As it is widely known, in recent times interest rates around the world have been reduced to record low levels. This has consequently driven down the yields on a whole range of investments, and forced many investors to reduce their reliance upon more traditional sources and seek income further afield. Furthermore, this nation's demographics, and the developed world's in general, also point to the fact that income-generating investments are only set to continue to gain in popularity; whole swathes of the population are, or soon will be, keen to secure investments to help fund retirement. As such we have seen many new income focused strategies being launched as well as a rise in popularity of those previously less considered.

Equities have long-since been a significant asset class for yield seeking investors, though generally for those with a higher risk appetite. However, dividend distributions and yield can obviously fluctuate depending on the fortunes of the company or state of the economy. As such a relatively new breed of Equity Income fund has launched into the UK retail market; and one that has a definable yield target. We would point out importantly that these funds have yield and not income targets. Meaning that whilst, in any given year, they may meet their yield target, the absolute level of income received can vary.

These approaches combine a portfolio of higher yielding shares with a derivative overlay strategy, which helps to boost the income. From a yield and income perspective the equity portfolio's role is hopefully fairly self-explanatory, for it forms an essential part of the fund's income distribution capabilities. However, we would add that the different investment approaches taken by the individual underlying fund manager or teams will materially drive overall performance.

The next part, the derivative overlay, involves selling call options on shares and receiving in return a payment, termed a premium. This option gives the right to purchase shares at an agreed price on an agreed time-line. The option expires worthless if it has not reached this price at the contract's end. Importantly, most funds that sell call options do so over shares that are already owned in the underlying equity portfolio. In essence, potential future capital upside is sold in exchange for income received today.

These vehicles are not suitable for everyone and attention must be paid to how the underlying equity portfolio will be managed, for this will be an important driver of capital returns and can influence the success or losses of the associated call option overlay strategy. Some are managed in a very defensive manner, with the aim, after income has been taken out and not reinvested, to allow the net asset value of the fund to match or beat inflation over time. Others can be more aggressively run, and have a more discernible impact on capital value. A clear risk here is that if the equity portfolio loses value, the managers will still be able to meet the yield target, but the absolute level of income will be reduced. These products may be appropriate for someone requiring a high income, but careful consideration needs to be given to the implications they have for an investor's capital base.