Australian Equity Income Fund

Investment objective

To provide investors with high levels of income by accessing the dividend stream from companies while reducing exposure to the overall equity market, thereby reducing capital volatility.

Investment philosophy and process

The investment philosophy for the Fund is based on a belief that individual stock valuations can be mis-priced around the dates that stocks trade "ex dividend" ("ex date"). The Fund’s investment strategy offers investors a potential return comprising predominantly of income by exploiting the out-performance of stocks prior to their dividend ex date versus the market. Stocks are purchased in the period leading up to their ex date rather than adopting a buy-and-hold strategy throughout the year. This is achieved without exposing investors to credit risk or significant sensitivity to the equity market. The strategy’s costs are minimised by utilising the skill and experience of Schroders’ equity trading team.

The Fund invests predominantly in Australian and New Zealand equities but aims to reduce volatility by minimising the overall equity exposure through the use of derivatives. As the strategy only buys securities around their dividend ex date, the seasonal nature of the dividend payout cycle can sometimes result in sector exposures in the Fund that differ to that of the futures index which is used to hedge the equity exposure.

Schroders aims to control these risks by taking into consideration the likelihood that the price of a derivative will move in line with the underlying physical positions and assesses whether the level of hedging risk is acceptable. In order to minimise the hedging risk, the Fund may purchase strategic holdings in non-dividend paying stocks.

An overview of the investment process is as follows:

• Establish the dividend ex dates approximately 60 days ahead and determine entry dates for stock purchases.
  
• Determine the maximum weight of the stocks the Fund can purchase by analysing their liquidity, attractiveness of their dividends and their weights in the index.
• Construct the portfolio using a proprietary process which maximises the expected return to the Fund whilst minimising equity market exposure. An optimal mix of hedging instruments (short futures contracts or other derivative contracts) and strategic holdings in individual securities is derived at the same time.
  
• Positions are liquidated shortly after the relevant ex date.