For some manufacturers of structured products, investments featuring U.S. fixed-income securities have been all the rage.

Over the past several months, manufacturers have created investments based on the returns provided by U.S. mortgage-backed securities and on floating-rate U.S. corporate loans.

A new issue from Claymore Investments Inc., a subsidiary of Claymore Group LLC of Chicago, pushes the envelope further by introducing a product based on different fixed-income and equity investments.

What’s more, Claymore will use a covered call option strategy in a bid to boost returns, another new wrinkle in this product type.

Advent/Claymore Enhanced Distribution & Growth Trust will invest in a diversified portfolio of U.S. convertible fixed-income securities, U.S. equity securities and traditional high-yield U.S. fixed-income securities.

Advised by Advent Capital Management LLC of New York, the fund is expected to invest in a portfolio of about 100 securities — 35% of assets in fixed-income convertibles, 35% in equities and 30% in high-yield debt securities.

The portfolio should provide dividend and interest income of 4.6% a year, the manager says. Structured as a closed-end trust, this deal is a replica of a US$270-million product that Claymore did last year in the U.S and is slated to be wound up in 10 years.

Advent Capital, which manages about US$3.8 billion in assets, will write covered calls on all three of these asset classes, including the fixed-income securities.

Typically, those options will be written 5%-10% out of the money (and 0%-5% out of the money for high-yield securities) and
will typically run for three to six months.

The call options will allow the portfolio to
benefit from any rise in the value of the securities, while the income received from selling the options will boost the income generated by the portfolio.

Claymore believes it can add 3.15-3.65 basis points to the base return of 4.6%, meaning an overall return target in the 7.75%-to-8.25% range. The extra return will be tax-efficient because option income is regarded as capital gains.

The fund intends to generate returns of 4%-6% by writing options on convertibles, 7%-9% from writing options on equity securities, and 1%-3% from writing options on high-yield securities.

The fund, which plans to hedge at least 90% of its US$ exposure, will pay distributions on a quarterly basis.

“As a strategy, the offering is worth taking a
look at,” says industry analyst Don Hallett, president of Windsor-Ont.-based Dan Hallett & Associates Inc., although he says he can’t comment on the suitability of the product without reviewing its specifics.

Hallett says he plans to review structured products over the next two months.

His report will focus on the viability of the strategies involved in structured products, and take a closer look at individual products that have been offered.

Among other recent deals featuring U.S. debt securities are:

> First Asset Funds Inc. of Toronto’s Preferred Securities Income Fund is based on U.S. preferred securities, a investment that looks like debt but has many of the characteristics of equity. First Asset aims to generate annual returns in the 6%-8% range.

> Toronto-based Sentry Select Capital Corp.’s Mortgage Backed Securities Trust is based on mortgage-backed securities.

> Toronto-based Fairway Capital Management Corp.’s Nuveen Floating Rate Income Fund, is a retail-oriented product based on floating-rate U.S. corporate loans.
The strategy was to offer a product with a return that would move with the trend in short-term interest rates; as interest rates moved up, so did the return, and as rates fell, so did the return.

But investors knew that, at worst, their returns would lag the market by three months, the maximum term of the floating-rate loans in the portfolio.

> FT Floating Rate Management Inc.’s First Trust/Highland Capital Floating Rate Income Fund is a floating-rate fund based on non-investment-grade corporate loans.

> Bayshore Floating Rate Senior Loan Fund, from Bayshore Asset Management Inc. of Toronto, is seeking returns in the 7% range from investments in adjustable-rate senior secured loans, although up to 15% of the fund can be invested in other securities.
IE