WAM Leaders Fund Avoids “Carnage” in Markets with Active Trading

WAM leaders also moved early into energy stocks and resources, although exposure to the latter was reduced a few months ago on expectations that commodity prices may have peaked. Haupt is now buying the mining sector after the recent drop in commodity prices.

The way WAM leaders adjusted their exposure to commodity prices — first up, then down and then back again — is a good example of what Jeff Wilson calls the “dynamic investing” approach at LIC, which has been an average investor of 96.4 percent of the stock during Fiscal year 2022.

Far from pick and stick

Haupt dismisses suggestions that this is more like trading than investing, arguing that investing is at its core about collecting data points and adjusting your view of companies, sectors, and markets accordingly. He describes WAM leaders as investing “in the tails” of the markets, where sentiment swings from bullish to bearish much faster than it usually does; As such, LIC wants to be able to switch from defensive to aggressive mode at the right pace.

“There is such a wide dispersal of potential outcomes at the moment. So we have to get smarter,” says Haupt. “We get data points every day, which changes the likelihood of those events happening, so we respond. Our job is to respond to the environment.”

This approach is clearly different from the pick-and-stick approach taken by many LIC managers in the country. But given the frequency with which fund managers lose their benchmark – and research suggests this is due in large part to their inability to shift their investment strategy as market trends change – Haupt’s willingness to be flexible will find admirers.

He also notes that WAM Leaders have several long-term bets in their portfolio as well, including insurer IAG (which Haupt expects to revalue over time), Treasury Wine Estates (Haupt is a big fan of how CEO Tim Ford is moving away from China) and Telstra.

The latest data point for Haupt to take in is a 0.5 percentage point rate hike by the Reserve Bank on Tuesday, and the somewhat more dovish tone of Governor Philip Lowe’s statement.

How the banking sector responds to this is important to Haupt’s holdings at NAB and the Commonwealth Bank. WAM leaders have a lot of tactical weight on the banks right now, and Haupt expects the CBA to deliver an impressive full-year profit result with improved margins next week. But he warned of how difficult it would be for the Reserve Bank of Australia, and indeed other central banks, to raise interest rates in a slowing economy.

“Policy makers are on a collision course with economic growth to fight inflation,” he says. “If they continue to go the way they are, they will cause a massacre across Dangerous Assets.”

It’s no surprise, then, that the WAM Leaders Portfolio is on the defensive right now, even though cash is only 2.9 percent of it. This is very typical, says Haupt; WAM leaders largely turn to cash only when they can see a major credit shock to the environment.

Haupt hasn’t seen any of it yet, but he’s vigilant, given what he describes as glimpses of credit market stress, including inverted bond yields, a strong US dollar, and poor conditions in the European repo market. Add low bond market liquidity to this list as well.

“The problem is that if people don’t trust other people’s collateral, you run into a liquidity crunch and that’s what happened during the GFC. So there is a possibility, and the odds are increasing every day, but it’s still fairly low at this point.”

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