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Schroder covers calls for property

The Schroder global property income maximiser fund applies the same covered call derivatives strategy as other funds in the income maximiser range.

It has a 7 per cent annual target yield and provides the potential for growth by investing in a portfolio of 60 to 80 Reits and listed property companies that is expected to yield around 4 per cent a year. To meet the target yield, the portfolio is enhanced by 2.5 to 4 per cent by selling covered call options on some of the stocks held.

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. A covered call strategy involves selling options on stocks that the manager already holds, so that some of the potential growth will be sacrificed for an upfront payment. This strategy will boost income if the prices of the shares within the portfolio fall or do not rise above the specified target price.

The fund combines the derivatives experience of Schroders’ head of structured fund management Thomas See, manager of the original Schroder income maximiser, with the global property securities expertise of European Investors Inc. EII managers Jim Rehlaender and Al Otero run the Schroder global property securities fund and use a similar stock selection process for the new fund, but with a focus on high quality income producing securities.  The portfolio is initially weighted towards the US, where the higher volatility in property securities is helpful in enhance the yield through the derivatives strategy.

Schroders has aimed this fund at investors needing income when interest rates are low and rising inflation is a concern. It says property is a natural income producer and sees property securities as a way for investors to gain exposure to the potential recovery in commercial property without the problems of bricks and mortar. Bricks and mortar investments have higher minimum investment levels that can make diversification difficult and present liquidity problems to investors

Having two sources of income to draw on to meet the target yield is useful but this yield is not guaranteed. The fund will also underperform strongly rising markets due the enhancement strategy.

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