YMAX - BetaShares Australian Top 20 Equity Yield Maximiser Fund

So_Cynical said:

The YMAX fund holds the top 20 ASX stocks and writes covered calls over those stocks, calls that are short expiry and just out of the money, this buy and write strategy aims to deliver quarterly dividends that exceed straight buy and hold, 12 Mth Gross Distribution Yield* (%) 13.0%

http://www.betashares.com.au/products/name/equity-yield-maximiser-fund/#each-overview

Holdings.
http://www.betashares.com.au/files/YMAX/YMAX_Holdings_Disclosure_Report.pdf

Entered this week on the basis that the top 20 has been doing poorly over the last 12 months or so and that the SP was still significantly low enough to enter, the low was back in April @ 8.40 ~ using a dogs of the Dow rationale i figure its time to buy some exposure to the top as i have very little in my portfolio, plus the yield is attractive and usually about 50% franked, went ex div on Monday.
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So_Cynical said:

The YMAX fund holds the top 20 ASX stocks and writes covered calls over those stocks, calls that are short expiry and just out of the money, this buy and write strategy aims to deliver quarterly dividends that exceed straight buy and hold, 12 Mth Gross Distribution Yield* (%) 13.0%

http://www.betashares.com.au/products/name/equity-yield-maximiser-fund/#each-overview

Holdings.
http://www.betashares.com.au/files/YMAX/YMAX_Holdings_Disclosure_Report.pdf

Entered this week on the basis that the top 20 has been doing poorly over the last 12 months or so and that the SP was still significantly low enough to enter, the low was back in April @ 8.40 ~ using a dogs of the Dow rationale i figure its time to buy some exposure to the top as i have very little in my portfolio, plus the yield is attractive and usually about 50% franked, went ex div on Monday.
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So_Cynical said:

using a dogs of the Dow (DOTD) rationale i figure its time to buy some exposure to the top
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Muschu said:

I find this quite intriguing and did not know of this Fund at all.

Very little trading - and is the price getting a bit "stretched" atm?

Also, please, where can payout figures [distributions?] be found? I gather these are not considered "dividends"?

Thanks

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tinhat said:

Using the underlying theory and modelling that the fund strategy is built on, I wonder whether it is suited to the dogs of the dow strategy? The DOTD strategy is to buy high dividend yield stocks in the expectation that big companies can maintain their dividends throughout the business cycle. Thus the strategy is to benefit from high yields at the bottom of the stock price cycle in anticipation of also achieving capital gain. The covered call strategy in contrast trades off future potential capital gain for an increased income stream now. It actually exposes your investment to underperformance in a bull market. In theory it maximises investment return in a bearish or sideways market.

This is an interesting fund for someone like myself with only a simple mind with which to understand the complexity of derivatives.

The fund unit price has underperformed on the market compared to the underlying S&P ASX20 index (XTL). Yet, currently the fund's unit price is at trading at the underlying net asset value (NAV). So, given the underperformance since at least late 2014, was the unit price trading at a premium to the NAV earlier on when the ASX20 companies were trading at generally lower yields?

View attachment 68742

Chart shows XTL in blue and the relative performance of YMAX in red.

Looking at the 2016 annual report, on a cashflow basis, the fund made $17mil from dividend income but incurred management fees, transaction costs and other expenses of $3.5 million leaving $13.6 net income from the underlying assets.

It made a further $11mil from investment activities (which I assume is the profits made from the covered calls).

There are $3.5 mil net receivables on the books.

It paid out $35.6mil in distributions to unit holders of which $1.8mil was paid by issue of units through the div reinvestment plan.

There was a $1mil decrease in cash on hand over the year and the value of the fund's underlying assets suffered a $48mil reduction in value through the year (12.5% depreciation in value of the underlying share base).

As at 30 June 2016 the fund is invested in $209mil worth of listed options (about 67% of the underlying assets are exposed to covered calls).

I am naturally cautious about a fund that uses derivatives to out-perform the underlying asset. At the end of the day the fund manager is seeking to make an income stream which comes from the value of my investment regardless of performance. Secondly, given that all markets represent a zero-sum game, this type of fund exposes my money to the smart people, the market makers, who are sitting on the other side of the trade and looking to profit from my money. So that's two parties that my investments are exposed to on top of the normal risk exposure of the underlying stocks.

Additionally, trading in the fund's listed units quite illiquid in comparison to the liquidity of trade of the ASX20 stocks themselves. There is only $600,000 daily trade in this stock compared to $176m daily trade in CBA. So there is another risk.

It is worth thinking about the underlying risks and market outlook and the market psychology that might behind the underperformance of the unit price.

The explanation of the fund's strategy on the betashares website includes modeling which theorises that the fund should:

- outperform in a modest bull market
- outperform in a range bound market
- outperform in a bear market
- underperform in a bull market

Why then, has the fund underperformed the index in this cyclical bear market? It should be outperforming. The price should be dropping in line with the market should it not? Is it just a matter of market sentiment? Is the fund strategy seen as being more risky than the underlying stocks and therefor more exposed to the sentiment of the market? If so, has the relative lack of liquidity of the fund hurt the price?

If the market is pricing the units to the underlying asset value, then is it that the market does not see any outperformance potential from the covered call strategy in the medium term? Or, if the market is mindful of a dogs of the Dow scenario, as suggested by So_Cynical, wouldn't this suggest that a bull run will see a potential underperformance with the risk that there is potential for underperformance should option holders exercising their calls during a rising market?

Also, as a long term investment, what is the fund's strategy for covering losses through option holders exercising calls? Let's use a scenario that the fund has exposed $1000 of shares in CBA to a covered call with an exercise price of $1050 for fee income of 1% ($10). Let's say the market finally catches some Malcolm mojo and decides that there has never been a more exciting time to be as innovative and agile as Malcolm (or Scott Morrison) and CBA goes on a trot and appreciates 8-10% in a month (which it has done several times in recent years). Let's say the value of the shares has risen 8% to $1080 and the option holder makes a call on the shares. The fund has received $1050 - $10 (total $1060) for its $1,000 investment so made a profit of 6%. But, if the fund goes on market to buy back the same position they held originally, they need to fork out $1080 so the fund has actually lost $20 of capital value.

How does the fund handle this loss of capital value if a covered option is called? Is the fund's strategy to replace the underlying asset (ie, if an option gets called it purchases the same number of shares on-market to replace the shares sold under the contract?). Because, if it doesn't then the investor should keep in mind that the extra income stream coming from the writing of covered calls has, in this instance, come at the cost of a reduction in the capital value of the underlying asset base. Keep in mind that the fund has stated that it passively follows the index, so it would at least need to rebalance its holdings from time to time which could mean selling down underperforming stock to reweight back into the outperforming stock.

To me, this seems like a fund that would be worthwhile if your outlook for the ASX20 is bearish or sideways range bound. It doesn't seem like a good strategy if you are anticipating a reasonable capital gain in the underlying stocks.

The fund says they passively follow the ASX20 index and and its weightings.

Top 10 Portfolio Holdings - 8-Nov-2016
Name %
1 Commonwealth Bank of Australia 14.9 %
2 Westpac Banking Corporation 12.1 %
3 Australia & New Zealand Banking Group Limited 9.6 %
4 BHP Billiton Limited 8.7 %
5 National Australia Bank Limited 8.4 %
6 Telstra Corporation Limited 7.3 %
7 CSL Limited 5.5 %
8 Wesfarmers Limited 5.5 %
9 Woolworths Limited 3.6 %
10 Macquarie Group Limited 3.2 %

ASX20 Sector breakdown month-end Oct 16

Financials 55.2%
Materials 11.5%
Consumer Staples 9.1%
Telecommunications 7.2%
Health Care 5.4%
Real Estate 4.7%
Industrials 4.6%
Energy 2%

So, I guess it all comes down to what you believe the sharemarket performance of the banks (including MQG), BHP, TLS, CSL, WOW and WES and WPL will be over the medium term. Are the banks oversold? Probably they are, but probably only 12-15% or so? That said, I can't see the market getting too far ahead of itself for some time. But then, a covered call strategy relies on betting against someone who thinks the market is going to go up. If the market makers don't see upside then there is not going to be much premium to be made in writing covered calls.

BHP has proved to be an exception to the DOTD rule having reduced its dividend. ANZ has also just disproved the theory too, technically anyway (although ANZ has reduced its dividend I can't see it crashing in the foreseeable future even though the return on equity outlook for the banks is in decline).

I've been piling into the banks over the past 12 months in line with the DOTD theory, although I never thought specifically about following the DOTD strategy but I guess that is what I have done. I've factored in flat to slightly reduced dividends for the medium term with a view to hold long term.

That said, I bought a few YMAX for my Mum's pension account yesterday. I sold a few NAB pay for them and theoretically I should be able to double-dip a proportion of the latest NAB dividend franking credits in doing so (to the extent that they are provided in the YMAX distribution). In the long run, however, I am not sure that YMAX will significantly outperform the underlying index even on an accumulation basis.

So, my issues are that:

1. The unit values have underperformed when the model says the strategy should dampen the effects of falling markets. Why?
2. The fund strategy is to forgo future capital gain for increased yield using a covered call strategy.
3. The fund will underperform in the long run by reducing upside gains,
4. To maintain parity with the underlying stocks in the long run, an investor would need to reinvest the income premium,
5. When taking into account the dead weight loss of all the transaction costs and overheads from the options trading, plus the fund management fees and compliance costs, the potential return is further diminished relative to directly holding the underlying.

I am interested in others thoughts.

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Quant said:

Top way to add significant returns to a buy and hold portfolio with the right option strategy , 4-5% extra easily doable with minimal work and compound that over 10 years

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tinhat said:

So, I guess it all comes down to what you believe the sharemarket performance of the banks (including MQG), BHP, TLS, CSL, WOW and WES and WPL will be over the medium term.

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