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Schroders takes covered calls to Asia

Schroders has launched an Asian ex Japan equity fund that will use a similar covered call strategy to its income maximiser fund.

The Schroder Asian income maximiser fund aims for growth and income by investing in a portfolio of higher-yielding Asian stocks. To meet the fund’s 7 per cent target yield, income will be enhanced by selling covered call options on 80 per cent of the portfolio. 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 remaining 20 per cent will not have any call option overlay so that the managers can access stocks and markets where option writing is more limited.

The fund will combine the derivatives experience of Schroders head of structured fund management Thomas See, manager of Schroder income maximiser, with the Asian stockpicking expertise of Schroder Asian income fund manager Richard Sennitt. Around 80 per cent of the new fund will be invested in the same stocks as the Asian income fund.

Investors can choose from several UK equity income funds that boost income using covered call strategies and firms are now starting to look further afield. Ignis recently launched a European fund using this strategy and Schroders’ Asian ex Japan option may have appeal for investors who like the Asian investment story, but do not want to rely solely on dividends in the region for income.

Schroders’ experience in using covered call strategies over the last four years may provide a comfort factor to some investors, but giving up some of the growth potential in strongly rising markets will not sit well with others.

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