For Professional Investors and Advisers Only RWC Enhanced Income Fund F E B R U A R Y 2 0 1 4
RWC Yields are low across all asset classes 8 7 6 5 Yield (%) 4 3 RPI, 2.6% 2 1 0 Base Rates UK 2 Year Barclays Capital UK 10 Year FTSE 350 UK 30 Year RWC Enhanced IG Corporate Dividend Yield Income Bond Index Source: Bloomberg, December 2013 RWC | 2
RWC Equities have shown alarming volatility 7500 7000 6500 6000 -50% -50% 5500 5000 4500 4000 3500 3000 2013 1998 2000 2002 2004 2006 2008 2010 2012 FTSE 100 Our objective is to deliver an attractive and stable yield Source: Bloomberg, December 2013 RWC | 3
RWC RWC Enhanced Income Fund Offers higher than average yield • UK equity income fund targeting 7% yield • Underlying fund yields c. 4% • Yield is ‘enhanced’ through the use of covered calls But with lower than average volatility • High quality, lowly valued cash compounders • Call overwriting strategy lowers volatility • Willingness to hold cash • Other methods of capital protection e.g. put spread RWC | 4
RWC How do we produce the income? How the Strategy Works • Current underlying portfolio dividend yield of c. 4% enhanced to 7% • Fund sells 3 month call options on each stock in the portfolio for 1% premium (x 4 quarters=4%) • Strike price of call options is set above the level of individual stock price at the start of the quarter • This has the effect of a cap on the growth of each stock at the end of the 3 months • Fund receives option premium from selling the call options, which is applied to enhance income for investors Example : Vodafone option Vodafone share price 200p Option Price 1% = 2p 3 month option Strike level 220p = c. 110% RWC | 5
RWC Lower volatility produces smoother income streams Yield 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Source, RWC RWC | 6
RWC How do we lower the volatility? • Call over writing strategy reduces volatility • In a falling market, few prices go through strikes and hence premium income is retained • Willingness to hold cash when dividend yields and projected returns are low • Taking advantage of fall in share prices to buy higher yielding stocks • Ability to apply measures of downside protection • Use index put options to reduce drawdown in weak markets • High quality, lowly valued cash compounders • This does not mean paying ANY price for Consumer Staple stocks! RWC | 7
RWC Countercyclical cash and put protection levels Percentage of fund distribution arising from company Expected cash levels Expected put protection dividends levels 100% Minimum Minimum 75% Low Low 50% High High 25% Maximum Maximum RWC | 8
RWC What stocks are suited to the strategy? Factor Yes No Size Large to mega cap Small to mid cap Risk Lower risk stocks Higher risk stocks Valuation Not deep value Deep value Profitability High ROIC Low ROIC Implied volatility Mid level volatility Extreme low & high Would I rather an average 120% strike or an average 110% strike? • Not enough information. It all depends on the underlying stocks RWC | 9
RWC Stable cash compounders suit the strategy Growth Rates for Next plc 2003 - 2013 Compounding cash flow drives value creation Source: RWC, 2012, company report and accounts *Dividends reinvested in stock RWC | 10
RWC Lowly valued cash compounder – GlaxoSmithKline 180 45 160 40 140 35 120 30 100 25 80 20 60 15 40 10 20 5 0 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013e 2014e EPS (LHS) DPS (LHS) P/E (RHS) Share Price rebased (RHS) • Since 2000 earnings and dividends +7% p.a. whilst the shares have fallen • Investors concerned by patent expiries, falling R+D productivity and a tougher regulatory environment • Nevertheless profits are forecast to grow and management are focused on growing the dividend • Shares priced at 12x 2012 earnings; 5.4% dividend yield Source: Bloomberg, company report and accounts RWC | 11
RWC Current Portfolio Breakdown – RWC Enhanced Income Fund Food Retailers Tesco 3% Retailers Wal-Mart 2% Next 4% Pharmaceuticals 6% GlaxoSmithKline 5% 4% Telecoms Astra Zeneca 5% Vodafone 5% Merck & Co 3% Deutsche Telecom 4% Pfizer 3% 10% 21% Eli Lilly 2% J&J 2% Media B Sky B 4% Reed Elsevier 3% 7% Energy Index Put Options 0.6% Royal Dutch Shell 4% 8% 3% BP 4% Utilities Centrica 3% 3% Insurance Industrials Legal and General 3% Smiths Group 3% 7% RSA Insurance 2% Other Financials 2% 2% Close Brothers 2% 20% 4% 0.3% Food & Beverage Cash Unilever 2% Technology Swaptions Microsoft 2% Source: RWC, December 2013. Stock position less than 2% excluded RWC | 12
RWC Reducing drawdown, lowering volatility 2012 Performance 2013 Performance 25% 15% 20% 10% 15% 5% 10% 5% 0% 0% -5% -5% -10% -10% -15% -15% Year to end December 2013 - drawdown* 2012 2012 - drawdown* RWC Enhanced Income Fund FTSE All Share RWC Enhanced Income FTSE All-Share Volatility - 30 day rolling** 14% 12% 10% 8% 6% 4% 2% 0% RWC Enhanced Income FTSE All-Share Source: Bloomberg, RWC * Refers to periods 19 th March 2012 to 1 st June 2012 and 21 st May to 24 th June 2013 ** Average 30 day volatility for January 2012 to end of December 2013 RWC | 13 Equity index used is FTSE All share (TR)
RWC Historic volatility closer to high yield bonds than equities 30 day rolling realised volatility 25% 20% 15% 10% 5% 0% Jan12 Mar12 May12 Jul12 Sep12 Nov12 Jan13 Mar13 May13 Jul13 Sep13 Nov13 RWC Enhanced Income Fund FTSE All Share Index BBG Global HY Corp Bond Index Source: RWC/Bloomberg, December 2013 RWC Enhanced Income Fund volatility calculated on non-swing adjusted unit prices RWC | 14
RWC Trade Update • Quarter 1 was particularly difficult for a covered call strategy • Low volatility, sharply rising market • Quarter 2 and 3 was a big improvement • Slight increase in volatility led to higher strikes, less aggressively rising market • Quarter 4 was mixed • Strong equity markets in October led to increased option payouts, November and December were neutral Strike Levels Capped Stocks Covered Sector Volatility 22 Roll 27 106% 18 24 Roll 28 106% 16 22 21 Roll 29 106% 15 24 20 Roll 30 106% 12 22 19 Roll 31 106% 5 23 18 Roll 32 107% 9 24 17 Roll 33 107% 8 24 Roll 34 107% 2 26 16 Roll 35 109% 8 26 15 Roll 36 108% 2 21 14 Roll 37 108% 10 24 13 Roll 38 108% 13 26 12 Roll 39 107% 8 25 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Roll 40 108% 25 Pharmaceuticals Retail Integrated Oil VIX Index Roll 41 108% 24 Roll 42 107% 25 Roll 43 109% 25 Source, RWC, Bloomberg RWC | 15
RWC Trade Update The Fund Continues to Deliver the Income Target Fund Distributions Covered Call TR Contribution 125 Unit Price Distribution Date Yield % 120 (B Share Class) (£) Sep-11 81.9 1.66 1.75% 115 Dec-11 84.5 1.48 1.81% 110 Mar-12 87.7 1.50 1.78% 105 Jun-12 86.4 2.06 2.35% Sept-12 87.3 1.43 1.67% 100 Dec-12 87.3 1.37 1.57% 95 Mar-13 92.7 1.20 1.37% Jun-13 91.2 2.10 2.27% 90 Sep-13 90.6 1.45 1.59% 85 Dec-13 92.0 1.36 1.50% Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Covered Portfolio Uncovered Portfolio *The Yield is calculated as the summation of quarterly percentage distributions. Individual quarterly distributions are calculated based on the end of the previous quarters unit price. Source: RWC RWC | 16
RWC Summary • Fund aims to deliver 7% yield, low volatility and element of drawdown protection • Has delivered against these objectives and is attracting support • RWC Enhanced Income Fund offers a unique approach in a difficult market RWC | 17
Stock Market Environment
RWC 2013 was another year of elevated appetite for risk BAML Fixed Income Returns Global Equity Indices Total Return (USD) 59.3% 14% 13.30% 60% 12% 50% 10% 38.8% 40% 8% 32.4% 30.5% 6% 30% 26.1% 4% 21.6% 20% 2% 1.40% 0% 10% -0.95% -2% -1.80% 0% -4% -2.4% -4.30% -10% -6% CCC BBB BBB AAA AAA Japan (JPY) Russell 2000 US Japan Europe UK EM UK Equity Indices: 2013 Returns Best Performing Members on the FTSE 100 in 2013 35% 140 30% 117.2 120 100.7 100.6 25% 100 90.5 85.0 20% 78.3 80 72.1 65.9 64.6 64.2 15% 60 10% 40 20 5% 0 0% Consolidated Easyjet Hargreaves ITV International Ashtead Group Travis Perkins Persimmon Banking Group BT Group International Lansdown Sport Direct FTSE Small Cap FTSE 250 FTSE 100 Airlines Lloyds Source: Bloomberg, Bank of America Merrill Lynch RWC | 19
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