A growing number of investment managers are bringing derivatives back into their portfolios to enhance income returns and manage volatility. One of them is a newcomer, Wheelhouse Partners, which has launched an equity income fund that produces a significant amount of its income from options and other derivatives.
Wheelhouse managing director and portfolio manager Alastair MacLeod believes derivatives offer investors, particularly retirees, many desirable characteristics that are not always available to pure equity investors.
Wheelhouse was established in March this year and in May launched its fund, Wheelhouse Global Equity Income Fund.
The objective is to outperform the MSCI World Index over a rolling five-year period, net of fees, and produce income of around 5 or 6 per cent a year. Income distributions will be paid quarterly.
The strategy is based on Morningstar’s Developed Markets ex-Australia Wide Moat Focus Index.
In addition, the manager runs a derivatives contract program as a way of reducing volatility, improving capital preservation and generating higher income.
It uses a combination of short options positions and long derivatives, which are implemented alongside the Morningstar portfolio.
MacLeod says the fund was developed for retirees. It combines growth assets with capital preservation.
“The narrative is changing. Retirees have different objectives. High cash and fixed income holdings are not working. Derivatives can deliver,” he says.
In its short life, the fund has underperformed. Over three months it is up 0.48 per cent, compared with the 2.5 per cent increase in the MSCI World Index.
MacLeod says: “In strong markets we will underperform because when you sell options you have a capped capital gain. You get a fixed premium but in return you cap your upside.
“Our performance is in line with expectations. This fund will do well in a down market. We are one-third of the market volatility.”
The fund’s management fee and expenses add up to 79 basis points. There is no performance fee.