The fund invests in 35-50 high-yielding equity stocks, mainly UK equities, with up to 20 per cent invested in other regions. It also sells call options on stocks in the portfolio, which is known as a covered call option strategy. This will help meet the target yield of 8 per cent a year.
Call options give the buyer the right but not the obligation to buy shares at a set price on an agreed date before the option expires. The fund receives an up-front payment from the buyer of the call option, but this means sacrificing some of the growth potential of the stocks in strongly rising markets.
The fund will be jointly managed by Insight’s equity income specialist Tim Rees and head of structured solutions Richard Lloyd, a derivatives specialist.
Rees has been with Insight, formerly Clerical Medical Investment Management, for 25 years and is responsible for managing over £2bn in assets. Lloyd joined Insight from Schroders in June 2008. He has been designing structured products for more than 10 years and was responsible for managing around $10bn in assets at Schroders, including the Schroder income maximiser fund.
The equity part of Insight’s fund will focus on big companies that are expected to benefit from economic conditions, attractively valued and able to provide growing dividends. Stocks will typically be held for two to three years, so turnover will be low, which suits the covered call option strategy.
The benefit of the fund’s two-pronged approach to income is that if dividends rise or fall, the covered call strategy can be adjusted to help meet the fund’s target yield. This may be useful in a recession, where companies may be cutting dividends and another source of income will keep investors’ monthly income stream steady.
However, prioritising income through the derivatives strategy means the fund is likely to lag pure equity funds when markets recover.