The RWC Enhanced Income fund, managed by Ian Lance and Nick Purves, is attracting investors keen to increase the income generated by their investments but reluctant to take on full equity market volatility during a period of heightened risk.
Some 98% of investors in the fund hold the income units suggesting they are primarily interested in the funds income producing capabilities. The effectiveness of the fund’s strategy has been demonstrated during the recent market decline as the fund has held up relatively well. Since the market peaked on 16 March, the fund is down only 3.8% compared with a decline of 9.8% for the index. In addition the 30 day volatility figure of 12% compares with 18% for that of the market.
Investors currently face a depressing range of investment returns from the bond market and the flight to safety has meant that corporate bonds from high quality companies such as GlaxoSmithKline now yield only 2.4%. Whilst some equities are now priced for reasonable long term returns, investors have experienced two 50% draw downs in the last ten years and given the risks emanating from Europe are understandably reluctant to repeat this experience.
The RWC Enhanced Income Fund seeks to offer a 7% yield which is substantially above the wider equity market, whilst also offering considerably lower volatility than the equity market. The yield is achieved through holding a portfolio of high quality, defensive equities which on average yield 5%. This yield is then ‘enhanced’ by selling call options on the majority of the funds holdings.
The lower volatility is achieved in four ways:
The companies the fund owns must have strong balance sheets, a history of earning high returns and generating cash and must be available at a reasonable starting valuation. In aggregate, these companies will tend to be less volatile than the wider index.
The call over-writing strategy further reduces volatility as in a falling market, the fund will keep the premiums from the option strategy.
The fund will hold cash when the managers are unable to find a sufficient number of companies meeting their investment criteria and also available at low starting valuations. Currently the fund has 15% cash which lowers volatility and gives the managers the ability to invest in high quality equities once valuations improve.
Finally, the fund has employed other methods of protection which reduce the exposure to a declining market and smooth the income stream from the fund.
Dan Mannix (pictured), Head of Business Development, RWC, says: “Nick and Ian have a long history of achieving exceptional returns for investors from their value orientated approach to income investing. With market volatility as it is and yields from bond markets looking unappealing on a long-term basis the approach we are adopting within RWC Enhanced Income is becoming increasingly attractive.
“John Teahan is an integrated member of the investment team and is responsible for managing the overlay part of the fund. We have found that the integration between the stock picking part of the process and the overlay allows us to ensure the portfolio is built to maximise the benefits of the approach.”