F&C’s Phil Doel has started writing covered call and put options to boost the yield on his £138m UK Equity Income fund as the maximiser model continues to expand.
Doel has already sold 12 covered call options to generate extra income on the 42-year-old fund, which he took over in January 2009. He expects to generate 40-50 basis points a year of extra income, with the fund currently reporting historic yield of 4.4%.
Selling a covered call generates a regular fee, but the writer agrees to give up possible future gains on the underlying stock to the buyer. Put options expose the writer to possible downside in return for fees. This has triggered criticism of the maximiser model, which some say exposes investors to losses in times of market volatility.
Doel says: “It is early stages. At the moment, there is probably more value in the put overwriting because people are more concerned about downside.” (article continues below)
Schroders pioneered the model in 2005 with the launch of its Income Maximiser fund, which is now £730m in size and regularly exceeds its targeted 7% income per year target.
Meera Patel, senior analyst at Hargreaves Lansdown, says: “There are a lot of high-yielding equities. I do not see why income managers should go out of their way to stretch themselves.”