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New Star fund buys into Schroder trust

Schroder sets initial target yield of around 7%, with 3.5% from dividends

New Star’s recently established cautious portfolio unit trust fund of funds has made its first investment into a structured product.

The fund has bought into Schroder income maximiser, a unit trust which invests in higher-yielding UK large-cap stocks and trades covered call options on these stocks to enhance the yield. Schroder has set an initial target yield of around 7 per cent for the fund, of which 3.5 per cent is expec- ted to come from dividends and the remainder from premiums on the sale of the covered call options.

New Star says its 10 per cent stake in the Schroder product blends well with the cautious portfolio’s existing holdings and will help to maintain a balance between delivering attractive returns and minimising exposure to risk. The comp- any says preserving investors’ capital is an important part of the cautious portfolio’s objective and it sees the inclusion of a structured product as a way of achieving this.

New Star had looked at other structured products which provide downside protection through buying put options but it did not feel that the costs for the protection were justifiable at current levels. Instead, it will invest dir- ectly in derivatives to create its own downside protection. This is made possible through the fund’s non-Ucits retail sch- eme structure which gives it a wider investment remit than Ucits-regulated caut- ious managed funds.

New Star fund of funds manager Craig Heron says: “Essentially, what we liked about the Schroder fund is quite simply the yield from a high-quality UK equity portfolio. The covered call options potentially limit the upside but it is a lower-risk strategy. “


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