Denning Pryce Equity Income Fund

Investment Objective

The aim of the Fund is to generate income of 10% per annum plus capital growth, whilst offering significant downside protection in falling markets.

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Investment Approach

The investment strategy of the Denning Pryce Equity Income Fund is based on holding covered call option positions and actively managing those positions. The Manager’s investment approach is to:

1. Buy shares, in the form of an Australian share portfolio, which deliver a primary income stream of dividends with a high level of franking.
2. Sell options against the Fund portfolio, to deliver a secondary income stream from option premiums.
3. Buy options, to control and manage portfolio risk.

Investment Process

Investment Universe

The Fund will primarily invest in ASX Fifty Leaders (S&P/ASX50) equity securities. The Fund will generally not hold stocks in companies that have no liquid options market available on the ASX.

The Fund may hold equity index futures and options.

Stock Selection

A share portfolio of 30 to 50 stocks will be constructed, with shareholdings having regard to index weights. The portfolio may be tilted towards high-yielding stocks.

Individual stock positions will not exceed the higher of 5% of Fund assets and 2.5 times the S&P/ASX50 index weight at the time of initiating the position.

Option Selection

The Fund maintains a portfolio of both bought and sold options over shares and equity index futures.

The Fund’s option positions combine to reduce and control equity exposure, increase the income, and lower the volatility of the portfolio.

The objective of the option selection process is to optimise the net level of option premium income retained whilst managing and controlling equity exposure.

The principle underlying the process is that it is possible to manage preferred portfolio characteristics in terms of time-to-expiry and option strike price. A number of investment return-based filters help to define these portfolio characteristics.

By controlling the overall time to expiry and strike price level of the option portfolio we control the rate of decay of option premium and the level and variability of market exposure.

All option positions contribute to the objectives of the Fund: to deliver income of 10% per annum, capital growth, and significant downside protection in falling markets.

Fund Characteristics

The characteristics of an equity portfolio which has sold components of risk in exchange for an increased income stream (such as the Fund) are:

• higher income
• lower risk
• less volatility
• dampened market exposure

The characteristics of the income stream will depend on market conditions. The Fund has the potential to generate higher-than-market income derived from dividends, retained option premiums and realised capital gains.

By their nature, covered call positions result in a reduction in market exposure when the market rises, and an increase when the market falls. This feature will be a characteristic of the Fund, and control of this risk is an important focus of the investment process.

Target Exposure

Net exposure to the Australian share market will generally be maintained between 40% and 75% of Fund assets.

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