Type: Unit trust
Aim: Income and growth by investing in UK equities, with ability to enhance income through derivatives
Minimum investment: Lump sum £500, monthly £50
Investment split: 16.8% oil & gas, 15.3% financials, 12.3% industrials, 10.3% telecommunications, 10.2% consumer services, 9.6% basic materials, 8.7% consumer goods, 8.3% healthcare, 7.5% utilities, 1.25% cash and equivalents
Isa link: Yes
Charges: Initial 5%, annual 1.5%
Commission: Initial 3%, renewal 0.5%
Tel: 0845 070 8684
The Legal & General UK equity income fund aims for income and growth by investing in UK equities. Fund manager Richard Black can also use a covered call strategy to enhance income. Thisinvolves selling options on stocks that are already held in the portfolio, 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.
Putting the fund in to its market context, Chelsea Financial Services Darius McDermott says: “L&G has a strong presence in the UK and this new fund will strengthen its existing range. This presence, coupled with its marketing and distribution potential, means the fund will enjoy company access not available to even some of the existing managers in the peer group.
“In terms of bringing something new to the table, L&G has developed something different, if not unique.”
McDermott notes that the capacity for call-option overwriting is nothing new, but adds that L&G says this will be exercised under specific circumstances. “It is unlikely to be used on high dividend-paying stocks; if so, this represents a more tactical product in the largely homogenous UK equity income space. “
He finds the fund’s charges and remuneration in line with the competition.
Turning to the less attractive aspects of the fund McDermott says: “If anything, L&G is coming quite late to what is an already crowded market place with some very strong payers such as Invesco Perpetual’s Neil Woodford and Artemis income’s Adrian Frost boasting strong track records.”
He points out that the main criticism being levelled at the sector is that its constituents are far too concentrated on a small pool of bigger company stocks and questions whether there is really room for this product. However, he feels the fund does have credentials given that L&G’s UK equity team, headed by Robert Churchlow, has a successful track record.
“It is also important to note that the call option is already well established in the UK equity income sector. Schroder income maximiser has already set the bar very high for this type strategy, hitting a seven per cent yield every year since inception. However, as I said before, the new L&G fund appears to be aiming for a more tactical use of the derivative tool.”
McDermott thinks the main competition will come from the Schroder income maximiser.
Summing up, he says: “The fund’s positioning is a 10 per cent weighting to small caps, 20-30 per cent in mid caps and the remainder in bigger companies. These percentages are subject to change as the fund develops. The fund is aiming for a 3.3 per cent yield, but this is relatively low given that it will employ the call-writing option.”
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Average