WHICH WAM LEADERS TO FOLLOW, SPECIAL SITUATION INVESTING & APW

Around late September it struck me that some investors buying WAM Capital (WAM) & WAM Leaders (WLE) may not have considered some alternatives. Was there potentially cheaper back door entries into these stocks available?

They may have been too focused on the leading LIC in terms of size in the Wilson stable (WAM). It could have been better to examine the takeover it was making over the Wealth Defender fund (WDE).

Or in the case of WLE, were investors too focused on this LIC with the WAM Leaders in its name? It may pay not to forget about the one with the low profile that is being run in a similar fashion to WLE. I refer to Century Australia (CYA), which is still managed by the Wilson team.

I shall discuss those buying WAM around late September first. I wasn’t interested in owning WAM for the long term but picked up some WDE as a short term trade. I got filled in WDE shares at 93.5 cents whilst WAM were trading around $2.48. To keep this post simple, I shall consider an example of buying 10k shares in WDE at this level, so cost of $9,350. WAM were offering as a takeover to give you 1 share for every 2.5 WDE shares held. Therefore at the time, the implied value of those WDE shares were quite a bit higher. At $2.48 a WAM share, after the takeover you would hold 4,000 shares. This gives a value of $9,920, which was 6% higher than the cost of the WDE parcel in this example. This could safely be expected to be realised in about 6-7 weeks, which made it a pretty impressive annualised return for an arbitrage. That is of course IF the WAM price held up and the deal went through. It wasn’t risk free of course, but I shall explore that a bit further down. I thank a reader of this blog in Adrian for alerting it to me.

I had made a note to myself to look into it but may well have forgotten if I wasn’t prodded again from Adrian. For those that wanted to own WAM shares back then, I was curious as to why they didn’t just buy WDE instead. It cost 6% cheaper and after 6 weeks or so you end up with exactly the same thing. Maybe they were simply not following the events of WDE, or they perceived risk in the deal that I couldn’t see.

The discount for the Wilson Asset poor relation widens again.

Regarding CYA, it is no secret that when it utilises its tax losses it might be rolled into WLE. In late September when I last looked at it closely, CYA was trading at approximately a 9% discount to after tax NTA (note I have included a couple of cents of tax loss benefits which are currently not counted on the balance sheet, refer to their NTA releases). WLE on the other hand was at a small premium to its after tax NTA. It’s not the first time I have mentioned this situation but I bring it up again because the pricing has changed since mid-2017. Back then there was hardly any difference in how these 2 LIC’s traded versus their post-tax NTAs.

They are not entirely the same of course and could experience differing investment returns and dividend levels over the next few years. If you like the idea of buying WLE though I wouldn’t forget about CYA. The approximate 10% discount to after tax NTA may eventually be realised in the future IF it was merged into WLE. We still could be talking about more than 5 years away as it is difficult to predict. Yet that 10% gap is nothing to sneeze at even if it did take that long. Once again if one has made up their mind they want to invest in WLE for the long term, I found it odd more seemed to be following WLE but ignoring CYA. Liquidity, management expense ratio & the dividend outlook may differ with CYA, but perhaps being a small size can benefit in being nimble with its trading.

What does the leader do with their Wilson investments?

The title of this blog post also infers another question I had for those buying WAM & WAX at large premiums to NTA recently. I occasionally observe on forums a certain thesis behind doing this. It follows that the leader of the WAM group in Geoff Wilson is one of the best investors in Australia and has overseen a great team of staff with a superb track record. I find it odd though that if they are of this opinion, wouldn’t they pay some attention to the director’s interest notices from the leader that comes through on the ASX? Also perhaps pay attention to how the WAM funds often buy other LICs, but only when they are trading at large discounts to NTA and not premiums.

One should still be mindful of course that Geoff Wilson has different personal circumstances, investment objectives etc. to everyone else. Yet in early October he was reducing his WAX exposure and adding to his WAM Global exposure (WGB).

That doesn’t mean his choices will always outperform though. I noticed he did some switching out of WAX also in 2014/15 and accumulated the Future Generation Funds. The latter have done quite nicely but so far I think he may have done better simply keeping all of the WAX holdings.

On the company level WAM were using their scrip to takeover WDE. Some have the view that when companies use their scrip to make takeovers it can on occasions imply their own scrip is expensive. If you are fans of the WAM way of investing, should you be backing the leaders of the stable in term of historical performance. i.e. just buying WAM & WAX regardless of the premium to NTA? Or should you be reading between the lines, paying more attention to what the leader (Chairman Geoff Wilson) is doing himself?

I just find it interesting that Geoff has been very consistent over many years in saying because of such large premiums means he does not view them in the buying zone. He was quite clear again on this in a video presentation I saw from the recent October LIC conference. Yet assumedly fans of his go out and keep bidding them up well above NTA.

Below is a link of the conference I referred to. The words are quite firm from Geoff at the 11 minute mark that you would not be a buyer of the Wilson funds at premiums. You can judge for yourself. Over many years I have heard him deliver this consistent message.

https://www.youtube.com/watch?v=geC5SYLMU6U

Another interesting thing I noticed at this point in the presentation was that CYA didn’t feature in the list. It also doesn’t get included on the monthly NTA pack they now release altogether. Rather than see that as a problem it could be viewed that it results in less competition to buy it with the lack of publicity.

 

Special Situation Investing & Risks of the WDE/WAM Arbitrage.

Investopedia describes special situation investing as follows “A special situation refers to particular circumstances involving a security that would compel investors to buy the security based on the special situation, rather than the underlying fundamentals of the security or some other investment rationale.”

Since my purchase of WDE was not to become a longer term holder of WAM, I suppose it fits the above description well. Some would say the deal could have fell over, and what about all the conditions WAM put in it regarding falls in the market? We should note though that WDE in their monthly reports had highlighted how the portfolio was carrying some decent levels of protection. We also knew that WAM still carried high levels of cash in their own portfolio. Getting control of the WDE portfolio so that they could eventually manage it and boost the investment returns had a major long term benefit. It lifts investment management fee revenue for them well into the future so they were very unlikely to back out of it. The conditions they put in were conservative in case of very extreme events. We even got a taste of it with the market turning down and volatility surging. Despite that the deal still didn’t look at risk. There was the risk of the WAM premium to NTA to deflate all of a sudden. Mitigating this in part though was it had already deflated somewhat over the prior year. For my short term trade I was only relying on the premium staying around for a short period.

As a result of nearly not getting around to investigating this WDE/WAM trade, I have given further thought lately on the importance of managing one’s time. Sometimes it is difficult to keep tab of all these special situation events, crunch the numbers, participate in the corporate action etc.

 

Do you have any special situation investing ideas for me?!

Most readers of this blog have probably seen the following post, but I updated it recently to give some more examples of these types of special situations that I find interesting. If you haven’t already read it then please check it out. You may find a strategy you hadn’t thought of before, or you can comment and let me know some fresh ways to approach special situation investing.

https://valueinvestingforaliving.com/2016/10/21/where-institutions-avoid-and-retail-investors-find-boring/

I warn that it is a very lengthy post for the following reason. A main objective of this blog was to force me to reflect more on my own investing style and have some reference notes I can look back on. When I am struggling to find opportunities I can (along with google news alerts for similar terms), go back to this list and think of what to try and hunt down.

Apologies that most of it reads like a harry hindsight post how everything works out well after the fact, like WDE above. I have plenty of scars with these situations, RKN & MUA are a couple of strugglers of late that spring to mind as a bit embarrassing.

I am bringing attention to the link again just in case like minded investors feel like discussing some current special situation opportunities that may be out there. If so, please drop a comment not in this blog post, use the link I just mentioned immediately above instead. From the home page, a quick access link can be seen right at the extreme top of my blog. I think when you comment there you can choose to be updated when others reply with comments if you wish.

Another reason for posting this is there might be another area on the net that already specifically tends to chat about this style of ASX investing. Please let me know if that’s the case then I shall just visit there!

You can interpret this as me being lazy and hoping that readers deliver me the great buying opportunities on a silver platter in the discussion thread! Hopefully though it may sometimes work the other way. If I think of something interesting I might include it briefly in the comments there.

In terms of my article above, note the following for disclosure purposes. Regarding the Wilson stable of funds, I only bought into WDE for a short term trade so am now not a WAM holder from this takeover. I currently hold shares in CYA and both of the Future Generation Funds. All of the above is not to be taken as financial advice.

For the record I exited WAM for $2.42 the very first morning I received the stock. The trade therefore struggled due to such a weak market backdrop. That meant the return was about 3.5% over about 6 weeks. We saw some of the risk I mentioned about former WDE holders quickly selling WAM. It has traded a little weak after the new scrip was issued on November 1st. During that time that I held though the ASX200 fell around 4% so I still felt the risk rewards of the trade stood up well.

 

Speaking of Wilson Asset Management.

By the way I have put my name down for a couple of LIC presentations in Melbourne late this month. There is the big presentation day on November 29 in Melbourne from the Wilson related funds. It will be my first time attending the entire long day of WAM & Future Generation Fund presentations.

I have had to edit this post as I originally had the wrong date listed. The other one was GVF in the same afternoon on November 29. I shall have to double check which ones I am attending if they clash but I’ll be somewhere in the area on that day anyway!

Hopefully I come away with having learnt something I can apply to my investment strategies.

If readers of this blog also plan on attending any of these and have some spare time to catch up before or after, let me know if you are interested. Just email me at valueinvestingforaliving@gmail.com

Going by my blog analytics not many readers make it down to the end of my posts so I don’t expect to be flooded with offers!

 

Wind up of Aims Property Securities (APW).

I have blogged about APW numerous times before so those interested can find the posts via the search function of this site. I won’t go over too much old ground again here but just note where we are at now.

This time Samuel Terry Asset Management have been joined by Sandon Capital to work together for the purposes of organizing a wind up of APW.

https://www.samuelterry.com.au/apw.php

http://www.sandoncapital.com.au/campaigns

APW has been subject to a wind up vote on two other occasions already, this being the third attempt. The most recent of which took place in early 2017, with the meeting that was also called by Samuel Terry Asset Management. The first attempt was called from a different group to Samuel Terry Asset.

I am not offering any prizes for guessing which way I will end up voting.

I just wanted to make the point that in the previous two wind up attempts AIMS has voted their stake against the wind up.

I wouldn’t assume that this stake is necessarily allowed to be used to vote. Within the meeting booklet from the Samuel Terry site, you can read section 2.5 (part c).

Therefore those who are in favour of winding up APW should make sure they are diligent and get their vote in by the required dates (info in the above links). If the AIMS vote is excluded the wind up has every chance of succeeding, but only if holders of all sizes vote accordingly.

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6 thoughts on “WHICH WAM LEADERS TO FOLLOW, SPECIAL SITUATION INVESTING & APW”

  1. Thanks for the post, some interesting stuff in there. Have you tried shorting the acquiring stock in these merger arb situations to lock in the spread rather than having to hope that the share price holds up?

    From a very quick look at the situation I’m guessing there are a couple of reasons the spread was so wide on this. Firstly the target had a pretty small marketcap, so it’s hard for actual special sits HFs to put money to work in it because if they have any sort of AuM at all then they’d run into shareholding limits pretty quickly. Depending on what Aussie rules are might actually have to make an acquisition bid themselves! Secondly I’m guessing that it’s hard to get borrow in WAM itself because it’s not a particularly big company and it’s pretty unlikely to be held by institutions who would lend out the stock as they would rather invest themselves than have WAM do it. So if you’re an institutional investor then you can’t really put much money to work buying the target stock in which case why bother when you’ve got other stuff you can focus on, and even if you could buy the target you maybe can’t borrow the acquiring stock so you’re really just doing a long play rather than an arb play which may be outside your mandate or just not what you want to do.

    In any case interesting post, thanks for sharing.

    1. Yes I think you have summed up the reasons for the spread well there Aussie HIFIRE. I think these factors were at play rather than it reflecting some fundamental risk of the deal failing.

      I think we had a fair few sellers of WDE that just contemplated the good price in comparison from months before. This happens a lot with the target company.
      The old holders feel relieved to flick the underperforming company on a large bounce. Yet not thinking about the potential annualised returns from holding in the last month or two and bothering going through the processing of the corporate action.

      Good point about examining whether to short the acquiring stock though, generally worth a look at as you say. I am not sure it would be that easy in this case as you point out. I think of WAM as a fairly large stock but it would all be held by retail rather than institutions. To be honest I didn’t really give much thought to shorting the acquirer here. Knowing my luck the deal would fall through and then WAM would surge to a 40% premium if I shorted it! I continue to be wrong about it in terms of how the large premium remains.

  2. Re the Wilson Shareholder presentations day in Melbourne – it is on Thursday 29 Nov, not Friday 30 November. Regards.

  3. I had a look at the CYA / WLE situation, but from the position of already having middling size holdings in both. More about deciding if I would be having too much in (a) Wilson managed LICs in general and (b) Wilson managed large caps LICs in particular. Somewhat complicated by the logical one to sell for premium to NTA purposes not being the one to sell CGT wise. In the end I kept the lot, the ‘excuse ‘ being that, (a) I suspect Wilson large cap and small cap funds may not correlate that highly, and (b) I was underweight large caps at the time. That or I just got sick of staring at the numbers.

    As far as GW’s advice not to buy at the current premium, I couldn’t agree more. Indeed I would be selling WAM and/or WAX if not for the CGT position (average entry prices of 109c and 76c respectively).

    With regard to presentations, I have been to those of a few different managers over the years, but invariably came away wondering why I bothered. Also, these days you can often find the presentation somewhere on the ‘net. Nevertheless, I will be interested in your view on the Wilson ones.

    1. Yes there must be plenty of WAM / WAX holders not selling due to CGT being a factor. I can appreciate that and I doubt those investors will head for the exits all of a sudden. I can see your tax dilemma there and if it was me I could easily end up still holding like yourself, hard to say. Kind of a good problem to have, it at least means you have done quite well and probably bought at a discount I assume. Some newer investors probably don’t even know they once traded at a discount. A discount persisted for WAM from 2004 to 2013 I think.

      Newer investors that have jumped on board when the premium has been 25% are the ones that may be different and have “weak hands”. I think the future profit reserves and franking that WAM is sitting on is a fair bit lower than WAX. So perhaps that may be the key factor to watch.

      Totally agree with you about the presentations. Thought I would give these a run anyway though and get out of the house for a bit! One exception I have found is Sandon Capital if you are following their holdings because it is a small audience there (less than 10 when I’ve turned up). I haven’t been to GVF before so figure I’ll try that as it could have a small turn up since it is on at the same time as the Future Generation fund investor conference.

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