Aim: Income by investing in investment grade bonds and global equities covered by call options
Minimum investment: Lump sum £5,000
Investment split: 60% investment-grade bonds, 40% global equities
Isa link: Yes
Pep transfers: Yes
Charges: Initial 4.5%, annual 1.25%, performance fee 10%
Commission: Initial 3% renewal 0.5%
Tel: 0800 234 6023
The Morley Barclays global cautious income fund is an Oeic that enhances income through the use of derivatives known as covered call options.
Chadney Bulgin Bruce Bulgin sees this as an interesting product because it aims to generate income in an innovative manner by combining the proven income potential of bonds coupled with shares.
“However, in the case of shares, covered call options are sold and the premiums generated from the sale of the options are used to boost income. This is why the fund can generate a targeted income of 5.5 per cent or 1 per cent over Bank of England base rate,” says Bulgin.
Bearing in mind that there are many investors seeking income without taking too many risks, Bulgin believes this fund should be a popular addition to the income sector. He notes that the level of income is significantly in excess of that available from many other comparable funds.
“The use of covered options means Barclays and Morley will be issuing options on shares held in the fund – in the event that share prices rise, then buyers will exercise their options and the fund will have to sell shares below the current marker price. For this reason the fund will under perform in rising markets. However, the premiums received for selling the options will help to boost overall returns in falling markets,” says Bulgin.
In his opinion, the charges are average for this type of product, as is adviser commission. “The fact that it is available on administration platforms and through wrap providers is an added attraction,” he says.
According to Bulgin, the cautious strategy of holding 60 per cent in bonds will reduce volatility and reduce the downside in falling markets. “The global exposure is positive and also helps to spread risk – but investors could win or lose depending on how sterling performs against other major currencies,” he says.
Switching his attention to the potential drawbacks of the fund Bulgin says: “As with any fund that uses derivatives, there may be suspicion among potential investors and even advisers as to whether the strategy will work. The main risk appears to be underperformance in rising markets.” He adds that the fund appears complex.
“The product literature is clearly written but is a little confusing in that it is badged as Barclays and Morley and the explanation of how the call option strategy works could be more comprehensive,” he says.
Competition is likely to come from other cautious managed funds in Bulgin’s view, and also traditional bond funds. “There are few funds that have a similar investment remit, especially with worldwide holdings. This means there are few, if any, direct competitors at the present time,” he says.
Summing up Bulgin says: “Overall, this is an innovative product which aims to deliver above average income without taking too many risks. There is unlikely to be significant growth, but investors opting for income should not find this of serious concern. Both Barclays and Morley are respected names in the investment arena and the way in which derivatives are being used is not creating any significant level of risk.”
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Average