Investor Update for June 2022

Does a 5% dividend yield make the market a buy?

With a roller-coaster start to the year (okay we’ve just seen the down bit), investors may well see an opportunity in local, home grown, Australian dividends.

The cash dividend yield on the S&P/ASX200 Index is currently touching 5.0%, which if history is any guide, ranks the current market in the top 10% in terms of dividend yield. With yields rarely more attractive (and this is the cash yield, so add another 1.4% for franking), this has historically been a reasonable indicator that there is value appearing in the local market.

*The chart uses 12-month expected forward dividends to calculate yield.

Of course, dividend yield shouldn’t be the only yardstick used to determine if there is value in the current market pricing. And even on dividend yield, a 5% dividend yield does not mean there is a floor under the current market. It should be remembered that a move to 5.5% yield (which happened often enough in the above chart) implies a further market fall of 10%.

It should also be put in context that as the GFC period indicates, a 5% yield offered little defence during a major global financial crisis. Therein lies the risks in equity investing, although we would argue that the capitalisation of the financial sector is vastly superior to where it was in 2007, and the risk of a systemic global financial crisis appears far lower. Bears may beg to differ but this slowdown looks to us far more cyclical in nature, as opposed to structural, which means we believe the banks will grapple more with growing earnings than with their own survival.

In any case, and assuming we’re not entering a doomsday scenario, dividends over time have proven to be far more resilient than earnings during a downturn. Most companies implement a ‘progressive dividend policy’, which means they aim to grow dividend payments from year to year even if earnings sometimes fall. Companies are generally loathe to cut their dividend unless absolutely necessary due to the negative signal this sends the market on longer term earnings and profit potential.

Despite this, one risk to current dividend payouts is the outsized contribution from the materials sector. The chart below allocates the dollar components of the 5.0% yield into the underlying sector that is generating it. Mining and materials are generating a very large component at 37% of the total market yield, despite accounting for only 22% of market capitalisation.

*The chart uses 12-month expected forward dividends to calculate yield.

This presents risks.

In 2016 both RIO and BHP announced a change to their dividend policies, where they moved away from a ‘progressive’ policy and declared their dividends would be more closely tied to underlying earnings. This makes sense given the underlying cyclicality of commodity pricing, but it does mean that dividends are more likely to decrease with earnings, versus most other companies that have a ‘progressive’ policy and try to grow dividends every year.

This hasn’t been a problem in recent years as iron ore prices have consistently grown and as a result dividend payouts for the miners have grown alongside. However, the recent comments this week from both RIO and BHP should introduce caution in terms of extrapolating future dividends. Indeed, market estimates appear to be factoring in a near 25% cut to BHP’s dividend in the year after next (FY2024).

Assuming the entire sector faces similar challenges, a 25% cut to the yield from the materials sector would decrease the market yield to around 4.6% next year (assuming some growth in the other sectors) and take the yield much closer to historic average of 4.3% for the broader market.

As a result, while the headline yield may be screening OPPORTUNITY, we believe a more measured approach may be warranted. To us it looks like the market screens a lot closer to fairly valued on a dividend yield basis. Despite this, ‘fairly valued’ doesn’t mean the local market is not an attractive place to put money to work. Even should mining dividends be reduced, the broader income opportunity looks to be comfortably over 6% once franking is included.

In a lower growth environment, which seems likely, a safe and stable gross yield of over 6% may well prove to be an exceptionally valuable source of return relative to most anything else.

Wheelhouse Global Equity Income Fund


Income over 5 years (p.a.)


Income over 5 years (p.a.)

 1 month1 year3 years (p.a.)Since inception^
Total Return2.35%10.39%9.05%8.36%
Risk (Beta)**n/a0.760.450.60

Performance figures are net of fees and expenses.
* Benchmark is the MSCI World Index (ex-Australia).

** Risk is defined as Beta and sourced from Morningstar Direct. Beta is represented vs the Benchmark and vs the S&P/ASX 200 Index. A Beta of 1.00 represents equivalent market risk to the comparison Index. A minimum of 12 months data is required for the calculation.

^ Inception date is 26/05/2017. Since inception figures are calculated on a p.a. basis. Past performance is not an indicator of future performance.

Click here to read the full performance report of the Wheelhouse Global Equity Income Fund.

Wheelhouse Australian Enhanced Income Fund


 Income since inception (p.a.)


Total return since inception (p.a.)

 1 month3 months6 monthsSince inception^
Total Return(0.24%)(0.83%)5.87%12.96%
Excess return0.64%1.18%1.79%2.16%

Performance figures are net of fees and expenses.

* Income includes cash distributions and the value of franking credits and special dividends. Cash distributions are paid quarterly.

** Benchmark is the S&P/ASX 200 Franking Credit Adjusted Daily Total Return Index (Tax-Exempt).

^ Inception date is 9/03/2021. Since inception figures are calculated on a p.a. basis. Past performance is not an indicator of future performance.

Click here to read the full performance report of the Wheelhouse Australian Enhanced Income Fund.

Article: 2020 vs 2022 - Two very different bears

It goes without saying that protective strategies need to work in bear markets – but a review of three traditionally defensive strategies during the past two major drawdowns shows very mixed results. Depending upon the market conditions, some strategies worked and some failed.

In this article we review different defensive strategies and highlight the importance of diversification cross defensive strategies to deliver reliable and predictable capital preservation.

Please click here to read the article.

2020 vs 2022 Two very different bears

It goes without saying that protective strategies need to work in bear markets – but a review of three traditionally defensive strategies during the past two major drawdowns shows very mixed results. Depending upon the market conditions, some strategies worked and some failed.

In the charts below we use style indexes to illustrate the different returns during these two drawdown events with returns of the S&P500 Index. The strategies represented are:

  • Tail hedging – represented by the S&P500 5% Put Protection Index (PPUT). This Index pairs ownership of the S&P500 with a monthly protective put option with a strike 5% out-of-the-money.
  • BuyWrite overlay – represented by the S&P500 BuyWrite Index (BXM). This Index pairs ownership of the S&P500 with the sale of a monthly call option with a strike at-the-money.
  • Value style – represented by the S&P500 Value Index


2020 Drawdown

During the aggressive Coronavirus selldown where the market fell over 35% from its high in just a few weeks, protective tail hedging strategies were worth their weight in gold. The bought put options with strikes only 5% below the market were very quickly demonstrating their protective properties during a crisis, nearly fully insulating the portfolio during the worst of the downturn.

By comparison, Overlay and Value strategies underperformed, offering little to no protection at all.

Overlays are not well suited to providing protection during aggressive sell offs, as the income generation offers only a limited defensive buffer in a short, sharp sell off. Furthermore, Value also underperformed as the rotation of demand into more stay-at-home type activities, plus aggressive monetary and fiscal easing, both served to benefit Growth/technology exposures over Value. 


2022 Drawdown (to date)

How things changed! So far in the current drawdown, Overlay and Value strategies have roughly halved the market losses, bearing in mind that losses are far shallower than in 2020. During this drawdown the combination of a far more gradual sell-off which allowed more time for income generation helped to meaningfully buffer losses. Combined with a tightening Fed policy to combat inflation, Value strategies also delivered a good result in terms of capital preservation.

By comparison in this more recent drawdown, tail hedging strategies effectively delivered zero value (even with only a 5% out-of-the-money strike), as the market falls were just too shallow and took far longer to materialise (combined with elevated volatility which made hedging more expensive).


Is there a lesson for what is the best approach? 

What seems clear is that there is no one single defensive investment strategy that works in every market environment. We might add to this list the exposure to the Australian dollar, which is ‘usually’ defensive and falls during a market crash, but as we saw during February this year, is not always a reliable defensive partner (and can make things worse).

We could sit in cash of course and enjoy a guaranteed defensive exposure, however the low returns would also guarantee (for most of us) that we would fail to achieve our investment goals.

Thus in order to target equity returns but with much better drawdown characteristics, it makes sense to diversify across defensive strategies that are better suited to a range of market environments.


An example of defensive diversification 

In the Wheelhouse Global Fund we rely on tail hedging for more acute market falls, plus a systematic BuyWrite overlay for more ‘grind down’ scenarios that take longer to manifest. We acknowledge we don’t know what the next drawdown will look like, or how long it will take, so we rely on diversification of defensive approaches to deliver a highly reliable defensive profile that is designed to nearly halve losses across any type of drawdown.

When paired with a fully invested and generally balanced (Growth/Value) equity portfolio, the end result is expected to be highly reliable – with no surprises when you can least afford them.

The charts below plot the defensive characteristics across the same time periods as above.

The Global fund was slightly positive during the 2020 drawdown and is 7% down during the current bear market. On a USD basis which removes the impact of currency, the fund caught 53% of the drawdown in 2020 and 57% of the drawdown in 2022, both of which are consistent with our risk management targeting.

However the main source of protection across both drawdowns was very different. Similar to the Style Index returns above, most of the defensive benefits were delivered by the tail hedge in 2020 and then by the Overlay in 2022. Through active risk management of Overlay and Tail hedge, the drawdown outcome remained highly reliable regardless of the market environment.

As the portfolio is unhedged from a currency perspective, it also usually benefits during drawdowns as the AUD usually declines. As we discussed in our February newsletter (‘Australian Dollar: Friend or foe’), this defensive characteristic is less reliable than the risks we can otherwise control via Tail hedging and Overlay strategies. We are investigating ways of managing this exposure better internally, and importantly seeking to reduce the currency drag when markets recover.

One large bet we don’t make is Value vs Growth, as we believe this one can be a little unpredictable (and tends to mean revert over time anyway). Through incorporating defensive strategies like tail hedging that are designed for sudden acute drops, or overlays that are better suited for much slower market grind down environments, we remove the need to try and second guess which types of stocks or sectors are likely to prove defensive.


So where to from here? 

There are a number of benefits that result from minimising drawdowns that we won’t go through here. However, minimising drawdowns is only half the story, as we also need to maximise our participation as and when markets recover. Remaining fully invested and not trying to time market rebounds ensures that what happens from this point is treated as equally important to the performance in getting here.


This communication is for Wholesale investors only and has been prepared by Wheelhouse Investment Partners Pty Ltd (ABN 26 618 156 200), a Corporate Authorised Representative (CAR 001253586) of Perpetual Corporate Trust Limited (ABN 99 000 341 533) AFSL 392673. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs.

Past returns are not an indicator of future returns. You should consider, with a financial adviser, whether the information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.

The product disclosure statement (PDS) for the Wheelhouse Global Equity Income Fund, issued by The Trust Company (RE Services) Limited, should be considered before deciding whether to acquire or hold units in the fund. The PDS and TMD can be obtained by calling +61 7 3041 4224 or visiting No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital.