Angus Murray, the head of the investment committee at Castlestone Management believes that predictable income over unpredictable returns (appreciation or depreciation of equities) is what investors should be focusing on.
If the summer months of July and August has taught us anything, it’s that this global economic “recovery” is uncertain. Just last week we saw the European central bank cut interest rates to the bare minimum of .05% from .15% in a last ditch effort to stimulate growth before the inevitable European version of quantitative easing. All this at a time when the S&P 500 is at record high, and why is that? Because investors have nowhere else to put their money.
Austerity tired Europe is on the verge of falling into a deflationary environment without the necessary stimulus. Geopolitical risks across the Middle East, North Africa and across Russia and the Ukraine have only added to European economic woes and global uncertainty. Equity markets have risen to a point where we are not sure how much further they can rise before we see a significant correction. But with the United States Federal Reserve still pumping in 30bn a month of stimulus and Europe cutting rates, it’s hard to see where investors can place their money without pushing equity markets even further.
Castlestone’s new Fund is focusing on predictable returns versus this market uncertainty. With the launch of the buy-write strategy in December the Funds’ performance since inception is above 6.5%. The buy-write funds stable, consistent and predictable returns are in the form of dividends from holding large, blue chip, and defensive style stocks like Vodafone, Sydney Airport in Australia, GlaxoSmithKline, American Electric, AT&T and the UK’s Centrica. Returns from these dividends are enhanced by receiving premium income from selling covered call options on the portfolio. As we know, this is an advantage when equity markets decline (like we saw in 2008 and in 2011) as it limits potential downside.
A true testament to the performance of the fund was displayed over July and August. The July and August period marks the largest period of volatility since January of this year. Over July and August, declines across global equity markets saw the S&P 500 and the Dow Jones Industrial Average fall close to 4%. In Europe the German DAX 30 fell 8%, while the French CAC 40 fell over 5%. The UK’s FTSE100 and Australia’s ASX Index fell just under 3.5% respectively. Over the same time period Castlestone’s Equity High Yield & Premium Income Fund fell 2.5% and has since rebounded by over 3.7% respectively.
The backdrop to running this strategy is that we are not proclaiming to know what is going to happen across financial markets and that anyone telling you they do know, has been historically incorrect.
What we are focusing on is providing “enhanced” predictable income within a plain vanilla equity fund. We are aware that no one is able to “judge the directions of markets” accurately over time. Assuming equities will broadly be the same price in the long run; then income from dividends and premium will provide the added return for investors. Irrespective of this, in today’s world investors need funds that are fully transparent, do no use leverage, are easy to understand, offer real liquidity and provide consistent returns.