I’ve developed my own methods of using options to generate income and turbocharge my portfolio, but screening for these opportunities can sometimes be very time-consuming.
A few mutual funds exist that take their own approach to this strategy, and I thought it would be worth a look to see if I could save myself time and effort while getting similar returns. The results? Not so promising.
The Gateway Fund (MUTF:GATEX) essentially is a large-cap fund that holds all the big, familiar names you’d expect and attempts to mirror the S&P 500. However, it then sells calls against the entire portfolio and uses that cash flow to purchase index put options against most of its holdings. The point is to hedge the portfolio against extreme drops.
It sounds like a great idea in theory, but in practice, the fund has not performed all that well. Through the end of 2011, the fund was up 7.42% annualized since inception vs. 7.45% gains for the S&P 500. Across all the usual measured periods (one, three, five and 10 years), the fund never has outperformed by more than 160 basis points — and in some periods (such as three years), it lagged behind the S&P by almost 10%.
When you factor in GATEX’s 5.75% load and 1.6% expense ratio, I see no reason to buy it.
The Collar Fund
The Collar Fund (MUTF:COLLX) runs essentially the same program but is not nearly as diversified as the Gateway Fund. Its top 30 holdings make up about 66% of its assets, and they are spread across stocks that are generally solid companies that traditionally have enough volatility to provide good call premiums.
The fund is relatively new, having started in Q3 2009, but its overall performance is even less impressive. Since inception, COLLX has returned only 1.71% annually, which doesn’t even keep pace with inflation, and lost 3% last year while the rest of the market did much better — and that’s even with a low expense ratio of 1%. I wouldn’t bother with the Collar Fund, either.
The Neiman Large Cap Value Fund (MUTF:NEIMX) focuses on large-cap names that pay dividends, and also sells covered calls to generate even more income. The fund is small, with only $30 million in assets, and only holds about 50 stocks.
Yet again, it seems you could do much better on your own. NEIMX lags the S&P by 6.7 percentage points this year alone, by 5.25 points over the past year and by 8.8 points over three years. It is presently beating the index by 1.5 points during the five-year period.
You will, however, finally find some modestly good news with Madison/Claymore Covered Call & Equity Strategy Fund (NYSE:MCN). This actually is a closed-end fund that is more aggressive in its approach, because it sells covered calls but doesn’t use the income to buy puts. That’s the Achilles heel of these other funds. MCN’s record has been spotty, but overall it has done very well.
Its performance relative to the S&P 500 per calendar year has been (since 2005): +3.5%, -4%, -22%, -1%, +35%, -4.5% and -12% last year. The good news in all that is MCN kept pace with the S&P in the disaster that was 2008, and blew the market away coming off its terrible year.
Overall, though, I think you are better off ignoring all these folks and continuing to follow your own strategy. Finding solid companies offering monthly call premiums of 2% or more has proven to be an effective strategy for me, and should yield nice returns.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books.