Type: Oeic, also available through an Isa and Sipp
Aim: It provides investors with a combination of high, regular income and potential for some capital growth, aiming to deliver a yield of 150% to 200% of the FTSE All-Share Index yield (net of basic rate tax)
Minimum investment: Initial lump sum £1,00 top up of £250
Isa link: Yes
Charges: Initial 3.5% (reduced to 3% until April 30, 2009) and annual management 1.5%
Commission: Initial 3% and renewal 0.50%
Tel: 0800 41 41 81
The enhanced income fund from Fidelity International is targeted at investors seeking a high level of regular income. It aims to deliver a yield of 150 to 200 per cent of the FTSE All-Share Index and the core portfolio will be based on the Fidelity income plus fund.
Hargreaves Lansdown investment research manager Ben Yearsley says: “This is an interesting product launched at a time when achieving a high yield is becoming more important”.
Essentially, it is an equity income fund with a derivative strategy in place to enhance the income. In order to achieve enhanced income. Capital growth prospects are limited compared with a normal equity income fund and for this reason Yearsley believes it is not suitable for the whole market.
He says: “There are drawbacks to these products.”
To achieve the enhanced income, the managers sell call options on companies they own in the portfolio to provide additional income which can be paid out.
Yearsley says by selling call options, the managers are effectively selling away some future upside above a certain level. He believes that advisers need to be “fully aware of the mechanics behind these funds before using them”.
Yearsley feels that the fund charges and commission are standard. He says: “I like the fact that quarterly income is paid although I am not convinced investors should use the regular withdrawal facility available where capital can be withdrawn.”
Fund manager Michael Clarke has been managing the fund only for a short period but Yearsley says: “His short-term record is reasonable”.
Yearsley says the main competitor to this fund is Schroder income maximiser, although he believes there are subtle differences. Schroders sells call options based on the whole portfolio, while Fidelity sells them on a company by company basis. The ideal product for Yearsley would be a combination of both funds.
Yearsley finds the Fidelity product an very interesting offering and says it is very flexible in its approach. However, he believes that advisers should treat such funds with caution and “ensure they know what they are buying before using them.”
The one major drawback for Yearsley is the covered call strategy and the restriction to potential future growth above a certain level by selling it away. As long as the adviser and client are aware of this prior to investing, then he feels there should not be a problem. In summary, Yearsley says: “There is not a great deal to dislike about this fund as long as you fully understand how it works”.
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Average