Portfolio Manager Perspectives

Jeff Benjamin

Goldman fund seeks to generate income, reduce worry lines

U.S. Equity Dividend and Premium Fund maxes out dividend income while hedging against downside risk

Jan 11, 2011 @ 11:35 am

By Jeff Benjamin

For investors seeking low-risk income, the surest route is picking out high-dividend-paying stocks and purchasing options to limit possible losses, according to Donald Mulvihill, manager of the $404 million Goldman Sachs U.S. Equity Dividend and Premium Fund Ticker:(GSPAX).

Mr. Mulvihill, who also manages an international version of the fund, the $217 million Goldman Sachs International Dividend and Premium Fund Ticker:(GIDHX), said the “goals-based” investing strategy is geared toward investors in or near retirement.

The basic idea is to build an equity portfolio to represent a benchmark index, but to enhance the potential income by loading up on the highest-dividend-paying stocks within each index sector.

From there, Mr. Mulvihill writes three-month call options on the index, which are designed to generate at least four percentage points of return annually.

“In this kind of goals-based investing we're considering what makes people happy or sad,” he said. “This is for people who are living off the wealth they've accumulated, and they're mostly worried about the effects of bad returns.”

With the equity portion of the fund acting as a hedge against the option strategy, which provides guaranteed income but caps the portfolio's upside, Mr. Mulvihill said the fund is designed to be less volatile than its benchmark index.

“If the market is strong, this fund is likely to trail, but if the market is weak, this fund is likely to do better,” he said.

Normally, the fund would be expected to lag its benchmark if the index gained 10% or more. But in 2010, when a lot of investors were chasing dividend-paying stocks, the fund's 15.1% gain beat the 11.3% gain by the benchmark S&P 500.

A better example of how the fund performs in relation to its benchmark would be the 23% gain in 2009, when the S&P was up 30%.

In contrast, the fund fell by 31.9% in 2008 while the S&P lost 34.5%.

Although taxes are not always the biggest concern for people living in retirement, the strategy also is designed for tax efficiency.

The dividend distributions are still counted as long-term capital gains.

And most of the income from the index options is also counted as long-term gains.

“The goal of the fund is to generate cash flow from dividends and long-term capital gains,” Mr. Mulvihill said.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit arjuna-design.com/pmperspectives.


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