WAM Capital
 
About Wilson Asset Management
 
The team is passionate about making a difference and believe in an approach which is agile, innovative and entrepreneurial. They invest the time and expertise in causes which resonate with most of their people. The details of the listed investment companies are as follows:
 

 
Listed investment companies (Source: Company Reports)
 
The Future Generation Investment Company was launched in September 2014 as a vehicle for the creation of philanthropic wealth and provides access without the cost to performance and management fees to the best fund managers in Australia it donates 1% of assets every year to Australian charities supporting children at risk. The market capitalisation has grown to $ 210 million which means that annualised donations are currently $ 2.1 million. The group is looking to establish a new entity Future Generation Global Investment Company which would provide access for shareholders to global fund managers under the same arrangement. A senior management team has already been appointed.
 
The investment process
 
Exposure is to strategies driven by research as well as the market in the case of  WAM Capital. In the case of WAM Research, extensive company research is carried out by meeting more than 1000 companies every year and focuses on forecasting free cash flows and the attributes of investment ratings. Catalysts are identified to provide a basis for selling when the valuation for the company has been reached. Exposure is generated for undervalued companies with growth prospects and the portfolio turnover is low. In the case of WAM Active, the market is examined for trading opportunities the the process allowing sound returns with a low correlation to traditional markets. The opportunity exists to perform well in both bull and bear markets and a high portfolio turnover is encouraged. In all cases, there is the flexibility to hold cash.
 
The research driven investment process starts with an investment universe of more than 2000 stocks and investment ideas are generated which are progressed by preparation and meetings with companies of which there are about 250 under review. Each stock is analysed in both qualitative and quantitative terms, the stocks are ranked with the catalysts identified. Between 20 and 60 stocks are selected for the portfolio. The market driven investment process is based on the extensive networks for information in the investment community with the object of exploiting stocks that are mispriced in the market. Investment opportunities include a whole range such as IPOs, capital raising and block trades, short selling and market trends.
 
The company is deeply concerned about capital preservation and looks to deliver risk adjusted returns while preserving capital. The default position is cash and the pool of capital is closed. Mandates are nimble and flexible and stop losses are extensively employed as is the weighting of investment. The percentage of cash holdings can be understood from the following diagram:
 

 
Cash Preservation (Source: Company Reports)
 
Funds under management (FUM) have been growing and now total more than $ 1 billion across the three listed investment companies. This growth has several benefits for shareholders including reduced fixed management expenses, increased liquidity in the shares, and greater relevance to the market. This means more substantial broker and research coverage, additional interest from investment platforms and financial planners as well as enhanced access to companies with potential for investments and capital raising.
 
Overview and outlook for the market
 
The equity markets have been characterised by the end of the mining boom and equity valuations may generally be regarded as full. The capital requirements of banks and the interest rate scenario have impacted on both equity and bond markets. Among the more prominent changes are how you shop for groceries and the duopoly structure dominated by Woolworths and Coles with protected industry-leading margins are being threatened by new competition like Costco which offer significantly cheaper prices for everyday products. The experience in the UK suggests that high margin local supermarkets will struggle to survive. Similarly, the way you watch television will change from the traditional digital signal to streaming on demand content and the manner in which the three major free to air networks react will determine the future of their share prices. Equity valuations look full when you consider the one-year forward P/E for the ASX 200 while there is a lack of earnings growth and, when interest rates in the US rise as they must eventually, there is a growing risk of withdrawal from US equities.
 
WAM Capital
 
Among the recent highlights were the fully franked annualised interim dividend of $ .14 per share which translates into a dividend yield of around 7.3%. Investment portfolio performance was outperformance of 16.1% and the current cash weighting is 38%. The company has a track record of consistent dividend payments since inception, the estimated profit reserve is 16.5 cents per share and the franking account has a balance of $ 1 million. The ability to pay franked dividends depends on the size of the profit reserve as well as size of the franking credits from franked dividends received and tax payments. Since inception, the investment portfolio has outperformed the S&P/ASX All Ordinaries Accumulation Index by +9.3%. The Shareholder Purchase Plan (SPP) and Placement raised $ 193.5 million in this fashion and more than 8800 and existing WAMshareholders invested $ 103.4 million at $ 1.90 through the SPP while the placement which received $ 90.1 million was oversubscribed.
 
Though past performance is no guarantee for the future, it has to be noted that the performance of the company is up more than 1250% since inception while the performance of the S&P/ASX All Ordinaries Accumulation Index is up more than 270% over the same period. We are of the opinion that the secret of this success is the focus on small to medium industrial companies and the hard work that goes into stockpicking rather than blindly following the index. Moreover the techniques used to pick catalysts which could influence the market's valuation is critical to timely entry and exit and the realisation of optimum value from the equity positions. We would rate this stock as a Buy at the current price of $1.955.

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