The funds that pay a 7% yield: The Schroder Income Maximisers

In the current low yield environment it can be difficult to find investments that offer an attractive level of income, so you might be surprised to hear that there is a range of funds that is paying out 7%. The five Schroder Income Maximisers are some of the highest yielding open-ended funds available to UK-based investors.

The flagship is the Schroder Income Maximiser fund, which was launched in November 2005 and has attracted just over a billion pounds of assets under management. It aims to provide income with the potential for capital growth and is benchmarked against the FTSE All-Share Total Return index.

The managers have an annual target yield of 7%, which they attempt to achieve by investing in a concentrated portfolio of high yielding, deep value, UK equities and by trading the associated options. This mainly involves selling out-of-the money short-dated call options on the portfolio holdings so as to sacrifice some of the potential capital gains in return for income.

An out-of-the money call option gives the buyer the right, but not the obligation, to buy the stock at a fixed higher price (the strike price) at a set point in the future. The seller gets an upfront fee for writing the option, although if the share price finishes above the strike price they miss out on the excess gain. If the managers get it right and set the strike price above where the share finishes the option would end up worthless and the fee for writing it would be pure profit.

It is an interesting strategy with the aim being to sell just enough potential capital growth across the combined holdings to meet the target yield, while still benefiting from the first phase of capital appreciation. They have done it remarkably well as the fund has been going for 10 years and has met its 7% target yield in every one of them, although the total return is only marginally higher at 79.6%, which suggests a very limited capital gain.

The income is distributed on a quarterly basis and the ongoing charges are 1.66% due to the additional costs associated with this sort of strategy.

Two further funds were added in 2007. The Schroder ISF Global Dividend Maximiser and the Schroder ISF European Dividend Maximiser both use a similar strategy and target the same 7% yield, but pay the income on a monthly basis.

The fourth fund in the series, the Schroder Asian Income Maximiser, was launched in June 2010 and is smaller with £238m in assets under management. It has the identical 7% annual target yield, but is benchmarked against the MSCI All Companies Asia Pacific ex Japan index.

Schroder Asian Income Maximiser uses the same covered call strategy as its UK equivalent, but can also sell out-of-the money put options to generate additional income. The fund has successfully met its target yield in each of its first 5 years and has made a total return since launch of 28.1% with ongoing charges of 1.7%.

The latest addition to the range is the Schroder Global Property Income Maximiser fund. This was launched in February 2011 and has £65.6m in assets under management. It has the same target yield as the others, but invests in real estate investment trusts and other property companies from around the world.

The managers look for high quality real estate companies that are capable of generating sustainable long-term cash flow growth and whose prices do not reflect their true value. They use the dividends from these securities and the option overlay strategy to target a 7% yield.

Schroder Global Property Income Maximiser has made a total return since launch of 16.8%, which is well below its benchmark, and has ongoing charges of 1.7%.

All five Schroder Income Maximiser funds are overseen by Dr Thomas See, the company’s head of structured finance management. They are probably the only way that income investors can realistically hope to achieve a 7% yield in the current environment.