Castlestone Management launched its equity buy-write strategy in December 2013 which, since inception, has achieved double digit returns*.
Castlestone’s Equity High Yield & Premium Income Fund has seen performance increase over 2.5% in January to the 26th of the month, with the fund now up over 11% from inception in December 2013*. This buy-write strategy aims to provide stable, consistent and predictable returns in the form of dividends from holding large, blue chip, and defensive style stocks like AT&T, GlaxoSmithKline, American Electric, Zurich Insurance 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.
The backdrop to running this strategy is that Castlestone is not proclaiming to know what is going to happen across financial markets. Anyone telling you they do know has historically been incorrect.
What Castlestone is focusing on is providing “enhanced” predictable income within a plain vanilla equity fund. 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, don’t use leverage, are easy to understand, offer real liquidity and provide consistent returns.
The month of January 2015 has seen the fund increase further in value as European stocks benefitted from the European Central Banks (ECB) quantitative easing (QE) programme announced on the 22nd of January. Larger in size than anticipated, the €1.1trn QE plan to stimulate the Eurozone economy should benefit Europe much in the same way that the Unites States bond buying programme helped stimulate US equity markets.
Angus Murray, the head of the investment committee at Castlestone Management, believes that with Eurozone inflation falling in to negative territory, the ECB and Mario Draghi were left with no other choice as interest rates are already as low as they can be. Furthermore, Angus Murray believes that investors should be focusing on predictable income over unpredictable returns (appreciation or depreciation of equities) as volatility will inevitably pick up over 2015.
In the lead up to the ECB’s announcement in January, European stock markets had already seen a healthy bounce in performance in anticipation of the stimulus programme. With energy prices falling by over 50% from September 2014, the chance of prolonged deflation across the Eurozone was too great a risk. By buying €60bn worth of Eurozone government bonds each month starting in March 2015 and lasting until September 2016, the ECB hopes to boost inflation, push down the Euro, increase Eurozone exports and stimulate growth.
Global financial markets also digested the Greek election news that saw the far-left Syriza party move into power. Greece’s new government wants to renegotiate the €240bn bailout by international lenders; the European Union, European Central Bank, and International Monetary Fund. What this means for global markets over 2015 is further uncertainty. On top of events in the Eurozone, an eventual US interest rate increase in the second part of 2015 should see asset flows return to US markets.
