Adrian Mee

Hi, welcome. I’m Adrian Mee at WKM Wealth and I’m joined today with Ben Wattam, investment director at WKM Wealth. We wanted to go through a few common questions our clients have on our investment management process. Ben, markets can change quite suddenly, what are your typical go to tactics when you see periods of market volatility?

Ben Wattam

So I suppose the first point that we try and do is understand what’s driving the market risk and volatility. Because it can be different things at different times and often, risks created over a long period of time, other risks happen very, very suddenly and sharply. So over the career, you can tell some things that builds risk, things like rising inflation, rising interest rates are generally quite slow forming. Other risks are much more sudden. And it’s often trying to understand how those risks affect asset prices and what’s priced into asset prices. Because some things happen very quickly and are overpriced on the downside from a risk point of view. Sometimes things take too long to react. So it’s trying to understand what’s priced in and almost in the secondary risks that might come about as well.

Adrian Mee

In terms of our portfolios, as they sit right now, what would you say are the most exciting areas that we’re looking at investing into?

Ben Wattam

There’s quite a few areas at the minute. We started the year with rising pressures on interest rates and inflation and it’s created quite a lot of opportunity with how we invest. There’s lots of areas at the minute that I think are too cheap and look quite attractive. There’s a couple of areas I’ll pinpoint, one is commercial property. So we’ve been adding to UK commercial property in the last 12 months, because it’s been an area that’s been slow to react post pandemic, and we still think is too cheap. It’s got some really interesting growth and income characteristics at the minute. So we’re trying to add more commercial property to the portfolios.

Adrian Mee

Which is really interesting, because we’ve both been there before with commercial property and seeing the rise and fall of property funds over time, especially open ended versus closed ended funds. It seems there’s quite a few options out there.

Ben Wattam

Yeah, definitely, I think commercial property, the way people invest into commercial property is still changing, it definitely has changed in the last 10 years, it continues to change. We don’t invest in any open ended property funds, all the property exposure we have is through either PLC structures or through investment trust structures. So all either REITs or PLC structures. I should say another area that we’re quite excited about is some of the growth areas that we’ve been investing in post pandemic, lots of the growth equity areas, so things like technology and healthcare had a very, very good 2020 and an okay 2021 but towards the end of 2021, and the start of 2022 they’ve been sold off quite aggressively. And a lot of those ideas we have are looking very, very cheap, their pricing and a lot of downside, the pricing in near recessionary conditions. So we’re quite positive for clients that have got a slightly longer term time horizon, we think that you can make a lot of attractive returns in that area.

Adrian Mee

And you made a distinction a while back of technology companies versus tech enabled businesses, and how important it is to understand which two you feel are the right ones for right now. Which one’s the right ones for 20 years down the line and picking your investment time.

Ben Wattam

Yes, 100%, we generally don’t have a huge amount of exposure to the traditional technology companies that everyone knows and has heard of, so the likes of Google and Apple and Microsoft, we do have some, but that’s not really where we’re focused. We’re focused more on smaller technology companies, medium sized technology companies and technology is such a broad area now that defining what is a technology company, and what isn’t, it’s a bit blurred.

Adrian Mee

Amazon is still down there as a book company or a retailer.

Ben Wattam

Yes, it’s classed as a retailer and a lot of the other big technology firms aren’t classes technology. So we try and capture a broader space than just the formal definition of technology.

Adrian Mee

And is that space still kind of dominated by mainstream technology companies? Or is it more private equity at the moment?

Ben Wattam

So we have more exposure I would say to private equity technology companies, it’s probably about 50/50. But it’s changing, the private equity space is changing because a lot of companies are staying private for longer now. You don’t need to go to public markets to raise capital in the same way as you did 10-20-30 years ago. There’s a lot more funding avenues to stay private for longer. So we have to have some exposure to private assets. We have more exposure to private assets than we would have done 10-20 years ago.

Adrian Mee

So what’s an example of a technology based company inside our private equity investments?

Ben Wattam

So one example is a company called HG Capital. A London based firm, and they started, I think, in 1995. And they’re solely based on software. So European software. It’s a very large, firm but they’ve concentrated on more of the boring areas of software. It’s not at the cutting edge of technology, like some other firms might be. It’s quite boring, but it’s business critical software and it’s been growing really strongly in the last not just few years, but last 15 years. We continue to like it, we continue to hold it for the majority of our clients, and we think it’s going to do a good job.

Adrian Mee

Is it still the case that those funds that we do like for clients, we don’t feel the need to rush in and buy them instantly, we like to take a position and build that position over time.

Ben Wattam

Yeah, so when a new client comes on board, we won’t just invest all of their capital on day one, unless we think it’s an absolute standout opportunity, which is rare. Usually what we’ll do is build positions over time, especially if they come with existing assets. So they come with existing assets, we will slowly sell those down, and reinvest when we think it’s the right time to do so. If clients come with cash, that generally takes longer to get invested, because we take our time.

Adrian Mee

I guess from the financial planning process, it’s making those big movements. So going from a 100% cash position to be 100% invested, and then trying to think about cash flow planning. After you’ve done that, it always seems the wrong way around of doing this, how do you approach it from the investment management side when you do receive a cash transfer over?

Ben Wattam

So when we receive the cash transfer, the objectives of the client dominates what we do from a portfolio management perspective. If we know the client has got 5-10-15 years before, they’re going to need that capital, it allows us to take our time and to get invested when we want to get invested. Often that’s driven by the two investment committee meetings we have per month. We look at how much risk markets are pricing in and how much risk we should be taking in portfolios. And that can often drive how much cash will get put to work. When markets have been stressed, we generally see more opportunities and might put the cash to work quicker. When markets have performed really well, often it takes longer to get cash invested.

Adrian Mee

From a financial planning point of view, it’s always important for us to hold back cash that we want to pay out in form of pensions, for example, over the next six months, so on your investment management side, you’re aware of what the requirements are so you can match your assets and liabilities and in terms of when markets do become quite volatile. What are your tactics around that process?

Ben Wattam

I think that’s one thing we do slightly differently to most other wealth management businesses that we sit on the same bank of desks as a planner, and investment manager. And we have formal quarterly meetings to discuss cash flows. But often we just have conversations about cash flow planning for clients. We look at each client individually and work out cash flow requirements, at least for the next six months, and ensure that clients have got enough cash in portfolios. So when we have stressed periods, we don’t have to be selling to be a forced seller of assets.

Adrian Mee

From my point of view, we’ve worked together for the past 16 years, and I’ve been really impressed, since we set up WKM Wealth of the attention to detail in the individual fund liquidity that we know instantly how long how many days, it will take us to liquidate an entire portfolio into cash if we ever needed to. So from your point of view, how often does that change the liquidity of our investment funds?

Ben Wattam

So it’s really important to understand liquidity of assets and it doesn’t mean that everything we invest in is perfectly liquid, i.e. if we need to sell things today, we have to understand the likely price we would get and how long that might take. And some assets it might take 2, 4, 5, days to fully liquidate positions. But if we know that, we can plan for it. So we have a lot of assets that we can liquidate very quickly. Liquidity doesn’t change a huge amount. The only time it does really changes in times of severe stress. So think of the pandemic as a great example in March 2020. When buyers and sellers, there’s a big mismatch because there’s so much uncertainty. So usual market conditions, liquidity doesn’t change much it’s just in those points where you really need liquidity often the liquidity isn’t there.

Adrian Mee

And that was kind of a key learning for me on the financial planning side that even during times of significant market stress of say March/April in 2020, that markets fell significantly very, very quickly. And they recovered in some instances pretty quickly but in other instances very slowly, yet, you have different tactics around those two events, right?

Ben Wattam

Yeah, I suppose it’s understanding what the driver is of the change of market sentiment. So the pandemic was a really good example of that, the pandemic changed a lot of industries pretty much overnight and it changed a lot of the outlook of assets overnight as well. It’s very easy to become emotional about what you own and what you hold. And to keep thinking what you’re doing is the right way of doing things when the world has changed. The pandemic has changed the way that companies behave the way that consumers behave and that March 2020, April 2020, was a great example of ensuring that the portfolio is the right areas to be invested in for the recovery. Tt’s not looking at what could have saved capitalist, it’s trying to be positive, and look how you can grow capital out of that period, because it’s very, very difficult if you do time things like that correctly, it’s more due to luck than skill.

Adrian Mee

And you’ve been talking to us previously about anchoring of how your views on a certain position can anchor you and restricts you from moving forward. In investment management, you must have chosen tactics and chosen stocks that you do have that are your go to’s. How do you make sure you’re not anchored to them?

Ben Wattam

I suppose that’s where the team comes into it. In the twice monthly meetings, the second meeting, we have looks at holdings. And it’s important that as a team, we understand when we’ve made mistakes. Because we do make mistakes we have made mistakes, and we will make mistakes. It’s just ensuring that when you’ve made a mistake, you know what to do with it, and to move on and don’t feel beaten up or worried about what you’ve done. There’s usually lots of other opportunities out there and you have to be brave and to say that other opportunity is a better way of investing than what we currently own.

Adrian Mee

I guess that’s a key difference that I’ve seen that you don’t get too concerned about a spreadsheet showing red numbers, you seem to be very at peace of understanding what it did yesterday is my history. And now I can learn from that moving forward. What kind of detailed records do you keep or do you feel you need from the market to be able to make those decisions of holding something that has lost money?

Ben Wattam

Yes because with some commercial property companies at the minute, we’ve got a good idea as to what we think is a fair value for some of those companies. We usually do a pessimistic outlook, kind of affair outlook and an optimistic outlook for each of those holdings, and then stress test them. So we have an idea as to what we think it’s worth. And then we’ll look at what the market values are. Markets are usually driven by fear and greed. So markets can get too pessimistic about things. And in that example, where we know what we think it’s worth, if it’s gone below that, we’re happy to add it to client portfolios. Sometimes greed takes over and things get too expensive and we will either sell down or hold a position if we think it’s gone too far but it’s understanding what we think it’s worth and making sure that’s continually up to date as well.

Adrian Mee

Over your career, what would you say have been your key learnings?

Ben Wattam

I suppose one big thing is not to panic because as I’ve just said, markets are driven by fear and greed and it’s very easy to become emotionally attached to things when they’re doing really well and emotionally attached to things when they’re going badly. Especially when they get things going badly wrong. You tend to overanalyse thing and it kind of forces you into change, because you see a lot of red on your valuations, on spreadsheets, and you get nervous about it and worried and you want to buy things that are doing better. It’s usually exactly the wrong time to do it. So lots of the time, it’s just making sure that we understand what we own. We understand the diversification of what we own, and what we think those assets are worth and keeping calm and not panicking when there’s too much stress.