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Give your income a boost with Fidelity Enhanced Income

If you are concerned about outflows from Neil Woodford's funds and want to go elsewhere, a good place to start is Fidelity Enhanced Income.
October 30, 2013

The shock announcement of Neil Woodford's forthcoming departure from Invesco Perpetual has created concerns about a mass exodus from his monster-sized Invesco Perpetual Income (GB0033053827) and High Income (GB0033054015) funds. If you're feeling nervous about the sudden change in management at Invesco Perpetual then you might want to look somewhere else for income. And IC Top 100 Fund Fidelity Enhanced Income (GB00B3KB7682) a is not a bad place to start.

IC TIP: Buy at 126.9p
Tip style
Income
Risk rating
High
Timescale
Long Term
Bull points
  • High income
  • Similar to Neil Woodford funds
  • Derivatives strategy
  • Lower volatility
Bear points
  • Higher than average TER

It's based on the popular Fidelity MoneyBuilder Dividend Fund (GB0003860904), which co-manager Michael Clark also runs. Fidelity Enhanced Income has the same holdings as its sister fund, but uses a derivatives strategy - covered call options - to boost income above that of traditional income funds, with the potential to take its yield to 7 per cent.

To do this, the fund sells call options on a portion of its holdings. For example, it will sell the right to buy certain of its holdings at a fixed price in the future to counterparty investors. Purchasers of these options pay an income premium for that facility, which boosts the fund's yield. In return, the fund gives up some capital growth if the stock price rises above the strike price at expiry.

This method also has the added bonus of dampening volatility, so it is better suited to investors looking for higher dividends and a smoother ride. The fund is currently the lowest volatility fund in the Investment Management Association (IMA) UK Equity Income sector.

Over the last year it has produced a solid 6.21 per cent yield, which looks extremely healthy compared to the sector average of 4.41 per cent. It's also up from a historic yield of 5.59 per cent, giving investors an encouraging indication that the fund might continue to grow its dividends.

 

IC TIP RATING
Tip style:INCOME
Risk rating:HIGH
Timescale:LONG TERM

 

The fund has managed some decent growth, too. It made a 15.91 per cent return over one year (compared to the 26.1 per cent sector average over the same period), fulfilling its aim of "providing income with the potential for some capital growth".

The investment strategy is focused on identifying stocks with a stable income and commitment to dividend growth. Mr Clark recently sold out of Vodafone (VOD) following its sale of Verizon Mobile, one of its main cash-generative assets. He no longer thinks Vodafone is capable of delivering good income and, as such, he took the decision to sell out completely.

He's recently increased his position in SAB Miller (SAB), the emerging market beverages company. Mr Clark is particularly confident it will provide investors with significant dividend growth in coming years. And he's also keen on Greene King (GNK), an integrated pub company with a high quality of portfolio of pubs. He says its focus on food is working well and that steady single-digit earnings growth should translate into an increasing dividend payout over time.

The fund is one of the eight equity income funds in our IC Top 100 Funds. It has a similar composition to the Invesco Perpetual Income and High Income funds. But it is smaller and more nimble.

The fund is particularly heavy in consumer goods, healthcare and utilities. Its top holdings are pharmaceuticals giants GlaxoSmithKline (GSK) with a chunky 6.9 per cent allocation, followed by AstraZeneca (AZN) with 5.9 per cent.

The fund has a total expense ratio (TER) of 1.73, so it's 0.1 per cent more expensive than the average fund in its peer group (1.62 per cent). But for its good income stream boosted by an extra tool - its derivatives strategy - it's well worth the slightly higher expense. If you want dividends you can rely on, then Fidelity Enhanced Income Fund is a good option. Buy.

 

FIDELITY ENHANCED INCOME FUND (GB00B3KB7682)

PRICE

126.9p

MEAN RETURN

10.98%

IMA SECTOR

UK equity income

SHARPE RATIO

1.2

FUND TYPE

Open-ended investment company

1-YEAR PERFORMANCE

15.91%

FUND SIZE

£205m

3-YEAR PERFORMANCE

35.24%

No OF HOLDINGS

65*

TOTAL EXPENSE RATIO

1.73%*

SET UP DATE

2 Feb 2009

YIELD

6.21%

MANAGER START DATE

2 Feb 2009

MINIMUM INVESTMENT

£1,000

STANDARD DEVIATION

8.18%

MORE DETAILS

www.fidelity.co.uk

Source: Morningstar, *Fidelity.

Performance data as at 29/10/13

 

Top 10 holdings as at 30 Sep 2013

Glaxosmithkline6.9
Astrazeneca5.9
Imperial Tobacco Group3.9
BT Group3.7
Reckitt Benckiser3.4
BG Group3.3
Centrica3.0
British American Tobacco2.9
HSBC Holdings2.8
Tesco2.8

 

Equity sector breakdown

Consumer goods19.1
Healthcare18.3
Utilities14.2
Financials13.6
Industrials10.6
Consumer services6.6
Telecommunications5.4
Oil & gas3.3
Basic materials0.3