The strategy behind the £88.54m Insight Equity Income Booster fund was launched in 2009 as the Insight Investment UK Equity Income Booster fund.
But when BNY Mellon took over distribution in February 2013, the Insight Investment Monthly Income fund was folded into the original fund to create the Insight Equity Income Booster fund.
Managed by Tim Rees since inception, the portfolio aims to provide a higher yield than a typical equity income fund, but with a return “not dissimilar” to the FTSE All-Share index.
Mr Rees explains the fund’s process is to invest predominantly in large-cap stocks, with the income target also being achieved through the use of “writing call options on most of the portfolio’s holdings”. The fund’s large-cap bias is a consequence of the fact this is where liquidity in the option market is most readily accessed.
Call options can be used as either a buyer or a seller. As a buyer they offer the right – but not the obligation – to buy shares in the future at a fixed rate, guaranteeing the purchase price. As a seller they offer the buyer the option to acquire underlying shares at the agreed price if the buyer exercises their call option rights. The manager notes: “The yield remains close to 200 per cent of the FTSE All-Share Index, which has been the intention since launch. Although we will write options on the vast majority of holdings, we have more recently only written them on 70 per cent of each holding, allowing more of any outsized returns to be retained.”
The fund’s institutional W share class sits at a level five out of seven on the risk-reward spectrum, while its key investor information document shows the ongoing charges are 0.87 per cent.
The fund has consistently outperformed the FTSE All-Share across one, three and five years, although it has lagged the Investment Association (IA) UK Equity income sector average in the medium and longer term. Since launch to March 25 2015, the strategy has delivered a return of 125.54 per cent compared with the FTSE All-Share rise of 143.5 per cent and the IA UK Equity Income sector average of 145.95 per cent, data from FE Analytics shows.
However, Mr Rees says: “Although the fund sits within the UK Equity Income sector, it should be remembered that its yield credentials sets it much farther apart from the sector average than the sector is from the market overall. The fund has distributed the target monthly yield of 0.6 per cent and has exceeded the annual yield target of 7.2 per cent.”
The manager notes that in strongly rising markets “some of the upside in capital appreciation has naturally gone to the option holders”. But while many managers like to portray themselves as pure bottom-up stock pickers only, Mr Rees freely acknowledges that he spends “considerable time reading economic as well as stock research. This provides me with the confidence to see through short-term fluctuations in company performance”.