Tap into a consistent high yield with Schroder Income Maximiser

IC TIP RATING

Tip style: INCOME

Risk rating: HIGH

Timescale: LONG TERM

A better option might be an equity income fund that uses derivatives to boost its income. A good example is IC Top 100 Fund Schroder Income Maximiser (GB00B0HWJ904). In addition to an equities portfolio it uses a covered calls derivative strategy with the aim of delivering a yield of 7 per cent a year.

"Over the last five years you could have received more or less 7 per cent of income every year from this fund," says Brian Dennehy managing director of fund research website FundExpert.co.uk. "In addition, the fund value is 31 per cent higher - that is after receiving the income."

In the equities portfolio its managers look for companies that can provide high and sustainable dividends and long-term capital growth. They also use the covered call strategy, whereby they regularly enter into contracts under which they effectively agree to exchange the profit on any stock exceeding a level, for an agreed fee. This premium is used to boost the income on the fund.

Schroder Income Maximiser's managers may selectively sell short-dated call options over securities or portfolios of securities held by the fund or indices, by setting target 'strike' prices at which those securities may be sold in the future.

However, the fund gives up some capital growth if the stock price rises above the strike price at expiry, and if the market rises sharply the fund will not participate. It also limits the scope for the income to grow, according to Mr Dennehy.

"Not every five-year period will be like the last five years," he says. "There will undoubtedly be more difficult periods where the capital value might fall, but it would fall similarly in a plain vanilla equity income fund. Income might also fall in some years, but that would also happen with other equity income funds. At least with this fund you have the compensation of a somewhat higher income."

This has been the case over one and five years with the fund underperforming its peer group average, following a strong rise in markets. But its yield remains one of the highest in the Investment Management Association (IMA) UK Equity Income sector.

And this is in line with the fund's objective of income with potential for capital growth. The way in which it uses derivatives increases the income and reduces volatility, but performance or capital value may be eroded.

Schroder also warns that investors should be prepared for short-term volatility and that the fund has a concentrated number of shares - between 35 and 50 - making it potentially riskier.

The fund has an ongoing charge of 1.66 per cent, which is in line with that for mainstream equities funds, but as it also uses a complicated derivatives strategy this is very reasonable.

So if you have a requirement for high income and are not concerned about sacrificing growth, Schroder Income Maximiser is a good option. Buy.

Read more on high-income funds

Source: Morningstar, *Schroders.

Morningstar as at 9 June 2014

Top ten holdings as at 30 April 2014

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