Contrary to the Ken Henry/David Murray push for more fixed income in portfolios, Merlon Capital Partners is talking up the post-retirement benefits of its high-yielding equity approach, with risk hedged through derivatives.
Merlon analyst Hamish Carlisle said equities' franking credits lifted retirees' income and capital growth, while derivatives (put and call options) cut volatility risk by up to one-third.
The Merlon Wholesale Australian Share Income Fund focused on 30 undervalued stocks, was benchmark unaware, and construction was in four steps, Carlisle said.
"Cheap stocks are chosen based on proprietary research," he said, with this leading to a 1 per cent to 2 per cent dividend yield premium versus the market.
The skew to "sustainable yielding names" added another 1 per cent to 2 per cent incremental income in the second step, he said.
Third, income was enhanced by selling call options over part of the portfolio - which could deliver 2 per cent to 3 per cent more income.
Finally, part of that income was reinvested in put options for downside protection, which was a 1 per cent to 2 per cent incremental cost.
Neil Margolis, who is chief executive of this Challenger boutique fund, said: "If you see franking dividends as no different to cash, then equities become very compelling. In the past six to seven years, there's been 2 to 3 per cent per annum extra from franking dividend credits."
Margolis said some of the fund's competitors used the undervalued stocks approach, but did not manage the risks with options, while other competitors used options for risk but were not value managers.
"We're unique for value investing with risk options," he said.
