Friday, 24 October 2014
Last updated 1 hour ago
May 21 2014 | 6:24am ET
RWC raised $60 million for its new Global Enhanced Dividend Fund on the day of its launch—May 1.
The fund is managed by a trio of equity-income specialists—Ian Lance, John Teahan and Nick Purves—who joined RWC from Schroders three-and-a-half years ago (prompting Schroders to buy 49% of RWC).
The London-based team currently runs $4 billion in equity income funds, including the model for the new fund, the $560 million UK-focused RWC Enhanced Income Fund, which they launched upon their arrival at RWC in 2010.
“At the time that we actually launched that [fund] we did say that we would shut it when it reached capacity,” Lance told FINalternatives in a recent phone interview. “And we would regard capacity of around £500 million and it is around £340 million at the moment. So that was one of the reasons for launching the global strategy, the fact that the UK one had the potential to reach capacity in the next year.”
The UK-focused fund has been “pretty popular over the last few years,” according to Lance, who sees no mystery in that popularity: “[I]n an environment in which there is very little yield around, people are looking for income but, at the same time, are wary about taking too much risk and therefore something that can give you an above-average level of income but will also give you an element of protection from draw-down is quite a popular thing at the moment.”
To achieve its goal, the fund combines an underlying portfolio of “reasonably defensive, blue-chip types of stocks” with a call-overwriting strategy that involves selling three-month calls on the fund each quarter to generate premium income of roughly 1%—or 3% to 4% annually.
That premium income combined with the dividends in the underlying stocks produces the fund's target 6% yield.
In building the underlying portfolio, Lance said they look for firms with strong balance sheets; a history of generating decent returns; a history of converting all the profits into cashflow; and management that uses that cashflow in a way the team considers wise—paying out dividends or buying back stock, for example.
“You would expect to see quite large exposure within the fund to areas like consumer staples, healthcare, and telecoms,” said Lance, “and you would expect to see not much exposure to areas like financials, which tend to be slightly more volatile.”
As for the call-writing strategy, Lance said that while in a strongly rising bull market it can lead to your getting capped out, when employed over an entire portfolio of stocks “what will normally happen is only one or two of the stocks might get capped out...So the overriding effect of this is, number one, that you generate a high level of income—you turn 3% into 6%—but number two, you lower the volatility of the fund because, if you think about it, you're being capped out on the upside but in a falling market you're banking the premium and you're never getting capped out so it lowers volatility on the downside.”
The RWC team employs several other measures to lower volatility: they choose underlying stocks that tend to be lower beta; they “let the cash drift up on the portfolio” when market valuations are judged “pretty full” (as they are now, in its opinion); and they buy protection in the form of put-spreads.
“You put those four things together and what you end up with is...a portfolio which...gives you an element of protection on the downside,” said Lance. “Now, at the end of the day, it's a long-only equity fund so it's never going to be completely immune from any draw-down but it basically...it provides you an element of protection.”
The UK-focused version of the strategy tends to see draw-down of half of the market, and that's what they're hoping for from the global fund.
The RWC Global Enhanced Dividend fund will hold 30-50 positions and will initially be focused on developed markets—roughly 20% UK, 30% Europe and 30% U.S. with cash on the order of 15-20%. Capacity will be “several billions,” said Lance. with the minimum investment in the retail share class €1,000.
Some big fund of funds investors have already signed on, said Lance, and they've had pension funds, charities, family offices and “all manner of different types of investors” express interest in the fund which “meets quite a lot of people's requirements at the moment.”
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