Geoff Wilson goes back to market

Geoff Wilson’s team turn their sights to large caps in this latest offering on the LIC smorgasboard.

Summary: WAM Leaders Limited is currently seeking to raise $330m – and this new investment vehicle will depart from the focus of previous Wilson LICs to look at companies in the ASX200. Don’t expect the management team to pay attention to sector weightings or have a close to fully invested portfolio – they will employ their own bottom-up management style. While it’s worth questioning whether the fund be challenged to outperform with large cap stocks, this is a compelling opportunity.

Key take out: WLE will not be coming in to the LIC model portfolio because we already have large cap exposure covered off – whether this one will work for you is purely down to your large cap exposure.

Key beneficiaries: General investors. Category: Listed Investment Companies.

The latest offering on the LIC smorgasbord comes from a familiar name. As I write, Geoff Wilson and his team are crisscrossing the country holding their annual shareholder briefings and at the same time spruiking the latest offer from the WAM stable, WAM Leaders Limited (WLE).

Wilson is seeking to raise up to $330 million (including oversubscriptions) into the new investment vehicle. The offer is now open and is expected to close on  May 17. WAM Leaders is a natural step for the team at Wilson Asset Management, who already have the mid to small cap end of the market covered with three different LICs offering two different strategies and one combining the two.

WAM Leaders will focus on companies in the ASX 200. To put it simply, WAM Leaders will adopt the same strategy as current flagship fund WAM Capital. The portfolio will invest in stocks chosen from the team's strong research-driven, bottom up fundamental stock selection process and also take advantage of shorter term market events such as attractive IPOs, M&A activity, mispricing and arbitrage opportunities. All investment selections, long term or short term will need to have a catalyst on the horizon before the team invest. Unlike all of the other Wilson offerings this fund will only select stocks within the ASX 200.

What can investors expect?   

Don’t think these guys will go out and buy the banks, Telstra and BHP. Don’t expect them to pay any attention to index weights or sector weights. And don’t expect them to fill a portfolio and be 80 per cent or 90 per cent invested like the others. The team behind WAM Leaders do not care about holding what everyone else does. They care about generating returns and if they do not see opportunity in the banks they will not hold them – and they are more than happy, as they have shown in the past, to hold as much cash as they like, for example right now WAM Capital is holding 31.8% of the portfolio in cash.

Expect the turnover in the portfolio to be a lot higher than the traditional large cap portfolios. Chief Investment Officer, Chris Stott anticipates annual portfolio turnover will be approximately 50 to 60 per cent. This is in stark contrast to other large cap portfolios like BKI, Milton, AFIC and Argo, which tend to be 16 per cent or less.

The active strategy outlined above will be what generates a substantial dividend in time. The active strategy of taking profit is what has generated the other LICs’ above average yield when compared to peers.

Speaking with Stott and portfolio manager Matthew Haupt, the pair suggested investors should expect to see stocks like Mayne Pharma Limited (MYX), Vocus Communications Limited (VOC), Bluescope Steel Limited (BSL) and Ardent Leisure Group (AAD) make it in the new portfolio.

Readers of the prospectus may have noticed the rather relaxed investment guidelines:

 “...potential investments for the Company is focused on Large-cap companies included in the S&P/ASX 200 Index, however it may invest in all securities quoted on the ASX or other exchanges, hold cash, and invest in the other permitted investments identified in…”.

Stott and Haupt were able to give some further clarity around the above statement. They reaffirmed the portfolio would be focused on the ASX 200. The exception to this would be stocks that are dual listed, and stocks outside of the index are ones that will obviously be coming into the index when it is reweighted. A recent example of this would be intellectual property lawyers IPH Limited (IPH) which entered the ASX 200 in the March quarterly rebalance.

The portfolio also has the ability to short sell, however this will be used very sparingly as it has been in WAM Capital in the past. At any one time the team expect no more than 10 per cent of the portfolio to be short. 

For more on the strategy, catalysts and investment case for the stocks stated above watch our ten minute interview with Chris Stott and Matthew Haupt here:

The question marks

Putting my sceptical hat on a few questions come to mind. Firstly, why large caps? The team have always said investing in the mid to small cap space gave them a competitive edge.

The smaller end of the market is under covered by the larger research houses, and the analyst team could get in there before the big institutions were aware of the great companies they found. The S&P/ASX 200 constituents receive a lot of coverage and because of this catalysts for a stock re-rating may be harder to come by as well, potentially making performance harder to come by.

Combating this is the point made by Stott in our video above: Over the past 18 years, 20 per cent of WAM Capital has always been invested in ASX 200 stocks. This shows the strategy is effective on larger cap stocks. 

The cynical part of me asks if the timing of this is due to the other Wilson offerings starting to reach a ceiling. The balance between funds under management (FUM) and being able to effectively operate a small to mid cap strategy may finally be at the point where returns may be compromised if FUM is to continue to increase.

Also on the question of why now, is this launch coming along at a time when the team at Wilson see significant opportunity in the market? With the market struggling to move off 5000 points, are the team launching a fund now with the view of looking forward to some sensational five year numbers as the fund will be coming off a low base?

It is always better to launch something new with the ability to grow well beyond the current LICs’ capacity rather than push forward, increasing FUM and potentially diluting returns due to capacity issues. Additionally, there is nothing wrong with growing the business.

The reason why Wilson Asset Management has been able to successfully grow as a manager of LICs is because it has been profitable for shareholders. Very rarely will you see a funds management business be successful over the long term without being successful for its clients.

The view

When it comes to looking to grow the LIC stable at Wilson Asset Management, it seems a large cap fund is the next logical step. This new venture brings them up against the likes of AMCIL Limited (AMH), QV Equities (QVE) and Perpetual Equity Investment Company (PIC).

WLE will differ because it will have similar elements to those that have let the other Wilson LICs perform well. It will hold as much cash as it needs to, and going to cash for WLE won’t mean just increasing to 20 per cent. The other distinguishing feature will be WLE’s level of activity. The vast majority of large cap managers focus on long term investing and have far less portfolio turnover than what WLE anticipates having.

It is also a team with a history of successfully marketing LICs and trading at a premium, and with Geoff Wilson out front doing what he does best there is every chance WLE will come out of the gates strong.

WLE will not be included in the Eureka LIC model portfolio, because large cap exposure is well and truly spoken for at this point in time. This is the only reason why I am not including it. This one is purely down to your own exposure if you have room in your portfolio for an active large cap manager – and unlike a lot of active managers this portfolio really will be active.

It is a unique proposition from an excellent team who have managed to do something many LICs don’t: Perform well and communicate its message effectively. I am looking forward to seeing how it comes together. It is by far one of the most compelling LIC IPOs that has come across the desk in a while. I am comfortable with the proposition. This one is up to you.