Invest with confidence. Boosting income and preserving capital in retirement

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1 Invest with confidence Boosting income and preserving capital in retirement

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3 Australians have an income challenge As the cost of living continues to rise and retirement nears, you need more than ever to start thinking about protecting your savings but at the same time generating returns to ensure you have enough to live on in retirement. Even though equities provide superior returns in the long run there is the risk that market events or volatility can lead to negative short term returns. In the early years of your retirement, such events can significantly impact your capital. With this in mind, the challenge becomes about balancing your appetite for risk and at the same time extracting enough income and capital growth to ensure you have enough to live on in retirement. Many of us may think choosing safer options such as cash is the solution. But with cash rates at the lowest level on record this is not the case. An alternate solution is to alter the return profile of your equity portfolio, as you can achieve a virtuous circle of results; 1. Raising the total level of distributable income 2. Dampening portfolio volatility to ensure you have the equity exposure you need without the same level of risk as a normal equity fund. Not only does this help resolve much of the income challenge but it gives you a better chance of preserving capital for longer dealing with the rising importance of longevity risk. One unique solution that can do this is to use options Equity income products use options markets to convert some future capital gains into upfront income, or option premium. Some of this can be distributed as income and some can be used to control risk, allowing better management of up and down markets. Properly managed equity income funds are an excellent way to generate income and at the same time capture the benefits of equity market exposure. At Zurich Investments we pioneered this space, launching the Zurich Investments Equity Income Fund 8 years ago. This flyer will step you through the how and why of options to help you overcome your income challenge. 3

4 1. Options as an alternative source of high income As an asset class, the sharemarket can provide both growth and income. In fact, it is possible to generate high, reliable income from a share portfolio, above and beyond dividends, by using exchange traded options. Using options to enhance income A traditional buy-write option strategy which involves buying a stock and selling a call option against it is one of the simplest ways to earn extra income from a share portfolio. Far from being a new concept, buy-write option strategies have been used successfully for many years by highnet-worth and sophisticated investors. Buy shares Sell call options against shares Receive income from dividend payments Receive income from option premiums This simple example shows how a traditional buy-write strategy can make a share portfolio work harder to earn extra income. When you purchase shares, the rule of thumb is generally to buy now for as low a price as possible and sell later for a higher price. A buy-write strategy, if exercised, simply takes this process one step further by specifying the selling date and price in the future. Some investors may be concerned that this type of strategy is high risk. However, a buy-write strategy is considered to be quite conservative as it doesn t involve any financial leverage. Advantages of a traditional buy-write strategy The investor earns additional income by being paid an option premium in return for agreeing to sell the shares at a future date if the agreed price is reached. The investor receives some protection against falling sharemarkets as the option premium offsets the fall in the value of the shares. Disadvantages of a traditional buy-write strategy If the share price rises significantly above the option s exercise price, the investor will forgo some of the upside in the value of the shares. If the option is exercised you are obligated to sell the shares. 4

5 2. Zurich Investments Equity Income Fund If your clients recognise the importance of investing in the sharemarket yet remain concerned about market fluctuations, it s worth considering an allocation to a specialist Australian share fund. One option to consider is the Zurich Investments Equity Income Fund. This fund can play a valuable role in both income and growth portfolios due to its focus on providing income, some downside protection and conservative capital growth. The covered call or write-buy strategy $6 Buy-write strategy Involves selling call options to generate additional income over and above dividends from shares held in an underlying portfolio $4 -$2 M P $2 $0 $6 $8 $10 $12 $14 $16 -$4 -$6 P premium earned M exposure sold Source: Denning Pryce; Zurich Investments 5

6 3. Income today plus capital growth tomorrow The Zurich Investments Equity Income Fund is a specialist Australian share fund suitable for investors wanting to ease themselves into the sharemarket. It is designed to maximise income while managing the disadvantages associated with a traditional buy-write fund. This enables the fund to: deliver a high level of income protection against some downside risk, and provide long-term capital growth by maintaining market exposure at all times. The fund can therefore play a valuable role in both income and growth portfolios. Investors with a high appetite for income will appreciate that the fund provides an alternative way of generating high, reliable income that doesn t rely on complex structured credit or debt securities. Growth investors will benefit by blending this fund with more aggressive or high-growth Australian equity funds to reduce their overall level of risk. 4. Protection against market falls The fund uses options to manage sharemarket exposure and cushion the impact of market falls. As a result, the fund may be suitable for investors who are concerned about the possibility of an extended bear market. Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Source: Morningstar To 30 June 2014 Monthly data of total fund returns after fees, and index accumulation returns, from inception on 3 October 2006 till 30 June Franking credits are excluded from the returns calculations. The chart above shows how the Zurich Investments Equity Income Fund performed in distinct market conditions. In the bear market from October 2007 to January 2009 the fund s downside protection is clearly evident. In the following bull market, from April 2009 to April 2010 the fund participated in the market s growth and over the bear / bull cycle investors outperformed the market because of the fund s lower volatility. In the sideways market period from April 2010 to July 2012 the fund performed well benefiting from its options strategy. 6

7 5. Consistent tax effective distributions The fund is true to label and has provided no surprises for investors as the table below shows the running yield or distributions since inception. Financial Year Net Yield (%) Franking Yield (%) Source: Zurich Investments, distributed to clients in financial year. Yield may include capital components. 7

8 6. Who is it suitable for? This fund was purpose built for retiree s and pre retiree s. We believe they require 3 things: 1. High, predictable and regular income 2. Growth assets to deal with longevity risk, and 3. A lower volatility experience. It s also good for those looking for conservative exposure to Australian Equities. Step 1 Blue Chip Share Portfolio ASX 50 Leaders only of Blue Chip shares Step 2 Step 3 Provide some Generate income protection & growth Active option management Results in sharemarket exposure, dividends and franking credits Results in additional income, dampened volatility and some captial growth Source: Denning Pryce; Zurich Investments 7. Why consider Zurich Investments Equity Income Fund? Income The fund has consistently provided 7-9 per cent income per annum. This is after fees and has been consistent even during the global financial crisis. Based on a running yield, paid monthly, includes franking credits (grossed up). Capital growth As the fund invests in a portfolio of blue-chip Australian shares, you may also benefit from some capital growth. Provides some downside protection The fund aims to reduce volatility by actively managing options positions over the portfolio. 8

9 A fund for different types of investors For retirees, the fund provides high income, paid monthly that doesn t rely on gearing or complex debt securities. The fund can be used by risk averse investors, providing some downside protection. Managed by a highly experienced team Zurich Investments provides exclusive access to specialist managers recognised as being the best in their area of expertise. The Zurich Investments Equity Income Fund is managed by our strategic investment partner Denning Pryce Pty Ltd. Denning Pryce is a boutique asset management company, established in The Principals are acknowledged as experts in derivatives markets, with over fifty years of combined experience in senior positions within the securities industry. Highly regarded by research houses Lonsec September 2013 Recommended 1 The options trading and risk management experience of the team is highly complementary and a key feature. Zenith July 2014 Recommended 2 would attract investors with an income appetite and an aversion to equities market volatility Bringing it all together Generate income in all market conditions Provide some downside protection in falling markets Deliver conservative growth over the long term Zurich Investments Equity Income Fund 9

10 For more information about the fund and how it can meet your investment needs, please speak to your financial adviser. Alternatively, you can call Zurich Investments on or visit our website Scan here to find out more 10

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12 Disclaimers 1 The Lonsec Limited ( Lonsec ) ABN rating (assigned September 2013) presented in this document is limited to General Advice and based solely on consideration of the investment merits of the financial product(s). It is not a recommendation to purchase, sell or hold the relevant product(s), and you should seek independent financial advice before investing in this product(s). The rating is subject to change without notice and Lonsec assumes no obligation to update this document following publication. Lonsec receives a fee from the fund manager for rating the product(s) using comprehensive and objective criteria. 2 The Zenith Investment Partners ( Zenith ) Australian Financial Services License No rating (1 July 2014) referred to in this document is limited to General Advice (as defined by the Corporations Act 2001) for Wholesale clients only. This advice has been prepared without taking into account the objectives, financial situation or needs of any individual. It is not a specific recommendation to purchase, sell or hold the relevant product(s). Investors should seek independent financial advice before making an investment decision and should consider the appropriateness of this advice in light of their own objectives, financial situation and needs. Investors should obtain a copy of, and consider the PDS or offer document before making any decision and refer to the full Zenith Product Assessment available on the Zenith website. Zenith usually charges the product issuer, fund manager or a related party to conduct Product Assessments. Full details regarding Zenith s methodology, ratings definitions and regulatory compliance are available on our Product Assessment s and at This general information must not be taken as personal financial advice. It does not take into account the personal investment objectives, financial situation or needs of any person. This publication is only intended for general information purposes only, is dated August 2015, is given in good faith and is derived from sources believed to be accurate as at this date, which may be subject to change. It should not be considered to be a comprehensive statement on any matter and should not be relied on as such. Zurich Investment Management Limited ABN AFSL nor any of its related entities, employees or directors (Zurich) give any warranty of reliability or accuracy and to the fullest extent possible under law, accept no responsibility arising in any way including by reason of negligence for errors and omissions. Past performance is not a reliable indicator of future performance. Zurich and its related entities receive remuneration such as fees, charges and premiums for the financial products which they issue. Details of these payments can be found in the relevant Product Disclosure Statement for each financial product and should be considered. A Zurich PDS can be obtained from your Adviser or from Zurich Client Service Centre on GIIN FVHHKJ ME.036 ZU12174 V4 08/15 MARO Zurich Investment Management Limited ABN , AFSL GIIN FVHHKJ ME Blue Street North Sydney NSW 2060 Zurich Service Centre Telephone: Facsimile: