It can be quite hard for investors to consistently produce market beating returns every year. Even with the best 'buy and hold' strategy there will be times when the market (and poor quality stocks) outperform the better-quality businesses, whether large or small.
One of the more likely ways to beat the market every single year is to be willing to hold more cash at times. This style isn't suitable for most investors, instead they should stick to the buy and hold method which should outperform the market over the long term assuming you choose the right stocks.
However, there are certain fund managers out there who are active and produce market-beating returns over the short term and long term. One of those great performing managers in my opinion is Wilson Asset Management who run several listed investment companies (LICs).
WAM Capital Limited (ASX: WAM) is one of those LICs and here are three reasons why I'm happy and willing for it to play a part in my portfolio:
Not afraid of cash
The team running WAM Capital aren't afraid to hold a lot of cash when there aren't many opportunities, or when it looks like it's safer to have more cash.
When you have high levels of cash, it protects strongly against market dips and provides ammunition to buy beaten up stocks. It's hard to be a contrarian investor and buy at low prices if you don't have cash to utilise.
In the last three updates of 2016 (December, November and October) it reported cash levels of 33.4%, 35.4% and 39.1%. You may think over the long term having high cash would produce reliable, but lower returns. That brings me to my next point.
Outperformance
WAM Capital has consistently outperformed its benchmark, the S&P/ASX All Ordinaries Accumulation Index, over the short term and long term.
WAM Capital's portfolio has returned 14.5% over the last 12 months whilst its benchmark returned 11.6%, which is still a good return. It's similar when looking at longer timeframes, over 5 and 10 years WAM Capital's portfolio has returned 95% and 121% respectively, whereas the benchmark has returned 58% and 45%.
It's clear that the WAM Capital approach is working, making very satisfying returns whilst also having cash too.
Dividends
WAM Capital has produced great returns in its portfolio, it then pays out a lot of that profit as dividends to shareholders, giving them solid returns and realised cash into the bank account.
It's been raising its dividend every year since the GFC and I imagine it will keep doing so as long as it has the profit reserves. In the half year to December 2016 it has announced it's growing the dividend by 3.45%, which is better than inflation, particularly when you consider how large the dividend yield is.
Risks
Other than the ebb and flow of the overall share market, I think the main risk to WAM Capital is a change to personnel. The current team have shown they have a great strategy and a change in the team could alter how decisions are made, potentially for the worse. For now, the leadership team all seem committed to many more years of investing at WAM.
Time to buy?
You will be hard pressed to buy WAM Capital at a discount to its Net Tangible Assets (NTA) and it generally moves with the market (though hopefully grows quicker than the market). Therefore, I don't think there will be one standout time to buy WAM Capital, but I think it's definitely worth having it play a part in your portfolio.
