How to increase the yield on an equity portfolio
iPartners STAR Series (By iPartners, 15th August 2018)
We received quite a lot of investor inquiry on the back of the "How iPartners Investors are making money off Telstra" article.
Below is a loose attempt to articulate how iPartners STAR Series could fit into an equity portfolio allocation.
As a starting point it is worthwhile reiterating 2 of the key characteristics of the iPartners STAR Series;
- Investors typically receive a higher fixed return than the dividends and franking of the underlying shares. (Increased Yield)
- Investors typically have no equity exposure unless one or more of the underlying shares fall 30% or greater (Lower Price Risk)
If you were to allocate 100% of your equity allocation to the ASX200 Index you would expect a gross yield of @4-5% p/a.
If you were to allocate 80% of your equity allocation to the ASX200 Index and 20% to iPartners STAR Series paying @10% p/a you would expect a gross yield of @5-6% p/a.
Adding @1% p/a yield on a portfolio basis.
Price Risk (Example; ASX200 Index down 20% & No underlying share down >30%)
If you were to allocate 100% of your equity allocation to the ASX200 Index and the Index was down 20% (stating the obvious) you would be down 20% on your investment.
If you were to allocate 80% of your equity allocation to the ASX200 Index and 20% to iPartners STAR Series you would be down 16% on your investment.
Reducing the loss by 4% on a portfolio basis.
What is the catch? Good question! Well the catch is a bit like if you weight your portfolio between Fixed Income and Equities. With iPartners STAR Series your maximum total return is the fixed return, therefore, if the total return on your equity allocation is above the fixed return paid on the iPartners STAR Series then you will underperform.
In General terms iPartners STAR Series will typically
- underperform in rising equity markets as you would likely have been better off old school buying the equities. (maximum return on STAR series is the fixed return).
- outperform in flat markets as the fixed return is typically greater than expected dividend yield.
- outperform in mildly falling markets, as noted above investors do not have exposure to the equities unless one or more of the reference shares falls greater than 30%.
- outperform in market falls >30% due to the fixed return buffer (may underperform due to share specific event as compared to a portfolio).