In the newly created role, Wayne will be responsible for driving the growth of Wheelhouse’s Global and Australian Equity capabilities. He will focus on key accounts, research relationships, asset consultants, independent financial advisors and private wealth as Wheelhouse continues to build its base across the Australian Wealth Management market.

Mr McGauley brings 25 years’ experience in distribution, most recently at Investors Mutual Limited (IML) where he served as Head of Retail for 13 years and was responsible for setting and executing the IML Retail Strategy. Throughout his 17 years at IML he gained vast experience across all segments of the Wealth Management market.

Alastair Macleod, Wheelhouse Managing Director and Portfolio Manager, said, ”Wayne’s appointment is a significant milestone in Wheelhouse’s journey as a truly independent asset manager. Since launching our first global income fund five years ago, we’ve affirmed our lower risk and income generative approach and are excited to be building a dedicated distribution capability with Wayne’s direction and support. He brings tremendous wealth experience, knowledge and investor understanding, and we’re thrilled to be working with him as we continue to grow and expand.

Commenting on his appointment, Mr McGauley said, “I’m delighted to have been given the opportunity to build out the distribution capabilities of Wheelhouse. What attracts me to Wheelhouse is the expertise within the investment team and the refreshing different approach to managing specialist income strategies across both Global and Australian Equities.

“Having spent 25 years in distribution I understand clearly the needs of retail investors and I am confident in Wheelhouse’s capabilities to deliver consistent and growing income over time, through a systematic process that consistently prioritises risk management. ‘No surprises’ is key for me when it comes to investment returns and I share Wheelhouse’s intense focus on delivering reliable investor outcomes.”

Mr McGauley’s Head of Distribution role is effective 1 October 2022 and based in Brisbane.

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Alastair MacLeod

The flagship fund of Australian-based specialist income manager Wheelhouse Partners, the Wheelhouse Global Equity Fund, is now available to Australian retail investors through the BT Wrap and BT Panorama platforms.

The Fund is unique in that it combines a targeted 7-8% income return with ‘always-on’ tail or crash protection, designed to partially protect the portfolio during any market sell off.

Alastair MacLeod, Managing Director of Wheelhouse Partners, commented, “With equity markets approaching all-time highs and interest rates at all-time lows, the demand for strategies with an absolute return focus is increasing.

“Our strategy offers investors, who are being pushed further along the risk curve in their search of yield, a highly novel income solution without them having to expose their capital to full market risk.  Retirees in particular can be severely affected if their capital base is impaired, resulting in a weaker income generation. This is why the Fund prioritises capital preservation and income generation.”

The Wheelhouse Global Equity Fund is among the lowest risk long-only global equity strategies available in Australia, due to its highly defensive investment approach that invests in global equities but also applies a specialist derivative overly to target income plus capital preservation.

The Fund’s absolute return characteristics were evidenced during the coronavirus affected March 2020 quarter, where the Fund delivered a positive 2.2% return.  During this period the Fund’s protective tail hedge that sits embedded within the portfolio, materially appreciated in value, serving to offset and mitigate equity losses. Coupled with the Fund’s defensive currency benefits of owning unhedged global equities, these twin defensive exposures combined to fully mitigate capital losses for Australian investors.

“We are excited to be working with BT and broadening our distribution footprint in Australia,” MacLeod said

“There is a genuine scarcity of specialist retirement income strategies designed for Australians, and the distribution arrangement with BT means many more advisors and retirees around the country will be now able to easily access the fund.”

The Wheelhouse Global Equity Fund was rated ‘Recommended’ by Zenith in 2020.

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Alastair MacLeod

Research house Zenith has awarded a ‘Recommended’ rating to the Wheelhouse Global Equity Income Fund managed by Australian-based specialist income manager Wheelhouse Partners.

The fund’s global equity strategy aims to deliver a 7-8% annual income return, plus some capital growth, while assuming 40-50% less risk than the equity benchmark.

”Zenith believes Wheelhouse has thoughtfully designed the derivative overlay to generate a growing and consistent income stream. Furthermore, Wheelhouse has efficiently managed the costs of its protection and has demonstrated an ability to deliver upon its capital preservation objectives,” the Zenith report says.

“Wheelhouse’s investment approach is differentiated and appealing for investors who are income focused. In addition, we draw confidence from the investment outcomes produced by the Fund in periods of market distress, which were consistent with expectations.

“Overall, Zenith believes the Wheelhouse team has a wealth of experience relating to the options market and risk management, which ensures that the Fund’s risk management processes are strong.”

Alastair MacLeod, Managing Director of Wheelhouse Partners commented, “We are very pleased that Zenith’s first rating of the global fund acknowledges the quality of the investment strategy, as well as the scarcity of genuine income generative investments in the current market environment.

“The fund’s focus on capital preservation has also been recognised, an element we believe is paramount with markets touching new highs amidst widespread economic uncertainty. These defensive characteristics were amply demonstrated when the coronavirus pandemic spread globally, with the Fund posting a positive year-to date performance through to March 31, 2020,” MacLeod said.

Over the past three years to 31 July 2020, the Wheelhouse Global Equity Income Fund has delivered a total income return of 7.4%, plus unit price growth of 2.0%, for a total annualised return of 9.4% per annum. From a risk perspective, the fund beta has been 0.59 during this period, reflecting the meaningfully lower risk investment approach. A beta of 1.0 means equivalent risk to the benchmark.

The fund’s investment approach is based upon integrating a systematic, rules based derivative overlay with a portfolio of quality focused, global listed securities. In addition, actively managed downside protection strategies, known as ‘tail hedging’, are designed to protect capital in a drawdown and limit losses.

Wheelhouse Partners was launched in April 2017 and has recently completed a successful transition to an independent fund manager with specialisation in income generation and capital protection.

The Zenith rating follows on from the ‘Investment grade’ rating issued by Lonsec in 2019.

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The revised structure includes a new co-investor in Wheelhouse, Alan Howard.  Mr Howard is a co-founder of Brevan Howard Asset Management LLP, the UK hedge fund where Wheelhouse trader Andrew MacLeod and chief information officer Sam Jacob worked for many years across several markets.  Mr Howard replaces Bennelong in the capital structure of the business.

Managing Director of Wheelhouse, Alastair MacLeod, said Mr Howard’s investment represents a tremendous vote of confidence for the business which began operating under Bennelong’s structure over three years ago.

“While volatile market conditions have played to our strengths, we remain steadfastly committed to the core objectives on which Wheelhouse is founded; to generate a reliable, consistent income stream whilst preserving investor capital from market downturns,” MacLeod said.

“For the first time in decades, investors are facing falling dividends, fewer traditional income yielding options and inflated asset prices across the board, which is transferring more risk to capital bases.

“Our global strategy seeks to address these concerns, targeting a high-income yield whilst safeguarding our investors’ capital.

“The time is right for a differentiated investment approach and we are excited to be in a position to invest in our business and create solutions for investors to help navigate this challenging environment.”

The MacLeod brothers are based at Wheelhouse’s headquarters in Brisbane, while Sam is based in Sydney.

The team will be supported by recently appointed Chief Operating Officer Tony Hammond, well known in Australia’s funds management industry for his stewardship of fast-growing boutique investment managers.

Hamel Strategic Partners will head up distribution efforts for Wheelhouse, led by Andrew Aitken, the former Head of Distribution at Bennelong, and Cameron Dickman, formerly Head of Distribution at AMG and Australian Unity.

The Trust Company (RE Services) Limited (Perpetual) is now the Responsible Entity for the Wheelhouse Global Equity Income Fund.

The team has completed extensive testing of an Australian equities focused fund, applying the same rules-based and disciplined derivatives strategy to that of its flagship global fund, however over an index of Australian listed securities.  The local fund is expected to be rolled out to Australian retail and wholesale investors later this year.

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Under its independent ownership structure, Wheelhouse will continue to focus on delivering purpose-built investment solutions that target income and protection for Australian retail and wholesale investors, including its flagship Global Equity Income Fund.

The fund’s net positive returns year-to-date are attributed to its rules-based systematic approach to preserving capital, particularly in market crises, while continuing to generate consistent income.

Alastair MacLeod, Managing Director of Wheelhouse, said, “We are excited to take full ownership of our business and extremely grateful to Bennelong for its support in establishing and positioning Wheelhouse for future success.

“We remain fully committed to delivering defensive income for Australian investors challenged by today’s ‘lower for longer’ equity growth environment and historically low interest rates. We look forward to leveraging our track record and momentum to pursue new opportunities.”

Bennelong CEO, Craig Bingham, said “We are proud to have partnered with Wheelhouse, and look forward to seeing them continue to flourish.

“Over the past three years, Wheelhouse has focused on its objectives of generating income, protecting capital and lowering volatility – timely offers for today’s market. We wish them well as they enter their next phase of growth and development.”

“Across the industry, this is a time of change and undeniable challenges, but we’re also seeing the arrival of new opportunities,” said Craig. “At Bennelong, we continue to refine and strengthen our global capabilities, managing the business to deliver the best possible outcomes for our clients.”

Wheelhouse has agreed terms with new distribution partners and has appointed a new responsible entity for its offerings, which will be announced later this month. The team also plans to launch an Australian equities focused fund, which will apply the same rules-based and disciplined derivatives strategy used for the global fund.

The buyout and transition arrangements will be finalised by 31 July 2020.

-oOo-

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Alastair MacLeod

Retirees should ensure they have a well-designed market crash protection strategy in their portfolios to help reduce the impact of inevitable downturns, particularly in the current low interest rate environment, says Alastair MacLeod, managing director at Wheelhouse Partners.

Mr MacLeod believes the portfolios of many retirees are not adequately constructed to withstand the likelihood of an imminent turn in market fortunes, but said it’s not too late to position themselves appropriately.

“Crash protection is like having little sleeping securities – they are always there, ready to wake during times of crisis when investors need them.

“They mean that investors can remain fully invested in order to make the most of equity returns, but at the same time ensure a valuable layer of capital protection,” he said.

Mr MacLeod said the move into retirement introduces new risks that don’t exist when people are working, and it’s important that investment objectives can pivot.

“Most investment strategies are designed for people in the accumulation phase, but those entering retirement need to reassess their investment approach to make sure it still suits their needs,” he said.

Many retirees increase their portfolio allocation to cash as a way of minimising the impact of any downturn, an understandably cautious approach. However, while cash is the lowest risk asset available to investors, it’s also the lowest returning.

“In the current environment, with returns from cash so low – and interest rates predicted to fall further – retiree investors need to consider other options.

“For example, a crash protection strategy using derivatives or ‘put’ options can limit losses to 50 or 60 percent of the market’s fall in a correction, but only cost the investor between one and two per cent over the course of a year,” he said.

Like insurance, crash protection is bought for a certain period (such as 12 months) and is attached to a certain notional value. The premium is also significantly cheaper if the investor wears the first few percentages of declines, in the same way that house insurance is less expensive if a larger excess is taken on.

One key advantage of crash protection is that it allows the rest of the portfolio to remain fully invested in the pursuit of equity returns, Mr MacLeod said.

“This can have a meaningful impact on long-term investment outcomes.”

He warns that crash protection isn’t a quick fix solution for every investor.

“Any worthwhile crash protection strategy needs to be tailored to the underlying portfolio exposures, and match the risks present. If the strategy hasn’t been designed properly, it will not only be more expensive, but it may not provide the desired protection,” he said.

In addition, crash protection needs to be actively managed in order to maximise its effectiveness. But in a low interest rate environment, the defensive qualities of crash protection permit a retiree’s portfolio to be more fully invested, harvesting steady income streams and accessing equity rates of return, thus reducing the risk of capital erosion and critical failure.

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Sarah Shaw

Ongoing political constraints, shifting economic trends and long-term social changes are creating significant investment opportunities globally, according to Bennelong Funds Management’s boutique partners 4D Infrastructure, Quay Global Investors and Wheelhouse Partners.

Sarah Shaw, CIO at 4D Infrastructure, says economic growth combined with major public policy initiatives are contributing to a rapidly expanding middle class.

“It’s estimated that 160 million people will join the middle class annually for the next five years, with the majority in Asia.

“This will drive a change in consumption patterns to more services-oriented expenditure as well as demand for new and improved infrastructure, starting with basic utilities and moving to roads and airports as wealth improves.

“The opportunity for infrastructure investment in this environment will be significant as new assets are developed and existing assets are sold or ‘recycled’ by governments, and private sector financing will inevitably play an increasingly important role in funding these changes,” says Ms Shaw.

“An infrastructure portfolio is not just a ‘bond proxy’, and can be positioned for growth in a strong macro environment by holding user pay assets such as roads, ports, airports and rail, which perform well due to their correlation with GDP growth.

“As a result, we are currently overweight user pays as traffic volumes typically grow as a multiple of GDP growth. In the longer term these assets will also benefit from the emergence of the middle class.

“And like all infrastructure assets, they have high barriers to entry, visible earnings and high operating leverage – all of which make them attractive investments.”

Justin Blaess, principal and portfolio manager with Quay Global Investors, also says social trends are driving opportunities in specific property sectors, many of which are not available in the Australian market.

“One such theme in US markets is multi-family dwellings.

“Home ownership rates remain near 50-year lows, and renter-occupied dwellings as a percentage of total housing stock continues to rise. What’s more, approximately 85% of those renters will seek an apartment or multi-family dwelling to reside in.”

He says companies that supply these ‘multi-family’ apartments, particularly those with a focus on the supply-constrained markets along the west coast of the US, are well-positioned to perform.

“Since the GFC, prices have recovered in many of the multi-family markets which has triggered a resultant supply response in the sector. However, this is not out of line with the historical relationship between jobs created and in the context of the strong demand drivers.

“The result has been strong rental growth, especially on the west coast where jobs and wages growth has been strongest. Additionally, construction cost inflation is making developments harder to stack, which is tempering further supply and is likely to elongate the cycle, increasing the attractiveness for investors.”

He added that contrary to popular opinion, a rising interest environment around the world is not necessarily bad for global real estate investments.

“In the short-term, noise around interest rates rising in the US has been creating share price headwinds and creating opportunity.”

“However, while 10-year bond yields have been rising, so have inflation expectations. Inflation is good for real estate – rents are often linked to inflation, and replacement cost, or supply, is impacted by higher input costs, requiring higher rents to justify development.

“Picking real estate winners in the long term isn’t just about discount to net asset value, especially later in the cycle where valuations for certain asset classes may be elevated and forecast total returns low. We prefer to focus on long-term total returns and identifying investment opportunities at or below replacement cost that have focused strategies and sustainable capital structures,” says Mr Blaess.

Meanwhile, Wheelhouse Partners’ CEO Alastair MacLeod highlights the implications that the changing economic environment will have on retirees’ portfolios, and says there are unique investment challenges faced by this group.

“Retirees require growth for their savings to fund ever-lengthening life expectancies, so equities are an important part of their asset allocation decision.

“However, retirees need those equity returns delivered in a more ‘retiree-friendly’ shape that incorporates a higher component of income along with greater levels of capital preservation.”

He says that adding a “defensive growth” allocation to a global equities portfolio to help achieve this is increasingly important for retirees, which is managed by running a systematic derivatives overlay on a concentrated equity portfolio.

“There are two elements to this approach. Most equity returns are two thirds capital and one third income, with dividends delivering the income. The derivative overlay reverses this mix, delivering an equity return that is two thirds income-driven and not overly reliant on high dividend-paying sectors.

“No one wants to buy into a bond proxy at this point of the market, so where do you get the growth? This is the beauty of a derivatives overlay – it means a portfolio can be growth-oriented but still deliver a strong income-based return.”

Pointing to some of the tech allocation in the portfolio, he says companies like Adobe Systems, Salesforce.com, Veeva Systems and Amazon generate revenue growth of more than 20%, but none of them pay dividends.

“We nevertheless aim to deliver a 5-6% income stream, an importantly the underlying portfolio has genuine growth prospects which adds capital growth to the total return an investor receives.

“It is an improved investment outcome for retirees and delivers equity growth in an income-driven and retiree-friendly shape,” Mr MacLeod says.

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Alastair MacLeod

The market falls of the past few days will have left many investors exposed to significant losses if they don’t have a program in place to manage tail risk, says Alastair MacLeod of Wheelhouse Partners.

“A market downturn is inevitable. Whether we are seeing the start of that process now, or just a blip, is yet to be determined – but it will eventually happen.

“Indeed, our research suggests it will happen sooner rather than later. So-called ‘100-year storms’ in fact happen every eight or nine years, so it could be said we are now living on borrowed time since the global financial crisis hit just over 10 years ago.

“It’s therefore important for investors – particularly those approaching or in retirement, when sequencing risk becomes so critical – to have in place some kind of tail risk management program to protect themselves from the full impact of market downturns.

“Our approach recognises that, in retirement, the goalposts have moved and the focus should not always be to seek the highest return each and every year.

“Instead, the critical objective should be to reduce the risk of unfavourable outcomes, where a retiree’s lifestyle may be affected in some way because they were simply unlucky in the path of returns that were delivered.”

Mr MacLeod says the Wheelhouse active tail risk program has now engaged, and over the past two days has more than covered the cost of protection since the fund’s inception nine months ago.

“This means our investors have been protected from the worst of the market falls over the past few days.

“At the market’s low point yesterday, the tail risk program had lowered effective risk in the portfolio to around 57 percent of the market and significantly smoothed the return profile for investors, while at the same time remaining near fully invested and having every dollar pursue equity returns.

“Should the market fall further, this market risk level is expected to decrease, preserving capital more aggressively.

“If we were to enter a period of lower equity returns and increased market volatility, the fund’s high income and capital preservation characteristics should be well-placed to add further value,” Mr MacLeod said.

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Alastair MacLeod

A commonly held assumption is that catastrophic financial crises – “100-year storms” – are an infrequent occurrence, but far from being a once in a century event, data shows they are in fact happening every eight to nine years.

In terms of investment outcomes, this has a potentially devastating impact on retirees, warns Wheelhouse Partners in a recent white paper.

The paper, The retiree and the 100-year storm, explains that significant market falls seriously affect retirees because typically their asset balances are much larger; they have less time to recover from sharp losses; and they rely on their savings for income, often drawing down on their savings during periods of market volatility.

Alastair MacLeod, author of the paper and managing director of Wheelhouse Partners, says that while traditional approaches to managing this issue – such as using cash – are increasingly ineffective, there are opportunities for investors to continue their exposure to the growth of equity returns by reshaping those returns and thus reducing risk.

“Advisers and their clients must recognise the very different objectives of retirees, and adjust their portfolios with appropriate tail risk management strategies to accommodate longevity risk,” he says.

The paper shows that managing tail risk is important for anyone who relies on their wealth to fund their lifestyle or other ongoing liabilities or obligations – that is, anyone not in accumulation phase.

It outlines three key reasons why managing tail risk is important for these investors: sequencing risk, behavioural loss aversion, and diversification and liquidity.

Looking at diversification and liquidity in particular, the paper outlines how other risks tend to correlate during crises and the source of liquidity that equities can provide during these periods.

It says: “… historically in times of crisis, returns across asset classes have collapsed together as correlations spike – and thus the benefit of diversification as a risk management strategy evaporates.

“Many asset classes such as credit and real estate have historically demonstrated a sharp decline in liquidity during these crisis periods, meaning the most available or liquid source of capital may be equities – which is, unfortunately, often the asset class that has fallen the most.”

The paper also points out that “in many respects, the traditional means of managing tail risks are broken. The conventional solution to lowering risk in retirement has been to increase allocations to either cash or fixed income, which both serve to reduce volatility and preserve capital better in drawdowns.”

Instead, in today’s environment, derivatives should be considered as a way to harvest higher returns from more volatile asset classes while delivering a retiree-friendly return profile, says Mr MacLeod.

“We realise that for some people, derivatives are seen as complex or risky.  However, we emphasise that this is usually only the case when leverage is used.”

The paper describes three main ways that derivative overlays can benefit investors, if used appropriately:

• tail risk overlays mean assets can remain fully invested in the pursuit of equity returns;
• derivative overlays can add convexity to a hedge, meaning capital is increasingly protected the more markets fall; and
• multi-asset derivative overlays can exploit pricing inefficiencies of indirect hedging.

Mr MacLeod says that retirees get just one shot at their future path of returns and it is vital to get it right at the outset.

“As people approach and enter retirement, their financial course is unknown but already largely set. Their outcomes are dependent on the future returns with which they will be presented.

“We like to think that tail risk hedging strategies will help them sleep a little better at night,” he said.

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Alastair MacLeod

Wheelhouse Investment Partners has launched the Wheelhouse Global Equity Income Fund to the retail market. The fund has been available to sophisticated and institutional investors since May 2017 and aims to deliver improved investment outcomes to Australian retirees.

The fund addresses the dual concerns of market volatility and longevity risk, says Wheelhouse portfolio manager Alastair MacLeod.

“Large investment losses, particularly in the five to 10 years immediately preceding and after retirement, can be devastating for retirees,” Alastair says.

“This well-documented issue is known as sequencing risk. It’s particularly relevant for retirees and pre-retirees due to the large sums of money involved, the relative lack of time that retirees have to recover from losses, and the necessity for retirees to draw down income during these periods.”

The fund’s investment philosophy is based upon three pillars: investing in global equities as a growth asset to address longevity risk; shaping returns to be retiree-friendly with lower volatility, better capital preservation and consistent income; and delivering a lower-cost solution to help improve outcomes.

The fund’s underlying portfolio is based on the Morningstar Developed Markets Ex Australia Wide Moat Index, a semi-active index that was constructed specifically for Wheelhouse Investment Partners. The stocks comprising the index are based on the fundamental view of Morningstar’s team of more than 100 stock research analysts. The index composition changes quarterly, based primarily on selecting the most attractively-valued securities in the coverage universe.

All stocks that appear in the index are required to be rated ‘Wide Moat’ which, as defined by Morningstar, are companies with a structural business characteristic that supports a firm to generate excess economic returns for an extended period of time.

The fund’s strategy integrates a tailor-made derivative overlay, purpose-built for Australian retirees.

The move follows the partnership formed between boutique fund incubator Bennelong Funds Management and Wheelhouse Investment Partners in May 2017, which brought the number of partnerships Bennelong has with specialist asset managers to eight.

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