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Investor update for May 2023

Playing catchup

The thematic of the year to date has clearly been the melt-up in mega-tech names. Well documented elsewhere, the bigger question is where do we go from here? 

For many investors looking for a more durable market recovery, that is less reliant on 5-7 technology stocks, the rally needs to broaden across other sectors, regions and market caps which have hitherto struggled make much headway this year, at least relative to tech.  

Options markets are increasingly starting to price this scenario. One notable recent change in option pricing is the premium that investors are willing to pay for the upside risk in small companies. 

Buying the upside tail in the small cap Russell 2000 Index [RTY] is now costing nearly 3x the equivalent upside in the S&P500 Index, versus the recent average of 1.4x. In other words, these option buyers are positioning for a broadening of the market rally into more economically sensitive small caps and are willing to pay around 3x the broader market premium to gain exposure to it.

Source: Wheelhouse from GS data. Based on 1M 1% call pricing.

We would caution however, that the elevated prices for RTY options simply reflect demand and positioning, as opposed to a directional magic wand. Buying options provides exposure to the upside with no exposure to the downside if things don’t work out (outside of the cost of buying the option). However, such a dramatic pricing change is interesting to observe and we believe a good indicator of support building for a broadening market recovery.

Valuation support?

Valuations outside of the top 50 securities on the S&P500 are also supportive. While at the headline level the S&P500’s multiple of 20x trailing earnings is elevated relative to history, once the tech-heavy top 50 securities by market cap are stripped out (let’s call what’s left the S&P450), the valuation for the ‘other’ 450 names falls to around 15x on a trailing basis. 

This is meaningfully less than the 18x trailing average and is much more competitive with the local Australian market on 14.6x. On this valuation basis, the ‘S&P450’ looks to be at least partially pricing in a recession, even if their larger 50 index cohorts have rapidly appreciated to capture the upside from the AI revolution. 


Elsewhere and more broadly, there are signs that bearish sentiment is capitulating.

  • Short-covering – Traders have been rushing to cover short positions, in contrast to earlier this year when we flagged the record short positions in place on the S&P500. 
  • Earnings downgrades – the earnings downgrades cycle looks to be taking a breather, well off the historical averages of around 15% usually associated with a recession. 
  • Inflation continues to cool – while still a long way from the Fed’s target, the direction is supportive. The forthcoming CPI print this week will go a long way to confirm or deny this trend. 
  • US banking crisis – looks to be taking a summer recess, with the KBW Regional banks Index recovering near 20% since its low last month.
  • The debt ceiling fiasco looks to have been deferred, at least for the next two years.
Taken together, it does appear that many of the more recent left-hand tail risks to equity markets have fallen away. This is consistent with what we are seeing in the options market, with a cheapening of put options meaning that portfolio protection is looking more attractive once again.


If the options market is correct, we’d expect this market rally to broaden. This has positive implications for market sentiment as a whole, as well as the local Australian market which has no exposure to the mega-cap tech revolution happening in the US markets.

Tech may struggle in this environment, at least relatively. History suggests that in the 6-12 months after such extreme market leadership, the leaders underperform (Bernstein). We may be starting to see this in recent flows, with banks reporting the first net outflows from the tech sector in 8 weeks.This rotation would make sense given the supportive valuations in the other ‘450’.

More broadly for the market, left-hand tails appear difficult to determine (and protection is cheap), and right-hand tails seem capped by potentially sticky, albeit falling inflation, alongside more muted economic conditions. The spectre of much tighter liquidity conditions in coming weeks as the US Treasury replenishes their coffers, should also weigh on excessive growth.
We believe this lends itself to a continuation of a mostly sideways trending market, albeit with ebbs and flows as continued rotation within the market broadens the market ‘leadership’. This environment with low inter-sector correlations, tends to reduce volatility at the index level. 

As we flagged in our March newsletter, lower growth or ranging markets can continue for longer than many investors would have experienced in recent decades. This presents potentially damaging outcomes for investors who rely on decent returns to fund capital growth or their lifestyles. 

Wheelhouse Global Equity Income Fund


Income over 5 years (p.a.)


Total return 5 years (p.a.)

  1 month 1 year 3 year p.a 5 years p.a. Since inception^
Income 0.0% 8.3% 7.9% 8.1% 7.4%
Growth (1.2%) 0.7% (3.7%) (1.5%) (0.7%)
Total Return (1.2%) 9.0% 4.2% 6.6% 6.7%
RBA +2.5% 0.6% 5.2% 3.5% 3.6% 3.7%
Benchmark* 1.2% 13.4% 11.9% 11.3% 11.0%
Market Risk** nm 0.4 0.5 0.5 0.6

Performance figures are net of fees and expenses.

* Benchmark is the MSCI World Index (ex-Australia). RBA +2.5% represents equity returns with half the Equity RIsk Premium.
** Market Risk is defined as Beta and sourced from Morningstar Direct. A Beta of 1.00 represents equivalent marketrisk to the Benchmark. 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 Income Fund.

Wheelhouse Australian Enhanced Income Fund


Income since inception p.a.


Total return since inception p.a.

 1 month3 months6 months1 yearSince inception^
Total Return(1.9%)(0.2%)0.1%0.6%6.5%
Excess return0.4%0.2%(4.0%)(1.4%)

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.

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