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Can The Small Cap Experts Beat The Street?
BY CHRISTOPHER HALL - 06/05/2016 | VIEW MORE ARTICLES BY CHRISTOPHER HALL

Wilson Asset Management are bringing another Listed Investment Company (LIC) to the ASX, WAM Leaders (WLE).

The team at Wilson AM have a wealth of experience in investing in listed companies and bringing LICs to the Australian public. Wilson AM is chaired by Geoff Wilson – a name synonymous with Listed Investment Companies (or LICs) in Australia.

Together Geoff Wilson and the investment team at Wilson AM have over 80 years’ collective experience in the Australian share market are the investment manager for three of Australia’s leading LICs: WAM Capital Limited (ASX: WAM), WAM Research Limited (ASX: WAX) and WAM Active Limited (ASX: WAA).

The Wilson AM team also created Australia's first listed investment companies to provide investors with access to leading fund managers while supporting our future generation: Future Generation Investment Company Limited (ASX: FGX) and Future Generation Global Investment Company Limited (ASX: FGG).

Wilson AM successful past

In a recent study we found two of Wilson AM’s LICs were in the top three of the highly competitive LIC space on the ASX.

The success of Wilson AM’s LICs can be attributed to their team following a proven formula of its Research Driven and Market Driven investment processes along with:

  • a proprietary research rating process
  • an intensive investee company meeting schedule of more than 1,000 meetings per year
  • a total focus on managing money

Wilson describes this approach as being amplified “by the team’s extensive network of contacts to provide insights, intelligence and opportunities to the investment team.”

Wilson Asset Management’s focus on investing in undervalued growth companies has historically led to a significant exposure to small-to-medium companies. Wilson notes that as Wilson AM has grown its funds under management over time, it has invested in larger companies.

Wilson AM shareholders drive the WLE listing

Off the back of Wilson AM’s other LICs’ strong performance shareholders are seeking the same investment approach in the larger and more competitive end of the ASX, the ASX Top 200.

“Strong shareholder demand (has been) the catalyst for launching WAM Leaders…” Wilson says.

Wilson AM Philosophy extends to WLE:

WLE aims to provide shareholders with exposure to large-cap, undervalued companies in the S&P/ASX 200 Index and will combine the proven approaches of both a fundamental analysis perspective as well as insights from the experienced investment team.

WLE’s investment philosophy will combine:

1) The Wilson AM Research Driven investment process

“This process involves extensive research focusing on free cash flow, return on equity and the quality of the potential investee company. Each company is rated with respect to management, earnings growth potential, valuation and industry position.” Wilson says.

“Under this process, we will only invest in a security once we can identify a catalyst or an event we expect will change the market’s valuation.”

2) The Wilson AM Market Driven investment process

“This process takes advantage of short-term relative arbitrages and mispricing’s in the Australian equity market. This part of the investment portfolio is traded actively,’ Wilson says.

Opportunities are derived from initial public offerings, placements, block trades, rights issues, corporate transactions, such as takeovers, mergers, schemes of arrangements, corporate spin-offs and restructurings, arbitrage opportunities, LIC discount arbitrages, relative value arbitrages, short selling and trading market themes and trends.

Can WLE beat the street?

In discussing the upcoming IPO of WLE with many experienced investors and money managers the common question comes up: ‘Can WLE beat the street?’

When discussing this question with Wilson, he notes that “We believe Australian and New Zealand investors have limited access to research-driven, active and index unaware fund managers focused on Australia’s large-cap listed companies.”

“Wilson Asset Management’s absolute bias, bottom-up, benchmark unaware, fundamental investment methodology with the flexibility to hold cash if investment opportunities are not identified within the investment process.”

Recent research supports the importance of actively using cash for a LIC to beat the market, and it has proven to be a successful tool both now and in the past for Wilson AM’s LICs.

WLE IPO timing:

In this current market environment, the ASX has been dragged down by both financials and Top 20 (‘blue-chip’) shares over the last year. Financials make up 44% of the ASX 200, this strong weighting towards underperforming blue-chip shares has made it difficult for most money managers benchmarked on the ASX 200 to make strong returns.

However, with each market event there is an opportunity for astute investors. WLE will be benchmark agnostic, or ‘benchmark unaware’ - meaning Wilson AM are free to invest in the best opportunities, regardless of what everyone else is doing.

The fund managers who are benchmark aware must hedge their bets and keep their certain exposure to the market heavy-weights, regardless of their investment outlook. This is called ‘index-hugging’, which has been a lead-weight for many benchmark-aware funds over the last year.

Arguably this market environment provides prime conditions for WLE to list on the ASX and showcase the benefits of benchmark unaware investing over the ASX 200 combined with the flexibility of cash.

A free option to sweeten the WLE IPO Deal

Investors who take part in the WAM Leaders initial public offering are entitled to a bonus option for every share, with an exercise price of $1.10 until 17 November 2017.

This bonus option will be a lot like ‘free money’ for investors in the right conditions. Normally what happens is that if the equity market performs, the investment portfolio grows and share price increase during this period.

For example, if the ASX 200 rallies 15% over the next 18 months, it is very plausible that WLE could be also be trading 15% higher, around $1.26. Using the free options form the IPO investors are entitled to purchase discounted shares in WLE at the IPO price of $1.10, taking a net profit of 15% that can be turned around in a matter of days for negligible risk.



View More Articles By Christopher Hall

Christopher is head of equites at Spring Financial Group. Christopher has over 10 years' experience managing equities desks with thousands of retail clients and responsibility for maintaining and servicing retail and wholesale relationships.



 

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