Market-driven investing
WAM Active FPO (WAA) is a listed investment company that provides investors with exposure to an active trading approach, which seeks to capitalise on short-term relative value arbitrage and market mis-pricing opportunities in the Australian market. The managers aim to deliver positive returns in a rising market and preserve capital in a falling market and are willing to hold relatively high cash balances. WAA has delivered a pre-tax NTA return ahead of the S&P/ASX All Ordinaries since inception in January 2008. WAA’s 7.3% dividend yield is probably a key contributor to its 19% share price premium to NTA.
Investment strategy: Exploiting trading opportunities
Through active trading, the managers seek to exploit relative short-term arbitrages and mis-pricings in the Australian equities market arising from, for example, IPOs, capital raisings, block trades, oversold positions and corporate transactions. The managers take a disciplined absolute return approach balancing risk and reward, aiming to deliver positive returns in a rising market, as well as preserving capital in a falling market over the long term. The significant cash weighting allows them to exploit investment opportunities and provides a balance to equity risk. Performance is compared with cash returns and the S&P/ASX All Ordinaries Accumulation Index, although this is not treated as a benchmark for investment allocation.
Market outlook: Subdued, but still opportunities
While there appears to be a broad historical correlation between NTA and market performance, the nature of WAA’s trading strategies and the level of cash holdings mean that performance may differ appreciably from market trends. Market strength has some influence over the number of potential trading opportunities that arise under capital markets and corporate activity strategies. Although capital markets activity has been subdued in early 2014, the managers expect corporate activity to be sustained at current levels, supported by low interest rates. In an uncertain market, with the potential for correction if economic or corporate earnings trends disappoint, investors may favour a fund with WAA’s absolute return approach.
Valuation: Premium supported by dividend yield
WAA’s price discount to NTA before tax steadily narrowed from a peak 29.7% in March 2009, reached a premium of 22.8% in March 2014 and currently stands at a 19.2% premium. The main factor that appears to have driven the move to a significant premium is the level of dividend yield, made more attractive by the 100% franking credits attached.
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