Wilson Asset Management Chairman & Chief Investment Officer, Geoff Wilson AO

Wilson Asset Management Chairman & Chief Investment Officer, Geoff Wilson AO speaks about the rotation away from tech and into value stocks, as well as his views on inflation.

25 May 2021

 

Transcript

TOM PIOTROWSKI: Thanks for joining us for the Executive Series. Today I'm speaking with Geoff Wilson, who is the Chief Investment Officer and Chairman of Wilson Asset Management. Geoff, it's always a pleasure to talk to you. Thanks for making the time.

GEOFF WILSON: Thanks, Tom. Good to be here.

TOM PIOTROWSKI: And the reason I'm looking forward to our conversation is that it's interesting times as the Chinese say. And that can be a blessing or a curse. We're not sure, but--

GEOFF WILSON: We could be both.

TOM PIOTROWSKI: It seems like that. But when you consider where we are today, where the markets are concerned, how do you take stock of things?

GEOFF WILSON: It does worry me. I mean one thing that worries me significantly is all the people playing the market for the first time, all that new money in the market. Now I remember when I started in the industry back in the early '80s, I was told that you make your money in the second bull market.

And when I was told I was like, what does that mean? And what effectively means is in your first bull market you invest and you lose what you make, but you learn. And what really does worry me is the fact that all this new money that's come into the market recently, in terms of how the market's positioned-- to me it nearly looks as though it's priced to perfection.

Now whether we'll look back in 10 or 20 years and say, look that was the period where there was all this incredibly low, record low interest rates. There was all this money being pumped into the system. Valuations went to very high levels. And maybe we'll never see that again. So to me, I am nervous. And I've seen instances where there really have been some very uneducated investing. So yeah. So that's that worries me.

TOM PIOTROWSKI: One thing that can often inoculate you against irrational markets is investing in quality, of course, because quality organisations perform well in all sorts of markets and economies. How do you apply that to where we are at the moment?

GEOFF WILSON: Well, I mean that's a very good point. And I mean you'd remember, well there's a bit of grey hair there. And I remember--

TOM PIOTROWSKI: I'm only 25. It's just working here makes me age.

GEOFF WILSON: The financial markets, made you--

TOM PIOTROWSKI: Yes.

GEOFF WILSON: Being so close to them as you are and have been for so many years. Back in the '80s, '87, I remember in early '87, everyone said the market was expensive. And we ended up in October '87, we had the stock market crash when the market fell 25% one day. But from the start of '87 when everyone knew the market was expensive, it actually went up in Australia 50%.

So the hard thing is-- and this comes back to the comment you're making in terms of buy quality, because over time the market goes up on average 10% over time. There could be periods in there where the market goes up a significant amount and also can fall a significant amount. So if you're taking a medium-long term view, the equity market is a great place to invest.

I suppose what I'm saying is don't overextend yourself at the moment. And be prepared that you can ride any major fluctuation you can ride it through. Because in '87, from the start of '87 to the end of '87 in the US, even though the market fell 25% in October that year, it was up 8% for the year. So you still made-- no one would-- everyone would be happy with a good 8% return.

TOM PIOTROWSKI: Absolutely. Particularly in almost zero interest rate environment.

GEOFF WILSON: Yes.

TOM PIOTROWSKI: I suppose that's another important consideration. From here we can't cut rates much more. Spending is even harder given the deficit position of governments. Is that the sort of thing that you're worried about?

GEOFF WILSON: All those factors. The fact is there are some-- it's that free money. We've seen asset values, equities, property, you know there's been significant upward movements in asset values particularly over the last 12 months. And they're all the facts. And if interest rates do back up and inflation does rear its ugly head, which it looks as though it's starting to do, then the pain can be very swift in the equity market, where what I was always taught is if interest rates double then the price earnings ratio of a company halves. So you know forget if you're having 15%, 20% earnings growth, if the P halves, yeah, then there's still a lot of pain.

TOM PIOTROWSKI: And that's a particularly important thought to have when interest rates are so low and only a small increase can make that big dent on P's.

GEOFF WILSON: 100% Yeah.

TOM PIOTROWSKI: So how are you approaching this environment that we're in for the next six months in particular?

GEOFF WILSON: Yeah, well in terms of investing I mean there are opportunities. And as I mentioned earlier, over the medium term you do get a good performance from the equity market. So you want to be continuing to play the game, continuing for looking opportunities. There's been that rotation away from tech, more to value. And we've got our portfolios are more exposed to financial services, those type of companies.

One that we like, Virgin Money, the old Clydesdale that [? Nav ?] owned and sold--

TOM PIOTROWSKI: Why do you like that business?

GEOFF WILSON: It's trading-- effectively, it's the financial services, so in theory it should do well in this environment. And is just cheap. It's trading on a multiple of about seven times. Cheap relative to other banks globally.

TOM PIOTROWSKI: And what is it about that brand do you think that can cut through? Is that the more youthful nature of it that it can make an impression?

GEOFF WILSON: There's no doubt. There's no doubt there's been a-- sort of the area that everyone's trying to capture is the millennials.

TOM PIOTROWSKI: Yeah

GEOFF WILSON: And even ourselves, as old fund managers, it's an area that has really sort of taken to the investing in equities over the last 12 months. So you know that is obviously a factor. For us, getting new, younger people looking at investment opportunities that we provide through our listed investment companies, but also anyone I think with a business, if you can get the next generation or the millennials. Yeah, we've all had the benefit of the baby boomers.

TOM PIOTROWSKI: Or not.

GEOFF WILSON: And now-- or not. Yeah, that's right. Yeah, exactly. And that's definitely a positive.

TOM PIOTROWSKI: So you mentioned inflationary expectations. So historically, and you talk about the '80s, a good way of hedging yourself against inflation back then would have been to expose yourself to resource stocks. You'd get that upswing in commodity prices. That's happened in the last six months. Is that going to be a trend that continues?

GEOFF WILSON: We're a little bit hesitant on that in terms of China, just thinking, yeah, maybe things are slowing down a little bit in terms of what people are expecting in China. Probably thinking that our view on iron ore is that we've probably seen the best there. So yeah. So with that scenario it's probably going to be tougher for the resource sector.

TOM PIOTROWSKI: Now one thing that you are very good at, at Wilson, is capturing secular themes. And there are a couple of big secular themes at play at the moment, artificial intelligence, for example, 5G. All of those things are a significant drivers of wealth creation when you look at the next quarter of a century. Would you agree with that?

GEOFF WILSON: Totally agree. And the incredible thing is if we look back 12 months, and I suppose I'm a real live example. I would, in terms of my online purchasing skills 18 months ago were zero, I'd prefer to jump in the car and drive up to Officeworks and buy my ink for the printer.

TOM PIOTROWSKI: Smell the copying paper.

GEOFF WILSON: That's right. But now, of course, it's ordered online. I get it there the next day. And so in terms of how the world has transformed itself in the last 12 months, and they are significant. They're not cyclical. They're structural changes. So I mean, the interesting thing is as an investment thesis, we've had a lot of money flow into those companies that have been benefiting. Probably now it's probably more rotation out of those, because their valuations have got to very high levels, into more the more like the bricks and mortars. You know? The more value. That's that we're saying we'll see.

TOM PIOTROWSKI: Decarbonizing the economy globally has also got a long runway. When you approach a subject that is going to last half a century like that, what are the sort of names that you focus on, because organisations are extraordinarily good when they've got a lot of skin in the game in terms of reinventing themselves?

GEOFF WILSON: Yeah. No, that's true. And the interesting thing is, I mean, we're fund managers. And people have employed us to manage their money and get the best return they can from managing their money. And we've taken assessment as, obviously we look at ESG, and we know there's enormous, a tsunami of money that is moving in that direction. So we know that companies that embrace it will be beneficiaries.

What we've done as a fund manager, we actually went carbon-neutral 2018, 2019. And that's Wilson Asset Management, that's as a cost to us as the fund manager. And we will stay carbon-neutral. That to me, it's when people are talking about, I'm going to do it by 2050, to me it seems a long way away.

TOM PIOTROWSKI: Bit lazy, perhaps.

GEOFF WILSON: Well, exactly. Yeah. But I know it is a cost. And I suppose we're lucky because we've got a small business. So it's not a big cost. So it's no doubt a trend. It's no doubt that you want to be positioned for that. And you know, and find companies that benefit that. There will be opportunities the other way as well where sort of people throw the baby out with the bathwater. So the, I don't think we're there yet but, with coal companies, when their valuations become extremely cheap, there'll be some really countercyclical investment opportunities. I just think we're still too early in that sort of the theme to sort of play on the countercyclical side. Yeah.

TOM PIOTROWSKI: In terms of the decarbonizing theme, are there organisations that stand out for you participating in that that stand to benefit?

GEOFF WILSON: Well I'd just have to go back to the office and ask our 14 analysts and portfolio managers what they like, because I know we look at themes and themes are important, and it's important to get positioned in themes. And in terms of what we're focused on, obviously the big picture themes, because you want to benefit from any growth that comes from that. We're very much a stock picker, the bottom up. We're looking for-- our focus is undervalued growth companies, and we'll buy them when we can see a catalyst that's going to change the valuation. So that's it. But to me, it's Katrina who runs the Global Fund. Matt, who you've had down here both before who runs leaders. And Oscar who runs the mids and smalls. They're the people. When they're in, you can drill them on--

TOM PIOTROWSKI: In the engine room.

GEOFF WILSON: Exactly. That's right.

TOM PIOTROWSKI: You mentioned the desire to buy undervalued assets, and that's an important theme in a new vehicle that you bring to the market which is aptly called WAR. I suppose it is a war in some respects in terms of trying to find something that is well priced. Tell us a little bit about this investment vehicle.

GEOFF WILSON: Well it's a listed investment company, so it'll trade on the stock market. We're in the IPO process at the moment. It opened Monday this week. It's open for three weeks. And the company's name is WAM Strategic Value, and the acronym is WAR. What we're trying to do there is what we've always done, is to try to buy $1 of assets for $0.80, and effectively own those assets and buy them when we can see a catalyst is going to change the valuation, and get that $0.80 share price to move back up to $1 so they realise full value.

It is a very pure way of investing. We've got 100, over 100, listed investment companies and listed investment trusts here that are listed on the market. And about 80 of them are trading at some type of discount. We have seven of them. Six of them we floated, and all six that we manage to try to get NTA, if not a premium. So when Buffett started Berkshire in 1965, an area that he started investing in was that because it's really-- it is very a pure way of investing.

You assess the fund manager, whether he's a good fund manager or not. You know the assets you're buying, and if it's $1 of assets, and you can buy them at $0.80, and you believe that the share price will move from $0.80 to $1 because of a catalyst, whatever that is, then it's a great investment opportunity. And so that's what we'll be doing in-- well fairly named, or I don't think it is fairly named, but the acronym that it'll be trade under is WAR.

TOM PIOTROWSKI: It's certainly got people's attention, if nothing else.

GEOFF WILSON: I mean just on that, we'll buy positions in these listed investment companies which are managed by other fund managers. We actually see, we think there's various things you need to do when you have a list of investment companies as a fund manager. You need to perform, have a growing stream of fully franked dividends, because the marginal buyer of licks tends to be self-managed super funds. Like all companies, you need to treat shareholders with respect.

And the fourth thing that we spend a lot of time on is that shareholder engagement, communication, and marketing. And that's what a lot of the fund managers miss, and we're very, when we buy positions in those listed investment companies, then we're very happy to sit down with the guys and say, look, this is what you need to do. Like we have eight people in that area at our place in corporate affairs, and we're going to add a couple more in the near future. So to me it's a great opportunity for us to work with those managers and get them to get their share prices back up to $1.

TOM PIOTROWSKI: Indeed. So you mentioned a couple of factors there in terms of that the discount to net asset value. Do you reckon, combined, that's what tends to see that that divergence between the price and the discount?

GEOFF WILSON: Yeah. I think what happens is so if you're raising money for a listed investment company, that is our area of expertise. We've got 100,000 shareholders. We've been doing it for more than a couple of decades. Newer people, you know, it's great to have newer people list a pool of capital that they manage as other fund managers. They are obviously new to the game, and they've got to realise that it is a supply and demand equation. So it's not as if when you list you've sort of won the grand final. It's when you list, you've started--

TOM PIOTROWSKI: You've put your boots on.

GEOFF WILSON: Exactly. The game started. It's the end of pre-season, and then you've got to do all the hard work, because in the end it is supply and demand.

TOM PIOTROWSKI: Now one of the things that you've been a big proponent of is your charitable work through WAM, and you've got a fund that's especially geared towards that. Tell us a little bit more about that.

GEOFF WILSON: Oh look thanks, Tom. We set up the future generation LICs a number of years ago. Our Future Generation Investment company, that's FGX. That's-- and it's really been the generosity of yourselves and everyone in the finance industry. The fund managers, they manage the money Pro Bono, so that allows us to give 1% of the assets to Future Generation Investment Company, FGX, which is the Australian, gives you exposure to the Australian Boutique Fund Managers. That 1% goes to children at risk. Future Generation Global, FGG, and that's managed by global fund managers, some based here in Australia, some based in the US. And so it gives you exposure to global equities. That 1% goes to youth mental health.

So this year it'll be $10 or $11 million due to the generosity of CommSec, because I know if you buy shares through CommSec, then yourselves you kindly you rebate the cost so you can buy them for free. And you get exposure to those two companies and fund managers and really, really give back. So--

TOM PIOTROWSKI: And you're getting access to some extraordinary names in terms of the money managers as well as the charitable good.

GEOFF WILSON: 100%. And it is-- you look at all the performance of the managers, they're exceptional. I think the last 12 months, I think 80% of the managers have outperformed the index that we've got in there. And yeah. It's all a good quality big name boutiques. The Magellan's, the Global, the Paradises, the Coopers. Yeah, so it's a great group.

TOM PIOTROWSKI: It is indeed. And it's great work that you've done in terms of getting that idea off the ground, Geoff, so--

GEOFF WILSON: And with your help. Thank you.

TOM PIOTROWSKI: Look, it takes a team effort, but it's a great cause. So it's worth checking out if people aren't aware of it. But

GEOFF WILSON: Thank you.

TOM PIOTROWSKI: Geoff, it's always a pleasure to talk to you, and really grateful for making time to come down and have a chat.

GEOFF WILSON: Good to see you, Tom. Thanks.

TOM PIOTROWSKI: And thanks very much for joining us for the Executive Series.


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