Van Hulzen Asset Management is tapping into the options space to add a little extra income to a portfolio of large-cap stocks.
The Iron Horse Fund Ticker:(IRHAX), which was launched a week ago, will use a strategy that the $250 million asset management shop has been applying in separate accounts for nearly 10 years.
The basic idea, according to portfolio manager and chief executive Craig Van Hulzen, is to earn extra portfolio income by selling call options on high-quality stocks in the fund.
“The strategy gets back to the old tenets of long-term market growth,” he said.
The portfolio, which has roughly 65 stocks, is built first and foremost on a bottom-up stock-picking basis, which means Mr. Van Hulzen finds companies he believes have solid income and growth potential.
He then sells call options that give their holders the right to buy the stock in the future at a predetermined price.
For example, he might purchase a stock such as Wal-Mart Stores Inc. Ticker:(WMT) at the current price of around $53 per share and sell the right to purchase that stock from him for $60 at some point over the next six months.
The buyer of the option is betting that the price of Wal-Mart stock will be above $60 before the option expires, thus enabling the option holder to buy the stock for below market value.
The income from each option varies, but Mr. Van Hulzen said the strategy historically has added 4 to 5 percentage points to the portfolio's total return.
In the separate account over the past nine and a half years, he said the strategy was able to earn an average of 4 percentage points over that of the S&P 500, with just two-thirds of the benchmark's volatility.
“We believe this is the perfect time for a covered-call strategy, which is designed to reduce equity risk and increase income,” Mr. Van Hulzen said. “Slower economic growth stands to limit stock price appreciation, and enormous sovereign debts are adding volatility to securities markets. We feel investors should put more emphasis on income and risk management.”
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