Product road test – BT Equity Income Funds

Co-founder of the Switzer Report
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BT Investment Management’s innovative equity income funds are clearly aimed at the SMSF market – particularly those with a more defensive investment appetite. They offer the opportunity to earn a consistent tax-advantaged, high monthly income, while taking a measured exposure to movements in the share market. Sound ideal? Let’s find out.

The funds

Two funds are available – the BT Defensive Equity Income Fund and the BT Balanced Equity Income Fund. The former benchmarks its performance against a synthetic index, comprising a 30% weighting to equities and a 70% weighting to cash/the money market through the UBS Bank Bill index. The balanced fund has a benchmark comprising a 40% weighting to equities and a 60% weighting to cash.

The funds invest in a portfolio of 20 to 60 stocks from the S&P/ASX 200, with a bias towards those stocks paying high fully-franked dividends, and stocks where there is a liquid options market.

By selling short-term call options over the individual stocks in the fund in exchange for a premium, additional income is generated for unit holders. The sale of these options also caps the potential upside exposure to the market. Some of this income is then used to purchase downside protection – the net effect being that an investor in the defensive income fund should, on average, have a 30% exposure to share market falls or gains.

Key benefits

  • High target income – the defensive fund targets an income return of 6.0% per annum (partially franked), the balanced fund targets an income return of 7.5% per annum (partially franked);
  • Income is set in advance and distributed monthly. Rather uniquely, the funds set the distributions up to six months in advance. For example, the defensive fund will distribute 0.50 cents per unit (the unit price is approx 101.08 cents) in June, July, August and September, and by 30 June, will announce the monthly distribution for October, November and December;
  • Potential for moderate capital growth through limited exposure to the share market. Depending on the fund, your investment will be approximately 30% exposed to the share market – you should get 30% of any gains, and 30% of any losses;
  • Access to BT’s investment management expertise – stock selection, investment management processes.

Fees and minimum size

  • BT charges a management fee of 0.99% for the Defensive Equity Income Fund, and 1.39% for the Balanced Fund. When expense recoveries of up to 0.30% are added, this takes the total fees to 1.25% and 1.69% pa;
  • Buy/sell spread of 0.70%;
  • Minimum investment is $25,000;
  • You can invest through your adviser, or through this website.

Issues?

Like many of the innovations from BT, this product is great in concept and certainly suits those SMSFs who want a relatively high income while taking only a moderate level of risk. Predictably, the fees are on the high side – but they are not out of the ordinary.

Unfortunately, BT is yet to fully demonstrate the “investment expertise” it claims. As the following table shows, the Defensive Fund has underperformed its benchmark for each of the periods since its inception in October last year:

While unit holders have been enjoying the 6.0% per annum (3.55% over seven months) income return, they haven’t participated in the increase in the share market over this period. With the underperformance, the unit price has hardly moved – a net capital increase of 0.39% since inception. The April Investment Report notes some interesting stock exposures, as it seeks to explain its underperformance. I particularly liked the comments about Newcrest – when did this stock ever qualify as a “high dividend yielding stock with franking credits”?

While it is early days in the life of these funds, it doesn’t look like BT has really got its act together yet. Watch and wait.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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