of Warren Buffett, ‘the moat is widening’. It’s critical to a business’ longevity and success.
“Widening the moat... that is essential if we are to have the kind of business we want a decade or two from now. We always, of course, hope to earn more money in the short-term. But when short-term and long-term conflict, widening the moat must take precedence." Warren Buffett
The good news for Australian investors is they can access this high-quality manager on the ASX via an Australian Listed Investment Company with the code, WQG. And even better, access the WCM portfolio at a discount of more than 15% to the cost of replicating the portfolio by buying the underlying shares.
WCM’s portfolio is very well diversified. Far more so than the ASX200 index. While financial and resource stocks represent over 50% of the ASX200, they represent c20% of WCM’s portfolio. In contrast, Technology and Healthcare represent c40% of the WCM portfolio versus c10% for the ASX200. This reflects WCM’s desire to find businesses in sectors with tailwinds. Businesses for example, that benefit from the long-lasting global trends such as e-commerce, the emerging global middle-class and ageing populations.
“One of the lessons your management has learned - and, unfortunately, sometimes re-learned - is the importance of being in businesses where tailwinds prevail rather than headwinds.” Warren Buffett
The other key attribute of the WCM process is a key focus on downside protection. Since inception in 2008 the WCM portfolio has captured, on average, just 59% of the downside of its benchmark index. In other words, historically when the index has fallen, WCM’s portfolio has declined by c40% less. In the long term, outperformance comes from beating the market in the bad times.
"When things get really rocky, our companies and our portfolio tend to hold up much better. So people don't lose as much money. That to us, is the name of the game. The less you lose in difficult times, the less you have to make in very, very good times. If you can lose less, over the long run you're going to do really well." Paul Black, WCM Investment Management
A comparison with WCM’s global equity fund peers demonstrates the management team’s ability to think and act differently (low correlation with peers), manage risk (low relative maximum drawdowns) and outperform over time (high relative outperformance). Following the latest weekly NTA update, 26 July 2019, WQG trades at a 16% discount to its NTA backing per share, an incredible mispricing for a global fund manager with a differentiated approach to investing and a track record the envy of its peers.
Having spent over two decades studying the world’s greatest investment managers and successful global companies, I’ve realised the importance of both culture and sustainable competitive advantages to investment returns. I’ve found few investment managers of the calibre of WCM.
Adding WQG to your portfolio of investments provides the opportunity to own a portfolio of high-quality global businesses, diversify exposure towards growing industries and reduce the ‘home-bias’ prevalent in most Australian’s equity portfolios. Over time, I’d expect the portfolio can continue to outperform, with the additional benefit, of narrowing the current discount to NTA as the market comes to appreciate and seek access to the investing acumen of its manager.
Disclaimer: A Moelis Australia Asset Management managed fund owns shares in WQG.
you can always just buy WCMQ, the exhange traded managed fund which trades at NAV therefore don't need to worry about these stupid discounts to NTA.
Why do you think so many LICs, many having outperformed over the past 5-10 years trading at sizeable discounts, Are people sitting on the sidelines fearful of a market meltdown and possible liquidity issues if that were to happen?
So far I have been really impressed with the performance of the underlying WCM portfolio, and I have confidence that their team will be able to continue to outperform, so I'm hoping to remain a long-term shareholder. On the other hand, the share price has been held back by some pretty ordinary decisions by the WQG board. I can forgive the issuance of the recently expired options, as this was the norm several years ago when they listed. Of course, hindsight shows that the share price is then constrained due to the expectation of dilution on the option expiry date. However, the decision to underwrite about half of the options upon expiry and thus seriously dilute the premium that current shareholders could expect to enjoy, was definitely NOT in the interest of those shareholders. I find it staggering that a board can be allowed to make such a decision given that it is clearly also motivated to increase the profits the company can expect to make on the greater number of shares now issued. I know they will argue that increased scale leads to a reduced discount to NTA, but since the fund was already over $130M this was never a serious factor, and in this case the dilution of NTA was so great that I doubt any effects of greater scale will ever recover the loss. As an aside, I still find it hard to understand how a company is allowed to take options that I owned and allowed to expire (as is my choice), and then actually pay someone else to exercise them. I guess it's just another example of the inequality that exists for small shareholders.....
Ian, no doubt the options underwriting was highly dilutive. The board's defence, which I think is reasonable, is that these options were part of the existing capital structure, so (at least theoretically), could have been exercised by holders. Or putting it another way, the fact that only about half were exercised pre underwriting is unexpected good luck for holders. You probably wont agree with this position but something to think about. Anyway, lets hope that they are not doing any further dilutive issues.
Whilst I can understand that the circumstances meant it would have been "fortunate" for current shareholders if the options had not been exercised, it certainly wasn't in their best interest for them to be underwritten, so am I wrong in assuming that directors are supposed to act in the best interests of the current shareholders?
Ian, I completely agree with your sentiments. We would have preferred less liquidity and a larger discount. Going forward, a similar scenario is not possible as a vote would be required, which would be highly unlikely to be forthcoming. John
When you compare WCMQ to WQG, you would have been much better off in WCMQ because WCMQ always trades at NTA. The return on WCMQ for the last 12 months is up 18.5% vs WQG of only 3.70%. Like all LICs the problem is that they trade on a hefty discount to NTA. It's about time the LIC industry did something about this problem of NTA discount and converted the funds to active ETFs so that there is no NTA discount.