Castlestone Management has been increasing exposure in their long only developed market equity fund, Equity High Yield & Premium Income, towards Europe since Q4 of 2014. Current exposure to Europe stands at just over one third of the portfolio including stocks like Zurich Insurance, Munich Re, EON, Bouygues, Veolia, Orange and Allianz. Castlestone has reduced its exposure to the UK and US in favour of western European stocks. As of April 2015, the fund’s exposure to Europe was 33.96%, the United Kingdom 18.20%, Australia 19.89, China 3.68% and the United States at 24.27%.
Aided by a €1.1trillion quantitative easing package which kicked off in March, European stock markets have had an excellent start to the year which has also seen the Euro fall in value from over $1.20 vs the US Dollar to around $1.07 today, greatly benefitting European exports.
Castlestone’s Equity High Yield & Premium Income Fund invests into large cap developed market stocks that have a high dividend yield. On top of receiving income from dividends, the fund also writes covered call options on the underlying equities with the aim of increasing returns into the fund irrespective of which way the markets move.
If 2015 has taught us anything so far it is that global interest rates are only headed in one direction as global central banks try to fight off deflation and spur growth. This will undoubtedly push investors into global equity markets as we have seen in the United States since 2009.
Backed by an enthusiastic Central Bank, European markets have so far demonstrated the positive effects that a bond buying programme can provide to financial markets, similar to the bond buying programme launched by the US Federal Reserve shortly after the global financial crisis of 2008.
As the ECB launched its bond buying programme earlier this year, the US Federal Reserve signalled it would begin raising interest rates, marking the first rate increase since 2006. This monumental policy move has increased the amount of volatility in markets as the perceived impact on the US and global economy is still unknown. One thing can be sure, it looks like US rates will increase, the question is whether that will be in June, October or early 2016.
Castlestone Management believes that a buy write strategy focusing on blue chip, developed market, dividend paying stocks should be the main focal point within any investment portfolio in order to provide stable and predictable income over the uncertainty of market returns in increasingly volatile times.
Selling call options is an advantage when equity markets decline or remain flat (like we saw in 2008 and in 2011) as it limits potential downside. When selling a call option the seller receives a premium, or income, committing to sell the option buyer a stock at an agreed price in the future. What it can do in a quickly rising market is limit the potential upside in equity price appreciation. However, with the outlook for equity market returns looking to be flat over the next decade, this strategy aims to provide the fund a source of enhanced performance.
Castlestone believes that demand for predictable income in the form investing in large cap, defensive, blue chip, dividend paying stocks should be the focus of every investor as interest rates fall and currency values plummet. As the Euro slides closer to parity with the USD and global currencies like the AUD and CAD fall in value, the ramifications on global corporate balance sheets will soon take centre stage. On top of already increasing volatility across financial markets, Castlestone believes the only way to shield ones investment portfolio is through investing in defensive strategies that enhance returns through predictable income.
