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Ignis enhanced income on the hedge

Ignis Asset Management – Ignis Argonaut European Enhanced Income Fund

Type: Unit trust

Aim: Income and growth by investing in European equities and derivatives

Minimum investment: Lump sum £500, monthly £50

Investment split: 100% in European equities and derivatives

Isa link: Yes

Charges: Initial 5.25%, annual 1.5%

Commission: Initial 3%, renewal 0.5%

Tel: 0845 60 50 444

The Argonaut European enhanced income fund is a European equity income fund that uses a derivatives strategy to boost income. It invests in 30 to 55 big blue chip European  companies, excluding the UK. This is combined with a covered call strategy, where fund managers sell call options on stocks they own.

A call option gives a buyer the right, but not the obligation, to buy stocks from the seller at an agreed price on a specified date.  For this right, the buyer pays the seller a premium, which will boost income for the Ignis fund.

However, the seller gives up potential growth above the agreed price, because the buyer is likely to buy the shares, or accept a cash settlement, if the shares are trading above it

Looking at the ways in which the fund is useful to IFAs and their clients, Michael Philips proprietor Michael Both says: “There is certainly demand from investors for high income and diversification, which, if properly implemented, should reduce risk. Relatively higher income might be obtained from weaker companies because of the risk premium but care must be taken that the losses from these higher risks do not outweigh that higher income.”

Both adds that the UK’s economic circumstances need to improve, so looking for income from investments generated in a stronger currency has an appeal. “Whether the Euro area will prove weaker or stronger from now on is far from clear but this fund aims to avoid that question by hedging returns back into sterling.”

Both then discusses the product literature. “The literature Ignis has produced to explain its strategies is exceptionally well presented although whether investors will all draw the necessary inferences is unlikely,” he says.

Turning to the less appealing features of the fund Both says: “I am always concerned by managers who write calls on the stocks they hold to enhance income because the strategy is schizophrenic. They presumably buy a particular stock because they believe it has long-term potential, so where is the logic of writing calls which will force them to give up that same stock for a modest profit?”

Both says he could see the sense in buying on dips, but not of selling on rises. “The other strategy which gives pause for thought is that of hedging the currency risk. The manager may not do this in practice as well as he hopes, either due to poor timing implementation or because the cost of the currency hedge eats up more than the not insignificant 5 per cent that is anticipated. “

Both points out that foreign exchange markets are dynamic and the cost of hedging will vary according to the perceived risk. “The greater the risk of loss, the dearer the insurance. It will be cheap to hedge the suro if it is rising relative to sterling – but why would you want to give up those profits? –  and expensive if sterling is rising against the Euro, thereby costing a higher proportion of your expected dividend profits.”

Newton global higher income and Invesco Perpetual monthly income plus are the main funds that Both expect to compete with the Ignis Argonaut fund, but he says there are also many others.

Summing up Both says: Readers may wonder why Ignis’s launch flyer compares the past performance of fund manager Oliver Russ’s Argonaut European income fund with the UK Equity Income & Growth sector. This is rather more flattering than how it ranks in its own Pan European Equity Europe ex-UK sector.” Both adds that Russ’s stewardship of the Argonaut European income fund puts him close to, or below, the sector average for most of the last three years, during which the sector fell  25 per cent.

BROKER RATINGS

Suitability to Market   Poor

Investment Strategy   Poor

Charges   Average

Adviser remuneration: Average

Overall 5/10   

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