New Schroders income fund to target 5% yield

Schroders plans to launch a US version of its popular Money Observer Rated Fund, Schroder Income Maximiser, targeting a yield of 5% - far higher than investors are able to get elsewhere.

Schroders says it will launch the fund, which will charge investors around 0.4 to 0.5%, between March and April 2017, subject to regulatory approval.

It will combine a passive underlying vehicle that will track the S&P 500 index with call options written on the top 200 of those stocks. The call options, which give the fund the right to buy shares in companies at a specified price within a specified future date, are expected to deliver 4% of its planned yield.

At the moment, the highest-yielding fund in the Investment Association North America sector is Aviva US Equity Income, which pays a dividend of just 2.14%.

Rupert Rucker, product manager for the Maximiser fund range at Schroders, says the firm thinks it "can do a lot better" than current actively managed offerings, which are low-yielding, charge high fees and have high tracking errors, meaning they tend to underperform those that closely track the market.

Speaking at an event in London on Wednesday (18 January), Rucker added: "The reason we thought it was a good idea is because we looked at other options in the US equity income sector in the UK and we thought they were really poor.

"For clients who want exposure to US equities but still want income, we felt this was a much better proposition than exists in the market."

Rucker adds that the fund will not be able to "deliver significant alpha in US large cap", meaning it will not try to compete with the cheap exchange traded funds that are a popular way for investors to gain exposure to the beta of the US market.

The high tracking error of actively managed US equity income funds comes about because they are forced into investing in the relatively few companies that pay generous dividends, and out of fast-growing stocks like Amazon and Alphabet, which pay no dividends.

Instead, the equity portion of US Income Maximiser will act as a kind of halfway house; investors will "get the whole market" through the index tracker. "They're going to get everything - Amazon, Alphabet [as well as] all of those dividend payers," says Rucker.

The fund will be the third in the Maximiser stable, which currently includes a UK version and an Asian version. Both of these are run using the same mandates and target a yield of 7%.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.