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”.
Therefore, portfolio turnover is relatively low, which he points out is a benefit given the attached call options, but stock weightings “can change markedly”. As an example, he points to significant overweights in GlaxoSmithKline, Vodafone and BT Group, which have been reduced after strong performances led to less appealing valuation outlooks. “In contrast, positions have been established in Sky Group and Carnival after periods of marked weakness as their prospects appeared more favourable than the market was assuming,” he adds.
Contributors to performance in the past year have included Legal & General and Aviva, as these firms started to “articulate their cash-generation abilities”. The manager notes he also had “more confidence than the market in ITV’s role within advertising and the potential recovery”.
But it’s not been all plain sailing, with Mr Rees noting a lack of exposure to the small- and mid-cap space and continued positions in the resources sector have weighed on performance.
He says: “This fund aims to produce steady returns, so it does not pursue a feast or famine approach to stock selection. Neither does it invest meaningful positions in the mid- and small-cap [sectors]. Clearly, these areas have led performance in recent years, although no longer appear cheap by historical standards.”
EXPERT VIEW
Martin Bamford, chartered financial planner and managing director, Informed Choice
This fund uses financial instruments, including derivatives, in an attempt to boost the yield generated from a portfolio of UK equity income stocks. Its historic yield of 7.58 per cent demonstrates the effectiveness of this strategy, although it should also highlight the risks investors face to receive this level of income. This is a well-diversified portfolio holding more than 150 stocks, and the ongoing charges for the clean share class look reasonable for running a more complex investment strategy. Investors considering this fund should take care to fully understand the strategies involved and the risks to their capital.
