WAM Global's outlook for international equities

Wilson Asset Management

Wilson Asset Management

Listen to the WAM Global (ASX: WGB) FY2022 Interim Results Webinar where Lead Portfolio Manager Catriona Burns, Portfolio Manager Nick Healy and Equity Analyst William Liu provide their outlook on the global equities and discuss the companies they believe will perform well in the months to come.

Key discussion points:

  • WAM Global FY2022 interim results
  • Outlook for global equities current investment opportunities in high quality companies
  • Stock picks from the investment team: Arthur J. Gallagher (NYSE: AJG), TransUnion (NYSE: TRU), Booking Holdings (NASDAQ: BKNG), Intercontinental Exchange (NYSE: ICE)

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Geoff Wilson: Thank you for joining us today. This is the WAM Global (ASX: WGB) FY2022 Interim Results Webinar. This is your company. We are presenting to you as you all own the company as shareholders and we are at your service. There has been a lot of really good questions that have been sent in and we will cover them.

We have the A-Team that manage the money at WAM Global. That is lead by Lead Portfolio Manager Catriona Burns. Catriona went to live in New York a little over six months ago and we just think it makes a lot of sense to have someone in the Northern Hemisphere managing a global pool of capital with high quality resources in Australia. In Australia, Catriona’s backed up by her team, Portfolio Manager Nick Healy and Equity Analyst William Liu and they will all present to you during this presentation. Then we will open up for questions, as I said, a lot of people have sent in questions and thank you very much. Now we really appreciate all your questions, comments or suggestions because as I mentioned this is your company. Our Senior Corporate Affairs Advisor Camilla Cox will moderate the questions after the presentation.

As I said at the start, this is to talk about the six month result for the period to 31 December 2021 last year that has been announced. We will also be giving you a look into the future of what Catriona, Nick and William see will develop in the equity markets globally over the next six to 12 months. In terms of the results for the period to December, it was a tough market in terms of performance. The portfolio increased 5.8%, and for the year, it was actually up 19.7%. A solid result, but in a tough market. Over that period 5.1% was held in cash and obviously that figure moves from time to time depending on the opportunities.

On the pleasing side, it is great the profit reserve being built up over time. There is 39.0 cents per share in the profit reserve and that allowed the Board to decide to increase the dividend by 10.0% in the six month period to 5.5 cents per share for the six months. You can assume another 5.5 cents in the second half, so 11 cents per share for the full year. That is an excellent result in terms of profits that have been made over time to allow the Board of Directors to give that back to shareholders over time and that gives you an annualised fully franked dividend yield on the current share price of about 4.8%.

Now over the last period, there were some exciting news in terms of WAM Global merging with Templeton Global Growth Fund (ASX: TGG). That has significantly increased the size of WAM Global and as a listed investment company (LIC), WAM Global is one of the biggest global listed investment companies and there will be benefits. Benefits will flow from that over time. What we did see, and maybe this will come up in Q&A, we saw a number of hedge funds buying Templeton Global because it looked cheap for the arbitrage opportunity, and unfortunately we have worked through that. WAM Global was trading at net tangible assets (NTA) if not a slight premium earlier last year and now it is trading at a 13% discount and to me, that is exceptional value. You have that fully franked yield, plus the discount. That discount will be removed over time. WAM Global has been at discounts before and it has been at premiums before and it will just take a little bit of time to work through the overhang of some of the hedge funds that bought in for just arbitraging the opportunity of the merger with Templeton Global.

In terms of long-term benefits of WAM Global being larger, they are significant. You look at the large players in the LIC space, there is a significant benefit for size in the LIC space. Now, Australian Foundation Investment Co. Ltd, AFIC, (ASX: AFI) which is the largest LIC in Australia is trading at about a 14% premium. Argo Investments (ASX: ARG) is the second largest trading at a 7.5% premium and WAM Capital (ASX: WAM), the third largest, trading at a 20-odd% premium.

So there is a big bias for size and why is that bias for size? Really it is the financial planning community. When they say they want to allocate assets to a certain strategy, they don’t want to buy $1,000 or $2,000 worth of shares, they want sizeable amounts and good liquidity and so once WAM Global works through this current period, as I said where the arbitragers or the unnatural owners of Templeton Global are departing, then I think you will see a significant benefit of that deal and WAM Global being a larger player, so that is just a little bit of the background.

First of all, I just want to thank Catriona and her team for doing all the hard work. These are the guys that are investing the money. Catriona, from downtown New York, can you give us an update of the portfolio, the performance. Let’s look at the period to December last year.

Catriona Burns: Great. Thanks Geoff. Thanks to everyone who has joined the call today. Looking at that six month period from 1 July 2021 through to 31 December 2021, the WAM Global fund rose 5.8% which was solid but certainly lagged the MSCI World Index (AUD) by 5.5%. Markets through this period have moved around significantly as we grappled with strong demand and that significant liquidity that had been pumped in to financial systems globally by both governments and central banks, but that was met with supply chain issues and rising inflation and then that surge of the omicron variant of coronavirus through December.

With reference to the fund specifically, the performance has been hurt by a few factors. Firstly, our tendency to hold small-cap stocks which have vastly underperformed the large-cap stocks during this period and which make up that MSCI World Index (AUD), and also by some of our sector exposures and then some stocks specific pressures. On that first point, we have seen small and mid-cap stocks underperform. The MSCI World SMID (Small/Mid) Cap Index is about 7.0% behind MSCI World Index (AUD) and mid-caps are about 4% behind. We have about 60.0% of the fund invested in small and mid-cap stocks.

What we are seeing though given that sell off is for small-caps relative to large-caps are at nearly 20-year lows, versus that historic premium that they have traded at. On the second factor, sector wise, we have seen banks, energy and resources do particularly well. These are sectors that we tend to be underweight in and don’t focus on, given we love businesses that can really compound earnings through a cycle and we don’t see those businesses as generally fitting our investment process. Then lastly, we have had particular stocks that have dragged on performance, namely from the payments sector, China and e-commerce, and we will dig into detail a bit more on those I think a little later.

Geoff Wilson: Thank you very much for that Catriona. That is sort of looking back and I know this webinar is for that period. In terms of the outlook for global equities moving forward, do you want to touch on that?

Catriona Burns: Yes absolutely. That was the period up to 31 December. Since then, up until now at 1 March, we have seen equity markets under significant pressure. It has been a very tough period; we have seen technology stocks for example sell off particularly aggressively. I saw some statistics the other day that in the NASDAQ Index, which is the technology index in the US, more than 40% are off over 50%, and 25% are off more than 70% from their 52-week highs. So it has been very volatile and particular sectors have been under significant pressure. For context though, I would say that if we think back to the beginning of 2020, which was before the pandemic hit, the MSCI World Index (AUD) was up 28%. We have had a global pandemic in that period and yet we sit on the other side with global equities 28% higher.

Our outlook going into 2022 was that it would not be at all unsurprising to see lower returns as those emergency policy settings were withdrawn from global economies. But what has made markets so volatile is firstly around that stickiness of inflation. In the US, where I am for example, we have inflation prints above 7%, which are at levels not seen in 40 years and that has really meant that the US Federal Reserve (the Fed) has had to change the rhetoric around how quickly they would raise rates. That has riled markets. We have gone from a situation where markets were expecting one to three rate increase in 2022, to a situation now where they are pricing in seven. This change has had significant implications for the prices that people are willing to pay for stocks because as we feed higher discount rates through valuations, we have seen that de-rate in stocks more generally, and a huge rotation in the kind of stocks that people want to hold. Those growth stocks have come under pressure, particularly in the technology space, as I referred to earlier.

Now the second factor that has really added to the volatility, sadly, more recently is the Russia/Ukraine situation. It is incredibly sad and we feel for the Ukrainian people. We have seen Europe in particular suffering from concerns around the potential for energy supply to be cut off and the potential flow-on effects to economic growth. If I think through then the outlook for equity markets, we think that the debate will really continue to centre around how quickly the Fed will raise rates. The positive on this front is how much tightening is actually already being priced into forward curves, so the indication that the markets think seven rate rises is significant, and actually may end up having to be revised down given the increased concerns around growth and around Ukraine.

The other positive is that household and corporate balance sheets right now are in very strong shape with excess savings in places like the US, Europe, Japan, a higher level of equity in homes and then high levels of employment. On the negative, we do have that sticky inflation that is eating into some of people’s savings and rates are rising off those very low levels. A number of inflation pressures we think as we go through the back half of this year will start to abate. Some of the freight costs are already starting to come off and some of the bottlenecks are starting to relieve. We hope that we will eventually move pass this pandemic and that those supply chains can open up which will help inflation.

Overall, we actually do think that the recent sell off in markets is presenting some interesting ideas and opportunities. As I mentioned at the start, those small caps have been aggressively sold off and this is has been really indiscriminate regardless of whether their earnings fundamentals have actually remained very strong, so we are being opportunistic there. Even in that large-cap end of the market, we think that some of the highest quality companies are being really unduly punished just because they operate in the technology space regardless of whether they actually have valuations that actually look compelling. We are being opportunistic, but we certainly do expect ongoing volatility in equity markets. It is not an easy environment right now as companies are grappling with inflation, interest rate rises, the Ukrainian crisis. It is certainly not easy, but we are seeing that there is an increasing pool of new investment opportunities and we do like the set up ahead for the companies that we have in the portfolio.

Geoff Wilson: Catriona I know a little while ago you flipped over a chart of just showing how cheap I think the small-caps are, and what was the cheapest in, was it 23 years?

Catriona Burns: Yes 27 years.

Geoff Wilson: 27 years. We all know the markets are cyclical and it is quite bizarre because normally you think, the tail of a bull market, that small-caps are the most expensive. Is that telling us something different or is it just telling us that there is exceptional opportunity there?

Catriona Burns: I think you are right, and we have just had one thing after another. That period of underperformance has been that 2018, 2019, 2020, 2021 period, where we have had trade wars, Trump with the tweeting and you were waking up each night not knowing what was going to be next. Then a Fed pivot, trade wars and then coronavirus and all this supply chain disruption. There has been a number of factors that have caused people to flock to large-caps for liquidity, for certainty, but as you say, typically at this point you would expect the small-caps to be trading extremely well, but I think that is creating a lot of opportunities.

Geoff Wilson: Yeah and look thanks and in terms with opportunities why don’t we drill in a little bit and Nick why don’t you take us through some of the stocks that you guys as a team are looking at and are excited about at the moment?

Nick Healy: Yeah absolutely Geoff I am very happy to. Thank you everybody for tuning in today, we always appreciate your time. I would like to run through two companies. I will pass over to Will after that for a few more companies that we hold in the fund. The first one I would love to talk about is Arthur Gallagher (NYSE: AJG). Now Arthur Gallagher are the global leading mid-market insurance broker and we have invested in the insurance brokerage space in the past through AON (NYSE: AON) and in general we really do like this space. We think the recent AON/Willis antitrust investigation actually proves to highlight how good this industry is. There is really only a few competitors and that is a natural outcome of the fact that these brokerage firms connect many companies looking for insurance with many providers of insurance and by aggregating up demands they are able to achieve cost savings and pass that through to customers and kind of create a win-win, so it is a sustainable oligopolistic industry and we just really think it is quite a favourable space. Now why Gallagher in particular? They are the leading company in the mid-market. What this means is they don’t compete with Marsh McLellan (NYSE: MMC) and AON as much as they compete with smaller, regional brokers. For years they have taken market share off these firms and the reasons are pretty clear. They have the scale to invest in technology, data and analytics, whereas their competitors often don’t. Looking forward we see a situation where they can continue to take market share. Having engaged with management, we see them as extremely high quality. They have a history of execution. They speak really clearly. They are very optimistic on the future at this point and the CEO himself holds over a USD100 million of stock, so we see a good alignment of interests.

On the catalyst front, we see a clear catalyst here in that much like everything Gallagher do, they like to be conservative. We think they have understated their earnings effectively. If you look at their cash flows, they are about 30% to 40% understated and management have said to be more apples to apples, they are going to move to an industry standard approach this year and we don’t think the market is pricing this in properly because analysts and brokers cannot make the change until management confirm that they are going to do that change, so we see that as a clear catalyst over the coming months. Gallagher is a new position for us but we see it as a very high quality one. It is in the top 20 position and it is a company we are quite positive on today.

Just briefly I will run through another one which is TransUnion (NYSE: TRU). I have talked in the past about TransUnion. It is quite similar to the insurance brokerage space. It is a global credit bureau and it operates in an industry which just naturally leads to smaller number of players, quite oligopolistic and rational. For them, it is that they aggregate up the data of millions and millions of customers, so you need scale, and it is very hard to enter that business on a global basis. TransUnion reported their fourth quarter results last week. We thought they were really solid, including the 2022 guidance, however, the market right now really doesn’t like complexity and there was a bit of complexity here with TransUnion selling off some healthcare assets and acquiring some data and fraud assets. There was a bit to work through, but the market did not like that, and so it sold it off quite a bit. We love this opportunity because it allows us to act opportunistically and we have added to TransUnion on the back of that result. Big picture, we continue to see TransUnion as well-positioned as data is increasingly used in financial services across the world. I will pass over to Will for a couple more stocks that we really like in the fund.

William Liu: Sure. Thanks Nick. There are a couple of stocks I want to talk to you about today. The first one is Booking Holdings (NASDAQ: BKNG). Booking Holdings is an online travel agency listed in the US. We are constructive on Booking Holdings because we believe there is significant pent-up global demand for leisure travel. That is evidenced at its latest result where Booking highlighted the February room nights booked were ahead of 2019 levels and they highlighted an encouraging outlook for North America and Western Europe in terms of summer period bookings. We also believe that Booking is poised to gain market share and emerge from the pandemic in a stronger position than it was coming in. If you look at the business, you see the secular shift towards online travel agencies away from brick and mortar agencies. Further, we believe that hospitality venues and hotels are going to be increasingly reliant on Booking’s services to try and improve their occupancy rates.

Another point I would like to point out is that I think the market is under-appreciating the connected trip initiatives that Booking is undertaking. Booking is not only offering accommodation services. They are expanding into payments, car rentals and flights and we think they are going to get an increasing share of consumer wallets and we think this is going to be a positive power going forward which the market is not recognising.

The path to recovery is not linear for travel, there are bumps and turns along the way and we can see that there is some tensions now with Ukraine and Russia. We highlight that Booking noted on its core that they have a low single digit exposure to that space. We believe the management team is very well regarded. They also have a net cash balance sheet and we believe the earnings outlook is very constructive from here, so that remains a key position in our portfolio and we continue to be positive on the outlook.

The other name I want to talk to you about today is Intercontinental Exchange (NYSE: ICE) (ICE) and they are one of the leading operators of regulated market places and clearing services. The reason why we like Intercontinental Exchange is firstly because they have great earnings predictability. They have the leading market position in the markets they operate which gives them economies of scale and pricing power. Further, more than 50% of their business are data and analytics add-ons and we think they are really embedded into customer workflows and there is very little substitute products. The other reason we like Intercontinental Exchange is because they have some counter cyclical qualities. Their revenues are tied to trading volumes and we tend to see trading volumes increase in falling markets. We are facing clearly a quite uncertain macro-economic outlook with rising rates; oil prices above USD100 and we think ICE is well poised to benefit from that with the increase in hedging activity. The business in mortgage technology is also under-appreciated by the markets. They have the leading platform in digitising the mortgage process which is still in its infancy stages. The majority of the US is still using analogue services, and we think that provides a long way of growth in the future. ICE is extremely well run. The management team is very well regarded. We think there is clear earnings resiliency and it remains a core position within our portfolio. So they are two names I wanted to run through: Booking and Intercontinental Exchange. I will pass to Catriona.

Catriona Burns: Sure. The other thing we thought would be worth doing is to give you some insights in terms of those detractors to portfolio performance and give you a little bit more context around those. In terms of the three areas that have detracted in the period for the half year but which we still hold in the payment space are Tencent (HKG: 0700) and Alibaba (HKG: 9988) in China and then in the e-commerce space. I will kick off and discuss payments and then I will hand to you Will to cover off those China names and Nick e-commerce.

Firstly on the payment sector. What we saw in the period was that there was enormous bifurcation in the payment sector between stocks that have been seen as disruptors like Adient (NYSE: ADNT), Square (ASX: SQ2) and Stripe, and those that are seen as potentially disruptable. Names we hold that fell into that category are Visa (NYSE: V), Fiserv (NASDAQ: FISV), Fidelity National Information Services (NYSE: FIS) and PayPal (NASDAQ: PYPL), which we didn’t own, got caught up in that as well. We think the sell-off in these stocks is unjustified and continue to like the names longer term.

What was interesting was that the earnings power of these businesses have actually been very solid. There has just been a significant de-rating. To the point that in the example of Fiserv which we own, it is actually now trading at a 13 times multiple, but will grow earnings over 20%. We think there is significant upside. They own Clover which is the largest point of sale processing platform which is actually a disruptor in itself. We owned Fiserv and FIS going into the results, but we actually switched out of FIS into Fiserv because they were trading on the same multiples, but we thought the quality was higher at Fiserv. What we have seen is activist investor ValueAct invest in August last year USD1.2 billion in building a position in Fiserv. They have Board representation, so we think they will be also important in terms of realising the value going forward.

In the case of Visa, we also added in the sell-off in February. They have delivered a very strong result and we think they are very well placed to benefit from the return of cross border travel. The payment sector certainly did detract from performance, but we think the set up looking forward is compelling. Why don’t I hand over now to Will to run through Alibaba and Tencent.

William Liu: Thanks Catriona. China has been a difficult market for investors more generally. We do own Alibaba and Tencent. Together they make up 1.7% of the portfolio today. Despite reducing our position, we took down our position at Alibaba and Tencent in the wake of the regulatory activity, they have still been a detractor to overall portfolio performance.

The key concerns for China are really driven by two key factors. The first one is the heavy and sweeping regulatory activity and the second one being China’s zero tolerance on coronavirus that has lead to weakness in consumption across consumers and small and medium businesses more generally.

On the regulatory pace, it is very difficult to get clarity. We would make a couple of observations from our end, and it looks like the policies are aligned to China’s common prosperity initiatives tackling social issues such as income inequality, the rising cost of living and declining birth rates which they are experiencing. The government is in a difficult position where they are trying to balance the incentives for profit, incentives for hard work which is critical for productivity within their economy with the appropriate redistribution of wealth in a more equal way.

To us, China is not uninvestable currently. China is the number two economy in the world and a significant contributor to global innovation. If we look at Tencent and Alibaba, they have taken actions to comply with the new regulations. While this has come at a hit shorter term for their profit and margins, which has been disappointing, we believe the outlook is more constructive from here.

We are taking a very cautious approach. Alibaba and Tencent make up 1.7% of the portfolio today. We are seeing China’s monetary policy will hopefully stimulate credit growth and improve consumption. We are seeing the earnings expectations lowered for both companies and valuations are now trading at distressed levels. We think the risk-reward is geared to the upside from here, but we are taking a cautious approach. I might pass onto Nick.

Nick Healy: Thanks Will. I will run through the third area, we are going to do a bit of a dive to just to give you some extra detail and that is the e-commerce stocks. We invested into e-commerce in 2020 with the view that there is a multiyear shift going on from bricks and mortar to online and coronavirus clearly accelerated that, so we held names including Boohoo (LON: BOO), Westwing (ETR: WEW), Home24 (ETR: H24), Zooplus (ETR: ZO1) and BHG (STO: BHG). Although it worked in 2020, it didn’t work in 2021 and so far in 2022. We did actively reduce some positions given some of the things I will mention, however, nevertheless it was a detractor as an area.

I think the best way to illustrate this is just to go through Boohoo as an example. We invested in Boohoo in 2020 after engaging with management and forming the view that they were taking steps to improve some of the issues that had been highlighted in their supply chain. At the time we invested, it was a profitable business. It had years of double digit growth, so it wasn’t a concept stock, it had proven execution at that point.

What really went wrong for Boohoo was they rely to a great extent on smooth supply chains around the world. Where we were specifically wrong was although we could clearly see that those were impacted by coronavirus, we expected them to normalise in relatively short order, a year to two, and yet here we sit two years on and supply chains are still impacted by the coronavirus situation. We still think that they will improve over time, but clearly the timing is not what we thought it would be. This impacted Boohoo in two ways. Their lead times extended which impacted the customer value proposition and the margins were hit with freight costs coming up which impacted earnings.

They do have plans in place to solve this themselves through additional distribution centres they are building. Alternatively if supply chains are eased that will improve their situation. But as we have mentioned before, currently the market is extremely unwilling to look through periods of uncertainty or complexity and its taking these already lowered earnings and putting them on 16 times multiple which for a business that clearly grow double digit is quite a pessimistic view.

We do have the view that the business is not broken. It will take longer to return back to normal trading patterns, but our view is that from here it should incrementally improve and we do see a lot of upside from the current prices. It is fair to note that there is a lot of uncertainty in supply chains, so the position today is sized quite modestly below 1% to reflect the uncertainty inherent in the situation. That is the e-commerce bucket. I am going to pass back to Geoff.

Geoff Wilson: Great. Thanks very much Nick and you have done a very thorough analysis of what you like and what has worked and what hasn’t worked. I know most times we spend our time talking to the shareholders about what has worked, and I think it is great that you have shown both sides of the coin.

Why don’t I just quickly go back to Catriona before we go to questions. With this current volatility, how is the portfolio positioned now? Catriona, do you just want to touch on that before we go to Q&A?

Catriona Burns: Absolutely. Yes I will lead up on the portfolio position and then discuss what we have been doing more recently. The fund holds 65% in US listed stocks, about 13% in Europe, 7% in the UK, 8% in Asia with the majority of that in Japan and Australia, and the cash at the end of yesterday was sitting at around 7%. The cash is up from the end of last month as we have chosen to add a little liquidity given that uncertainty around Ukraine and as we saw markets adjusting to higher rates being factored in. We will draw that down as we find those stock-specific opportunities that we think are just too compelling to not put money into.

From a sector perspective, we are well diversified. As we have talked about in the past, we focus on finding undervalued growth names around the world. Generally you will expect us to be underweight areas like banks, energy, real estate investment trusts (REITs) and utilities. We love finding great businesses that can continue to grow through any part of the economic cycle, which often does lead us to those small-to-mid-cap stocks which are generally earlier in their life cycle. While this has been an area of under particular pressure, we do think those valuations of many of those companies are very compelling and do present exciting prospective returns.

Positioning wise, with inflation remaining stubbornly high, we are focused on ensuring the companies that we have in the portfolio do have that pricing power which really helps their ability to handle inflation and those that are managing those supply chain disruptions that we continue to see.

In the main, we aren’t adjusting the portfolio significantly overall, but we are adding where we see opportunity. We will never call a bottom perfectly, but we are selectively adding to both the businesses that we hold in the portfolio already that we think have been unduly sold off and we have added to positions in stocks that Nick and Will have talked to like TransUnion and Booking. We are adding other high quality businesses that we did not own going into the sell-off, but which we think have very strong earnings power. We have started to add small positions in businesses like Adobe (NASDAQ: ADBE) and PayPal. Our focus going forward is just to continue to find businesses that we think offer compelling upside, but without excessive valuations or leverage and where we can identify those catalysts.

Geoff Wilson: Thank you very much Catriona. Why don’t we go to the Q&A now. A lot of question have already been sent in and please continue sending questions in. Camilla do you want to start taking us through those please?

Camilla Cox: Thanks Geoff. Nick we will start with you. Catriona did touch on this but perhaps if there is something that you would like to add. Ross has asked: what impact do you see on global equities as a result of the war in Ukraine and is there any exposure to Russian stocks?

Nick Healy: Thanks Camilla and thanks Ross. Catriona did touch on this, but it is a topic that is incredibly at the front of the mind both for markets. Just in general, and Catriona said at the outset, we certainly all agree that from a human perspective our hope is for a peaceful resolution as quickly as possible.

Turning to WAM Global. With regards to the stocks that are Russian, Ukrainian or Eastern European, we don’t hold any, so the exposure there is zero. Some of our holdings do have indirect look through exposure in the Eastern European region and to Russia, however, having engaged with these companies, we see this as a very modest exposure. Some examples to set the scene are ICON (NASDAQ: ICLR) and Carrier (NYSE: CARR), and both indicated that it was below 2%. Carrier said below 1%. These are kind of the orders of magnitude of the look through exposure.

In terms of WAM Global’s position with regards to the situation, we feel quite comfortable in a direct sense. Clearly there are knock-on effects. There is already obvious impacts of this. This is clearly inflationary with regards to oil, gas, wheat and a lot of other commodities. It is driving a lot of uncertainty into the market and then when you see uncertainty you tend to see a lot of volatility. There has been some thoughts that given the uncertainty, this might take the edge off the monetary tightening cycle. Our view is this will be a challenge for the central banks just because they do face higher inflation, although we agree probably at the margin, this does take the edge of monetary tightening. The final thing that has already happened is from a geopolitical perspective, you see relatively quick moves and changes in stance. I remember back in the middle of last decade I was looking at the German Defence budget and it had been a sore point for years and years and years, that Germany underspent the North Atlantic Treaty Organisation (NATO) requirement of 2% of gross domestic product (GDP), already that has changed. Germany have committed to hitting or exceeding that target and these are kind of things that two, three, four weeks ago you wouldn’t have expected to see, so it is clearly a situation influx. The most important thing I guess is just to stress the fact that we have no direct exposure to the region. Thank you for the question.

Camilla Cox: Thanks Nick. Geoff we will turn to you now. WAM Global recently merged with TGG. Are the team looking at any similar opportunities in the future?

Geoff Wilson: The answer is there is nothing on the Board’s agenda. We did not expect that to occur. The TGG Board announced that they were reviewing their structure. The interesting thing is there is another company that WAM Global is not interested in, another listed investment company, Absolute Equity Performance Fund (ASX: AEG), which a week or so ago said they were reviewing their structure. It has been reported in the press that we have thrown our hat into the ring there, but that will be another entity. It fits more logically with another entity. TGG, because it was a global equity, it made sense for the TGG shareholders to get exposure to WAM Global which is global equity as well.

Camilla Cox: Thanks Geoff. Will, a question for you from Elizabeth. She has asked what were some of the key takeaways from the recent earning season?

William Liu: Thanks for the question Elizabeth. We are reaching the end of US reporting season. More generally the comment would be that it has been broadly positive. I think roughly three quarters of the company is in the S&P 500 Index have reported earnings above expectations.

In terms of what we are seeing in meetings with companies and through the results, a couple of points to highlight would be firstly demand is quite strong across the board, sometimes even outstripping supply. We are seeing price increases being taken across the board without much change in consumer or customer behavior.

On the margin front it is a little bit more tricky. As we have talked about earlier, there are macro impacts with supply chains, cost inflation and that is making it more of a difficult environment to navigate. For us, we tend to invest in high quality companies, they tend to have higher margins, so they can manage those costs in a better way and then operationally they have been able to execute a lot better.

Finally, guidance is becoming increasingly important. Companies which do have that predictability of earnings are getting rewarded, whereas companies which are less certain of their outlook are getting punished more by the market. From our perspective, we are seeing strength in terms of demand. We are seeing nuances in terms of managing the cost side of things. We are keeping a close eye on our companies. We tend to invest in companies with high quality management teams, businesses with predictability of earnings and with attractive industry dynamics. Reporting season has generally been quite positive for us.

Camilla Cox: Great. Thanks Will. Geoff a question for you from Bruce. He has asked: with a substantial increase in funds under management in the last 12 months, are there any thoughts from you on reducing management fees?

Geoff Wilson: The simple answer is no, that is not the plan. As we grow, then we actually grow our skill and expertise. From a managing-the-money perspective, the logic for Catriona to position herself in the US obviously is significantly more expensive than it was, but that was because as Catriona said 60% of the companies are over there. Particularly with coronavirus, there was a degree of uncertainty. In the funds management world, we are still pretty small. We manage $5.5 billion and we have 14 going to now 15 investment professionals, where say the likes of Magellan are managing $80 billion with 35-odd professionals and I think their global fee is actually higher than ours. I think it’s 1.35% and a performance fee. There is no plans.

Camilla Cox: Thanks Geoff. And just sticking with you we have a question from John on WAM Global options (ASX: WGBO). He has asked what was the purpose of the free options?

Geoff Wilson: The logic of the free option, effectively it is a buying right on behalf of all shareholders. It is giving you another piece of paper that you can decide what you want to do with it. You can sell it if you want. You can keep it and see how the underlying company performs and if it is trading above the strike price then you can exercise it. It was what we thought was the most equitable way of growing the business because it doesn’t put any pressure. It is like having a rights issue but having a rights issue over a year and a half, so it is a very gentle way of raising capital. With a rights issue, you tend to raise the money and that puts a bit of pressure on the share price. With an option issue, then there is no guarantee you will raise the money. You have to perform to raise that money, so that was the logic of having it.

Camilla Cox: Thanks Geoff. Back to you Nick. This was briefly touched on, however James asked: is the technology sector interesting to the team even given the recent sell off?

Nick Healy: Thanks James for the question. I think Catriona did touch on that and did mention that we do find that there are some amazing companies that as recently as six months ago, by sticking to our process, we found them very hard to get interested in, but some of the falls have been quite spectacular. We think at times like these the market does tend to throw the good out with the bad. Just keeping it simple, we do see it as an opportunity-rich environment and basically that is how we spend our time turning over stones and getting to know businesses and engaging with companies in the lookout for these really high-quality companies that we think are mispriced.

Camilla Cox: Thanks Nick. Over to you again Geoff. This one is from Alan. He has asked: why doesn’t WAM Global provide a daily NTA update?

Geoff Wilson: Effectively, we provide a monthly NTA update. I actually have seen no evidence that a daily NTA update adds value to anyone. There has been a number of listed investment companies that do daily NTA updates. I know the Perpetual (ASX: PPT) guys do their daily NTA update. It is tended to trade at a discount for most of its listed life, so it doesn’t necessarily get it to a premium.

I think one thing that is not positive about giving the daily NTA update is the fact that you are encouraging short-termism. What we are attempting to do is getting people that like what we are doing and want to come along for the ride. A good example of that is with WAM Research
(ASX: WAX). For the first broadly seven years of its life it traded at a discount to NTA and it took us a long time for the people that didn’t want to be there to sell and go and the people that wanted to go along for the ride to stay. On a monthly basis, of course, we would tell them how the NTA is going and but really it was people that wanted to stay for the medium-to-long term and that is what AFIC and Argo have. That is what we ended up getting with WAM Research and it took us the longest time of any listed investment company we have had to get it from trading at a discount to NTA and that was seven years. But now because we were so successful in getting that group of people that wanted to be invested in that product, I think the other day it was trading at above more than a 40% premium to NTA. Now that is a bit extreme, but that’s what happens if you get a long-term shareholder base that are really happy with what you are doing.

There will always be buying and selling, but our goal at WAM Global is not to get people that will trade for a cent or two, it is people that are taking a medium-to-long term view, like how we have invested and really have that alignment. That is how we will get WAM Global to trade at a premium and of course being a large WAM Global shareholder I would love it to be trading at a 40% premium, but NTA initially and then a premium after that, but we will get there, it will just take time.

Camilla Cox: Thanks Geoff. I have an interesting question from William for you on franking. He has asked: are franking credits only applied when investing in Australian stocks and if so, how can WAM Global pay fully franked dividends?

Geoff Wilson: How you get franking credits is if you own shares in an Australian company and then it pays a fully franked dividend, you get franking credits that way. The other way you get franking credits is if you make a profit and then you pay tax. How WAM Global gets its franking credits is from profit it makes. It is when we have bought a stock, it has gone up in value, we have sold it, we made a profit, we have paid 30% tax, then that gives us the franking to pay the fully franked dividends. Now obviously we don’t get the free kick that Australian investment companies get, that is getting fully franked dividends as well, so we only get it from the tax paid.

Camilla Cox: Thanks Geoff. Catriona, we will go to you. This one is from Terry. He has asked: how are you exposed to foreign currencies? What are the main sources and what hedging is done?

Catriona Burns: Thanks Terry for the question. In terms of the portfolio, we don’t hedge the currency exposure. Part of the basis for when we started the fund, we talked to our shareholders around what they wanted in terms of the fact that they had significant, in fact the majority of their assets in Aussie dollar stocks and Aussie dollars, and that they wanted diversification across their portfolios. In that vein, they get the exposure to the companies that we invest in and then the FX exposure. If I look at the cash weighting, as of yesterday, we were sitting about 7% cash and that was made up of about 4.5% US dollars, 1% Japanese Yen, 1% Euros and then a small balance in Pounds and Aussie dollars. We tend to align the FX exposure to the benchmarks so we are not taking big bets on currency, but the portfolio is unhedged.

Camilla Cox: Thanks Catriona. Nick we will go to you. This is a question from John. He has asked: are you looking at investing in the Health sector?

Nick Healy: Thanks John. We have talked about health and wellness in the past as a thematic that we very much like and are invested behind. Some specific names are Avantor (NYSE: AVTR), Thermo Fisher Scientific (NYSE: TMO) and ICON which 100% play on this theme. We like the health and wellness area because it has these really long demographic tailwinds behind it which we think drive multiple years, many, many years of above market, above GDP growth. At the same time there are very interesting technological breakthroughs that are occurring in the space which we think only increase the propensity for this area to grow. Lastly, I would say that a lot of areas are seeing a shift in consumer spending patterns, for example away from goods and towards services. We think healthcare is relatively immune from this. It will see elective treatments come back as coronavirus wanes, so it is not the kind of sector where we see short-term headwind issues. On the whole, very positive on the healthcare sector and yes we are invested in that space.

Camilla Cox: Great. Thanks Nick. Will, over to you. This one is from Oliver. He has asked if you can discuss if there are any opportunities that the WAM Global team are seeing in the initial public offering (IPO) space in the US?

Nick Healy: Sure. Thanks for the question. Clearly IPO activity was heightened towards the end of last year. We saw markets rallying, we saw the strength in markets and available liquidity and that lead to a lot of companies coming to the market. Many of these IPOs have underperformed. Some of them extrapolated strength during coronavirus, like names such as Peloton (NASDAQ: PTON), which we don’t own, and they took advantage of markets at the time. Generally speaking, we do participate in any of the IPOs and it was prudent in hindsight that we didn’t. We are still keeping a close eye some of these companies. If they do have the investment characteristics that we look for and trade at attractive valuations that could be a hunting ground for us, but we have not participated in IPOs over the past year.

Camilla Cox: Thanks Will. Back to you Nick. This one is from Sue and she has asked: do you believe growth or value stocks will outperform in the current environment?

Nick Healy: Thanks Sue. I think this is a big debate topic in the market: is growth going to win, is value going to win? A big picture comment, these are very rough buckets to use when thinking around about the world. We tend to find that sometimes our stocks, although they are growth companies with high quality, they can trade cheap enough to be considered value stocks and so we don’t think the buckets are a perfectly applicable way to think about the future. We very much go stock by stock in terms of how we actually invest.

That being said, will growth or value outperform? There is some pretty comment themes that tend to emerge. Value tends to include a lot of the commodity and energy stocks, so as long as those prices are moving upwards, value tends to outperform. At the same time growth includes a lot of stocks with earnings that don’t start occurring until many years into the future, they trade on very full multiples, so in a rising rate environment those don’t tend to be the best things to hold. Although it is not how we approach the world, I think probably if I were to place a bet would be more on value over the kind of six to 12 month window.

Camilla Cox: Thanks Nick. And Catriona this one is for you and it is from Lewis. He has asked: does WAM Global have any exposure to oil?

Catriona Burns: Thanks for the question. In terms of oil companies more generally and this can also be extended to resource companies, they are not generally the types of businesses that we tend to invest in. We focus on finding those undervalued growth companies that can really grow strongly and compound earnings through cycles. What we see with both oil companies and resource companies is their cycle is very much there. You are very dependent on a commodity price that you can’t control and that is not an area we tend to focus on.

Saying that, we can opportunistically own these names and when the oil price was sold off significantly we did have some small holdings in some of the oil companies like Chevron (NYSE: CVX) and Exxon Mobil (NYSE: XOM), but we have more recently sold those. We do have some indirect exposure through, and this is traditionally how we would play the thematic. It is around owning service providers, so as Nick discussed about in the healthcare sector, we love the picks and shovel companies that don’t care which company wins. So Applus (BME: APPS) which is listed in Spain would be an example of that. They are a testing business, they have an oil and gas business both operating expenditure (OPEX) and capital expenditure (CAPEX). The CAPEX business has obviously been hit dramatically as oil majors have turned off spend, but that OPEX business we think has growth and a positive outlook going forward because you still do have to maintain your facilities and so forth. That business has exposure to the oil and gas sector.

Quanta Services (NYSE: PWR), which we also own is listed in the US and has exposure to oil and gas pipeline investment. We do have some indirect exposures but the main oil companies are not the type of businesses that we really invest in.

Camilla Cox: Great. Thanks Catriona. Geoff we will just turn back to you now for any closing words.

Geoff Wilson: Thank you very much and thank you to all the shareholders. If there are any questions that we haven’t covered, we will get back to you. As I mentioned, this is your company, we are reporting to you, any ideas or suggestions or questions please feed them into the group. We are recording this so it will be up if you want to go back and look at anything on the website shortly. Always stay in touch. It is a crazy world we are living in at the moment. We thought coronavirus, then there are wars and then there are floods. There are obviously a lot of things going on, so please stay safe. What you will know is we are very passionate about what we do in terms of managing the money on your behalf and it is a 24 hour job and we will continue to do that to the best of our ability. Thank you very much.


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Wilson Asset Management

Wilson Asset Management has a track record of making a difference for shareholders and the community for more than 20 years. As the investment manager for eight leading LICs – WAM Capital (ASX: WAM), WAM Leaders (ASX: WLE), WAM Global (ASX: WGB),...

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