Interest rates may be in the doldrums but the Schroder Income Maximiser fund shows that expectations for returns on your investments don’t have to be low
Achieving a high income when interest rates are persistently low isn’t easy as they erode yields on financial assets across the board. However, there are still products available which aim for better returns – such as the Schroder Income Maximiser, which targets a yield of 7 per cent per annum.
The fund works in two ways – it invests in an actively managed portfolio of UK large and mid-cap stocks while boosting income levels through the sale of covered call options.
In the first step, Nick Kirrage and Kevin Murphy, co-managers of the underlying Schroder Income Fund, create a portfolio of stocks that they feel have low share prices relative to the companies’ long-term earnings potential and the amount of cash they will be able to generate.
These stocks will also tend to be high yielding, offering a generous dividend payment as well as the ability to grow that dividend over time.
The structured fund management team then looks to generate additional income by selling options on these holdings on a three-month rolling basis. This income stream is produced because Schroders exchanges some of the potential capital upside on selected holdings (above a certain level) in return for an upfront cash payment (premium) over this period.
This strategy gives investors exposure to equity markets, but with the provision of a regular income (although the actual amount will vary) and lower volatility than a similar fund without the option strategy.
The trade-off is that the performance or capital value of the fund may be eroded. If the market rises strongly, for example, the exchange of capital for income means the fund is likely to underperform. This could happen over consecutive three-month periods, eroding capital value by capping the gains and taking the falls.
The fund has maintained its ability to generate the target yield against a background of a range of economic scenarios
But of course the fund also has the potential to outperform when the market falls, with the yield acting as a cushion for returns.
The yield is the sum of the four quarterly distributions that comprise the fund year, each calculated by dividing the quarterly distribution amount by the unit price at the start of that quarter. Investors must be aware that the 7 per cent target yield is not guaranteed and could change according to market conditions, but Schroders has consistently shown its ability to hit this target, delivering 7 per cent every year since the fund was launched more than five years ago.
The fund has maintained its ability to generate the target yield against a backdrop of a range of economic scenarios, and there is little to suggest that demand for call options will weaken in the foreseeable future.
Whatever UK policymakers decide to do about inflation and interest rates, Schroders expects to see continued option demand – and the team is confident it can continue to generate an attractive level of income. However, past performance is not a guide to future performance and may not be repeated. Also, the value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.
Schroder Income Maximiser is unsuitable for investors who are looking for short-term returns, require a fixed quarterly amount of income, require capital security or are uncomfortable with the level of risk that comes with investing in equities.
However, it could be suitable for investors with a long-term investment horizon who are looking for some long-term growth potential.
Widow’s pique put to rest
Mr B retired in 2008 with a personal pension valued at £600,000 after taking tax-free cash. He had worked hard all his life to build up this retirement pot and he approached the Pension Drawdown Company to discuss his options and then used the money to go into a pension drawdown fund.
Unfortunately not long after his retirement Mr B died. However, his widow was relieved to discover that the pension pot could be transferred into her name and she could continue to benefit from the entire fund value.
Had Mr B opted for an annuity when he retired, he would have had to sacrifice almost a quarter of his annual income to purchase 100 per cent death benefit for Mrs B. This is because of the cost of building in this benefit to the annuity itself.
She now lives comfortably with a pension income equal to the amount her late husband drew and she is very happy knowing that when she dies the pension pot will be left to her three children.
Going for growth
Mr D approached the Pension Drawdown Company in November 2002 when he was retiring aged 60. In February 2003 his pension fund was used to provide 25 per cent as tax-free cash (£11,305), with the remainder placed in an income drawdown plan with a fund value of £33,916.
Since then Mr D has enjoyed an income of £25,464 as well as the tax-free cash sum. A plan which was worth £45,221 to start has paid out a total of £36,759 so far and with proactive management is still worth £41,655.
The important thing to Mr D at the time was that his wife would receive the full value of the plan should anything happen to him. Now both are pleased that the fund has grown and there is also the hope they will be able to leave part of this in their wills to their children (subject to the 55 per cent government recovery tax charge of course). In their opinion, this is better than the fund dying with them.
I would like to thank the Pension Drawdown Company for the ongoing management of my plans.
I worked hard in the financial services industry for over 30 years and in my experience the Pension Drawdown Company’s continual hands on approach is very rare.
I have encountered many advisers who can construct a portfolio commensurate with a client’s attitude to risk and investment objectives.
However, very few then fine tune this during the year to maximise opportunities and reduce downside risk during market fluctuations to the same extent as Jonathan has. Very happy with performance to date.