You’d be forgiven for experiencing a bit of déjà vu if you’re flicking through the funds in the UK equity income sector. All focused on providing consistent income from high quality companies, they tend to hold the same big, familiar dividend payers on the UK market, with the sector becoming quite homogenous as a result.
One fund that does offer something different is the Fidelity Enhanced Income Fund, a Select 50 fund, run by manager Michael Clark. While the main purpose of the fund is to generate a premium income versus the FTSE All-Share while preserving capital, the path taken to get there might be new to some investors.
Clark explains: “We invest in companies that pay sustainable and growing dividends. We aim for a 7% yield, although that’s not guaranteed, of which 5% tends to come from these companies. The other 2% comes from covered call overwriting where we generate premium on a systematic basis. That’s the enhancement process.”
Covered calls are contracts investors can use to sell company shares in the future at a pre-set price. If it sounds unfamiliar it’s because it is relatively scarce in the equity income world. Clark explains: “There aren’t too many funds out there that do it but we have a process that we have developed over the past ten years that has been able to generate that 2% extra income consistently.”
Away from the options strategy, Clark is still interested in growing companies that generate a lot of cash out of their operations to allow them to pay a dividend as well as invest in themselves. This means the fund may be of interest to investors seeking income, aiming for a consistent high yield from their investments while keeping an eye on capital preservation.
So what’s more important to the manager: growth or income?
He explains: “We’re looking for both actually. We need the income obviously but we need a company that can grow; where we can make a forecast about it, where we can say that in three, four or five years’ time that it will be bigger than it is today and will be generating significantly more income than it is today.”
For Clark, two of the fund’s top holdings exhibiting these traits are BP and Royal Dutch Shell. A rising oil price has helped the commodity giants recently but the manager is keen to point out their value beyond short-term peaks.
He explains: “The oil price is hard to forecast but it trades within a range over time. Even if it comes down, BP and Shell are still good investments because what’s happened over the past 5 years is that they have brought down their operational costs so they get much more out of a barrel of oil than they used to in terms of cash flow, profit and therefore, dividend. So, if the oil price were to go down to $50 it might have some impact on their share price but the dividend would still be well-covered and would still be paid.”
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. The yield quoted is not guaranteed. Investors should note that the views expressed may no longer be current and may have already been acted upon. This fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. This fund takes its annual management charge and expenses from your capital and not from the income generated by the fund. This means that any capital growth in the fund will be reduced by the charge. Your capital may reduce over time if the fund’s growth does not compensate for it. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.