Equity Enhanced Income Fund
sonic said:
Hi Darren thanks for your detailed reply. I just had a few more questions:
- How is the sell level determined?
- Given my understanding of the PDS there is no downside protection of the buy-write fund. From my basic understanding (you would know more), the fund would perform well in a rising market. but since it isn't buying puts on the stocks it buys the sell level can be breached VERY easily in even in a minor market correctino resulting in a substantional amount of funds moved to fixed interest.
i am still keen to invest but from my understanding even in a basic market correction say 10% a significant amount of funds would be switched to fixed interest correct? can u indiciate tge approximate percentage of these funds?
i know this has been brought up (and i work for an investment banks i know they are notorious for high fees). but there is a 1.15% management fee for each of the individual funds then on top of that another 1.15% management fee for the series 1 units.
there are other misc fees which i estimate add to up to a total of 2.5% - 3.0% of fees. if investments were switched to fixed interest net return would be 6% - 3.0% = 3.0% approx.
i am consdiering 100% gearing so thats a net 4.5% loss....
Dear Sonic,
To answer your questions regarding sell triggers I will need to answer hypothetically. This is due to the fact that the investments and consequently the Sell trigger and Knockout curve are all moving targets on a daily basis. As always any comments need to be read in conjunction with the PDS.
The Sell trigger (as is the Knockout Curve) is determined by market interest rates which fluctuate on a daily basis. I am unable to quote exact rates but hypothetically say the Sell trigger for today if the fund was open was 11% below the day 1 opening price, with the knockout curve below that at say 36% below day 1 opening price.
If the sell trigger was breached in so far as the value of the underlying funds fell by 14% the Net Asset Value would be $0.86 then approximately $0.2239 in every unit would be held in fixed interest with the balance of the $0.86 in the underlying investments. The new Knockout curve would be $0.5448 and the new Sell trigger $0.6973. A Buy trigger would also be set above the current NAV with the view that once the funds had increased in value by a certain amount the funds in cash would then be moved back into the underlying investments.
I hope that you can see that the main point is to avoid a knockout curve. Hence, in having Sell trigger's that look to place a certain portion of the funds in cash and then reset a subsequent Sell trigger and Knockout curve is a way to try and protect the capital of the fund. If one Sell Trigger was breached and then another it just adds to the Fixed Interest and at the same time lowers the Knockout curve with the ability to buy back in as subsequent Buy triggers are hit. This all assumes that we don't have a knockout event of say a 36% plus fall overnight. As per my previous e-mail we view this type of fall in 1 day as a low risk event. I don't really mind if some of the fund is in cash during a potentially volatile time from a management fee perspective as I would rather the attempt to have capital protected.
In regards to downside protection there are no purchased puts. The cost would be quite high and would need to be funded out of investment returns or charged as an extra cost to the client.
The manager can however implement measures in the investment process to be more defensive. As an example if things look overheated, and we need to remember that they are looking at things all day every day, they could look to hold more defensive stocks with higher yeilds and less beta. Other defensive measures could include tweaking portfolio construction to hold more defensive sectors and writing deeper in-the-money calls.
The Threshold Management described above is essentially for capital protection but I also view it as one of the defensive characteristics of the fund for all investors. If you have traded personally you will know that if you have a bad month you reduce your exposure until you start to get it right again. I see this as good money management and one of the best features rather than a negative.
In regards to fees/costs.
Ongoing
The ongoing management fees outlined on pages 30 & 31 add up to 3.675%. A portion of this is the manager recovering an upfront entry fee paid to Freeman Fox Ltd. The Fund invests all funds initially rather than deduct an entry fee but recoups this by charging a slightly higher ongoing fee. We prefer this feature so that our clients have 100% of their investment working for them from day 1.
This may at first seem high but when you put it into context with a normal managed fund charging say 2% ongoing it is pretty good value. They trade this fund day in day out. A traditional fund manager buys and holds with minimal turnover of stock.
In addition to these ongoing costs there may be a performance fee when the fund outperforms the benchmarks outlined in the PDS. The higher the performance fee we potentially end up paying the better. This is fairly standard for a hedge fund. It is another way to ensure that they are trying to earn every cent they possibly can.
The Fund essentially deducts these ongoing costs from returns before declaring a return to clients like most managed funds. As an example if the fund declares a return of 15% this will be net of all ongoing management and performance costs. You don’t get a bill for the ongoing costs mentioned above.
Other Costs
Other costs include interest on any loan and the Put Protection. The indicative rate of 7.6% plus Put Protection of 0.20% totals costs of 7.8%. On a $50k investment the client would need to fund $3,900- from there account every year. NB. This is an indicative rate that could change prior to the investments being established.
Let me know if you have any other questions.
Darren Brind
Freeman Fox Ltd
