WAM's global response to global trends

Wilson Asset Management

Wilson Asset Management

As we slowly reopen from a once in a lifetime pandemic, world economies have bounced back surprisingly quickly, which in turn has opened up a whole new set of issues along with it - including supply chain constraints, labour shortage issues and inflation fears - across the US, Europe, Asia and Australia.

There has been tightness in supply has been on the labour front. We have seen that a number of workers were let go across various sectors and that labour has not raced back into the economy as the demand has come back. - Catriona Burns, Lead Portfolio Manager, WAM Global

And despite the unprecedented monetary support, these issues continue to put significant cost pressures on many industries. This backdrop places greater importance on finding companies with pricing power, whilst also exposing those companies navigating supply chain constraints.

In this video in the WAM Vault series, Catriona Burns, Nick Healy and Will Liu outline the trends and themes they believe will impact investments going forward, and discuss some of the portfolio holdings in WAM Global.

Discussion Points:

  1.  WAM Global Fund developments and investment objectives
  2. The global reopening, quick bounce back and structural issues
  3. Cost pressures, guidance and valuation expectations
  4. Top investment picks and global trends


Edited Transcript

Olivia Harris: I am joined today by our WAM Global (ASX: WGB) investment team, that is Nick Healy, Will Liu, and from New York we have Catriona Burns. Hi Catriona.

Catriona Burns: Hi Olivia.

Olivia Harris: Catriona we will start with you. It has been a really eventful six months for WAM Global. Can you give us an update on all of the recent activity?

Catriona Burns: It has been a busy time for the fund. Firstly, at the end of October we closed the merger with Templeton Global Growth Fund (ASX: TGG). I am very happy to welcome almost 4,000 new shareholders to the fund, taking our shareholder base to over 17,7000. For those who are new to the fund, what we are aiming to do at WAM Global is provide access to a diversified portfolio of undervalued growth companies from around the world.

We have three key investment objectives. Firstly, preservation of capital. Secondly, to provide capital growth over the medium-to-long term. Then lastly, to provide a steady stream of growing fully franked dividends. We are pleased to welcome our new shareholders and we look forward to you continuing the journey with us.

From the perspective of our WAM Global shareholders, we think the merger provided a number of benefits. Firstly, it increased the relevance of the fund to both the companies that we invest in and the brokers that we deal with. Secondly, it spreads the operating costs of the fund over a wider capital base reducing those costs for all. Then lastly, it increases the liquidity of the shares as they trade on the Australian Stock Exchange.

From a personal perspective, in August I relocated over to the US. It has been very exciting to be back in front of the management teams of the companies we invest in and in the next few weeks I will head over to Europe and the UK to see the companies over there.

Olivia Harris: Thanks Catriona. What are your observations now in regards to the global reopening as we come out of the pandemic?

Catriona Burns: In regards to the reopening I would split it between demand and supply. From the demand perspective we have seen an extremely strong rebound since the beginning of the pandemic. But that has hit a number of issues on the supply side, and those issues differ depending on the geography that you are looking at.

If we look at the US, where I am, we have certainly seen the economy reopen. But where there has been tightness in supply has been on the labour front. We have seen that a number of workers were let go across various sectors and that labour has not raced back into the economy as the demand has come back. We are seeing tightness particularly in areas such as retail, restaurants and transport.

Whereas in Europe we see that instead of firing people there was a lot more people put on shortened working hours and as demand has come back in parts of Europe it has been easier to return that labour force back into the system.

If I turn to Asia the supply chain issues there are a little different, and that is because vaccination rates were particularly low in parts of South East Asia, in Vietnam and Malaysia in particular. That had the effect that as the Delta variant spread across these parts of South East Asia, we saw a number of factories shut down.

Olivia Harris: Nick what are the implications of all of these developments for central bank policy?

Nick Healy: Through coronavirus we saw central banks throw unprecedented monetary support at the system. This included zero interest rate policies, yield curve control and quantitative easing. Their thesis was that the economies across the world would be slow to recover coming out of coronavirus and what we have seen instead is that economies have actually bounced back very quickly and this increased demand was met with supply chain shortages, which has led to inflation.

Now this does not really surprise us. We have been talking to our companies for many months on this and inflation and supply chain shortages have come up as really important topics for them. Not only are they key, but they are broad-based and they are in most conversations we have. On that basis we would not actually be surprised if inflation stays strong into the first half of next year.

Now why does all this matter? If inflation comes through, interest rates are probably going to have to rise, and that happens to be a bit of a headwind to valuations in the market. We have been thinking about this for months and so we have avoided any of these types of extremely highly valued companies, and we think that that will provide the portfolio a degree of insulation should we get into a world where monetary policy has to significantly tighten from here.

Olivia Harris: Will, what is some of the latest information that you have gathered from the US reporting season?

Will Liu: Some of the key takeaways we have seen from reporting season was firstly, that the cost pressures are very real, whether it be from labour shortages or supply chain shortages. Secondly, the cyclical demand has actually been quite strong. Even though there is rising cost pressures, and yes it affects some companies who are sort of in the tricky position of being in between rising input costs and not being able to pass those through, others which have pricing power and others which have the operational leverage from the volume growth, they are actually doing quite well.

The outlook statements for companies is becoming increasingly important. Companies which have reiterated their guidance or have spoken positively about the subsequent year investors have looked upon favourably. On the other hand companies which trade on high valuations, such as Peloton Interactive (NASDAQ: PTON) which we don’t own, they have been punished by the market if they have downgraded their guidance, and this shows that valuation discipline remains an important theme in this market.

Olivia Harris: Looking to infrastructure, Nick we have seen some progress on the Infrastructure bill in the US. What does that mean for the WAM Global portfolio?

Nick Healy: Yes we have. We have seen the Infrastructure Bill in the US has finally passed through Congress. Now it was a bumpy ride to get here, lots of false starts, but in the end we did get a USD1 trillion bill passed. In reality, what this means is closer to half a trillion US dollars and that money will be directed towards the electricity grid, highways, water and some niche carve out areas like cyber security and electronic vehicle (EV) charging. We think a number of our companies in the portfolio will benefit from this Infrastructure bill, including Carrier (NYSE: CARR), Ferguson (LON: FERG) and Komatsu (TYO: 6301).

One I would really like to touch on today though is Quanta Services (NYSE: PWR). Quanta is the leading provider of construction and maintenance services for US electricity utilities. We have talked about this in the past, but regardless of the Infrastructure bill, they were set to see many many years of support and tailwinds, because in the US the power grid is going much more towards renewables at the same time as we see a significant uptake in the amount of electric vehicles. These two things increase the variability of supply of power and significantly increase the demand for power. We saw a lot of funding going into the grid even before the Infrastructure bill. The Infrastructure bill will only accelerate that tailwind behind Quanta, and given that they make the majority of their profits from this area we think they are the best placed company to benefit from this modernisation of the US electric grid.

Olivia Harris: Catriona, can you talk to us about how the portfolio has changed given the developments that you discussed earlier, like supply chain pressures?

Catriona Burns: Broadly we have taken a view as we have talked to companies across the year in an uncertain operating environment, it is more important than ever to have pricing power. We have consistently talked to the management teams across the companies that we hold in the portfolio discussing these issues. We have not made broad wholesale changes across the portfolio but at the margin we have made a few changes where we did have some concerns.

A couple of examples here would be PPG Industries (NYSE: PPG), which we did hold, a coatings and adhesives business. Another would be Trigano (EPA: TRI) which is in the recreational vehicle space. They are the largest player in Europe but they do source a number of components that overlap with the autos and trucking industry. I would say broadly we are pleased with the ability of the companies that we hold to push through price where they have needed to and their ability to weather the supply chain issues that we are seeing.

Olivia Harris: Can you talk us through some of the themes that the portfolio is exposed to at the moment? Will, can we start with you?

Will Liu: Sure. One of the themes that we are exposed to is the trend of health and wellness. We believe this is a long-term trend exacerbated by what is happened during coronavirus where unfortunately those with comorbidities had a more fatal impact than those that did not. We think there is this trend towards living an active lifestyle, eating better and focusing more on your wellbeing as a preventative form of healthcare.

We are exposed to this thematic through two key names. The first one I am going to talk about is Simply Good Foods (NASDAQ: SMPL). Simply Good Foods is a nutritional snacking company based in the US. We are really attracted to it because we think it has a long runway for growth. It has a strong portfolio of brands which resonates well with the customer and we believe they are leveraged to increase their revenue growth as mobility returns and workers increasingly come back to the office and the gym. Finally they had a standout earnings results where they increased their gross profit margins despite rising input costs. We are confident on their outlook for the full year 2022 and it is a name we are bullish on.

The next one I want to talk to you about is Adidas (ETR: ADS) and I think Adidas is extremely well-known. We like Adidas because we think it plays in an attractive industry structure. The industry is driven by trends towards casualisation and increased focus on an active lifestyle. Further, Nike (NYSE: NKE) and Adidas together make up less than 50% of the market so there is still this story of consolidating share from some of the smaller players. We are very confident that they can reach their 2025 ambitions, and this includes reaching the upper end of their 8% to 10% revenue growth target and delivering double digit earnings growth.

Nick Healy: A second theme I would love to discuss today is the power of data and analytics. We play this theme through two holdings in the fund, Intercontinental Exchange (NYSE: ICE) and TransUnion (NYSE: TRU). Intercontinental Exchange are a leading provider of marketplaces for credit derivatives, bonds, commodities and they have recently made a big move into mortgage technology. We are excited by Intercontinental Exchange because, and we have said this before, but we don’t think the market gives them anywhere near enough credit for the fact that the majority of the business generates profits from recurring data services that they sell into these marketplace participants. We think they have a best in class Chief Executive Officer Jeff Sprecher who is always thinking ahead of where the market is and as a result has driven over 15 years of annual earnings growth. Frankly, we are quite excited by the opportunities in the mortgage space. This is a huge market. A lot of it is still analogue and we think they are best placed to digitalise the experience.

The second company I would love to talk about is TransUnion. This is a leading consumer credit bureau with data on over 200 million individual filers, used by over 65,000 businesses across the world. TransUnion are really impressive to us because they lead the industry in taking this core data asset and turning it into adjacent verticals and adjacent products. Some examples of this is they led the industry in trended credit data. They have also moved into fraud and identity management. They are big in buy now, pay later and they are moving into media. We see a lot of white space in these adjacencies to continue to achieve the really impressive high single digit growth. We think TransUnion has great earnings power over the years to come.

Catriona Burns: A further theme that I would mention the portfolio has exposure to is automation. Automation is a trend that has been underway for many years but has accelerated significantly in recent times. That is because of a number of factors. Firstly, trade wars and the pandemic have really highlighted the necessity of security of supply and how much you benefit from having supply nearby to the end markets that you are trying to serve. Secondly we have seen changes in the way people consume both products and technology and a real trend towards e-commerce for example which requires a significant amount of automation to enable areas such as same day delivery. Lastly, because of the labour issues that we are seeing in market at the moment. With a shortage of labour you have seen corporates increasingly focus on reducing head count which is significantly achieved from adding automation to your processes.

A couple of stocks in the portfolio are really well positioned to benefit from these trends. The first is Zebra Technologies (NASDAQ: ZBRA) which is an innovative market leader involved in enterprise mobile computing, barcode printing and scanning and data capture. This is a business that in recent years has really transitioned from being a hardware provider to a software player. We think the business has executed extremely well. They are very well placed to benefit from these automation trends that are underway and have seen particularly strong uptake amongst the retailers around the world. In Australia you will see their products in businesses such as JB Hi-Fi (ASX: JBH), Target, Bunnings and we think the future looks extremely bright for this business as they continue to take market share and consolidate the industry.

A second business that we hold in the portfolio that is well positioned here is Concentrix (NASDAQ: CNXC). This business was recently spun out of US company SYNNEX (NYSE: SNX), so it is not very well-known. If you look at the broker coverage it is a USD10 billion company and yet only has one tier-one broker covering it. This business is involved in helping their customers process automate. They are implementing the use of technology such as machine learning to help their customers become more efficient. They operate in a very fragmented industry where they continue to take market share both organically and through mergers and acquisitions (M&A). Their management team has been executing extremely well and we think the company looks very well positioned as we go forward.

Olivia Harris: Where are you finding new ideas at the moment?

Catriona Burns: What we are seeing at the moment is an incredible amount of innovation. I recently attended a European micro-cap conference and was incredibly impressed by the amount of innovation and new companies popping out of places such as Spain, Italy and Norway. This innovation is meaning that various companies are popping up that are really disrupters across multiple sectors.

One of the sectors that we are seeing an incredible amount of innovation right now is in the healthcare space. There has been incredible funding flow into the healthcare area post the pandemic and a number of new businesses we are seeing there have developed incredibly innovative technologies in areas such as cell and gene therapy and across the biopharma space. We have a number of companies in the portfolio that are benefitting from these developments. These include businesses such as Concentrix, ICON (NASDAQ: ICLR), RWS (LSE: RWS) and JTC (LSE: JTC).

Nick Healy: From a size perspective, we are finding a lot of really great ideas at the smaller and mid-cap end of town. Traditionally this is a space we love, but I would say even more recently a lot of these names are not getting the respect they deserve from the market because they often operate in niches and they are not as well-known as the market darlings that are driving the headlines today.

A few names we have added in this small-to-mid cap space recently include Verra Mobility (NASDAQ: VRRM) who are a mobility solutions provider to governments and rental car companies across the world. We have also invested in Dun & Bradstreet (NYSE: DNB) who are the leading corporate credit bureau with a really strong presence in North America and data on over 300 million businesses. We are currently building a position in a small Japanese company that I look forward to updating investors on in the future. So that is just a few examples of the fantastic investments we are finding at the smaller end of town. Importantly these may be a bit unheard of, but they still fit our process. They are great businesses with good management teams and catalysts to unlock value.

Olivia Harris: Catriona can you give us an update on what your outlook is for the next six months?

Catriona Burns: Generally we think the backdrop for equities remains attractive. Demand continues to be strong and we do have both corporate and household balance sheets in good shape. There is very little alternative for yield in the market right now, yet we do not expect the same level of stunning returns that we have seen from equity markets to repeat.

We think it is more important than ever to be finding those companies that do have pricing power. At WAM Global we focus on finding businesses that have both revenue and earnings growth overlayed with a reasonable valuation. We continue to hunt around the world for great investment ideas and are still finding attractive opportunities as we look around the world.

Olivia Harris: Catriona do you have a final message that you want to leave with our shareholders?

Catriona Burns: I would like to thank our shareholders for their support over this period, and welcome again those new Templeton Global Growth shareholders who joined the register. We look forward to hopefully seeing you in person again soon and updating you on the portfolio developments as we go forward.

Olivia Harris: Thanks Catriona and thanks Nick and Will.

Want more content like this?

Check out Wilson Asset Management's Vault Series, to hear more about how our investment team are positioning their portfolios throughout the rest of 2021, the opportunities they see in the current market environment, and their outlooks for 2022".


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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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