Aim: Income by investing in global equities and bonds covered by call options
Minimum investment: Lump sum £5,000
Investment split: 60% global equities, 40% bonds
Isa link: Yes
Pep transfers: Yes
Charges: Initial 4.5%, annual 1.5%, performance fee
Commission: Initial 3%, renewal 0.25% every six months
Tel: 0800 234 6023
The Morley Barclays global balanced income fund is an Oeic that aims to boost income from bonds and equities through the use of derivatives.
Michael Philips proprietor Michael Both says: “We all have clients looking for a high regular income and the increasing demand for tax-efficient alternatives to pensions as a way of providing it is unlikely to end – especially given this government’s apparent obsession with destroying the appeal of pensions.”
He thinks the explanation of this product in the client brochure is almost excellent, but feels it glosses over or omits a number of crucial points about risk and how the fund will act in certain market conditions.
“Writing covered options is not a new strategy, although building a retail product where it is the core driver is still unusual. The glossary for covered call options is inadequate if not positively misleading and anyone offering this fund should ensure a supplement giving a comprehensive explanation, with diagrams, is a prominent part of their suitability letter. “ says Both.
Assessing fund manager Ilad Farah’s credentials, Both notes he hold a MSc in aeronautical engineering. “You may not need to be a rocket scientist to understand covered call options, but the fact that Morley’s Ilad Farah is one suggests Barclays and Morley think having one close at hand is no bad thing,” says Both.
Turning to the negative features of the fund Both says: “I’m not convinced the fund has a logically robust strategy, which makes it difficult to fit into a client’s portfolio. It will have a fairly concentrated share portfolio, but there is no guide as to how international that may be.” He also notes that the upside in a rising stockmarket is limited but not the downside when it falls.
“There doesn’t appear to be any strategy to limit the risk to capital of interest rates rising, or for hedging currencies, or to use options to enhance the yield from the 40 per cent of the portfolio in bonds. Adding insult to injury, there is an investor protection fee, which is Barclays’ Orwellian description of a market value adjuster,” says Both.
Both also thinks the charges are high once the 10 per cent managers’ incentive is triggered.
Both explains that writing covered call options involves giving away the capital gain if the shares you hold rise. He thinks this is poorly explained in the literature. “The ‘sweet spot’ is where you keep the option premium, the share and the dividend, which only happens if the shares you hold don’t move up until after the option you wrote has expired worthless. If you think you hold good shares, you could write put options, which would expire worthless if the market rises. In this case you win on the share and keep the option premium, but you are forced to buy more shares if the price falls below the strike price. The option premium effectively subsidises the cost of the ones you are forced to buy, boosting your yield.”
According to Both, option strategies can limit risk or boost income but always at a cost and it is not necessarily one which fully informed investors will consider worth paying.
“One would need to ensure clients fully appreciate that by employing this option strategy the long term cost of the short-term yield enhancement could be quite high compared with a more conventional high income unit trust,” he says.
Both believes that if the goal for clients is high regular income without capital protection, especially within a Pep or Isa wrapper, distribution funds such as Invesco Perpetual high income, Jupiter monthly income or Old Mutual extra income might be considered as competition, alongside some property funds.
Suitability to market: Poor
Investment strategy: Poor