One year on: European Equity Income Plus

Launched in March 2025, the Vontobel Fund – European Equity Income Plus was built around a persistent investor challenge: how to stay invested in equities while generating enhanced income and a more resilient risk-return profile without relying on factor concentration that have made traditional defensive approaches, including minimum volatility strategies, increasingly unreliable since 2022.

The fund draws on three complementary building blocks: Quality Dividends, a concentrated portfolio of 30 to 35 high-quality European dividend stocks selected for balance sheet strength and income sustainability, Enhanced Income, generated from option premiums through a covered call overlay, and Dynamic Participation, which manages overall portfolio risk through tactical hedging. Together, these are designed with the aim of generating stable income across different market regimes while providing meaningful capital protection.

That balance is particularly valuable for investors seeking equity exposure with a more stable income distribution profile. The covered call structure provides a degree of natural cushioning in sharp drawdowns through option premium income, while the dynamic participation strategy manages tail risk directly — addressing the limitations of minimum volatility strategies, which can struggle to protect in fast-moving markets in either direction.

The fund targets a 7% annual distribution without return of capital. The first distribution, covering only the five months from launch to end-August 2025, was approximately 5% pro rata, equivalent to more than 10% annualized, ahead of target.

The strategy is managed by a team with deep experience in both active equity selection and derivatives. It is designed for investors seeking regular, sustainable income from their equity allocation.

A year in, the proposition is unchanged: European equity participation, enhanced income, and a more defensive profile when markets are at their most demanding.

First Year Review

The fund's first year was marked by significant market turbulence, during which the strategy's three building blocks demonstrated their resilience and effectiveness. The fund was launched just days before Liberation Day. As the covered call strategy had not yet been fully implemented ahead of this known-unknown event, the portfolio was additionally tactically protected through Dynamic Participation using short futures and put options, reducing drawdowns by approximately 200 basis points relative to the unhedged equity portfolio. The subsequent recovery was rapid and V-shaped — a market environment typically unfavorable for covered call strategies — but active tactical adjustments limited underperformance versus the equity index during the sharp rally. In the fourth quarter, equity selection drove outperformance even in rising markets, more than offsetting the opportunity costs typically associated with covered call writing. The new year began constructively, before escalating geopolitical tensions prompted early defensive action; in March, all three portfolio components contributed positively to performance. Overall, the fund finished the year well above its benchmark, with lower volatility and reduced drawdowns, while the first distribution in November exceeded expectations.

Quality Dividends

The equity portfolio was built at launch around a high-conviction selection of 30 quality dividend stocks, with active management expressed primarily through tactical weighting adjustments rather than stock changes. Sector positioning — notably overweight in Utilities and Financials — proved well calibrated across different market regimes, with Utilities providing defensive ballast during drawdowns and Financials contributing strongly during risk-on periods. The most significant repositioning came at the beginning of the first quarter of 2026, rotating into energy and defensive names ahead of the geopolitical escalation, a move that proved timely.

Enhanced Income

The covered call strategy was managed with flexibility throughout the year, with the writing ratio actively adjusted in response to market conditions — reduced during periods of high single-stock dispersion to preserve upside participation and rebuilt toward the 50% target as conditions stabilized. This active approach limited opportunity costs during sharp rallies while ensuring the strategy delivered its intended income contribution during weaker markets. The permanent covered call strategy generated consistent premium income across all four quarters; the variable overlay was not deployed, as the economic cycle model did not generate a signal during the period.

Dynamic Participation

The strategy intervened at three distinct moments: hedging ahead of Liberation Day, which reduced drawdowns by approximately 200 basis points; deploying long calls during the subsequent V-shaped recovery to offset covered call drag; and building short futures and put option positions ahead of the Iran conflict escalation in early 2026, materially limiting losses during the March drawdown. In each case, the timing and instrument choice reflected both quantitative signals and qualitative market assessment. These interventions were a meaningful contributor to the fund's overall resilience across a turbulent first year.

Outlook

As the fund enters its second year, the environment remains challenging. The Iran war and its consequences for global energy markets dominate the near-term outlook, with the Strait of Hormuz largely blocked, oil prices elevated, and spillover effects building into inflation and consumer purchasing power. Economic indicators remain broadly constructive for now but are largely backward-looking — the full impact will only become visible in coming data releases and corporate guidance.

Should the conflict persist, stagflation represents the most adverse scenario for equity markets. A resolution remains difficult but cannot be ruled out, particularly given domestic political pressures in the United States ahead of the autumn midterm elections. The fund's first year demonstrated its ability to navigate turbulent markets across very different regimes. We enter the second year defensively positioned — maintaining our energy and defensive equity tilt, active covered call writing, and tactical hedging — while remaining alert to shifts that would warrant repositioning.