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Harewood targets 6% yield from European strategy
by Robert St George on Sep 16, 2013 at 08:09
A new European equities structured product that targets a 6% yield with a 50% volatility and drawdown hedge has been unveiled by Harewood Solutions, part of BNP Paribas.
Called Harewood Maximum Income, it will construct a core portfolio of blue-chip European income stocks. On top of this it will add a call option overlay to enhance revenue and reduce volatility, and a put option designed to cut the maximum drawdown to 50%.
Soobong Han, co-head of Harewood Solutions, accepted there still might be a 30% rally left in European equities – the equivalent surge having already passed in US and UK markets – but nevertheless emphasised the defensive characteristics of the product.
‘We’re not buying European politicians,’ he said. ‘We’re buying European corporates. But while everyone understands the attractions of Europe, no one is prepared to dip in because of what might happen.’
Han therefore noted that the strategy’s call options would be short dated and traded daily, to minimise the chance they would be taken up, while the put options would be longer dated.
Harewood Solutions simulated the strategy’s performance between December 2007 and August 2013, finding that it delivered an annualised return of 7.3% compared with a loss of 8.3% from the benchmark STOXX Select Dividend 30 index. Its volatility was 13.4% against the index’s 24.5%, with a maximum drawdown of 28.5% versus 67% in the benchmark.
The annual management charge will be 0.75%, with a minimum investment of £100,000. The product will be sterling hedged, pay dividends quarterly, offer daily liquidity and Sipp eligible. Its initial income portfolio will consist of 49 companies with a weighted dividend yield of 4.6%.
‘In the current market, investors looking for an income that can outpace inflation have been forced to take on greater risk and often reduced liquidity,’ commented Timothy Parker, co-head with Han. ‘Some high-quality dividend-paying companies are already offering a higher yield on their equity than on their debt. Yet in spite of this, some market participants continue to overlook fundamental value in favour of macroeconomic sentiment. We believe they are missing an important opportunity for their clients.’
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