Income-seeking investors will have a new route open to them from February 18, when Schroders launches its latest offering from its ‘Maximiser’ suite of funds. The Schroder Global Property Income Maximiser aims to deliver annual yield of 7% by selecting income-focussed property stocks and REITs and harnessing market volatility via the fund’s covered call option overlay strategy.
This latest offering combines the expertise of two previously-proven teams: Jim Rehlaender and Al Otero of European Investors Inc (EII) have over 40 years of global property securities selection between them, and Rehlaender's management of the Schroder Global Property Securities fund over the past five years has earned it Morningstar's Superior qualitative rating. Meanwhile, Dr Thomas See’s income maximiser strategy has helped the Schroder Income Maximer fund earn the same Superior rating since its launch in April 2009.
The active management of this new fund therefore takes two forms. Firstly, the dividends provided by Rehlaender and Otero’s selection of 60-80 property securities (with a focus on companies with strong market positions, proven management teams, solid balance sheets and high levels of liquidity) should provide around 4% yield p.a. Secondly, depending on the additional yield needed to achieve the targeted 7% p.a., See will look to the volatility of portfolio holdings to drive the extra level by selling covered call options.
The fund’s managers see several benefits of this two-tier approach: Property securities have a low correlation with other asset classes; REIT dividend yields tend to be higher than bond yields over long time periods—a factor that is particular pertinent given the current economic climate; and global property securities offer a broad level of diversification across geographies and real estate sectors. In addition, See points out that there’s a market for call options almost irrelevant of the direction of the stock market--it’s volatility that drives demand for these securities and higher market volatility should provide the opportunity to demand higher options strike prices. Speaking at Schroders this morning, See explained that he believes markets are likely to become more volatile going forward as interest rate changes come into effect and governments adjust fiscal policy.
Of course, as with all investments, there are risks as well as potential rewards. Property funds are niche players and should therefore only represent a small portion of a diversified portfolio. It must be remembered that while investing in real estate securities provides a level of diversification against equities, like all sector funds this fund will be exposed to industry-specific risk and will therefore court higher volatility than broad-based offerings. Furthermore, given the structure of the fund, it is likely to lag in times of strong market performance.
Having said that, for investors seeking income and comfortable with the levels of risk associated with equity investing, the managers believe they have much to offer. “We’re at an inflection point for property,” commented Rehlaender this morning as he highlighted the team’s particular attraction to the retail sector at present and a taste for China. He noted that while the global economic recovery is underway, the ongoing constraints on the supply of commercial property due to the difficulty of financing projects should create a beneficial supply-demand environment for investing in this area. The managers' preference for Asian, US and Australian property securities is exemplified by the Global Property Income Maximer’s top 10 holdings--a mixture of REITs and property securities from China, Japan, Hong Kong and the US; European holdings appear further down the list, while the portfolio does not at present house any UK investments.
UK investors considering such an approach to income generation will also be interested to know that when it is launched in mid-February, the Schroder Global Property Income Maximiser fund will be eligible for investment via an ISA wrapper, enabling individuals to avoid paying income or capital gains taxes on the 7% p.a. yield that the managers aim to generate. Note of course that, as with all funds, the annual management charge (1.5% for retail investors in this case) will eat into returns.
