Research and market-driven investing
WAM Capital Limited (WAM) is a listed investment company that provides investors with balanced exposure between an actively managed portfolio of listed Australian companies, typically small- to medium-sized companies identified as undervalued, and trading strategies involving relative value arbitrage and market mis-pricing opportunities. The managers’ approach is differentiated by a focus on absolute returns and a willingness to hold relatively high cash balances. WAM has delivered pre-tax NTA returns ahead of the S&P/ASX All Ordinaries over three, five and 10 years.
Investment strategy: Stock-picking and trading
The fund invests equally in an actively managed portfolio of mainly small and mid-cap companies and a broad range of equity trading strategies. The managers seek to select undervalued growth companies listed on the Australian market, buying when a catalyst for revaluation can be identified. A bottom-up research process is used, rating companies on a range of company specific and industry factors. Company meetings are seen as very important, both to gather information and to help assess management quality. Trading opportunities comprise relative short-term arbitrages and mis-pricings in the equities market arising from, for example, IPOs, capital raisings, block trades, oversold positions and corporate transactions. The significant cash weighting enables the managers to exploit investment opportunities and provides a balance to equity risk. Performance is measured against 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
In recent years, the key driver of Australian economic growth has been resources investment, which is expected to decline sharply from FY15, and the economic outlook now appears more subdued. The Australian market is trading on a forward P/E of 14.4x, above the 10-year average of 13.2x but not overly stretched in comparison with the high of 16.2x. In an uncertain market outlook, with the potential for correction if economic or corporate earnings trends disappoint, investors may favour a fund with WAM’s absolute return approach.
Valuation: Premium supported by dividend yield
WAM’s price discount to NTA before tax steadily narrowed from 24.6% in June 2010 and currently stands at a premium of 7.7%. The main factor that appears to have driven the move to a premium is the level of dividend yield, made more attractive by the 100% franking credits attached.
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