Foreign & Colonial Higher Income Plan offering a yield of 8% will have no front-end charge until the...
Foreign & Colonial Higher Income Plan offering a yield of 8% will have no front-end charge until the 20 April, writes James Thorneley.
All brokers, who register with the company, will be able to offer the product as a unit trust, Isa or Pep transfer to their clients with no initial charge while still taking 3% commission paid by F&C. The annual management fee is 1.5% with IFAs receiving 0.5% renewal.
The £411.5m fund, managed by Stephen Dolbear, seeks to generate an income return 2% above the UK base rate, now at 6%. Income is distributed on the 28th day of each month.
The portfolio now consists of 70% in UK corporates bonds with a minimum of an A rating with the remain 30% in an indexed basket of UK FTSE 100 stocks and volatility options on the UK equity market.
Philip Childs, managing director F&C Unit Trusts, said: "The diversification of the portfolio allows us to buy good quality bonds because we are not relying totally on them to produce the yield."
Dolbear said: "Over the long run between 10-20% of the income the fund provides is funded from the profits of our underwriting. Currently all our puts are around the 3,000 mark while the FTSE 100 is at about 6,400." He said that the fund did take a hit two years when it had to pay out to various protected funds when the FTSE fell below the level of some of the puts. He added: "There is a risk involved and we will take a hit from time to time but over long run we calculate we make more money than we pay out."
Among the F&C fund's bond holdings are Boots yielding 5.5%, Bass on 5.25%, Glaxo 8.25% and Whitbread yielding 8.25%.
The fund was originally launched in 1993 but suffered negative publicity when it had to cut back its target yield from 10% to 9% soon afterwards.
Dolbear took over the unit trust in 1995 at that time the fund was made up of a basket of FTSE 100 equities to provide capital stability to the portfolio while the income was generated by trading volatility in the UK equity market.
In 1999 the underlying portfolio was switched to its current structure so that it qualified as a fixed interest rather than an equity fund.
Last year equity funds could no longer claim back the full 20% tax credit for Pep or Isa holders, and could only claim back 10%. From 2004 even this will go completely.
By contrast fixed interest funds can pay a full gross interest payment to Pep and Isa holders.
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