Hi Guys,I've recently been thinking about the huge...

Hi Guys,

I've recently been thinking about the huge outperformance of large cap stocks in the Australian market which has been even more exaggerated in America. The ASX20 increased by 15% in FY24 vs the Small Ords at 9% and this was the third financial year in a row where there was a significant divergence in performance.

I often like stuff that's out of favour (having used a similar play on in the small cap REIT space in 2023) which has drawn me to WMI. There's a bit of a double up as it's an out of favour structure (being a listed investment company) in the most out of favour area of the market (micro cap/smalls).

This is hardly an outside the box view but the smaller the companies are the more inefficient the pricing and the more an active manager such as WAM can provide real value vs an index fund option so I think this one is right in the sweet spot.

So that's my broad view on why I'm interested in this investment.

Having read through the most recent annual report tonight I wanted to note down a few thoughts and get some different perspectives.

The Positives (Other than the broader themes I've highlighted above)

- An opportunity to get into this at NTA when it has historically traded at a premium that to some extent is justified considering the history of out performance

- A high fully franked dividend of 7.3% at the current SP

- I admire that the board remuneration hasn't increased since 2021 and also that Geoff Wilson owns around 1.5 million in shares alongside Kate Thorley who also has a financially significant stake

- Management seem reasonably bullish on their current opportunity set and are holding a lower cash level than the long term average for this fund which suggests they see plenty of value

The Negatives

- Having listened into their conference call tonight there is a lot of talk around the catalyst for big valuation gap closing between the small and mid caps being cuts in interest rates..... I'm just not sure these are going to eventuate and if they do in the middle of next year there may not be anywhere near as many as what people seem to be expecting

- I go back and forth on the WAM marketing and performance reporting in general as in some ways it's been a key ingredient behind their success and resulted in their funds rarely trading at big NTA discounts but it's also excellent for presentation but low on substance in terms of digging down more deeply into the after fees performance figures. For example in FY24 the top line performance figure was 21.6% but only 17.6% of that got through to the shareholders. This means that the shareholders effectively received 81% of the portfolio performance.

- I would be happy with a 5 to 6% fully franked dividend yield that's sustainable and ticks up a little each year. I don't want to see a situation here like with WAM Capital whereby they are under so much pressure to provide a high yield to their dedicated base of retail self funded retiree shareholders that they end up paying out a silly yield and eating into their capital too much to do it

- I also note there have been no major director purchases on market in the past couple of years and that disappointingly there are two directors holding no shares at all