by Cherry Reynard from interactive investor, 5th December 2023:
At a time when income is abundant, “enhanced income” strategies have been a surprise hit in 2023. The largest actively managed ETF in the world is now the JPM Equity Premium fund, a covered call strategy with $30 billon (£23.7 billion) in assets, while Morningstar identified “derivatives income” as its third most-popular strategy based on the number of funds launches over the past two years…
Performance
The idea was sound, but their success or otherwise will be in the eye of the beholder. The funds have delivered a high income, while retaining exposure to stock market growth. Many have delivered a similar return to the fund on which they were based, but simply ensured that more of that overall return came in the form of income…
Investment trusts
Investment trusts also offer a range of strategies to boost the natural yield of a portfolio. They may also employ call-writing strategies, or take income from capital to boost yield. The income-from-capital approach will often be used by high-growth trusts to bring in different types of shareholders. James Carthew, head of investment company research at QuotedData, says: “When income was hard to come by, there was a definite benefit to topping up dividends by paying part of them from capital as trusts as diverse as International Biotechnology, Montanaro UK Smaller Companies and JPMorgan Global Growth & Income do.”..
Creating income by writing options will tend to be used by conventional equity income trusts. Carthew gives the example of the North American Income Trust, managed by abrdn. “The manager has been careful not to lose too much of the upside from NAIT’s portfolio. The option writing augments the naturally attractive level of income generated by the portfolio, allowing the manager to hold some faster-growing but lower-yielding stocks.”
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