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Why gold is the ‘canary in the coal mine’ for this fund manager

On 17 August, Wheelhouse Partners featured in the Australian Financial Review as a Monday Fundie story by reporter Luke Housego.

Read full article here

A capital injection from hedge fund legend Alan Howard has made Wheelhouse Partners assert itself as an income fund to watch.

The growing divide between asset prices and their intrinsic value is a problem confounding not just mere mortals but also professional managers of exceptional pedigree.

Asked if there is systemic risk in the unconventional monetary policy experiment that is a hallmark of the COVID-19 era, Alastair MacLeod doesn’t mince words.

Alastair, left, and Andrew MacLeod set up the fund with Sam Jacob in 2017.  Attila Csaszar

“Absolutely,” the Wheelhouse Partners investor says. “There’s no penalty for expanding balance sheets and adding more liquidity to the market.

“But there’s always longer-term unintended consequences. And I think, obviously, the price of gold is kind of starting to really be the canary in the coalmine.”

The “wedge” that’s being driven between fundamentals and asset prices, whether that’s shares or otherwise, is at the heart of the rally in gold prices that has pushed the precious metal to record highs.

“Given the global expansion in central bank balance sheets during COVID is expected to approach $US6 trillion this year, more than three times what we saw during the GFC in 2009 when unconventional monetary policy got under way, I don’t think it’s unreasonable that markets are beginning to get jittery about inflation becoming a thing again.

“That’s what I believe the gold price is telling us.”

The 46-year-old, along with his brother Andrew MacLeod, make up the investment team of Wheelhouse Partners, an income funds manager that launched with an index-tracking global equities strategy in 2017.

And with the backing of hedge fund legend and Brevan Howard co-founder, Alan Howard, Wheelhouse broke away from Bennelong Funds Management at the end of last month.

Man and machine

The manager’s ties with Howard build on the firm’s macro pedigree and cautious views of the expanding role of central banks in financial markets.

Andrew spent 14 years in London and Geneva as a multi-asset derivatives trader for Brevan Howard. And while he is now a long way from the massive directional bets that are a feature of the trading desks of the global hedge funds, Andrew says there’s a lot of transferable knowledge that he has taken from the experience.

“[Although] we don’t trade multiple assets for the fund, the same screening process is used in determining how to structure a hedge for the portfolio to achieve the optimal outcome,” he says.

Wheelhouse’s third founder and chief information officer is Sam Jacob, who also spent time at Brevan Howard. The Sydney-based software developer and mathematician headed up quantitative development and technology for Brevan Howard in Israel.

“[Jacob] helped build a lot of the risk management platform that the traders use at Brevan,” Andrew explains. “So he’s built a similar style risk management platform for us.”

Alastair adds: “The calibre of the build is very institutional in terms of the architecture and the data management and analytics that are in the platform.”

Systematic approach

 The technology platform the former Bloomberg developer built from the ground up underlines the fund’s strategy execution and is key to its growth plans. “The beauty of using a very systematic approach and using a platform like that is that it makes our business scalable,” Alastair says.

“It means … with a three-man investment team, you can actually re-purpose for different asset exposures to really deliver our value.

“And that means that we can run and manage very effectively a global equities strategy. But also we can use that same [intellectual property] and approach and platform [to] run an Australian strategy, which is what we’re intending to do later this year.”

As part of those plans and the new capital injection, Wheelhouse last week announced the appointment of former Paradice Investment Management chief operating officer Tony Hammond as its inaugural COO, and Hamel Strategic Partners’ Andrew Aitken as its distribution lead.

Wheelhouse’s embrace of technology is coupled with a critical stance on the more labour-intensive models of active funds management.

“Most resourcing [in] funds management is being spent on stock research and that idiosyncratic [task of] trying to generate alpha. And I would argue that the ROI on that is incredibly low across the market,” Alastair says.

“I think you’ve got to design a business and a funds management business to reflect that environment.”

Low-cost tilt

 The shift towards lower-cost offerings was highlighted again last week when one of Australia’s largest asset managers, Magellan, unveiled its plan to push further into the retail investor market. Magellan announced the launch of an exchange-quoted low-cost MFG Core Series, aimed at the growing demand for inexpensive investment products.

Alastair says Wheelhouse differentiates itself by side-stepping active stock-picking altogether and instead adds value through its use of hedging to protect capital from market falls and its “buy-write” strategy to generate predictable income from option premiums.

“We’re focusing on an element that we can really add value in, which is systematic overlays and tail protection, where you can make a big difference in terms of wealth outcomes, and what the investor receives.”

The strategy helped Wheelhouse’s global equity fund deliver a return of 7 per cent over the year to June, which compared with 5.2 per cent for its benchmark, the MSCI World Index (ex-Australia), at a cost of 89 basis points.

The return is heavily weighted towards income. From inception to the end of May, income has accounted for three-quarters of the fund’s 9.2 per cent per annum total return.

And with the uncertain outlook for dividends and negligible yields on cash and fixed-interest, the fund also touts this as key to the offering.

“If dividends are going to be lower in dollar terms [and] if interest rates are lower for an extended period, the value of generating income from a different source becomes increasingly valuable,” Alastair says.

He describes the fund’s use of writing options over holdings as selling the hope for upside to convert that into a more certain income return.

“You still have the benefits of share ownership—where you own the share and you receive dividends—but you’re really wanting more certainty and more reliability in your return profile.”

The siblings moved back to Brisbane to start the fund, choosing the city where they both grew up over the traditional financial hubs of Sydney or Melbourne, where Alastair last worked as a portfolio manager for what is now Talaria Asset Management.

“I think family brought us back. [We] both had kids and I think when you grow up in Queensland, you miss it eventually you really want to come back to it,” Alastair says.

“And it’s great seeing the kids playing with each other as they grow up and realise all the benefits of living in south-east Queensland.”

Luke Housego is a journalist for The Australian Financial Review based in the Brisbane office.

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