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Taking stock

Schroder income maximiser is an interesting proposition with a mouth-watering yield. It aims to generate an income of about 6-7 per cent (net of charges) which is distributed quarterly.

The fund will invest in a portfolio of the UK value team’s 40-50 best blue-chip stock ideas coupled with an overlay strategy using covered call options.

A call option gives the buyer of the option the right to buy a fixed amount of stock from Schroders at a fixed price and date in the future (usually three months). The reason why it is a covered call option is because it is written on stock which is already owned in the portfolio. Lead manager Richard Lloyd writes a call option on each stock in the portfolio and sells it to a third party for a premium. It is this premium which enhances the yield on the portfolio.

By offering an income that is higher than the market, the trade-off is that the upside on the stocks is capped at around 8-14 per cent per quarter depending on market conditions. Therefore, the fund will not benefit from stocks which grow by more than their capped amount.

If markets are flat or falling, a fund like this should outperform. In rising markets, this fund may underperform trad-itional equity income funds. Buying a fund like this will depend very much on how important income is over capital growth in an investors’ portfolio.

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