SHAUN WEICK | from Wilson Asset Management

The environment that we've lived in over the past couple of years in particular with whole new asset classes like cryptocurrencies, just spawning up out of nowhere, the level of FOMO out there in the investment world is truly phenomenal. It can suck the best of us in. And it feels like Judgement Day for high growth unprofitable tech companies. I was joined by Shaun Weick from Wilson Asset Management for a free-range, grass-fed discussion about investing in the era of high inflation.

Shaun Weick BBus (Fin) CAT is Senior Equity Analyst at Wilson Asset Management He works within WAM Capital, WAM Microcap, WAM Research and WAM Active. Shaun has more than 10 years’ experience in financial markets. Prior to joining Wilson Asset Management, he worked as a sell-side analyst at Macquarie Group and CLSA. Prior to that, he spent five years at KPMG in the M&A Advisory division.

Shaun kindly offered his email address if you'd like to shoot any questions his way.

Wilson Asset Management has a strong track record of delivering risk-adjusted returns for shareholders and making a difference for investors and the community for more than 20 years. Established in 1997 by Geoff Wilson AO, Wilson Asset Management is responsible for investing more than $5.4 billion in undervalued Australian and international growth companies on behalf of 120,000 retail investors across eight listed investment companies (LICs). Wilson Asset Management created, and is the lead supporter of Future Generation, the first LICs to deliver investment and social returns. Wilson Asset Management advocates and acts for retail investors, is a member of the global philanthropic Pledge 1% movement and provides all team members with $10,000 each year to donate to charities of their choice.

TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE

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EPISODE TRANSCRIPT

Phil (33s):

G'day and welcome back to Shares for Beginners. I'm Phil Muscatello. There are many ways to skin a cat and many ways to invest in the share market. There's ETFs managed funds, buying companies directly or buying companies that invest in other companies on behalf of its shareholders to explain I'm joined by Shaun Weick, from Wilson Asset Management. Hello, Shaun.

Shaun (55s):

Hi Phil, great to be here. Thanks very much for your time and inviting me on your podcast.

Phil (60s):

Thanks very much for coming on. Now, Shaun joined Wilson Asset Management in 2020 and works within WAM Capital, WAM Microcap, WAM Research and WAM Active. Shaun has more than 10 years experience in financial markets working as a sell side analyst at Macquarie Group and the CLSA. And of course, my first question is, because we love busting jargon on this podcast, is what is a sell side analyst?

Shaun (1m 23s):

Yeah, I mean, this is one that always creates a great level of confusion; not only with my friends, but my mum and dad also. I still don't think they understand what I actually do. But yeah, a sell side analyst essentially works for an investment bank or an independent stockbroking company providing investment research and recommendations to fund managers who sit on what we term the buy side, which is where I sit today. So yeah, my day-to-day job on the sell side was really, you know, publishing research and then getting on the phone and calling investors and fund managers and essentially broking them my ideas. So a broker or a sell side analysts, essentially earns their crust, are really based on trading commissions when fund managers choose to buy and sell stocks through them.

Phil (2m 8s):

And so you're making recommendations for selling. Is that why it's called sell side?

Shaun (2m 11s):

No, I both buy and sell recommendations. I think really it's just turned the sell side as a result of the fact that, you know, a big part of these businesses is what's called ECM: equity capital markets. Work where you're essentially raising money and you're trying to sell these deals, if you like, to investors. So that's really where the term sort of was germinated from.

Phil (2m 33s):

And were you interested in investing in finance from a young age?

Shaun (2m 36s):

Yeah, I mean, I suppose I became more and more interested in investing and finance throughout high school. You know, my dad played in the share market a little bit. I know he owned some Lihir Gold when it got taken out by Newcrest, you know, many years ago. So I've always had a sort of an interest I suppose, in the markets and, you know, my parents worked in real estate. So every day after school, I sort of found myself knocking about the office and learning about real estate and the housing market, which I also find really interesting. And I guess my love for investing just continued to grow throughout university. And I joined KPMG in the mergers and acquisitions team as a graduate, sort of, fresh out of university here down in Sydney around 10 years ago.

Shaun (3m 18s):

And it was really through those initial years that I realized that investing and markets was where my passion lied.

Phil (3m 25s):

And how did you find investing yourself with your own personal account? Did you make any mistakes or did you, sort of, glide into it smoothly?

Shaun (3m 33s):

No, I have plenty of mistakes. The worst thing that can happen for an aspiring investor is that their, you know, first or their first couple of investments are really successful because overconfidence definitely breeds, you know, bad behaviours in the market. So, you know, I had a bit of a patchy track record I think, sort of, investing on my own account. But I think that's where you learn the most is when, you know, you've made a few mistakes and all investors are going to make mistakes and, you know, the best stock pickers in the world get six out of that ten calls right. So, you know, it's just a part of the game that you learn to live with. It's all about managing, you know, position size and risk, I suppose, around that.

Phil (4m 12s):

Yeah. I was talking to a financial educator recently and he said that he'd saying grown, professional, mature adults suddenly turned into 16 year olds that have been given a Lamborghini that's got a bottle of whiskey on the passenger seat.

Shaun (4m 26s):

That's dead right. I mean, the environment that we've lived in over the past couple of years in particular with these whole new asset classes, like cryptocurrencies, just spawning up out of nowhere, you know, the level of FOMO out there in the investment world was, you know, truly phenomenal. So no it has, it can suck the best of us in that's for sure.

Phil (4m 48s):

Can you share any of your mistakes or even just one in particular that listeners might learn something from?

Shaun (4m 53s):

Yeah, I think in the early days, I think I was probably too much on the, you know, buy and hold and think very, very long term and, you know, these certain companies or stocks will go up over time. I think you got to remember that, you know, what you're invested in, you know, particularly when you invested in cyclical companies, cyclical industries, they're going to go through bouts of, you know, share price, appreciation and volatility. So yeah, I think you've just got to be very cognisant of what you're invested in and why, you know, as opposed to just trying to, you know, I follow the hot theme or whatnot at the time. I mean, I think, I don't think there's many Australian investors that haven't got a horror story to share on a micro or small cap resources company.

Phil (5m 37s):

So that's where you were playing. Was it the microcap

Shaun (5m 39s):

I do a little bit of that in the early days, you know, the old chat down at the pub or what not all, you know, have you heard of this guard company, you know, they're drilling this resource out in this area, et cetera, et cetera, which was never my forte to begin with. But if for some reason you, you tend to get sucked into the, oh, this could be a 10 bagger if they hit something. But yeah, it's certainly a lot harder to hit those real good quality resource deposits than what it's perhaps led on.

Phil (6m 4s):

I think it's also because people don't want it to put in the hard work. They want to be given a tip. They want to be given a, an idea for buying rather than putting in the hard work to actually research and gain some conviction in what they're doing.

Shaun (6m 18s):

Yeah, that's exactly right. I mean, that's one of the most fundamental pieces of advice I'd give to, you know, to any young or starting out investors in our read and just consume as much information as possible, you know, drawing as many sources as you can. And ultimately it comes down to your own level of conviction and backing your own ideas. You know, if you are going to invest on your own behalf, because then when a stock falls 20%, you know, what are you doing? Are you buying you're selling and why? So you do really need to do the work and, and, you know, form your own investment thesis if you are going to, to invest yourself. Definitely.

Phil (6m 52s):

Okay. Let's get onto Wilson's. Wilson Asset Management is noted for the LIC structure. Why does Wilson's like the LIC structure and what is it?

Shaun (7m 1s):

So when listed investment company is essentially, you know, I guess a product structure whereby our funds are listed on the Australian Stock Exchange. So that provides investors within our funds, the ability to buy and sell their shares within our fund on the market. So I guess the key attraction of a listed investment company structure as a fund manager, you know, is really that we don't have to worry about the risk of redemptions, particularly in down markets. Like we're saying at the moment, which is when you know, investors do tend to panic and, you know, you start to see them pulling mandates, which is, you know, something we're hearing a little bit about at the moment across the market here domestically.

Shaun (7m 42s):

So, you know, our funds are closed-end and the capital's permanent in nature, if you like. And that allows investors, you know, to buy and sell those shares on the ASX and not have to worry about, you know, a run on the fund, if you like, which can create some very negative outcomes for funds we've seen in the past. So I guess, and it also enables us to take a longer term view and manage the capital in the best possible manner, which is ultimately to protect capital and drive the strongest returns for our shareholders that we can,

Phil (8m 11s):

It's interesting that concept of closed-end and open-ended, so an ETF for example, is known as open-ended, but LIC is listed investment companies closed-ended. How does it affect the way that they react to markets?

Shaun (8m 26s):

Yeah, yeah, I guess it's an interesting point. I mean, what we've seen, I guess, for our business relative to ETFs out there, and some other listed investment companies is, you know, our funds typically tried at a premium to the underlying net tangible asset value. And I think the key reason being aside from, you know, the long-term performance track record of the funds and, you know, has really been in, in our ability to continue to provide fully franked strong dividends dividend growth two hour to our investors. So, you know, that's another sort of core attraction of the LIC structure, you know, with an ETF, they're going to obviously try it in long with the underlying NTA, but, you know, Wilson Asset Management, we're very active in terms of, you know, our engagement with our shareholders and the market, you know, we're constantly out on the road or, or doing, you know, podcasts and things like that to ensure that our investor base, you know, both our existing investments and potential new investors, you know, remain engaged with the business.

Shaun (9m 24s):

And, you know, that obviously helps to continue to draw interest in our products where, you know, some of these listed investment companies, you say trading, you know, 10, 20% discounts and a big part of that is driven by, you know, in some instance, performance, but often it's driven by the fact that they just lack engagement with potential shareholders. So, you know, part of our strategies and you would have seen, potentially would have saw, you know, Wilson Asset Management, the Wilson strategic value product, which really looks to go and adopt the classic Warren Buffet approach and by 50 cents for a dollar where other listed investment companies are trading for 70 to 80 cents. And then we go and borrow them for a dollar, which provides a great outcome for the underlying investors in those funds.

Shaun (10m 8s):

And then also hopefully provides them with the benefit of being invested with us going forward.

Phil (10m 13s):

Why is it that a LIC is often traded a discount? And just to clarify, it means that they're actually holding assets worth a hundred dollars as an example, but trading at a value of only $80, for example.

Shaun (10m 26s):

Yeah. I mean, the key thing that I see that drives discounts is often, you know, if it's not a performance issue, it is typically driven by the fact that those fund managers, you know, may not necessarily be out there and engaging with potential investors in growing awareness and, you know, bringing new people in to invest in these funds. I think that's a, that's a really big, big part of it. And then, yeah, I guess outside of that, you know, just the length and the extent of the track record and the confidence that I have in the underlying investment manager, like we've seen some, you know, listed investment companies launched in more recent memory where the performance on the outset of the fund becoming a LIC wasn't great.

Shaun (11m 9s):

And then I quickly went to very big discounts to NTA as a result.

Phil (11m 13s):

So what are you finding interesting about markets at the moment? What's your bird's eye view of what's going on?

Shaun (11m 17s):

Yeah, that's a, that's a very interesting question itself. And I could tackle that from many different angles. There's so much going on, but I think at a broad level, we're at a juncture in asset markets really where, you know, there's a few different dynamics apply, but the most important driver is the inflation outlook. So be blonde, I mean, flashing just hasn't mattered for 40 years. So the personal experience of, you know, I most investors including myself in today's market is that, you know, we haven't invested through a, through an inflationary environment. So, you know, we really do have to look back into historical scenarios and situations and try and get a sense of, well, you know, what asset classes and work within that environment.

Shaun (11m 58s):

And then within equities, what, you know, what sort of work. So I guess that backdrop was very important as it did determine what correlations you saw between assets. I mean, you take the example of stocks and bonds in an environment of low inflation, you know, they became very negatively correlated. You know, that's decided when stock prices fell, bond yields often fell too. And then bond prices went up, which offered great diversification benefits for investors and the traditional 60 40 portfolio of stocks. And bonds really did reign Supreme in that environment, but in periods of high inflation, which, you know, we're in at the moment, things don't necessarily look that way in the correlations between assets do change.

Shaun (12m 41s):

And you can look at this in all sorts of ways. So many respects investors have become accustomed to the fact that growth was really the most important factor in the investment paradigm. And I suppose drove both asset and sector allocations with equities. And, you know, within that, as an example, you know, high growth companies such as the technology sector in the US has really been the stalwart of that and the FANG stocks, you know, that's what investors five at cause I would delivering growth. And the ramification of that was significant multiple expansion. And I guess the other key factor within this as central banks, you know, they've essentially been unconstrained in their policy actions, because if you think about a central bank, they're trying to do two things, really they're trying to maximize employment and ensure profitability through keeping inflation under control.

Shaun (13m 30s):

And, you know, if inflation is contained and not even close to out of control, the central banks can just do anything in their power to make sure growth is being stimulated. You know, as soon as I suppose you see signs of weakness appear. So we saw that through the GFC, through COVID, you know, central banks pushing interest rates to, to record lows, printing money through, you know, quantitative easing and, you know, coordinating with fiscal authorities to stimulate the economy and, and keep growth moving. So I think now, you know, the environment that we're in, once you have inflation running high, I mean, suddenly you have constraints on the central banks and, you know, they have to focus on their dual mandate, which is to keep the economy going at the same time as keeping inflation under control and you know, where central banks and no longer unconstrained in their policy actions, I must act to tame inflation and the investment landscape, I think, shifts to inflation being sort of the most important driver and asset allocation shift.

Shaun (14m 30s):

And, and frankly, the assets that most people held for the last 10 or 15 years have become less attractive because they're no longer supported by that backdrop of central banks and low rates. So like if you're trying to draw parallels, I suppose, to history, I mean, I sort of look at the 1970s as the most logical analogy, obey the economy's very different back then too. It is now, but you know, you had high inflation from, you know, a strong demand backdrop. You had fiscal and monetary stimulus and you also had external commodity market stocks at that time, which was from the Middle East and the, and the Gulf War. And,

Phil (15m 5s):

And that was a period like now where oil is going through the roof in price.

Shaun (15m 8s):

Exactly. Right, exactly. Right. So today we're saying, as you said, I mean, a combination of these exogenous factors, you know, we've had COVID, which is really caused, I suppose, a fracturing of supply chains. You know, we're seeing the mentality shift a lot from just in time to just in Case, which has meaning sort of a level of de-globalization and re shoring or onshoring of manufacturing is, is a common thing we hear about. And then, you know, obviously you've got the Russia Ukraine conflict as well, so there's a lot going on, but I sort of think about the outlook in that, you know, the fed sort of caught between a rock and a hard place, and they're being viewed by the equity market as being behind the eight ball with the result, being that one of the fastest, if not the fastest interest rate hiking cycle in history is being priced into markets.

Shaun (15m 60s):

So I guess what does that mean? Well, I think to summarize the main inflation protection, something that needs to be considered within broader asset allocations, you know, going forward, whether it's diversification through increased exposure to commodities or inflationary linked or floating rate credit and, and just hard assets in general. I mean, Gold's always talked about as inflation hedge, we'll admit, you know, you would have thought that the circumstances couldn't be better for Gold. And it hasn't really done that much, but equally it hasn't gone down. So it is preserving wealth, but I think within equities, it really has caused a re think of, you know, what sectors people want to be. And ultimately what valuations, you know, investors are willing to pay.

Shaun (16m 42s):

And we've sort of seen an unwind really, I suppose, the last sort of 12 months, those high growth unprofitable tech companies. I mean, many of those are down sort of 70 to 80% from their peaks last year. So yeah, I think within that sort of environment, you know, you've really gotta be thinking about where you want to apply. And I guess if you look at the equity market itself here domestically, I mean, small to mid cap industrials have been hit particularly hard. Investors have preferred larger companies in sectors, such as financials and resources. And, you know, they also have the benefit of from rising rights, but also liquidity as risk appetite reduces investors locked to move up, I guess, the liquidity curve.

Shaun (17m 23s):

And, you know, the ASX stream industrials mean the index picked around 23, 24 times. I think it was in the latest stages of 2021. It's currently trading around 18 times Ford earnings. And the long-term average is sort of 16 to seven, eight times. So we think, I guess a lot of the pain from a valuation standpoint has played out. It may be a bit more downside to guide, but we do think, you know, a lot of that has taken place. And I think, you know, in the equity market itself, I mean from here, I think it's really going to be driven by inflation expectations and, you know, as a result of that, the speed and the level of interest rate rises. And ultimately, I suppose whether the central banks can rise rights and deliver a soft landing of the economy and, and not trigger a recession.

Shaun (18m 8s):

So that's sort of the backdrop that we're playing in

Phil (18m 12s):

Just trying to ride the waves. Huh?

Shaun (18m 14s):

Yeah, that's right. I mean, we're also conscious of the fact that, you know, you look at some of the recent surveys, they suggest like the Bank of America, Institutional Investor, like great survey, I really liked going through that each month and your investor sentiments at the lowest level ever

Phil (18m 30s):

Really, because this doesn't look, feel like the GFC to me.

Shaun (18m 34s):

No, I'd say that's exactly rod. I mean, it doesn't feel like the GFC, it doesn't feel as negative as COVID even, but yeah. The sentiment out there on the institutional side of things is yeah, it's quite fascinating. Yeah.

Phil (18m 52s):

So let's get back to Wilson and the criteria. What criteria do you apply to screen for quality companies?

Shaun (18m 58s):

Sure. So, I mean, at Wilson Asset Management, yeah. We are bottom up fundamental active managers. So we do place the, obviously a very strong focus on researching and assessing companies. You know, I guess for Ross, when screening for quality companies, we do focus on, I suppose, a number of characteristics. So, you know, we are looking for companies that operate within large market opportunities, as I guess that provides real upside and potential for, you know, an exuberant rating. If management are able to successfully execute on the opportunity we look for growing industries, it's a lot easier to execute on growth plans when you have tailwinds at your back. And, you know, you don't have to rely on out competing others in the market to take share.

Shaun (19m 42s):

Yeah, we do place a strong focus on understanding the business model and the ability of this business to generate high returns. You know, it's often reflected through the term economic moat of a business, which is obviously a very common, I guess, characteristic described by the great Warren Buffett, which I'm sure a lot of your, your listeners have heard of before, but you know, that's really boils down to what's the distinct advantage of this company over its competitors, what allows it to protect its market share and you know, what factors are difficult to mimic or, or duplicate, you know, out there in the market that ultimately will say these benefits, you know, fly to shareholders. So I sort of think of things like, you know, strong brand names, like Nike, businesses with pricing power, which is particularly important in flashy environment.

Shaun (20m 29s):

You know, look at Apple, I think the new iPhones, you know, $2,400 or something. I remember when now off that. And then, you know, we looked for business cost or scale advantages. Like you look at the Australian supermarkets, Woolworths and Coles. They're really out of leverage that, that sauce and scout about a draft process, the lowest and best for customers and, you know, things like high switching costs, businesses like Microsoft, like how do you get off the Microsoft ecosystem? You know, I always been brought up with Excel. I can't imagine myself using any other spreadsheets at the moment. And then I'd say the other sort of K one, which has become more prevalent and racing is, is, is really around network effects where, you know, the moat of the business becomes increasingly more powerful as more users are added.

Shaun (21m 14s):

So I guess this is a be aware of, you know, the social networks like Instagram and Facebook, where, you know, the more people that join them, it just becomes self fulfilling the quality of the network increases, or, you know, marketplace businesses, you know, the likes of realestate.com. You know, Australia's favourite obsession property. The more properties are on there. The more, you know, you're going to get log onto those websites and search site. That's sort of the way we look at business models. And I think outside of that, you know, you really are looking for assessing the quality and the capability of the management team and the corporate governance. I mean, one factor that we look at and we like investing in, you know, is around, I guess, founder led businesses or management teams with significant skin in the game, because that ensures a line that, you know, if the incentives of management are aligned with shareholders and we're all running for, you know, the same goalposts, then that tends to create good outcomes.

Shaun (22m 7s):

And then I think, you know, a couple of factors that are probably more and more increasingly important in this type of environment are strong balance sheets and I guess, good earnings, quality and cashflow. You want resilient balance sheets in these types of markets because, you know, management are then able to undertake opportunistic acquisitions and create real value to showers or avoid dilution. You know, which at the moment, you know, we're hearing some fascinating stories play out in the venture capital land in particular for a lot of these high growth unprofitable tech companies that have raised money at exorbitant valuations. And they're basically priced hikers at this point for anyone to give them money. So really, really interesting sort of dynamics play out there.

Shaun (22m 48s):

So

Phil (22m 48s):

Just the point about founder led businesses, because it's often said that you want to found a lead business, but it can be a double edged sword as well, because sometimes they're looking after themselves rather than shareholders. Have you had any experience of that?

Shaun (23m 0s):

Yeah, it's an interesting, it's an interesting point. I mean, the one that would sort of look at as the, as the poster child for that is probably Tesla, you know, Elon Musk, he's a fascinating character and no doubt, you know, he's an absolute genius, but there are often times where you do question whose interest is ultimately acting in favour off. So yeah, I think it can be a double-edged sword, but my experience to diet as has really reflected more of the former in that, you know, management teams that, you know, have significant shareholdings or yeah, particularly founders like it's their baby. In many instances, you know, look in the Australian market, you know, there's businesses like Objective Corporation, SME software as a service provider and Tony Walls that has done a fantastic job growing that business.

Shaun (23m 49s):

And he still lines, I think 40 or 50% of the company. And, you know, he's driving really strong outcomes for shareholders, you know, other holdings in our portfolio, the likes of Maas Group, which we can go through in more detail later, you know, where's Maas, it's essentially a diversified building materials and construction company based in regional Australia. He started that business with a Bobcat. He finished his career in NRL started with one Bobcat and it's now $1.3 billion company. So yeah, my experience has tended to be, to be positive, but yet clearly it's not always gonna work in your favour.

Phil (24m 23s):

Well, let's dig into Mars and that's men from Mars, isn't it? That's what they used to put on their cranes. Or did I still put that on their cranes?

Shaun (24m 29s):

No, it's actually M a S S yeah. Maas group.

Phil (24m 33s):

Oh, okay. Sorry. I'm getting that wrong. Yeah.

Shaun (24m 35s):

Yeah. As I mentioned, it's a diversified building materials and construction company that based out in regional Australia, the success of the business is really due to solve its larger competitors like Borrell, and CIMIC. CIMIC not until recently, which was bought out by it, some Spanish parent, you know, but they're choosing to focus their attention away from regional areas, which really does leave Maas with the opportunity to dominate it's positioning in town, such as, you know, Dubbo, Orange and Tamworth, which is saying, you know, population surge as I guess the effects of the pandemic see people, we increasingly want to move to these regional areas and significant investment in infrastructure, in these areas as well.

Shaun (25m 16s):

You know, staff and management own over 60% of the shares in the company. And they're looking to continue to expand the business through a creative acquisitions, actually, just as I was walking into this room, I find flash and they've made an acquisition. I haven't looked at that. Hopefully it's good. But yeah, we see a strong outlook for the business driven by, you know, I guess the significant structure projects that are happening such as the inland rail, you know, the residential housing mark in regional areas provides a much cheaper cost of living compared to cities. We think you will continue to say that sort of migration trends and, you know, we believe the current run rate of the business before you, I guess, including any organic growth is at least 10% above the market's current earnings expectations.

Shaun (25m 57s):

And, you know, we think the share price can double in three years, they're doing some really interesting stuffing, you know, commercial property as well, which, you know, I could say the spinoff of a listed vehicle there at some point in the future. So yeah, it has that sort of Brickworks type feel or viable soul parts. So we we're big fans of that one and what the management team are doing

Phil (26m 18s):

And infrastructure is one of those sectors at the moment, which seems to have a lot of tailwinds for many reasons, doesn't it?

Shaun (26m 23s):

Yeah. That's dead rod. I mean, we lock the infrastructure spice. I mean, exiting the pandemic governments are looking to stimulate economies, you know, through investment infrastructure. And, you know, we do think these businesses provide a reasonably good level of inflation protection given the contract mechanisms that are implies. So yeah, companies like Downer, Downer EDI, Ventia, which a core, you know, maintenance and services providers, we think they're good places to be in the current market.

Phil (26m 50s):

So there are any other sectors that you're looking at apart from infrastructure.

Shaun (26m 53s):

Yeah. I mean, why we're that way sort of thinking about, I guess the market at the moment, you know, is really looking at, I guess, buckets or themes and then what sort of fits within that? So yeah, I mean, I guess one sector or theme that we like is really those stocks that have been significantly impacted by COVID and they will benefit from the re-opening of the economy. So, you know, this includes, I guess, sectors like travel and leisure, such as Webjet. They actually reported their FY-22 results yesterday. And, you know, we caught up with management and the WebBeds, you know, hotel inventory business is tracking 20% above pre COVID levels in my, and the forward indicators for the European summer.

Shaun (27m 34s):

A very strong there, while you look at the domestic OTA, the online travel business, and it's already recovered to 75% of pre-COVID and he's doing that rapidly, you know, as these fees of Omicron, you know, re-said and we think they've structurally lowered the cost bias. We think it exits, you know, the pandemic with stronger margins and in a much stronger competitive position, given some of its key competitors have just taking a wide too much debt. And, you know, in my view, a Lockley to fight off into the distance

Phil (28m 3s):

Just before you go on let's date stamp, this episode is the 20th of May, 2022. So listeners can get a fix on where and when we're talking about, and, and just on the travel side of things, it was just interesting. We're both in Sydney and I don't know about you, but a couple of days ago, it just seemed like suddenly there's more planes in the sky. Did you get that?

Shaun (28m 21s):

Absolutely. No, it's dead right. I mean, if you take a domestic trip, the lawns at the airports at the moment, a truly like I've never seen anything like it. I truly haven't. I, I took a flight two weeks ago down to Melbourne. One morning I was out the door at the Sydney QANTAS terminal. So I know it feels like it's absolutely roaring back at the moment. I think, you know, to some degree and we are seeing it reflected in the recent US reporting season. We really are starting to see that spend shift from goods to services. And, you know, I'd like to go on my lunchtime runs, you know, here in the city, around the Opera House. And I'm just noticing Opera Bar and just that whole area, which is obviously a very touristic part of Sydney.

Shaun (29m 6s):

Like that's picked up so much in the last two months.

Phil (29m 11s):

Sorry I interrupted you. We're going to talk about another sector. I think you're going to go on to

Shaun (29m 15s):

Oh yeah, no. Sure. Yeah. So, I mean, yeah, it's, it's obviously we've spoken about travel. I mean, the other names we locked within that travel spice, a corporate travel management and tourism holdings, which it owns and operates the largest camp van and caravan fleet in Australia and New Zealand. And then I guess the other stocks that, you know, we've, we've seen really impacted by COVID, you know, the likes of malt barley producer, United Malt Group, which supplies into United the global beer companies, which, you know, benefit from not only the re-opening of on premise consumption, but also normalization of supply chains. Given, I guess the lag that sometimes occurs between, you know, that pricing mechanisms and cost inflation, Bega cheese is another sort of business that we think, you know, fits that bill.

Shaun (30m 0s):

Yeah. We've spoke about, I guess, that maintainence and services that providers, which give you that leverage. So I guess the infrastructure tailwinds, which, you know, Maas is obviously a beneficiary of as well. We locked the insurance brokers like Steadfast and PSI, obviously that insurance cycle continues to harm with rates, you know, globally given how low returns have been for insurers on bonds in other investment returns in recent years. And just the level of catastrophes and weather events that we're saying as well, premiums, same to continue to go up. Yeah. And I guess, you know, we, we think in this market too, you know, stocks with hard asset backing that provide, I guess, an underpinning or a floor to the share price, you know, you look at names like Select Harvest, which is an almond farmer and processing.

Shaun (30m 46s):

You know, we think the, on the line tangible value of the almond orchards itself is both more than the current share price. And then you obviously get the upside of the operating business, which will benefit from, you know, I guess, an easing in the supply chain and congestion issues in the delivery of their product, you know, into offshore markets. Main Event is another one. Yeah. Sorry, main events, cinema operator, event hospitality. They on that one. That's another one we lock. I mean, the underlying assets account for the majority of the share price. And obviously as a hotel and, and cinema provider, you will benefit from that sort of re-opening trend as well. Yeah. We think quality growth is getting more and more interesting.

Shaun (31m 27s):

Like the valuations on a lot of those stocks have, have come back quite a long wide as potentially SAMO de rind apply out there. So we're just sort of dipping our toes in around some of these names, but you know, the likes of IDP education, you know, which is leveraged to the, I guess the global recovery and international student flows ResMed is another business we think is very high quality. It's been, you know, I guess, impacted short-term by supply chain challenges, but the backlog of patients taking treatment for sleep apnea continues to build. We think the outlook there is very strong. It's been a line market that still has, you know, a significant growth potential. And then I think more broadly just starting to pick the bones apart a little bit on, you know, stocks within sectors that have derided individually that we think are hated by other investors where valuations, you know, Stein are that really interesting, like an example there I would give is City Chic.

Shaun (32m 23s):

You know, it's a plus size women's retailer, you know, it's a form of market darling that, you know, probably at least a lot of investors out there at held. And now there's real worries or concerns, I suppose, around the position they've taken on inventory leading in potentially a slide consumer environment. But yeah, I mean, that's one where management have proven themselves very, very capable. And then he took the business from 20 cents to $7 at it's peak. And, you know, we think Phil, the CEO, there's a very, very good operator. So we're doing more and more work around names like that. And I think, you know, the sectors we're still avoiding, I mean, unprofitable tech, which has obviously benefited size significantly from the opposite backdrop to what we're seeing now, you know, which we ran through earlier.

Shaun (33m 8s):

It's just hard to see these businesses when the market's looking for them to reduce their cash burn. But then there's this risk that as you take down cost, reduce the cash burn that your sales growth starts to fall. And then the multiples that the businesses then attract compress can compress dramatically. So yeah, we think you still got to be careful with that sector. And then the other space we, I guess, cautious on in general is those stocks that are being perceived as defensive and investors have what we would term hiding in when they may not necessarily prove to be the case. So something like the consumer staples names, you know, I think fit into that bucket.

Shaun (33m 51s):

And we saw a little bit of that in the market yesterday, actually, you know, when the off shore laid with the likes of, you know, the results reported by Walmart, you know, and Target, Aussie investors decided to, I guess, draw parallels to the supermarkets here and Matt cash. So yeah, we think you just gotta be careful on some of those hidey holes if you want.

Phil (34m 11s):

Yeah. Icouldn't believe it. I saw it on Twitter today. Someone posted a chat of the Walmart share price, which you think would be pretty robust in any economy, but how much has it gone down? I can't remember the actual percentage figure.

Shaun (34m 24s):

I think it's down 30 to 40% now,

Phil (34m 26s):

Which seems a little strange, but I could be wrong. Who knows what a markets do.

Shaun (34m 31s):

That's right. That's right. And that's the opportunity to when these things over shoot. So now it's, it's fascinating

Phil (34m 37s):

So Shaun, you've given us a lot of tips here, a lot of stock tips and of course, listeners shouldn't act on just tips as well, but people can get access to these via WAM Funds and WAM LICs. So tell us about the best way of finding out more information.

Shaun (34m 53s):

Yeah, definitely. Wilson Asset Management, so the funds that I, I guess co-manage with a few other guys are WAM Capital, essentially the flagship fund that's been around for over 20 years now and was obviously started by our, our founder, Jeff Wilson. And then there's also, you know, within that sort of stable, I suppose, is WAM Active, WAM Research and WAM Microcap. So these are all listed on the stock exchange.

Phil (35m 21s):

So they'd like an ETF in a sense in that you can just buy and sell them on market and gain exposure to this firm investing thesis.

Shaun (35m 29s):

Yeah, that's right. So the stock codes on those, are WAM, WAA, WAX and WMI, of course, I'm very happy to talk to anyone that's interested in the funds. So I'm always available if anyone wants to speak to me, but yeah, our websites www.wilsonassetmanagement.com.au and my email is Shaun@wilsonassetmanagement.com.au so if anyone wants to reach out and have a chat, I'm certainly more than happy to

Phil (35m 58s):

Oh, fantastic. Well, that's Shaun with an S H A U N. Isn't it?

Shaun (36m 2s):

Yeah, that's right.

Phil (36m 3s):

Like Shaun the Sheep. Is it Shaun the Sheep that's got that spelling?

Shaun (36m 6s):

That's what my mom calls me.

Phil (36m 9s):

Shaun, it's been a great pleasure speaking with you and we'll put those links in the show notes as well.

Shaun (36m 15s):

Yeah. Fantastic. Thanks very much, Phil. And thanks to all your listeners and good luck out there in the markets.

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