Sector outlook and picks for FY22
The S&P/ASX 200 Index recovered and then exceeded its pre-pandemic high in the space of approximately 15 months, notwithstanding a 36.5% drawdown 22 days into March last year. Using pre-tax NTA growth as a gauge for underlying investment portfolio performance, Domestic Equity, International Equity and Alternative Strategy Managers all on average added substantial value over their respective benchmarks during the last 12 months. While the market average discount to underlying asset value has materially contracted since the onset of the pandemic, we anticipate income dependency, sector consolidation, shareholder activism and recent strong performance of actively managed alpha generating solutions to drive further contraction and realisation of value.
WAM Alternative Assets (WMA)
WMA currently invests in a diverse range of alternative asset classes, including but not limited to: (1) private equity, (2) real assets, (3) real estate and (4) cash. Wilson Asset Management, by way of appointment as the Investment Manager of the Fund in October 2020, has also agreed to adhere to a ‘Premium Target’, an uncommon objective in the Australian LIC market which would see shareholders empowered to vote on wind-up if shares fail to trade above the pre-tax NTA at least 3 times over the next 5 years. With yields remaining depressed, alternative assets, like fixed income securities, exhibit a similar low correlation to equities with strong annuity-style returns. Leveraged to Australia’s comparative advantage, the substantial allocation to agricultural assets and water entitlements may be the driver of future returns amid further supply-chain disruptions and price increases.
MFF Capital Investments (MFF)
MFF’s primary focus is to invest in large listed international companies where the Investment Manager has identified attractive business characteristics at a discount to their assessed intrinsic values. We believe there is a potential for share price appreciation given strong reported profit reserves, franking credits and supportive guidance from the Company’s Directors to revise the dividend policy from a 3cps 6 monthly fully franked dividend to 5cps within the next two years. An overhang does exist from in-the-money options, however turnover in the low cost base portfolio would foreseeably result in substantial tax liabilities. MFF has historically outperformed its benchmark MSCI World Index (in AUD) by 3.7% p.a. over the last 10 years, and we believe this injection of incremental liquidity will facilitate further long-term growth, evidenced by the Manager’s strong track record in selecting quality companies with prospects for sustained bottom-line expansion.
Ellerston Asian Investments Limited (EAI)
Asia has attracted significant fund flows, however historic US-China relations have undermined the expansion of this capital allocation. The new Biden Administration and the Fed’s avoidance to address tapering targets for quantitative easing may be set to benefit Emerging Markets. Positive prospects for China’s growth trajectory are supported by tailwinds such as: (1) an increase in the administration of vaccinations, (2) a focus on carbon neutrality with the production of electric vehicles and renewables infrastructure and; (3) an improvement in living standards with increased domestic consumption and services. EAI provides access to a benchmark agnostic, concentrated portfolio of high growth companies across the Asia region with a proprietary integrated Environmental, Social, and Corporate Governance approach through the investment process.
Figure 1: Trailing 5 year sector premium/discount
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