'Income maximiser' lives up to its name

Following another cut in Bank Base Rate to 0.5 per cent, income seekers are desperately looking for new ideas. And a fund that has 'income maximiser' in its name is bound to draw some attention.

Beloved of many independent financial advisers, Schroder Income Maximiser is a UK stock market-based fund. It aims to deliver a target yield of 7 per cent per year, while providing the prospect of some capital growth over the long term. Schroders tags it: "A simple, innovative concept, designed for income seeking investors."

To achieve the target yield, it follows a two-pronged approach. Firstly, fund manager John Teahan invests in a portfolio of stocks that he believes have reasonable growth prospects, healthy balance sheets and sustainable profits, but which appear to be underpriced by the market. They will also tend to be high yielding stocks - shares that offer a generous dividend payment as well as the ability to grow that dividend over time.

The income that these stocks generate is then topped up (to reach the 7 per cent target) by selling options on the holdings. These are derivatives that enable the manager to receive a premium in return for sacrificing some of the potential capital growth on the underlying stocks. By taking this approach, investors are still able to gain access to equity markets and the potential for some share price growth, but with the added security of a regular income and lower volatility than a similar fund without the option overlay.

The fund is not tied to replicating a benchmark. In addition to equity and short-dated call options, it may also invest in collective investment schemes, derivatives, cash, deposits, warrants and money market instruments.

Its fan base is growing among independent financial advisers and multi-manager funds. For example, highly respected boutique multi-managers Rob Burdett and Gary Potter at Thames River Capital have Schroder Income Maximiser as the top holding in their Distribution fund, which focuses on income generation and capital preservation. They also hold it in their Cautious Managed fund.

Innovative new funds should always be viewed with caution, but Schroder Income Maximiser now has a good three-year track record and seems to be delivering on its promises. The fund achieved its 7 per cent income target for the third year running. The fund generated an annualised yield of 8.7 per cent in the year to 30 November 2008, following 7.4 per cent in the first year, and 7.3 per cent in the second.

Note that as a result of all fees being charged to capital, the distributable income of the fund may be higher, but there is the potential that performance or capital value may be eroded. Also, as the fund invests in just 30 to 50 stocks, it may be more risky than funds spread across a larger number of companies. Gains in individual shares are capped at around 15 per cent over three-month periods, which means that in strongly rising markets, performance may not be as strong as for an uncapped fund.

Although it uses derivatives, the fund is eligible for Isas.

Key fund data:

Source: Investors Chronicle funds data and www.schroders.com

TOP 10 HOLDINGS

TOP 10 SECTORS