LICs, franking credits and philanthropy
With Geoff Wilson, Chairman and CIO of Wilson Asset Management.
Matt Heine: Hi and welcome to this episode of Between Meetings. Our guest today is an undisputedlegend in the financial services industry, with more than 35 years experience managing both money and also businesses domestically in the US and the UK. He's been instrumental in the success and evolution of listed investment companies in Australia and established the first listed philanthropic wealth creation vehicle, Future Generations. In 2018, he was awarded the order of Australia for his distinguished services to the business and finance sectors, as well as the community, as a supporter of charitable foundations.
In addition to a multitude of board seats and personal interest, he has most recently been leading the charge as a vocal opponent to Labor's proposed franking credit changes, which seeks to remove cash refunds on excess franking credits, which are not utilised against taxable liability. Welcome Geoff Wilson.
Geoff Wilson: Thanks Matt. Good to be here.
MH: Now Geoff, you've got a huge range of different interests are, you're obviously involved in more charities than I can count, as well as boards. How did this all start? What sort of motivated you to get into the industry some 35 years ago?
GW: Well, probably take a little step back a bit further than that, I was brought up in Melbourne. My Dad was a doctor. When his father died, he inherited from him, he had a choice to either take cash or some shares and he took shares in Mt. Morgan and I suppose that that made my dad sort of fall in love with the stock market, they obviously went up. When I was a teenager, I'd come home, and when dad would come home and he'd be sitting in the chair and he'd be looking at the newspaper and he was looking at this page, which had all these numbers on it, and I remember asking him, "What is that?"
He said, "It's a stock market." I look down the list and I thought, oh, let's see what I can afford. I found one that was trading at a cent, it was called Cox Brothers, it was a retailer in Melbourne. Then another time I looked, it was half a cent, and then another time I looked at his back to a cent and I thought geez, well if I bought them at half a cent, I would have made 100% of my money. Then a couple of months later I went looking again and I couldn't find them and I said to dad, "Where have they gone?" He said they've gone under.
It was really from my father that I got the interest and then, in my later teenage years, my dad lent me some money, and I bought my first share, which was around then, later part of the 70s, I looked down to at least try to find the cheapest again, and there was a company trading at 10 cents. I bought $1,000 worth. They went to 12 cents, I sold half. I didn't even know what they're doing, they end up going to 30 cents, they're drilling for oil, and I sort of thought this is the best thing in the world.
In those days, I thought the best thing in the stock market was like just going to the races, and the difference was that each sort of 100 metres, they stop the race and you could take the bet off or put it on. It was only when I started working in the industry that I realised that it isn't like going to the races. When you buy a share, you become a part owner of that business and it's really understanding what that business does and working out whether you really want to buy part of that business. That's sort of how I got in there.
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MH: That's fascinating. A number of the guests on the show already have commented and taking their stories that far back, and inevitably it started with their father or mother, inheriting some money and some shares and that interest starting at a very, very young age. Back then it would have been quite different as well, obviously you mentioned picking up the newspaper, that information flow presumably created a very inefficient market, and so whilst you were speculating at the time, how did people sort of leverage that dichotomy where there was only a few people with the information versus those that didn't have it?
GW: It's interesting because from sort of, I went to uni, I did a science degree, not related, and then went around looking for a job, this is in the early 80s, and then ended up getting a job at the investment department at Scottish Amicable in Melbourne. Even in those days, if a company announces a result, there was no way of seeing it. I was the youngest, so I used to then have to walk down to the stock exchange and pick it up and bring it back so that we could look at and analyse it. And now in terms of the level playing field in terms of information, it is so much easier to analyse a company's results, to make those various assessment. Probably a lot of the easy money, which was around in terms of the information gap, that's gone now. I think with so many more people investing in the market, and with the various privatisations we've had in Australia, and people wanting to understand companies and how they operate, there's a lot more people playing the game.
MH: The way that some companies are now seeking to get that advantage, if you look at the high frequency traders, it's actually who can have their server closer to the actual exchange to try and arbitrage those milliseconds, so it's certainly changed a lot.
GW: It's quite bizarre. To me, what I've learned over a long period of investing in the stock market, the biggest ... What does a share price have the greatest correlation to? And what I believe, it's earnings per share growth. If you can find a company that's well managed, that will grow at a good rate and is well funded and financed, then you've got a very good chance of doing well.
MH: That sounds very much like Warren Buffet's philosophy, and he's been obviously very successful as have you. You mentioned great management and the ability to invest back, is there a couple of other things that you look at fundamentally before you buy into a company for presumably a long time?
GW: Well, first of all, to me it's very much, when you're investing in a company, I suppose, being a fund manager, people give us money to manage because they believe we'll do a good job. To me, I'm probably a little bit different to Buffet, where in terms of his view is find a business that has a moat around it, and you don't have to worry enormously about the management, but if it's a really good business, then the right management will eventually come. We spend a lot of our time looking for sort of undervalued growth companies, and those undervalued growth companies tend to be smaller companies, so management usually with those smaller companies is a lot more important, because they can't afford to have ... Say look at AMP since they've been listed. If the various MDs of AMP were actually running smaller companies, those companies wouldn't have survived, they would have gone under. To me, management is incredibly important.
MH: Because every decision they make is going to have a big impact.
GW: Correct, and that's really the ability to assess management and look at their track record of what they've done before, trying to find out what their drivers are. We spend a lot of time, we like to sit down with management, and the management teams and really understand what drives them, and observe their body language, et cetera, to our various questions, so we're backing management. And then we're also trying to find the good business, that undervalued growth company that the rest of the market hasn't found, and we can sort of find it early and then we get the double benefit of [inaudible 00:07:54] performing and getting rewrited as well. That's what we're trying to find.
MH: What's this small company in your mind? Is that X50 or does it go further down?
GW: It doesn't matter.
MH: It doesn't matter. Something that's unvalued-
GW: To me if something is cheap, it's cheap. A lot of people sort of get caught up with size, and I know when you're managing big pools of capital, it's hard to maybe invest what you wanted to really small companies, but you can find good investments everywhere.
MH: How many stocks would you typically hold at any time?
GW: In the portfolio, well, as I mentioned, we're trying to buy undervalued growth companies, but we've got another little twist on that is because when we started the business, this is a little over 20 years ago, we started with the first fund and I put all the money I had in the world that was half a million dollars, and we also Reg Grundy putting the other half a million dollars, so we started with $1 million. We were really looking to buy those undervalued growth companies and do as much research as we can and really sit down with management.
Now these days we probably have, obviously we're managing a little over three billion. We've got 12 investment professionals and we're probably seeing three to four thousand companies a year, in Australia and also globally. That's really trying to get the information, trying to understand how those companies make money, trying to understand the management teams and what their drivers are. What I always, because I was starting with my own money, sort of the rule number one, rule number two, and rule number three was don't lose it, so unless we could find a catalyst that we thought would change the valuation of the stock in the markets eyes, we'd sit in cash, even though we might find a really well managed company that we thought was good value, but if we couldn't find that catalyst, because sometimes companies can be cheap for a long period of time.
How we invest is undervalued growth with a catalyst. That means that we sit in a lot of cash, because we don't want to take the risk. We're trying to take as much market timing out, risk of market out of our investment process. When we're sitting in cash, and because I worked in the industry for quite a period of time, and you move around so you tend to work with most of the brokers, then you get access to being a sort of an institution, you get a bit of free kick, where you can take positions in IPOs that maybe be a retail investor can't get or placements as a wholesale investor, et cetera.
When we're sitting in cash, we're looking for more short term trading opportunities, but that's more trying to pick a dollar coin up on a train track, every now and then you get hit. So really, our investment process is undervalued growth companies, when we can find them with a catalyst and when we're sitting cash looking for trading opportunities, so it's a combination of the two. We could have 110, 130 companies combined in the two and there'll be less in the undervalued growth companies and more in the trading part. The trading part of the portfolio would probably turn over four to five times a year, and the investment part of the portfolio that probably takes three or four years, the research part to turn over, because you tend to make multiples on your money, and it tends to happen over time.
MH: One of the other really interesting things about your investment house, Wilson Asset Management, is the structure that you've chosen to invest through. I think you've probably pioneered LICs or have certainly pushed them to the front stage. Why did you decide to go down that path initially? Was it around, so tax management or did you just find that it was a better vehicle to mention money because that was sort of a longer term focus?
Probably about 30 years ago, even though I started [inaudible 00:12:15] management, I worked as an analyst and an institutional broker for quite a period of time. Over that period of time, I remember reading a research report by Morgan Stanley out of the US, and it talked about the listed investment company or, it's called a closed end pool of capital, how that would perform versus most fund management vehicles, which are trust structures and open ended pools of capital. It showed that that outperform by one and a half to 2% per annum, like a 50 period, and that fascinated me, so I looked at it in detail and broadly what happens is money tends to flow into the market at the top and tends to flow out of the market at the bottom. And so therefore, if you've got an open ended pool of capital, you tend to get a lot of money in when things are going well and like say times at the GFC, you get a lot of money flowing out
If you're managing that open ended pool of capital, you got to manage those flows. You're buying when you know things are expensive and as a fund manager you're selling when you know things are cheap. Now, with a listed investment company or a company structure which is closed, then your amount of money you're investing doesn't change, so you're never forced to buy something that's expensive or sell something that's cheap, so you can really tight medium longterm views and you're never caught up with that. I think that's what gives those structures a competitive advantage. That was really a structural advantage which I saw.
The second thing, which some people say is the things, something they don't like about listed investment companies, but to me this is probably the second most important thing and close to the holy grail, is that I can be a fund manager, managing a listed investment company, and at various points in time in the cycle, that dollar of assets could be trading at 80 cents.
MH: Which has always been my issue and I've been burnt in the past.
GW: Well, exactly. Yeah, yeah. But it's more, first of all, if you're looking at investing in listed investment company, first of all invest in a manager that you understand and you believe will perform for you. Secondly, if you can buy that at 20, sort of like going to the boxing day sales, if you can buy it at 20% discount, what a cracking deal, and then be aware, take a medium term view that you believe, you can understand how they'll get it back to NTA.
MH: What does draw that discount, because I think that's not well understood because it's not the value of the assets, it's got to be around the supply and demand surely.
GW: Correct. It is supply and demand, so to me there's probably four things that listed investment companies have to do. One is they've got to perform. Secondly, they have to provide a dividend stream, potentially a growing dividend stream. Thirdly, they have to have a sort of share holder engagement strategy, communication and marketing strategy, because a listed investment company, it's just like a [inaudible 00:15:29] hair drier, or an Apple iPhone, it's something that has to be marketed. The fourth thing is they just have to treat shareholders with respect, and don't do things that are negative for shareholders.
To me if you do that and you do it well, it's probably like, I know we're in Melbourne, so Aussie rules, if the coach says, look, what you do is you tap it down to your man when they bounce the ball and you kick it to your other man that's a bit further down the field and then he just kicks it in between those two big posts and you keep doing that all day and don't give the ball to anyone else and you win. It sounds quite simple, but a lot of people find it hard to do that. To me that's the opportunity.
MH: Because obviously the structure is extremely appealing, because you can manage the money in a way that you can hold things for a long time, but if you don't have the shareholders along for the ride, you're going to get that volatility. I think that put a lot of investors off, particularly through the JFC where it suddenly started having equity like behaviour on top of the underlying portfolio.
GW: Yes, and they can go to big discounts, and where I see that as I get excited when the things then happens. Then I suppose, if you can't go through that cycle, then you shouldn't be playing LICs, but to me they've got two very good distinct benefits.
MH: Initially, I remember the listings, they used to come with free options, is that still done, or is that sort of moved on.
GW: It's just an evolution.
MH: Was that one of your ideas or someone else's?
GW: No, no. Because we've got our fingers in a lot of pies in the listed invested companies, a lot of people blame these things on our idea, but no, all we're doing is copying someone else, and trying to modify to benefit. That was the fact that there was a cost of the raising, so we'll give an option to everyone to make up for that cost, so the package will trade at a premium. The new ways, the manager pays that cost, so you don't have to put an option in there on day one, the NTA is the NTA, because that cost is being paid for by the manager, and so you don't potentially get the dilution impact of the options. The thing is the options never gave the dilution impact for the people going in the IPO, we're just more the people buying after the IPO.
GW: It's just an evolution. The next cycle, there's been a long cycle for LICs, and I think it'll continue to be, but the next cycle, it'll probably come a with options when they float again and then something in you will be in. You know we're in the mature stages of that cycle because some people are talking about giving you part of the management company-
MH: Like a staple security.
GW: Well, various. There's a couple of them that have added that, and so to me, that's sort of the mature stage where, we've got to add a little bit more spice to get people to invest.
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MH: Speaking of spice, there's a huge range of new investment types I guess, coming onto the A6 almost every. We've got ETFs, we've got activate yes, we've got 80 MFs, active managed funds, I've recently seen number of elites or listed investment trust coming on the market, what do you take of all that, it sounds like your preferred vehicle is still the LIC.
GW: Yeah, that is my preferred vehicle. The LIC or the LAT, and to me it's having the closed in vehicle, everyone says oh that's great for the fund manager, you've got the closed end vehicle, but I suppose a couple of people, well, here's three people that I sort of started my business before, well before was David Paradise, Peter Cooper and the boys and [inaudible 00:19:28] Chris Magellan, and we're managing $3 billion and I think, [inaudible 00:19:31] and Peter are managing 16 billion and Magellan's what, 70, it's 72 billion plus. The negative with the LIC is they're not that scalable. You're not open all the time, so if you're doing well, money doesn't flush in. You're shares might go to a premium, and we try to restrict our size for that.
GW: In terms of the various structures, I think they'll continue to evolve, and what we find is, when we're going around talking to the financial planners, they find those listed structures are so much more cost efficient for them, and as everyone is looking for cost efficiency, they'll continue to, the various listed structures where the paper work is reduced to a minimum, and it makes it efficient for everyone, they'll continue to do well. I think all those products you mentioned will continue to grow strongly.
MH: Speaking of financial advisors, I was going to ask the question, you've got a huge direct client base, I think a lot of managers potentially going into these new vehicles as a way to try and I guess tap into the SMSF or direct market. Do you have any idea for the split between, I guess money that's coming out of the financial planning industry versus that is direct?
GW: We don't really, we've got about 80,000 shareholders, and we think about 60,000 are the self managed Super Funds, we just don't know where exactly, how they ended up being shareholders. What we do believe in is, and probably in the very early days when we floated the company, I remember after six months going around to present to all the brokers and in those days, sort of the brokers after they got their fee for raising the money, they weren't that interested.
MH: Because you were doing their job.
GW: Yeah, that's right, and that's what they'd say. We do this, but now it's significantly different. They play more of the sort of advisor and have the wrap accounts.
MH: That's a bit more about the asset locations.
GW: Correct, so it's totally different, but what we found is we found all the people that are buying our shares where our current shareholders. So then we started on a six monthly basis just going around teaching the capital cities, just presenting to them. We went through periods where, we started with 2000 shareholders with WAM Capital, the first LIC we floated, and we went through, at one stage I remember going to Canberra and I think two people turned up, and then some of the guys I work with said, look let's not go to Canberra anymore, and I said, no, once we've started going, we ought to keep going. Now we'd have 250 there. In Adelaide, I think we got down to seven, I think we had 250 to 300 in Adelaide, and would have clocked 1,000 at our presentation in Melbourne and Sydney. We do all the capital cities. Got a high about now, we got a couple of hundred down there.
To me, they're the people that own the company, so what we're doing is on a six monthly basis, reporting back to them. I know you talked about franking earlier, and it might be time to talk about that situation here. Now a lot of people get a little bit misunderstood of why we're being so vocal on the potential changes to franking, and it probably comes back to the core of the business and sort of the why. Why do we have this business? The whole idea of setting up the business was the fact that I can manage my money and I can manage it with other people's money and we could be seen as an institution, so we could get those benefits that institutions get access and information. It really was to make a difference in terms of managing that money. This where the Future Gen entities come in as well.
In terms of making a difference, obviously in the first period of time, you're making a difference financially. Then also how can you make a difference to the community you operate in. We've tried to give back to that and whether it's from a philanthropic perspective. Everyone who works with us, we give them $10,000 to donate to whatever charities they want on an annual basis. That's all the employees. We have various other things.
MH: Just on that, how many employees do you have?
GW: At the moment, 34.
MH: That's fantastic.
GW: Yeah. I mean, that's beside the money that we give-
MH: Through Future Gen.
GW: Well, and the money that we give through the management company. Then, one of the opportunities was to, because I've worked in industry for a long period of time, I saw a gentleman in the UK set up this structure, where he got all these fund managers to manage their money for free and then the money, the fees they would normally get, he was giving that to charities. I thought, well, if he's doing that over there, why can't I do that in Australia? We're fortunate enough to go around and see various people, and they supported us, and now we've got, in those two vehicles, the future generation vehicles, and that's FGX and FGG, the codes, we've got about a billion dollars.
MH: Just take it back a step, because I'm not sure everyone's actually familiar with what you've actually done there, because it's incredibly noble in the Australian market, we started off on franking credits and moved back to the philanthropy, but I think on the philanthropic side, what you've built there and taken from there, it's never been seen in Australia, and it's been wildly successful.
GW: Yes. Well effectively, the two listed investment companies one of them is future generation investment company and the code FGX, and what that is is the best Boutique Australian fund managers that are managing money, and instead of charging a normal fees, like our normal fees, a 1% management fee and a 20% performance fee, and we're one of the various managers. All the managers except one have performance fees, because they think they're good.
MH: How many have you paid-
GW: Well, none, we've paid none.
GW: Because they give the money back to us, so it's actually, there's no fees. None of the managers take any fees, we're in their main funds and they donate the fees back to us, and that allows us to give 1% with the FGX, the Australian one, that 1% goes to children at risk in Australia, and we've got a number of charities that that money goes to. Then we've got another one, Future Generation Global, and that's FGG the code is. The same structure, they're global fund managers, Antipodes, Magellan, names like that are the top managers in there.
MH: I think it's probably worth it, just because it's a noble pursuit, you able to name some of the Australian managers as well.
GW: The Australian guys, yeah, David Paradise, Peter Cooper, those guys they're in, well actually they're in both because they've got domestic and international. You just go the website and you can see the list of them all. With Future Generation Global, that 1% goes to youth mental health, and this year, it'll be about $5 million going to children at risk, and $5 million going to youth mental health. It's a win, win, win for everyone. It's a win for the charities obviously, they get annuity funding, and it costs them nothing to get that money. It's a win for the fund manager because it's an opportunity for them to give back, and they are incredibly generous.
MH: Is it difficult initially going to some of these managers and explaining the concept, or do they all understand it pretty quickly?
GW: The hard part was ringing them up, and my pitch tended to be, hey look, I'm coming to hit you up, I'm ringing to hit you up, but I'm not going to take any money off you, I just like you to manage some money pro bono. Of course, they still get paid for all the other money they manage, so it wasn't that hard for them. But look, I take my hat off to them all who didn't hesitate but says hey, what a great concept, great idea, and we'll do it. This year it'll be about $10 million who got a youth mental health and children at risk, and from our perspective, if we could just save one person's life, then it's all worthwhile, and with a bit of luck, we can do suitably better than that.
To me, yeah, they were great structures, but in terms of what we're trying to do, make a difference, that was another way that we could make a difference. The third way, we talked about managing money, make a difference. Set up these vehicles and probably it costs us, we do the marketing for the vehicles and try to look after them as much as we can, so it costs a reasonable amount of money there. But also, in terms of the franking debate, is my super fund I've been fortunate in life, and you'd probably be disappointed if I hadn't performed well in my own super Fund, and these proposed franking changes have no impact on me, because I'm well and truly above that, you know the 1.6 million, so I'm paying tax, the 15% tax above that.
Also our business is closed in [inaudible 00:29:25] Capital, so $3 billion, so it doesn't matter what structure we manage, even if it's a company or a trust or whatever it is, it still stays there, so that has no impact on us at all. The unfortunate thing is what these changes do is have a significant impact on our 80,000 shareholders.
MH: I think initially, you mentioned it before, there was a bit of scepticism about why you're putting yourself out there and making so much noise in setting up a petition to actually help your shareholders, there must've been something else going on.
GW: Yeah, and really it as standing up for them, and to make a difference for them. We've advocated it as much as we can, we put a couple of reviews into the [inaudible 00:30:05] review, we put a couple of things in there, and that was more to level the playing field. We proposed to allow retail investors to invest in placements like sophisticated people. Unfortunately that didn't get through, but to me it's important that we stand up for our shareholders and that's why we're doing this, and we'll continue to do that.
MH: What's the next step for you?
MH: Yeah, what else are you working on that's interesting?
GW: I'm 61, my plan was-
MH: You still got 20 or 30 years left-
GW: That's right, my plan was to retire when I'm 80, but when we did the Future Gen Global, which supports the mental health areas, all the mental health people said don't retire. So it was 80, so who knows what retirement is. We've launched the Global Fund this year, which just takes a little bit of while to get, you know, we've got a really good fund manager, takes a little bit of while just to bed everything down there. We're looking at taking over the, expanding into the alternative space. We're looking at the Blue Sky. We have put a proposal in to manage the Blue Sky Alternate, LIC., it's trading at a big discount NTA. I personally bought quite a few shares and we think we can manage it and get it back to NTA, and if not grow that space. Short term, that's the couple of things we're looking at.
MH: When you talk about taking back to NTA, we touched on this right at the beginning, it's been a number of scenarios or different opportunities where you've looked to do that. Is that really just around putting new management in and getting the story right and supporting the shareholders and therefore normalising the supply and the demand? Is that what you're trying to do in those situations?
GW: It is. I know it does sound quite simple what you said, but it actually is. It's effectively stopping everyone from selling, making everyone understand what their assets are and what they're worth, and then trying to get by to levels that the people will believe those assets are worth that, and also they believe you can perform and provide performance dividend stream. And then for it to trade at NTA, if not a premium. Now a number of our LICs are trading at big premiums. I find that very hard because-
MH: Big expectations.
GW: I like buying things at a discount, so I wouldn't be paying a premium for anything. To me, find a good manager and try to find them at a discount. When they go at a premium, then it's your choice.
MH: Geoff, thank you so much for your time, you've been very generous and congratulations on everything you've achieved, and more importantly, what you've done for the community. I know it's incredibly well received, but also the money that you're giving back to some of these charities, they wouldn't have got, and [inaudible 00:33:12] doing some wonderful things for it.
GW: Thanks Matt, and also, we sat beside each other at a company, when you're downloading your results the other day, and I said to you after, congratulations on what you've achieved, because I think you've just got a fantastic company. Well done.
MH: Thanks Geoff.
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