5% INCOME FOR LOWER RISK INCOME SEEKING INVESTORS

The demand for yield has been one of the driving factors behind the enduring popularity of enhanced equity income funds that use a call-writing strategy to increase the yield that they distribute. These enhanced yield funds typically offer yields of between 5% and 7% through a combination of dividends and call premium.

The Distribution class of the Levendi Thornbridge Defined Return Fund offers a yield of 5%. The 1.25% per quarter payments are created through the redemption of units. This share class may be an attractive proposition for lower risk income seeking investors and as part of a drawdown portfolio.

ILLUSTRATIVE INCOME AND RESIDUAL PORTFOLIO VALUE 

Source; Levendi Investment Management

The chart above shows how the income received, the residual portfolio value and the number of shares remaining might evolve over a thirty-year period assuming an initial investment of £100,000 and an initial share price of £1.00. In this example the fund is assumed to generate a return of 6% per annum with 6% volatility. (Please note that this is for illustrative purposes only, although the assumptions are realistic and consistent with the objectives of the fund, the example above should not be used as a forecast)

REAL PERFORMANCE

The chart below illustrates the performance of the Levendi fund versus the accumulation share classes of three popular enhanced income funds.

The chart shows that the performance of the Levendi Fund has been better than the performance of the other funds with significantly less volatility.

5% INCOME THROUGH A REDEMPTION OF SHARES

The Distribution share class offers a 5% yield for investors. This yield is generated through the quarterly redemption of 1.25% of the outstanding shares. The cash realised is repaid to investors. This has multiple advantages;

• The income is paid regularly each quarter
• Income will move up and down with the value of the Fund, but it is not subject to cuts in dividends paid or changes in derivative pricing
• If the Fund meets the return target, investors will receive a regular income that rises modestly over time and the value of the remaining units should remain stable or rise as well. (Please note the value of the Fund is not protected. If the fund grows by less than the target returns the income received and the value of the remaining shares will fall)
• For investments held outside an ISA or pension, the tax paid on the quarterly income may be low because it is generated by a sale of assets. (Tax is a complicated area; we are not tax experts and so investors need to get their own tax advice.)

INVESTMENT STRATEGY

The covered put investment strategy used by Levendi is like the covered call strategy used by enhanced income funds. The return profile is similar; both covered call and covered put funds give up some upside potential in return for receiving a premium. This premium offers a degree of protection when markets fall and means that these funds can generate positive returns when markets are flat.

However, there are some important points to note about the way that the Levendi fund is managed which impact on the return profile and which are different from most covered call funds.

• The Fund does not have any exposure to the performance of individual equities. The Fund only has exposure to the performance of main equity market indices. Individual equities can be very volatile. Indices tend to be less volatile.
• The assets held by the Fund are very liquid, based on the liquidity of the underlying futures and options markets.
• The risk management overlay is designed to control volatility and limit drawdowns
• The Fund sells long-dated, low-strike puts through investing in equity linked securities. The pricing of these puts is inherently more stable than shorter dated options.

DRAWDOWN SOLUTION

The distribution shares can be used as part of a long-term drawdown solution. We have previously described the benefits in this note. A strategy of selling a fixed percentage of the remaining units has the benefit of generating a high income for investors and mitigates the risks associated with sequencing risk and “pound cost ravaging” which have been widely discussed.

DISCLAIMER

The contents of this document are communicated by, and the property of, Levendi Investment Management Ltd. Levendi Investment Management Limited Ltd is an appointed representative of Thornbridge Investment Management LLP which is authorised and regulated by the Financial Conduct Authority (“FCA”). The information and opinions contained in this document are subject to updating and verification and may be subject to amendment. No representation, warranty, or undertaking, express or limited, is given as to the accuracy or completeness of the information or opinions contained in this document by Levendi Investment Management Ltd or its directors. No liability is accepted by such persons for the accuracy or completeness of any information or opinions. As such, no reliance may be placed for any purpose on the information and opinions contained in this document.  The information contained in this document is strictly confidential. The value of investments and any income generated may go down as well as up and is not guaranteed. Past performance is not necessarily a guide to future performance.