Last Word
Perspective
ARTICLE
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Fund Manager
VIDEO
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Square Mile
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strategy directly from the fund managers themselves.
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research and market views together with an explanation of the
Premier Optimum Income Fund is one of a small number of UK equity enhanced or optimised income funds. The fund’s high income comes from the UK equity portfolio based on the Premier Income Fund, plus a covered call option overlay that allows the fund to target a yield of 7% per year.
Axis analyses the fund from four perspectives to bring you insight,
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Review By Gary Corcoran
COMPANY_ Last Word
Chris White and Geoff Kirk joined forces in October 2017 to co-manage the Premier Optimum Income Fund. As the new fund managers, they have made changes to the way the UK equity portfolio and covered call strategy is managed, introducing an explicit target yield of 7%.
Scroll down to read more...
“The UK equity portfolio is based on the Chris White-managed Premier Income Fund that is currently expected to generate a yield of 4% to 4.5%.”
JOB TITLE_ Director
YEARS IN INDUSTRY_ 25+
LOCATION_ London
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at Last Word
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GARY CORCORA_
GARY CORCORAN_
GARY CORCORAN
An enhanced income offering from a high-yielding equity strategy
COMPANY_ Square Mile Investment
To view Square Mile Investment Consulting and Research Ltd's disclosure on their involvement on this site, please click here.
JOB TITLE_ Head of Research
V_
“We view the yield target [of 7%] positively as, despite acknowledging there is no guarantee the fund will meet this, it provides investors with a clear objective.”
There are two key elements to the Premier Optimum Income Fund. Underpinning the fund is a portfolio of UK equities that is essentially identical to that of the Premier Income Fund. Holding an expected 40-60 companies, it invests across the market-cap spectrum and is designed to deliver a yield in excess of the FTSE All-Share index over rolling three-year periods. The second part is an options overlay strategy to enhance the fund’s target yield to 7%, with distributions made on a quarterly basis.
Scroll down to read more...
YEARS IN INDUSTRY_ 16
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VICTORIA HASLER
Last Word
Perspective
Premier Optimum Income Fund is the firm’s UK equity enhanced income fund, co-managed by experienced stock picker Chris White and covered call option specialist Geoff Kirk.
White is also the manager of the Premier Income and Premier Monthly Income funds, which are expected to invest in the same 40-60 stocks, providing investors with a high level of income along with the prospects of long-term capital growth. The difference between the two funds is the frequency of income payments: monthly or half-yearly.
These funds have a historic yield of around 4-4.5% and the UK equity portfolio for the Premier Optimum Income Fund is based on the Premier Income Fund. The fund also employs a covered call strategy, managed by Geoff Kirk, in order to target an attractive total yield of 7%, which means currently generating an extra income of about 2.5-3%.
Kirk joined the firm in July 2017 and started as co-manager of the Premier Optimum Income Fund alongside White in October 2017, introducing an explicit 7% target yield. Kirk and White work closely together to ensure the fund is designed to provide a good balance between the two sources of income, while also considering the long-term capital growth potential of the fund.
Another key point with the covered call strategy is it does not introduce leverage. Any liabilities due under the options contract are covered by gains made through the share price of the underlying stock.
Over and above investing across the cap-size spectrum, Kirk is also keen to ensure three specific elements of diversification in the fund.
Firstly, the options exposure is spread over a broad base of names to minimise stock-level bias from the overlay; secondly, there is diversification by option maturity, selling both one and three-month options; the third level is his averaging strategy where the options are written as multiple, overlapping contracts, with different strike dates and prices.
This fund sits well as the enhanced income offering within Premier’s range of other equity income funds.
A jointly-managed combination of an underlying stock-picking UK equity income strategy with a covered call overlay
AUTHOR_ GARY CORCORAN
Kirk was hired from Schroders and has been running covered call strategies for income enhancement for the past 11 years. His strategy at Premier is to sell call options on individual shares within the portfolio. This has the effect of selling some but not all of the upside on those stocks in exchange for an upfront cash premium that is subsequently paid out as income. The upfront payment means the fund does not assume any counterparty risk as there is no exposure to the banks bar this transactional relationship.
The options are sold only on stocks held in the equity portfolio. Options are not sold on every single stock, and it is expected that between 50-70% of the stocks will be over-written at any one time.
The underlying stocks White buys are across the market capitalisation scale, including investment in large, mid and small-cap stocks. The covered call options are usually sold on larger and mid-cap companies - likely to be the most efficient companies to use for these options – so the fund retains the growth potential of typically more dynamic smaller companies.
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Kames Global Diversified Income Fund
Fund
Vincent McEntegart has been managing the Kames Global Diversified Income Fund for six years and is well-versed to the changeable financial climate. Curabitur blandit tempus porttitor. Aenean lacinia bibendum nulla sed consectetur.
Manager
Vincent McEntegart
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The fund sells call options on specific shares in the portfolio at an agreed price which can be exercised at some point in the future, typically in one or three months’ time. In return, the fund receives an upfront payment, referred to as the option premium. The premiums are added to the dividend payments from the underlying share portfolio and this produces an enhanced income to investors in the fund.
The quid pro quo for receiving the higher yield is that this fund’s future capital growth is likely to be lower than the Premier Income Fund. Furthermore, investors should be aware that if the underlying equity portfolio loses value, the managers could still meet the yield target, but the absolute level of income will fall.
Historic yield and distributions will not reflect the present strategy given the fund has only operated under its current management structure since October 2017. Nevertheless, we view the yield target positively as, despite acknowledging there is no guarantee the fund will meet this, it provides investors with a clear objective.
AUTHOR_ VICTORIA HASLER
“This fund has recently applied a 7% target yield and although not guaranteed we see this as achievable. It combines a reasonably cautious UK equity income portfolio with an options overlay strategy. The latter element is the responsibility of Geoff Kirk, a manager who has a good level of experience in this field, particularly from his time at Schroders where he ran a similar product. The underlying equity portfolio benefits from a manager who applies a sensible approach to UK equity income investment.”
Given the focus on income, a company’s ability to pay, and indeed grow, its dividend is also a key aspect of the process. It is important to note that the manager will not aim to place capital at risk by chasing higher-yielding but perhaps riskier and less income-reliable stocks. Preferred investments would tend to demonstrate characteristics such as higher quality business franchises, strong free cash flow yields and low levels of debt. Investment is taken from across the market cap scale with the portfolio tending to hold 40 to 60 stocks.
The second part of the strategy, the options overlay, involves selling call options on some of the stocks held in the portfolio. This element is the responsibility of Geoff Kirk who joined Premier in 2017, and has a great deal of experience in this field. Indeed, he spent 11 years in a similar role at Schroders.
This fund is one of a small number of strategies available that seek to provide an enhanced level of yield. The Premier Optimum Income Fund follows the same principle as others in this space in that it combines a UK equity income portfolio with an option strategy designed to produce a target yield of 7%. It is worth mentioning that this and similar products have yield and not income targets meaning that while in any given year they may meet their yield target, the absolute level of income received can vary.
Underpinning this fund is a portfolio of UK equities that is essentially identical to that of the Premier Income Fund. It is managed by experienced investor, Chris White, who has managed the UK equity portfolio strategy at Premier since December 2010, as manager of the Premier Income and Premier Monthly Income funds.
He joined Premier following a seven-year spell at Threadneedle Investments. White uses an approach we think is wholly sensible for income investing. He is a naturally income-conscious and cautious investor, who thinks as much about the potential for capital loss with each holding as he does about its potential upside.
A proposition that makes good use of covered calls to provide an additional source of income
John Monaghan, research manager, Square Mile Investment Consulting & Research
Square Mile
Perspective
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Jonathan Woo_ investment research_ Santander Asset Management
×
“There has been considerable structural reform in giant markets like India, China and the Pacific Tiger economies. It’s a time of change from investment in infrastructure to innovation. Baillie Gifford looks for superior growth, meaning its style is suited to this change. They make some debatable valuations but are valiant investors and can spot businesses with great fundamentals early. They are picking the sort of businesses that have the potential to steam ahead and accrue multiple years of earnings growth for investors.”
Scott Spencer_ Investment Manager_ F&C Multi-manager solutions, BMO Global Asset Management
“The key rationale behind Income Maximiser is the delivery of a 7% yield. The use of derivatives in the portfolio means the upside is therefore limited but we find the fund is a lower beta way of getting equity exposure as well as some downside protection.”
“The fund managers of Schroder Income [Nick Kirrage and Kevin Murphy] pick the stocks, and the derivatives for Income Maximiser are then written accordingly. We like the fact that derivatives provide a diversification element and we have a great deal of confidence that the derivatives are run by a separate team. It is a very different skill set and is a USP of theirs.”
Richard Philbin_ CIO_ Wellian Investment Solutions
Mona Shah_ head of collectives_ Rathbones
“After years of lacklustre performance, Asia and the emerging world experienced a resurgence last year, driven by rising commodity prices and a fundamental shift in favour of more cyclical sectors like financials, energy and materials. But many of the fortunes of Asia and emerging markets are driven by sentiment from the West, which was negatively affected by the US election in November. While markets have regained their initial losses, we’ve had no more clarity on what Donald Trump’s policies will mean with regards to global trade and protectionism. For this reason, we believe that diversification should offer benefits in a period where markets are likely to be volatile. In addition, the economies in Asia-Pacific are showing increasing dependence on domestic demand, and we believe funds exposed to growing demand from consumers in China, for example, may be better placed to withstand headwinds from the US.”
Robert Shepherd_ Director_ Bright & Co.
We were on the lookout for something different and, let’s face it, 4% or lower is the norm in this environment. So this is attractive”
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Achievable, sustainable, reliable
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Fund
Manager
Perspective
Fund Buyer
Perspective
This demo version has been optimised for desktop, laptop and tablet. Smartphones, iPhones will be supported in the next version.
to bring you insight, research and market views
together with an explanation of the strategy
directly from the fund managers themselves.
Axis analyses the fund from four perspectives
Kirk was hired from Schroders and has been running covered call strategies for income enhancement for the past 11 years. His strategy at Premier is to sell call options on individual shares within the portfolio. This has the effect of selling some but not all of the upside on those stocks in exchange for an upfront cash premium that is subsequently paid out as income. The upfront payment means the fund does not assume any counterparty risk as there is no exposure to the banks bar this transactional relationship.
The options are sold only on stocks held in the equity portfolio. Options are not sold on every single stock, and it is expected that between 50-70% of the stocks will be over-written at any one time.
The underlying stocks White buys are across the market capitalisation scale, including investment in large, mid and small-cap stocks. The covered call options are usually sold on larger and mid-cap companies - likely to be the most efficient companies to use for these options – so the fund retains the growth potential of typically more dynamic smaller companies.
Premier Optimum Income Fund is the firm’s UK equity enhanced income fund, co-managed by experienced stock picker Chris White and covered call option specialist Geoff Kirk.
White is also the manager of the Premier Income and Premier Monthly Income funds, which are expected to invest in the same 40-60 stocks, providing investors with a high level of income along with the prospects of long-term capital growth. The difference between the two funds is the frequency of income payments: monthly or half-yearly.
These funds have a historic yield of around 4-4.5% and the UK equity portfolio for the Premier Optimum Income Fund is based on the Premier Income Fund. The fund also employs a covered call strategy, managed by Geoff Kirk, in order to target an attractive total yield of 7%, which means currently generating an extra income of about 2.5-3%.
Kirk joined the firm in July 2017 and started as co-manager of the Premier Optimum Income Fund alongside White in October 2017, introducing an explicit 7% target yield. Kirk and White work closely together to ensure the fund is designed to provide a good balance between the two sources of income, while also considering the long-term capital growth potential of the fund.
Another key point with the covered call strategy is it does not introduce leverage. Any liabilities due under the options contract are covered by gains made through the share price of the underlying stock.
Over and above investing across the cap-size spectrum, Kirk is also keen to ensure three specific elements of diversification in the fund.
Firstly, the options exposure is spread over a broad base of names to minimise stock-level bias from the overlay; secondly, there is diversification by option maturity, selling both one and three-month options; the third level is his averaging strategy where the options are written as multiple, overlapping contracts, with different strike dates and prices.
This fund sits well as the enhanced income offering within Premier’s range of other equity income funds.
-
Income
target_
Size of
fund in £_
m
Launch date_25/02/2014
Performance
year to date_
Number of
holdings_
%
.
Kames Diversified Monthly Income Fund
pa paid monthly
Performance
since launch_
Total return
target_
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Geoff Kirk
Chris White
Premier Optimum Income
Geoff joined Premier in July 2017 to become co-manager of the Premier Optimum Income Fund. Geoff joined from Schroders where he had worked for 11 years managing covered call option strategies.
Chris White joined Premier in November 2010 and has over 25 years of investment management experience. He manages the Premier Income and Premier Monthly Income Funds and is co-manager of Premier Optimum Income Fund.
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Scroll down to see what Square Mile has to say...
Chris White joined Premier in November 2010 and has over 25 years of investment management experience. He manages the Premier Income and Premier Monthly Income Funds and is co-manager of Premier Optimum Income Fund.
There are two key elements to the Premier Optimum Income Fund. Underpinning the fund is a portfolio of UK equities that is essentially identical to that of the Premier Income Fund. Holding an expected 40-60 companies, it invests across the market-cap spectrum and is designed to deliver a yield in excess of the FTSE All-Share index over rolling three-year periods. The second part is an options overlay strategy to enhance the fund’s target yield to 7%, with distributions made on a quarterly basis.Scroll down to read more...
The fund sells call options on specific shares in the portfolio at an agreed price which can be exercised at some point in the future, typically in one or three months’ time. In return, the fund receives an upfront payment, referred to as the option premium. The premiums are added to the dividend payments from the underlying share portfolio and this produces an enhanced income to investors in the fund.
The quid pro quo for receiving the higher yield is that this fund’s future capital growth is likely to be lower than the Premier Income Fund. Furthermore, investors should be aware that if the underlying equity portfolio loses value, the managers could still meet the yield target, but the absolute level of income will fall.
Historic yield and distributions will not reflect the present strategy given the fund has only operated under its current management structure since October 2017. Nevertheless, we view the yield target positively as, despite acknowledging there is no guarantee the fund will meet this, it provides investors with a clear objective.
This fund is one of a small number of strategies available that seek to provide an enhanced level of yield. The Premier Optimum Income Fund follows the same principle as others in this space in that it combines a UK equity income portfolio with an option strategy designed to produce a target yield of 7%. It is worth mentioning that this and similar products have yield and not income targets meaning that while in any given year they may meet their yield target, the absolute level of income received can vary.
Underpinning this fund is a portfolio of UK equities that is essentially identical to that of the Premier Income Fund. It is managed by experienced investor, Chris White, who has managed the UK equity portfolio strategy at Premier since December 2010, as manager of the Premier Income and Premier Monthly Income funds.
He joined Premier following a seven-year spell at Threadneedle Investments. White uses an approach we think is wholly sensible for income investing. He is a naturally income-conscious and cautious investor, who thinks as much about the potential for capital loss with each holding as he does about its potential upside.
Given the focus on income, a company’s ability to pay, and indeed grow, its dividend is also a key aspect of the process. It is important to note that the manager will not aim to place capital at risk by chasing higher-yielding but perhaps riskier and less income-reliable stocks. Preferred investments would tend to demonstrate characteristics such as higher quality business franchises, strong free cash flow yields and low levels of debt. Investment is taken from across the market cap scale with the portfolio tending to hold 40 to 60 stocks.
The second part of the strategy, the options overlay, involves selling call options on some of the stocks held in the portfolio. This element is the responsibility of Geoff Kirk who joined Premier in 2017, and has a great deal of experience in this field. Indeed, he spent 11 years in a similar role at Schroders.
John Monaghan, research manager,
Square Mile Investment Consulting & Research
A proposition that makes good use of covered calls to provide an additional source of income
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Market Reaction
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market viewpoints, together with the
to bring you incisive analysis, research and
Fund Manager’s own investment strategy.
Axis interrogates the fund from four perspectives
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Chris White and Geoff Kirk joined forces in October 2017 to co-manage the Premier Optimum Income Fund. As the new fund managers, they have made changes to the way the UK equity portfolio and covered call strategy is managed, introducing an explicit target yield of 7%.
Review By Gary Corcoran at Last Word
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Chris White joined Premier in November 2010 and has over 25 years of investment management experience. He manages the Premier Income and Premier Monthly Income Funds and is co-manager of Premier Optimum Income Fund.
Geoff Kirk joined Premier in July 2017 to become co-manager of the Premier Optimum Income Fund. Geoff joined from Schroders where he had worked for 11 years managing covered call option strategies.
There are two key elements to the Premier Optimum Income Fund. Underpinning the fund is a portfolio of UK equities that is essentially identical to that of the Premier Income Fund. Holding an expected 40-60 companies, it invests across the market-cap spectrum and is designed to deliver a yield in excess of the FTSE All-Share index over rolling three-year periods. The second part is an options overlay strategy to enhance the fund’s target yield to 7%, with distributions made on a quarterly basis. Disclaimer »
John Monaghan, research manager,
Square Mile Investment Consulting & Research
and market views together
Axis analyses the fund
strategy directly from the
from four perspectives to
bring you insight, research
fund managers themselves.
with an explanation of the
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John Monaghan, research manager,
Square Mile Investment
Consulting & Research
Dividend
income_
Source: Premier Asset Management
*Indicative figures 31.12.2017
Target
yield_
*
Typical expected
number of stocks_
Premier Optimum Income Fund
Sources of
income_
Covered call
enhancement_
1
2
3
4
5
6
7
8
9
0
Scroll down to see what the Fund Managers have to say...
Scroll down to see what the Fund Buyers have to say...
Source: Premier Asset Management
*Indicative figures, as at 31.12.2017
Selling some potential future upside for a known premium income now
Generating option premium for enhanced income
Source: Premier Asset Management
*Indicative figures as 31.12.2017
“We have owned this fund for the past couple of years and with the experienced and trusted Chris White now running the fund, like that its portfolio of underlying stocks is significantly differentiated from other income funds. Premier Optimum Income is a multi-cap fund with a large, small and mid-cap element to it. It is co-managed by Chris, who has an excellent long-term record of delivering income and capital growth and we have been very impressed by Geoff Kirk, who brings great expertise to the writing of the covered call options which enhance the yield.”
Rob Pemberton_ investment director_ HFM Columbus Asset Management
“Enhanced income strategies in UK equites like the Premier Optimum Income Fund currently deliver yields of around 7% which can be attractive compared to yields available elsewhere. The primary reason for buying an enhanced income strategy is for the increased yield, however the underlying holdings will remain the main driver of returns. Given the focus on income, these funds tend to have a bias towards value securities and therefore returns may differ significantly from the market.”
Jeremy Ward_ multi-asset fund manager_ Coutts
“High income funds can be incredibly useful when we are building portfolios with an income requirement, not just because they offer income but because if we can achieve a slightly higher level of income in one part of the portfolio, it then gives us greater flexibility elsewhere to dip into lower-yielding assets that have complementary characteristics. Incorporating high income funds can help us to build better diversified portfolios that we hope will be more resilient, while also maintaining an attractive yield on the portfolio as a whole.”
Joanne Benson_ senior fund analyst_ Wellian Investment Solutions
Will Dickson_ head of portfolio management_ P1 Investment Management
“We use the fund within portfolios which have a high income requirement meaning its close-to-7% yield is key to our selection. However, from a total return perspective we can still expect that the fund will benefit from the active management of Chris White, who has a long track record with the Premier Income and Monthly Income funds.”
Fund buyers' perspective
Premier Optimum Income enhances the high-yielding stocks within the Premier Income Fund with additional covered call options strategy to target a 7% yield.
“We use the fund within portfolios which have a high income requirement meaning its close-to-7% yield is key to our selection. However, from a total return perspective we can still expect that the fund will benefit from the active management of Chris White, who has a long track record with the Premier Income and Monthly Income funds."
Joanne Benson_ senior fund analyst_ Wellian
Investment Solutions
“We have owned this fund for the past couple of years and with the experienced and trusted Chris White now running the fund, like that its portfolio of underlying stocks is significantly differentiated from other income funds. Premier Optimum Income is a multi-cap fund with a large, small and mid-cap element to it. It is co-managed by Chris, who has an excellent long-term record of delivering income and capital growth and we have been very impressed by Geoff Kirk, who brings great expertise to the writing of the covered call options which enhance the yield."
Rob Pemberton_ investment director_ HFM Columbus
Asset Management
Distributable yield
Dividend
yield
7% target
yield
Always capturing the first share price growth
Options sold out-of-the-money
capping upside at around 110%
over 3 months or 107% over 1 month
Option
premium
Capital
growth
Equity
holding
Share price
2.5%-3%
Strike price
4%-4.5%