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Investor update for May 2021

Dear fellow investor

Every month going forward we intend to highlight an investment issue that crossed our desks here at Wheehouse, that we felt topical and worthy of a broader discussion. This month we highlight inflation and the impact on defensive portfolios, should inflation genuinely bounce back after 20 years in the investment wilderness.

The chart of the month comes from Goldman Sachs.

Recently, we have written about the reduced defensiveness of bonds within a balanced portfolio, and the chart above introduces inflation as a possible linkage.

Clearly the two different time periods represent two very different inflation regimes. The dark blue points refer to the period from 1970 to 1998, when inflation was markedly higher, whereas the light blue dots refer to the period since 1998 when inflation has typically been less than 3% on average and fairly non-existent as an investment consideration.

In the bottom half of the chart correlations are negative, which means the value of bonds rise when equities fall. This negative correlation has been terrific for reducing risk in balanced portfolios over the past 20 years. 

However, plots in the top half of the chart represent a positive correlation between bonds and equities, meaning that when equities fall, bonds fall as well. This represents a serious concern for defensively minded investors. 

Why does this matter?

Many investors are now factoring in a world with higher inflation expectations and are beginning to position their portfolios accordingly. Whilst balanced portfolios have been the mainstay of investment management for decades, particularly for institutional investors, in future they may not always provide the defensive characteristics their investors have come to rely upon. 

We believe that on balance, and relative to other asset classes, equities are not a bad place to be in an inflationary world as businesses with pricing power are able to push through higher prices and maintain margins over time. For example, we recently spoke about the benefits of large pharmaceutical exposures in an inflationary world in addition to more typical inflation exposures such as commodities and real assets.

Whilst such equity allocations will help add to the defensiveness of a portfolio, they will not be able to replicate the strongly defensive characteristics, and more specifically, the negative correlation to equities that investors have grown accustomed to. How investors successfully position for the next drawdown or market crisis – should inflation genuinely bounce back – may prove very different to previous crises of the last 20 years.

Wheelhouse Global Equity Income Fund

8.1%

Income over 3 years (p.a.)

8.1%

Income over 3 years (p.a.)

  1 month 1 year 3 years (p.a.) Since inception^
Income 0.00% 7.68% 8.09% 7.08%
Growth 1.44% (3.68%) 0.05% 0.78%
Total Return 1.44% 4.00% 8.14% 7.86%
Benchmark* 1.19% 20.41% 13.63% 12.62%
Risk (Beta)** n/a 0.49 / 0.13 0.48 / 0.18 0.59 / 0.19

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

Performance numbers below are based on exit prices and include the 30bps exit spread.

 1 monthSince inception^
Income*0.30%0.34%
Growth2.34%6.35%
Total Return2.64%6.69%
Benchmark**2.50%6.46%
Excess return0.14%0.23%

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.

New Insight: Vale David Swensen - Lessons from a pioneer of Endowment investing

Legendary investor David Swensen passed away in April. Mr Swensen had been the CIO of the Yale University Endowment since 1985 – so over 35 years – and is credited with inventing an entirely different way of investing for institutions and specifically for Endowments.

In recent months we welcomed a new Endowment investor to our Global fund and we reflect on some of the contributions made to Endowment investing by Mr Swensen during his time at Yale.

Please click here to view the full article.

New Insight: Is pharma the sleeping inflation hedge?

Research suggests revenue from large pharmaceutical companies is more correlated to inflation than even the energy sector. With the pharmaceutical sector trading on 13x PE versus the US market on 23x, there’s also not a lot of downside should inflation prove to genuinely ‘transitory’. In addition, investors can put far more money to work in a much larger sector than simply owning energy or commodities.

Please click here to view the interview.

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