Lootman wrote:Yeah, the yield seems abnormally high at 7.2% and on top of that there is a 1.1% annual expense ratio. So this fund is disgorging itself at the rate of 8.3% annually.
Since it is almost inconceivable that a portfolio of shares would naturally yield that much then one needs to understand how that payout is derived. Over one third of the portfolio is in financials and so that might explain some of it, but also shows where the exposure is, especially as another 10% is in real estate.
Are there preference shares or high yielding "junk" bonds in there?
Even so, there must be a chunk from selling call options, which of course would crimp any gains in the portfolio. And are they paying out some of that dividend from capital or reserves?
Yields like that set off alarm bells for me. But I guess if they can avoid capital losses then you can look at this as a bond-type income fund with the possibility of increasing payouts over time.
I can't see any junk bonds (or fixed interest for that matter). The only big holding of preferred shares is Samsung Electronics.
You can find lots of companies in the Far East which yield more than 6% in sectors other than financials. For example, China Overseas Land was one of its largest property company shareholdings in the most recent annual report and its shares currently yields 6.6%. Taiwan Cement 6.6%. China Construction Bank (the largest holding) yields 7.2%
HFEL sells options, though not as much as some might think. Note 4 to the 2019-2020 accounts shows £3.396 million of option premium income (plus £14,000 of interest). Note 3 shows £35.344 million of dividends. So options represented 8.8% of total income. I suspect that there's a fair bit of buying shares shortly before they go ex-dividend, in much the same way as UK income funds do so to boost their yields.
Chasing such as high yield means that it's never going to be a serious capital growth investment. I'm okay with that. I bought mine just over 7 years ago, paying just over 310p so I have a tiny capital gain. It's my smallest investment trust shareholding by quite some way.