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WAM CIO: How we find market-beating stocks

Wilson Asset Management (WAM) was established by Geoff Wilson in 1997 and today comprises three listed investment companies — WAM Capital (ASX: WAM), WAM Research (ASX: WAX), and WAM Active (ASX: WAA) — and one unlisted fund. The recent merger of Premium Investors with WAM Capital has boosted total funds under management (FUM) to around $700 million. Since inception in August 1999, the flagship WAM Capital has achieved a return before all expenses, fees, and taxes of 18.5% per annum.

Motley Fool contributor Tim McArthur recently sat down with WAM Chief Investment Officer and Portfolio Manager, Mr Chris Stott. In the first of this three-part interview, Chris discusses his investment philosophy.

Q: Chris, thanks for taking the time to chat with Motley Fool Australia. To start with, could you give our Foolish readers some insight into your background and what drew you to investing?

A: I was actually drawn into investing at the age of 14 when I purchased my first shares — of course the trade sizes were much smaller then. After university I worked at Challenger (ASX: CGF) before joining WAM as in 2006 as an Equity Analyst.

Q: What were some of the early lessons you learned from Geoff Wilson and Matthew Kidman that impact how you invest today? 

A: There are two lessons which really are very important. The first is to not get emotional. There is a lot of noise in the stock market which can be distracting and cloud your judgment. Secondly, don’t fall in love with stocks. At a particular price, a stock is a buy, hold, or sell — forgetting that and falling in love with a stock can be hazardous to your wealth.

Q: At WAM your primary focus is on identifying growing companies that can be purchased cheaply. How would you describe WAM’s investment philosophy and strategy? 

A: We believe that the best opportunities to buy growing companies at the prices we want to pay lie in the small-to-mid capitalisation space. I’d also add that over the long-term we see the best growth emanating from small-to-mid cap companies, specifically the Industrials.

Q: So you certainly don’t hug the index then? 

A: No, we are benchmark unaware.

Q: How does that strategy manifest itself in your day-to-day work, Chris? 

A: We spend a lot of our time actually going out and meeting with companies. WAM conducts over 1,000 company meetings a year. We need to undertake this intensive search to find the undiscovered stories. We have five people in the investment team at WAM. This search and discovery process also requires each team member to bring a new idea to our weekly meeting.

Q: A thousand company meetings would be incredibly interesting but exhausting! So by the sounds of it, I’d assume you would describe WAM as bottom-up stock pickers, not top-down? 

A: Yes absolutely. However we do have top-down views, which act as a filter on our ideas.

Q: What is your time horizon when investing in a growth stock? 

A: It really does depend. Within the Research Driven portfolio, which is longer-term in focus, we have owned stocks such as McMillan Shakespeare (ASX: MMS) and Reckon (ASX: RKN) for over a decade.

Q: You also have the right to short sell. Do you do much short selling and under what circumstances? 

A: Yes, we have a flexible mandate which allows us to but it’s not a major activity. One thing we don’t do is short to fund our longs. Also we don’t hedge in the sense that we would short the index. It’s more that from time to time we may identify a stock that we think is fundamentally flawed. We’re about 5% short at the moment.

Q: Thanks for those insights, Chris.

Tomorrow, we’ll continue my conversation with WAM Chief Investment Officer and Portfolio Manager Chris Stott, so stay tuned!

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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