WAM Capital founder Geoff Wilson ignites a war with LIC targets over value
The fund manager has said he wouldn’t advise his daughter to invest in his flagship listed investment company WAM Capital. Now he says there is an exception to the rule.
Video footage of high-profile fund manager Geoff Wilson saying he would advise his daughter not to invest in his flagship listed investment company WAM Capital is set to test the value of the fund manager’s takeover currency in his controversial campaign to gobble up undervalued rivals.
Over several years and as recently as last month, Wilson, who invests more than $5bn on behalf of 110,000 shareholders, has advised retail investors to buy shares in LICs only if they are trading at a discount to their book value.
Only nine days after WAM launched a competing scrip offer for Paul Moore’s PM Capital Asian Opportunities Fund (PAF), he noted in a private briefing to members of the Australian Shareholders’ Association on October 7 that WAM was trading at a 19.5 per cent premium to its net tangible assets. “So you’re buying a dollar of assets but you’re paying $1.195,” Wilson said.
The same issue arose in August 2019, when Wilson was asked in a public forum whether he would still advise his daughter not to buy WAM shares if she had a choice between his eight LICs.
“Oh yeah, it would be the same,” he said. “So, in theory, which ones would I buy, say for my daughter Amelia now? The ones trading at the biggest discounts, and WAM Global is the biggest discount.
“And then WAM Capital is at a premium, so I wouldn’t buy that.”
Wilson’s philosophy makes perfect sense, but complications can start to arise when he uses highly valued WAM Capital scrip as takeover currency for a discounted LIC target like PAF.
If PAF investors swap their shares for WAM shares, they end up with a riskier exposure to an LIC with a premium rating, which goes against Wilson’s core investment philosophy.
Not so fast, he says, citing an exception to the general rule.
“You shouldn’t buy shares in an LIC trading at a premium, unless you believe they are going to outperform the market by their percentage premium over time,” the veteran stock picker says.
The Australian is not suggesting Wilson has acted inappropriately
And while it seems like a pretty big ask when you’re talking about WAM’s historic premium of 10-20 per cent, some PAF shareholders are backing him.
As of Friday, Wilson had moved from a standing start to 10.4 per cent of PAF.
This is despite independent expert Lonergan Edwards advising shareholders to reject the WAM offer and accept the rival in-house bid from PM Global Capital Opportunities (PGF), even though its implied value could be lower.
In large part, the reason is that they would suffer significant dilution by swapping their relatively cheap shares for relatively expensive WAM shares.
“In our view, the significant dilution in net tangible assets under the WAM offer is not reasonably compensated by the potentially higher consideration,” Lonergan Edwards says.
PAF chairman Andrew McGill rams the point home in a letter to shareholders in the PAF target statement, saying there are “significantly higher risks” associated with the WAM offer.
Not only would shareholders suffer dilution, but the hefty premium in WAM’s share price could reduce to a more modest level like the seven other LICs in Wilson’s group.
It’s no surprise PAF popped up on the fund manager’s radar, given it has stubbornly traded at a 10-20 per cent discount to its book value.
The way Wilson puts it, there’s the prospect of a “double whammy” – superior management of the existing portfolio and then closing the gap to book value.
The businessman, however, would have known he’d be in for a fight, just like his tilts at other LICs.
PGF, as well, had been working on its own plan to address PAF’s stubborn discount. The fruits of that labour became public in September, when PGF proposed a merger by scheme of arrangement with its stablemate.
WAM effectively declared war before the month was out, pitching its rival bid for the suddenly sought-after PAF.
Wilson is a formidable foe, with rivals in his takeover bids quickly finding themselves embroiled in legal disputes as he seeks an edge through the Takeovers Panel.
Even self-styled Gen Y entrepreneur Nick Bolton was moved to express exasperation a year ago after Wilson launched multiple bids to shake Bolton’s grip on the small LIC Keybridge, racked up 14 related appearances in the Takeovers Panel and invested in other Bolton-associated LICs.
It was Wilson’s version of the full-court press.
Bolton said he had frequently tried to settle their differences.
“I’ve sent Geoff a number of texts. Other people have tried to mediate. I even offered him a board seat. But all to no avail,” he said.
The indications are that Moore and the PAF board are prepared to fight Wilson on a large battlefield.
In their target’s statement rejecting the WAM bid, they list a number of concerns, including WAM’s failure to disclose investment portfolio performance net of fees and expenses.
“By referencing only gross returns in the bidder’s statement, PAF considers that WAM has overstated its historical investment performance,” they say.
“PAF estimates that the one-year, three-year and five-year net investment performance of WAM has been below (the All Ordinaries index) benchmark.”
Wilson says it would be “illogical” to report performance after fees and expenses when the comparison that matters is with the movement in the index. The directors then take aim at Wilson himself, targeting his declaration that he has no personal interest in the outcome of the takeover.
They dispute this if the declaration includes “indirect” benefits, pointing to a “potential meaningful benefit” if Wilson’s wholly owned investment management company, Wilson Asset Management, is installed as manager of the PAF funds.
Wilson Asset Management is the cornerstone of Wilson’s wealth and has earned some serious money in management and performance fees over the years.
In 2020-21, WAM alone paid Wilson Asset Management $28.9m, split almost evenly between performance fees and a management fee equal to 1 per cent of assets under management.
WAM annual reports say the LIC has paid $138m in fees to Wilson Asset Management since 2015.
“PAF believes that Wilson stands to obtain a potential meaningful benefit if Wilson Asset Management obtains management of the PAF funds management,” the target’s statement says.
“PAF shareholders need to recognise the potential for this benefit and consider its relevance to the WAM takeover bid.”
Again, Wilson bats it all back, saying the Takeovers Panel has ruled in his favour on the issue of his personal interest in the takeover.
As to the huge management fees banked by Wilson Asset Management, he says: “That’s what happens when you outperform. Everyone knows (the total) is 1 per cent management fee and 20 per cent performance fee. It’s no secret.”
Wilson has attracted his share of critics by seeking to roll up LICs trading at a discount to their intrinsic value.
Apart from PAF and Keybridge, there’s been Contango, Concentrated Leaders Fund and Templeton Global Growth Fund.
In one of his recent presentations, he rejected suggestions that the LIC sector is on the way out.
“Not at all! It’s a fantastic industry,” he says. “This is just a rationalisation period.”
