Not Enough Blood In The Streets Yet, Says Veteran Investor
It’s not very often that a fund manager tells investors to sell out of his funds, but Geoff Wilson is doing exactly that.
Wilson Asset Management’s stable of listed investment companies (LICs) – which comprises WAM Capital Limited, WAM Research Limited and WAM Active Limited – are each trading at a premium to NTA (net tangible asset backing). So the veteran funds manager, who founded the eponymous independently owned boutique investment manager in 1997, is telling shareholders to sell – on one condition.
That condition is that the shareholder is not a taxpayer: in other words, they hold the shares in a self-managed super fund (SMSF) that is paying pensions. In “pension phase,” a SMSF has a tax rate of zero – so the fund won’t pay capital gains tax on selling its WAM LICs. “If you don’t pay tax, you should sell and buy them again when they return to discount,” said Wilson at the Spring FG Leadership Series even this week.
That ability is one of the reasons why Wilson is a big fan of the LIC vehicle. He also likes the fact that LICs are “closed-end” investment vehicles: after the initial capital raising, investors have to buy the existing shares – which trade at a price set by the market.
“It's a great asset class: as a LIC manager, you’re never forced to buy or sell any stock, you never have redemptions. It’s a great way to manage money for the long term and generate consistent growing streams of fully franked dividends. We’ve found that SMSFs on particular find LICs a very handy vehicle.”
Wilson’s firm will shortly add to its stable a specialist LIC investing in large-cap ASX-listed companies, to be called WAM Leaders.
Wilson has also brought to the Australian market a new concept, the Future Generation LICs. These vehicles are each a “fund of funds,” where the portfolio is managed by a chosen group of fund managers, but the fund managers – and all other service providers – work for free, and every year, 1 per cent of the fund’s net asset value is donated to selected local charities. Future Generation Investment Fund Limited (FGX), which invests in Australian shares, and Future Generation Global Company (FGG), which invests in global shares, are the first “philanthropic managed funds’ listed in Australia.
From his vantage point as a veteran investor – who started as an analyst, became a broker and a member of the Australian Stock Exchange (as it was then was) before setting up his own investment firm – Wilson has seen many cycles of the share market. As he told the Spring FG Leadership Series , the current bear market is not over. It won’t be over, he says, until we see some “real pain.”
“There is not enough pain out there yet for me to be bullish,” he said. When there is real pain, he said, there is “no liquidity.”
Wilson is a fan of the famous saying accredited to Baron Nathan Rothschild, that “The time to buy is when there’s blood in the streets.” (Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon: he was the first person in London to learn of the British victory. Legend has it that he sold when he learned of this, created a panic, bought back, and then profited from the euphoria when the news became official.)
You can tell that Wilson is a fan, because he knows the full quote: “The time to buy is when there’s blood in the streets, even if the blood is your own.”
“I love the Baron Rothschild quote,” he said. “But as an investor in the market, I don’t see blood. On the downside we have got further to go.”
It is a cliché, he said, but no-one rings the bell at the bottom of the market. But Wilson has a fair idea what will move first.
“Historically, large-caps move first, because investors go for liquidity. The largest, most liquid stocks will recover first. The first things we’ll buy will be the large financials, the four major banks and Macquarie, they will be the first leg out of the bear market. It’s only when the bull market is under way that investors will start to look at the smaller stocks," Wilson said.
Bull and bear markets are an unavoidable part of share market investment, said Wilson – but investors should ensure that they are net buyers throughout a bear market. “When the market falls I get excited. It’s not about how much money you lose in the bear market, it’s how quickly you can make the money back. The reason I’m not incredibly bullish at the moment is because there’s not enough pain out there.”
Wilson said his firm’s over-arching philosophy is to buy under-valued growth companies. “That typically means medium-sized and small industrial stocks. If the company is not well-rated and we can’t see a catalyst to change that, we are happy to sit in cash. Our average is 34 per cent cash over 18 years.” More recently, Wilson Asset Management has had more than 40 per cent of its funds in cash.
Investors can be confident that the market will rebound, said Wilson: it is just a matter of time. “When we’re more confident that things are really grim from a bear market perspective, then we’ll be trying to position our portfolio – maybe 5 or 10 per cent of it – to benefit,” he said.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au