It’s time for Europe. It’s time for income.

European Opportunity

The outlook for European equities has improved in 2025, as headwinds like the energy crisis and weak productivity show signs of easing. Shifting fiscal policies, particularly in Germany, point to significant investments in defense, infrastructure, and artificial intelligence. The changes mark a move away from austerity and should spur investment in productive capital. Additionally, declining energy costs and the end of private sector deleveraging signal a more favorable economic environment, particularly for undervalued European equities.¹

As business cycle volatility increases and geopolitical risks rise², the attractiveness of equity income strategies has grown. Dynamic strategies focused on quality dividend stocks and alternative sources of income (“an income approach to equity investing”) offer a compelling proposition to seek exposure to equity markets.

The Vontobel Fund – European Equity Income Plus (EEIP) invests in a carefully selected portfolio of large- and mid-cap European quality dividend stocks, enhanced by an income-generating strategy of selling call options (covered calls). This approach combines the stability of high-quality dividend stocks with the additional income potential of options, creating an attractive risk-return profile.

Quality Dividends

A European equity strategy focused on quality stocks has outperformed the broader market over the last almost 20 years. As shown in Figure 1, the highest tercile portfolio of companies ranked by quality outperforms the benchmark. In addition, and further adding to the evidence, the lowest tercile underperforms the benchmark. Specifically, high quality companies tend to outperform during market turbulence, thus adding value through capital protection. Figure 1 highlights periods of market stress, and the corresponding performance difference between top tercile companies and the broader market (highlighted at the bottom of the chart). In all periods of stress top quality companies have outperformed the market.

European companies also pay attractive dividends, which tend to remain stable across economic cycles. This makes them a reliable income source. A rigorous quality filter ensures that the portfolio delivers dividends above market average without compromising on the desirable quality properties described above. As depicted in Figure 2, where the portfolio average dividend yield is compared to that of the benchmark during the last 15 years, the portfolio selected within the fund has delivered an average dividend yield of 4.0%, 80 bps higher than the benchmark’s 3.2% (or 25% higher in relative terms). It is also noteworthy that the gap is relatively stable over time.

Enhanced Income

The Vontobel Fund – European Equity Income Plus (EEIP) fund targets an annual distribution of around 7%, with approximately 60% coming from dividends and 40% from an option strategy. The option strategy is what delivers enhanced income, and is primarily implemented via covered calls, which we explain next. As we will see, covered calls also offer some protection during market downturns.

Covered calls are a proven strategy for generating regular additional income. The fund sells call options on both individual stocks and the underlying equity market index, adjusting to market conditions and economic cycles. The option strategy is implemented via two streams.

• Selling call options on single stocks: the fund sells a regular stream of call options for about 50% of the fund’s portfolio providing a steady income.
• Selling call options on equity indices: the fund may sell call options on the underlying equity market index for an additional 20% of the portfolio, thus generating an additional potential source of income. Selling activity in this area is typically higher in periods of cyclical contraction and late expansion, where we expect markets to move sideways or slightly correct.³

Selling call options on stocks and indices not only generates additional income but also helps buffer against falling markets during periods of heightened volatility. This makes the fund ideal for investors seeking defensive portfolio characteristics.

Dynamic Participation

While covered call strategies are straightforward in principle, their success depends on careful implementation, especially during exceptional market conditions, such as sharp corrections and rebounds.

If implemented in a mechanical way, which is typical of passive strategies, covered call strategies generally provide limited upside in rising markets while still exposing investors to downside risks during large downturns.

To circumvent this problem, our approach leverages our experience in tactical timing signals and our expertise in active management. Via a dynamic participation approach, the fund reduces exposure ahead of sudden market corrections, and increases exposure ahead of sudden rebounds. The approach seeks to protect capital during downturns, and to participate to upturns when they materialize. The combination of the two seeks to generate returns which match or exceed benchmark returns, while targeting attractive distributions.

EEIP – A Powerful Income-Generating Strategy

The fund targets an annual distribution of 7% while aiming to outperform the underlying benchmark over an economic cycle. The strategy excels in moderate rising and sideways markets, while offering downside protection during market declines. Investing in the Vontobel EEIP Fund provides multiple sources of income potential—stock appreciation, quality dividends, and option income—making it a suitable solution for investors seeking a balanced approach to income and market exposure over the long term.