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Strategy

Two lessons from this $5bn LIC.

Ben Williamson

Ben Williamson

— 3 min read

Everyone knows WAM.

I first met Jesse Hamilton two years ago, in the back-end of 2021.

Jesse is the CFO of Wilson Asset Management. If you don’t know about WAM or Geoff Wilson, then you haven’t been paying attention to the market for the last decade.

Jesse gave me his time back then, and I’ve stayed in touch as an admirer of the business, how they approach the market and how it pays off massively.

WAM now have 8 listed companies that total more than $5bn of market capitalisation.

They’re one of the few listed investment companies (LICs) that trade at a premium to their net tangible assets (NTA). Trading at a discount to NTA is a big, big problem for LICs because it makes it very hard to grow inorganically.

Here’s an example.

Let’s say shares of your LIC are trading at $0.95 when you have $1 of NTA (a 5% discount). You see a fantastic buying opportunity and need to raise $100m to complete.

Even if you ignore broker fees and placement discounts, you can still only raise 95 cents on the dollar, so your investment needs to make 5% just to break even on NTA.

And there are always broker fees and placement discounts. Well, unless you’re WAM.

There are 68 LICs on the ASX (that I could find) and only 12 of them trade at a premium to the NTA. Of WAM’s 8 total LICs, 4 of them trade at a premium to the NTA - so they run at a rate of 50% compared to the market of 17%. Overall, WAM trades at a $150m premium to their NTA, with a median NTA discount of -17%.

So if the median is -17% and WAM trade on +3%, their alpha is +20% on a $5.5bn portfolio. That’s more than $1bn in shareholder value.

So what lessons have I learned from WAM?

#1 Your shareholders are as important as your operating business.

As we covered last week, you run two businesses. The operating business (the company) and the listed ASX business (the code).

WAM has a unique view of the market. Their shareholders are equally as important as their core business - investing. As such, they have a very simple, and very powerful rule at WAM.

  • We cannot have more investors investing the money, than we do advisors managing the investors.

With $5bn to manage, you could imagine they’ve got a good need of investment managers, but they’re capped by how many people are managing the underlying shareholders.

Now, you could say capital is their game so it’s more important for them, but I think you’re wrong here.

87% of the ASX is sub $1bn market cap and likely has a near-term desire for more capital. It’s the blood flow of a listed company, and the odds are you’re woefully underinvested here.

Does it work? Well for WAM, it does to the tune of +$1bn.

#2 It works at all sizes.

I think the other cool learning from WAM is they have a wide range of listed companies.

Their largest is WAM Capital with $187bn in market cap, listed on the ASX 200 and 46,000 shareholders.

Their smallest is WAM Active with $56m in market cap and 2,600 shareholders.

Both stocks have low top-20 percentages (7% and 15% respectively) but the great thing here is that their model seems to work all the way up and down the ASX. They’ve got big caps, mid-caps and small caps, and the strategy works across them all.

So here’s the takeaway.

What we can see here is a really thoughtful approach to the market.

  • Capital is required.
  • Capital is valuable.
  • Shareholders are valuable.
  • We need shareholders to buy on-market and off-market.
  • We need a dedicated team to facilitate that.
  • If we do, there’s a decent operational cost.
  • If we don’t, there’s a much bigger market cap impact.

If you’re looking for a different market cap outcome, then you need to treat the market differently.

Do what WAM does - take control, and harness the value of shareholders.

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