Maximize Your Income: Covered Call Strategies for Volatile Markets with Catherine Howse and Jeff Cullen

In a world where traditional income sources fall short and market volatility threatens portfolio stability, finding the sweet spot between yield and growth becomes increasingly challenging. Enter Cullen Capital's Enhanced Equity Income Strategy (DIVP), a thoughtfully constructed approach that's been delivering consistent results for over 14 years.

Unlike many covered call strategies that sacrifice upside potential for current income, DIVP takes a more selective approach. By writing options on just 25-40% of portfolio holdings, the strategy maintains meaningful exposure to market upside while generating a target yield of 7% or higher. Half of this yield comes from dividends paid by high-quality value stocks, with the remainder from option premiums – creating a more tax-efficient income stream than strategies relying solely on options.

The portfolio consists of approximately 30-35 carefully selected large-cap value companies across all eleven market sectors, each chosen for their strong fundamentals, dividend growth potential, and attractive valuations. Trading at just 13x forward earnings, these companies offer both current income and growth potential that many pure fixed-income alternatives simply cannot match.

Perhaps most compelling is the strategy's historical ability to protect capital while delivering income. A hypothetical $1 million investment at inception with 5% annual withdrawals would have provided $856,000 in cumulative income while growing to $1.3 million over 14 years – demonstrating that income generation doesn't have to come at the expense of principal.

With recent market volatility highlighting the vulnerabilities of growth-heavy portfolios, DIVP's value-oriented approach has demonstrated resilience, outperforming many technology-focused covered call strategies. As investors reassess their income needs in an uncertain market environment, consider how this balanced approach to income generation might enhance your portfolio's yield while maintaining potential for long-term growth.

DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of Cullen Capital and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own

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Transcript

Speaker 1: 0:00

My name is Michael Guyad. I appreciate everybody joining this webinar sponsored by Cullen Capital Management, schaefer Cullen. I want to hand this off to Mr Jeff Cullen and then, of course, kathy Howes as far as your background, and we'll get right into it. So, jeff, go ahead.

Speaker 2: 0:13

Thanks, michael, it's always good to spend time with you and we appreciate the ability to kind of bring our message to people who will follow you and then like what you have to say. So, by way of background, my name is Jeff Cullen. I work at Schaefer Cullen Capital. We're also known as Cullen Capital. We have SMAs and mutual funds. What we're here to talk to you about today is actually our ETF version.

Speaker 2: 0:33

We launched our first ETF, like many other firms. The ETF we launched that we're going to get into is actually based on a $1.8 billion strategy that exists, so it's a lot of assets in the program already. A $1.8 billion strategy that exists, so it's a lot of assets in the program already. There's some nuances to it that the minimums for SMA access tend to be a little higher. So we've had a lot of advisors basically ask us to make an ETF version of it. It's much easier for them to implement smaller positions in their book or their IRA accounts, whatever it might be the models that they run. So we did that. We just crossed a one-year track record and we're going to get into all that throughout the rest of the day. With that, I'll just turn it over to Kathy. Let her give a quick introduction and then we'll give a little background on Cullen.

Speaker 3: 1:12

Thanks, jeff. Hi everyone, I'm Kathy House. I've been with Schaefer Cullen for the past 19 years, based in Los Angeles, and work as a portfolio specialist. Like Jeff said, we're excited to be unpacking our dynamic covered call ETF DIVP today, so let's jump into it.

Speaker 2: 1:30

So a little bit about Schaefer Cullen, just to start. Look, we're an employee firm. We're actually celebrating our 40th year in the business. So, for those who haven't either heard of us before or heard of Schaefer Cullen or Cullen Capital, we've been in the business for 40 years. We primarily do separately managed accounts. We do have a mutual fund lineup on very strong performing mutual funds. We're based in New York Primarily. Everyone's based in New York. Obviously, we have sales and marketing and portfolio specialists that are located throughout the United States. We have $24 billion in assets, or just under $24 billion in assets In this portfolio.

Speaker 2: 2:02

I mentioned the strategy. We have $1.8 billion. So it's been one of our fastest growing strategies in both the SMA side, and we're starting to see some nice traction in our ETF that we're going to talk about. But this is a quick look at the investment team. They've been doing this for a long period of time. A lot of people have been in the industry, as you can see, for a long period of time. The average tenure of our portfolio managers is 34 years. So, again, we only do one kind of style of investing. For us, we do value investing with a focus on dividends, so we offer various versions of that, us international emerging markets, et cetera. This particular strategy we're going to talk about today is covered call writing on those individual stocks, but that is a view of our company overall. We just do equities. We don't do fixed income cash, so we just focus and we're a boutique and we're more as well known as a specialist in the value dividend space.

Speaker 3: 3:00

So I think it's helpful to also kind of address that this kind of corner of the market has been one that has seen a lot of growth in the last few years. So if you go back to 2019, the peer group that exists, which is derivative income, had just gotten broken out by Morningstar so its own separate peer group of funds, etfs, managed accounts and at that time there was about $20 billion worth of AUM in derivative income. In the last five years you've seen that grow sixfold to where at the end of last year it sat at around $140 billion. There have been some big players in that space. We can certainly talk about some of the differences between us and them today also, but at the same time there were some macro trends kind of forcing the hand of investors to find income in different ways. I mean, we think back then, you know, bonds weren't exactly paying a whole lot of money. Demographics have also just been very concentrated, where you have baby boomers that have been entering retirement or at retirement really needing to find higher sources of income. So derivative income, using options to enhance yield, is one way to do it, and so you know, when we think about our portfolio, we have a couple of characteristics that really set us apart from the rest of that peer group.

Speaker 3: 4:14

First of all, we have a very clear stated objective of what we are trying to achieve. So for us in DivP, we're trying to generate a yield of 7% or higher. Half of that is coming from dividends and the other half of it is coming from the covered call premiums. We also take a more selective approach to writing calls on our portfolio companies. We have a clear, stated range of what that coverage looks like. At the minimum end it's 25% and the maximum side of it is about 40%. So it's a more individual approach looking at the stocks in our portfolio and making a decision what looks to be the best candidates to be writing calls against. And then, third, our objective is to also protect that principle, protect the capital and have a strong level of downside protection.

Speaker 3: 5:06

In some of that derivative income peer group you're going to find strategies that just use options for hedging purposes. That's not what we're trying to do. But we want to have a good quality portfolio that can take the impact of a volatile market and offer a level of downside protection but really hold on to that principle, to where you can generate current income and also see some moderate growth from the underlying stocks as well. So that's the approach we take. There are some, again, dynamic features there, whether it be the fact that we are one of the highest allocators to large cap value within that peer group and that that dividend is a really key component of our stock picking approach. This slide, though, I think exemplifies really the best value add that we provide for clients, which is a consistency of the income. And again, when we look at other types of ETFs out there, there have been a lot more broad index approaches or using index-based options, which are just based on the volatility of an index. For us, we look at the candidates of our portfolio stocks that we can use and have a lot more flexibility to kind of work around the portfolio. So this slide, what it shows, is the track record of income based on our managed account, which goes back to 2010. So 14 years of history here, a lot of different dynamics thrown at us over that time period as well, but a consistent income track record. So the blue piece of the bar here is the dividend component, and the gold piece you'll see is the premium income component reaching that 7% yield, in some cases even exceeding it or going over 8% yield, in some cases even exceeding it or going over 8%. On average, though, over this time period we've generated 7.6 in total income. So our goal is to again aim for consistency, have that clear 7% target and meet or exceed it each year.

Speaker 3: 7:02

Now to take kind of a sidestep. For those that maybe need a refresher maybe it's been a while since you cracked open that series seven textbook and looked at covered calls it can be helpful to just kind of re-explain how covered calls work. So a call option let's start there that's a contract between a buyer and a seller where a buyer can buy stock from a seller at a preset price we call that a strike price on or a specific date, we call that an expiration date and the buyer pays the seller the cost of that contract, which is a premium. That's what the seller receives. In a covered call, the first thing you do is you own the underlying securities and in order to sell one contract you must have at least 100 shares. So the example we have here on the screen is a stock XYZ that costs $100. And let's say we have 100 shares of it today. That would be a $10,000 position in our portfolio. As the seller, we can sell the call at a strike price. Let's say the price is $105 and the expiration date is one month from now and the price of this contract is $1 per share. So when we open the contract we have a price that we're willing to sell it at and we receive that $1 per share or $100 up front.

Speaker 3: 8:19

Right now, if the stock price rises above the strike price, our buyer is likely going to exercise their right to it. We must sell it at the agreed upon strike price, which is 105. So that's one outcome that can occur, and that's really the risk that we take when we sell calls is that they go above the strike price. The other outcome would be that the stock moves sideways and doesn't hit 105. Buyer never exercises their right. We've retained. The stock moves sideways and doesn't hit 105. Buyer never exercises their right. We've retained the stock and we've received that premium. And then a third outcome could be that the stock price goes down and we've again received that premium. But that premium has also helped offset a little bit of the loss against the falling stock price. So these are the three outcomes that can occur.

Speaker 3: 9:08

What we're trying to achieve by selling covered calls is looking for opportunities where that premium income is attractive. So to us it's worth it to expose the stock and potentially get assigned in it, but also be really specific about what companies we pick and choose each month to sell calls against and to sell those calls out of the money or above the current price of the stock and in the hope that they do not get assigned. So let's move on and take a quick look at our portfolio here and we'll give you kind of a flavor of the underlying companies, and Jeff is going to unpack more of the option writing piece here in just a second. We have 33 stocks in our portfolio today so we do a lot of upfront due diligence and research on individual companies to find what we believe are some of the best stocks out there. They fall into kind of more of the defensive areas. If we take a quick look at the right side of this chart, you'll see that our highest allocations right now on a sector level are to staples, to financials, then healthcare. We are relatively underweight, both the Russell 1000 value and the S&P 500 in technology, but we are well diversified across all 11 sectors. Also, you'll take a look at the stocks here likely recognize these to be quality blue chip names, large cap, value-oriented companies. There's a lot of different catalysts that we're looking for when we're trying to find companies, but a couple of them is to find good, strong earnings growth over the next three to five years and a growing dividend as well. So let me look at an example here of a company that we've held in the portfolio for a couple years Citigroup.

Speaker 3: 10:46

As you may know, you know Jane Frazier stepped in to take over Citigroup in 2021. You know she had very you know a really clear idea of how she wanted to turn things around there, but I think the key is is that the stock went through a bit of a decline in 2022, down 25%. There were some skeptics around her ability in the early stages of it. The price of the stock got very cheap, trading around six times half a book value, and then, as things began to turn and she being very clear about upgrading technology, cutting costs, focusing on the more revenue parts of the company, like the institutional banking and wealth management size, began to see a gain 14% growth of the stock price in 2023. The company went through, as all banks did, the regional banking crisis, where a lot of the regional banks. A lot of that money drifted into kind of more of these more established, larger cap banks. You saw the multiple rise and then last year more even significant growth of the stock price you know, 38%. A lot of that happening also towards the end of the year. As you know, trump got into office of the year. As Trump got into office or was elected back into office, and the ideas going forward about deregulation in his administration, more M&A activity, easier capital markets, and so there's been a lot of great growth in the stock.

Speaker 3: 12:18

It's a company that we've held onto, but it also, I think, exemplifies that we take a longer term approach when we're picking and holding stocks. In the meantime, we've been writing on Citigroup over these three years as well to be able to collect additional income off of the stock. So another example I think that's probably something that when you think about tech and AI and all the boom, johnson Controls is not one that is probably first in your mind, but I think you'll probably relate to the story here. So Johnson Controls is a leader in HVAC systems and we have this explosive growth happening in the construction of data centers globally With that. You know Johnson Controls is a leader in those air cooling systems that are essential to these data centers. So we've seen a lot of growth in the company.

Speaker 3: 13:09

Five-year total return up 136%.

Speaker 3: 13:13

We bought the stock many years ago, traded it 10 times, was right in our spotlight for what we like as value-oriented companies nice dividend yield.

Speaker 3: 13:24

We've seen the multiple rise.

Speaker 3: 13:26

Again, it's a company that we've been able to strategically write on during this period as well, but it's one that I think has that sort of indirect play to AI, whereas in a growth portfolio you're going to get more of the direct companies to have Amazon's, apple's, google's, nvidia's, et cetera.

Speaker 3: 13:44

But for a value manager, this is how we can play that space still in a dynamic way and benefit from all of the catalysts and growths that are happening in both AI and in cloud computing. So that's just give you a little bit of flavor to how we think, how we're looking for good stories out there in our portfolio, and I'll hand it actually back over to Jeff to kind of go into the option piece here. Maybe I guess a quick point here on just the overall portfolio Still today trades cheaply, 13 times forward earnings, significant discount to the broad market, strong dividend yield component 4.4% and these companies have a track record of growing their income across the portfolio year to year. We've raised, or we've seen the companies raise dividends about 70% of the portfolio, increase by 7%. So back to you, jeff.

Speaker 2: 14:36

Thanks, kathy, nice job. One thing I did want to mention you can see on the title slide of this presentation the actual name of the product. So the strategy we're actually talking to you about today, it's called the Enhanced Equity Income Strategy. We offer it in separately managed account that Kathy mentioned and we also offer it in an ETF. Share classes is what we highlighted initially. I know that Michael and Kathy kind of glossed over the ticker, but the ticker is DIVP. We call it DIVP. It's DIV for dividends and P for premium income. So that's why we sort of refer to it quickly as DIVP. Divp is the ETF ticker for this strategy in ETF form, one of the things I just want to highlight in this slide. Actually, kathy touched on it.

Speaker 2: 15:21

Keep in mind, if we're just looking for yield, we'd wind up being just in communication services. We'd just be in utilities and maybe some energy names. But because we want to have dividend growth and we want that dividend growth to come from earnings growth, this is where we can get good growth in the portfolio over time. So the dividend yield, the underlying dividend yield, which you can see right now, is 4.4%. So how to think about this is what we're showing on this slide is that the dividend yield in the SMA on December 31st 2024 is showing at 7.3% 4.4 from dividends and 3% from options premium. On that 4.4 dividend yield it's very, very consistent for us. We're going to refer back to that slide later on today on yield, but you're going to see that that dividend yield has been very, very consistent for us. But on top of that, if you own the strategy over time, you have this compounding effect of dividend growth which Kathy highlighted below. So you can see these numbers On average we're getting about 60% to 70% of our portfolio holdings are increasing their dividends, with that average increase being 7.1% over time. So it's that compounding effect which really can drive some nice yield in this portfolio over time.

Speaker 2: 16:34

How does the options work? So again, kathy kind of went over it at a very quick and a high level. But the way it works is we have a portfolio management team who picks the underlying securities. They're buying them for our principles, which are low PE style investing. We want everything to have a dividend yield and then we also want the company to have dividend growth tied to earnings growth Once those 30 to 40 stocks are picked. Right now, presently, their portfolio has 32 names in it. Those 32 stocks are handed over to the options principle, whose job it is to look at those 32 stocks. And, as Kathy mentioned, we are represented in all 11 sectors, which is sort of important because we're looking for volatility in any one sector, right. So today is a good example. Today, healthcare is up and technology is down. That volatility that is created through the Trump administration has allowed for us to actually get very, very strong, good options.

Speaker 2: 17:23

Premium Volatility is our friend in these kind of strategies. So once the option portfolio manager has those holdings, he's going to look through and find out where he can get good options premiums. What we're writing on here is we're writing short-term options between two weeks and one month. We're writing the options always out of the money, somewhere between two and 4% it's going to vary on the sector, it's going to vary in the actual security and we're writing on about 25% to 40%. On average it's 33%. So if I had to give you an idea of the portfolio, at any point in time inside the month, we're going to own somewhere around 31 to 34 names. We're going to write on about a third of the portfolio and we're going to be writing short term out of the money options and we're just going to repeat that process over and over again.

Speaker 2: 18:12

Kathy mentioned that we have written a lot on Citibank. We have done that as Trump's rally the Trump rally for financials kind of happened in the fourth quarter and after he was elected, and now we're getting some pullback even today on financials with the inflation number that came out. So you have this volatility super helpful for us to get good options premium. At the same time, as long as company earnings are there and that's what we spend a lot of our time on, they're going to increase those dividends over time as those earnings are there. So that's what we look for is a two-part prong to that. There's a lot of activity on here. As you can see. We're writing a lot of options throughout the year. The average out-of-the-money option you can see here online in 2024 all the way to 2022, it changes. It can vary based upon current economic environment, current positions that we're writing on.

Speaker 2: 18:58

That's why it's sort of important that we have all 11 sectors of the S&P covered with holdings. We have all 11 sectors of the S&P covered with holdings Because if we just wrote on, say, financials and energy in order to get the options premium, we could wind up losing any energy, writing a lot of energy positions, and if there's a flare up in the Middle East, we wind up getting called away on a lot of our energy positions and then we don't have that. One of the nice things I really like what our portfolio managers do is they won't write an option on a company that's going to be paying a dividend Because, remember, we want to generate income, so we're going to wait, capture that dividend inside the portfolio and then we'll write on that particular position if we wish to. And because we pick the stocks first because we think they're going to appreciate in price, a lot of times our portfolio managers will write half positions. So instead of exposing the whole position of, say, xyz stock, they're only going to write on half the position. So if there's a good earnings announcement or something happens on a takeover case or some kind of news drives that stock price that we weren't expecting, we maybe only are going to be called away on half the position where the other half position could participate in upside appreciation for you and your clients.

Speaker 2: 20:04

So that's how we do the options overlay. It's very methodical, it's very structured. You can see on the left bullet point. Here we basically look at all the coverage that we have and we're looking for certain thresholds in order to be willing to write an option and have a stock called away. So we have internal thresholds on return levels that we need to hit in order for us to expose that stock.

Speaker 2: 20:26

And that's again also, I think, an important characteristic of an active management on the options part as well as active management on the underlying securities. Because if you're just running on the index, you're beholden to whatever happens in the marketplace and the spreads that the market's willing to give you on index options. By having the ability for us to do it inside the individual positions that we own, it gives us a lot of flexibility Write half positions, write full positions, write 2% out of the money, write 4% out of the money, do it for two weeks, do it for one month. That added ability to have active management allows us to have that consistent income and do that over time. We just repeat that process each and every month, and we've done that for the last 14 years. So, kathy, I'll turn it back to you here to just give a quick once over of some of the diagrams that advisors who own this $1.8 billion strategy have asked us to run for them and kind of provide for them.

Speaker 3: 21:18

Yeah. So if we're generating this 7% yield, or if any covered call strategy ETF out there is, you know, publishing a high distribution rate, one of the things you want to be looking at is you know what did the? How does the total returns look, as well as that distribution rate? One of the things you want to be looking at is you know what did the? How does the total returns look, as well as that distribution rate, the income rate. The worst thing that can happen is that these funds be publishing a super high yield and if you were to actually take it that, you would be just deteriorating the principle over time. So, as Jeff said, you know we're very thoughtful in the way that we've built the portfolio and the yield that we have stated so that we can achieve an objective of being able to provide the current income, as well as the stability of that principle and even growth over time. So what this study shows is hypothetical examples of withdrawing 3%, 5% or 7% and including a hypothetical 1% fee on that investment as well, and what is the effect of it. So let's just take a look at the red bar in the middle there. That is a 5% drawdown that might be indicative of you know, like someone's RMD, so it's a good example here. So if you had started at inception with us 2010 with a million dollars and you were taking out 5% each year and there was a fee deducted of 1% at the end of the year, over this 14 year period you would have withdrawn a total of five I'm sorry $856,000 of income in that portfolio. Would have still been able to appreciate 30% to go from $1 million in the beginning to $1.3 million at the end. So again, the 5% is taking a portion of the 7% that we're targeting. And then you had that additional 2% of income that was then reinvested back into the portfolio in companies that are also growing the income over time, and so that's where that appreciation has come from. Same thing in 7%. If you were to draw down the full income, 7% started with a million took out over a million dollars of income. Even You're seeing the stability of that principle 14 years later, just shy of the $1 million starting value. So that's the goal.

Speaker 3: 24:10

We see a lot of people that want to take current income we allow for it and they also still may want to be able to pass this account on to a spouse or an heir without it being deteriorated over time. The alternative is maybe you don't need income right now, but you're building out a plan so that you have it available for when you do need to take that income out and in the meantime, all that income is going to be reinvested back into the portfolio. So this is a yield at cost slide. It shows the reinvestment of that income. Same scenario starting in 2010 with a million dollars and reinvesting back each year to where your starting yield was around 8% and now, 14 years later, the yield on that original million dollars is 20%. So that's significant income growth over time. So we look at this really as a product that can offer both the stability of the cash flow to be able to take it currently, not deteriorate the portfolio, but also build wealth over time.

Speaker 2: 25:09

So the big question always becomes how are we doing and how's it performing? This is a quick look at two scenarios here. People are asking how's it held up during this market since the peak of the market on February 19th, and also how's it done year to date. They want of want to get a feel of how it's doing versus some of the broad indices. Now there's not an index that exists that is a value index, that invests in dividends, that writes covered calls. There's not one that exists, the only one that we are familiar with that we have to put on our prospectus and everything is an S&P buy-write index. It's called the BXM. What that does is it basically buy-write index? It's called the BXM. What that does is it basically it's owning the S&P 500 and doing buy-writes on the actual index at 100%. So more index writing than actually that we do. We're also showing the S&P 500. And because we're a value investor, many times we'll also show the Russell 1000 value. The S&P is a much different category, weightings and sectors than the Russell 1000 value. So we are fishing in that pond for new ideas and the portfolio from a sector allocation looks more in line with the Russell 1000 value than not, even though everything pays a dividend and we tend to be mega cap oriented companies and we also threw in the junk bond index.

Speaker 2: 26:22

Many times we are told from advisors that they think of our ETF and our covered call strategy here in that sort of same vein. It's equity-like returns. I want to complement the fixed income that I have inside the portfolio today. So many times we're asked to say well, how do we look versus the JNK? This is a quick look at how we've done since the market peak. This is through last Friday. It's when we made this PowerPoint presentation. You can see, obviously the strategy has been holding up very well since the peak. There's been a strong pullback in the S&P at this point times down 7.6. It's as of this podcast where it's actually down pretty strong today as well. But you can see our year-to-date numbers have held up as the market has sort of turned and gone in the way of a little bit more conservative.

Speaker 2: 27:07

Equity Healthcare has kind of started to perform. It's doing very well today which we own as well as utilities and some of the energy names that we have inside the portfolio. So this is just a quick look to give you an idea of what is out there. As I mentioned, the strategy is Kathy mentioned. The strategy is 14 years old. This is a little bit of a busy slide. We have this information for anyone who would like to email us afterward to get it, but you can see the longer term track record since inception We've averaged about 9% plus Higher than that, the index, way higher than that, and then the junk bond index and as well as trailing the Russell 1000 value, which sort of makes sense to us. This has been a sort of up market since inception in 2010. The Russell 1000 value has performed well with the mid and small caps, the areas of the market that we don't participate in this portfolio.

Speaker 2: 27:55

So we feel very good on the track record. If you look at the downside capture, we often are asked how do you perform in some of the down years? If you look here, I'm not sure if you can see my mouse moving here, but in 2022, some of the down years If you look here, I'm not sure if you can see my mouse moving here, but in year 2022, you can see when the market was down, russell was down seven, the S&P was down. Our strategy at the SMA level was actually up that year. So we're seeing indicative nature of that this year kind of playing out and a little bit later on we're going to compare it to a couple of the other ETFs that exist in the covered call space to give you a flavor for that, because we think they've done a wonderful job.

Speaker 2: 28:28

We focus on the value side of that equation and many oftentimes think we're a company of other covered call ETFs that exist. But we want to walk through also a quick view of the environment and what we see and what we're seeing from our portfolio management eyes. Look, it's a sector performance turn. You're seeing again today technology and discretionary sort of names, and when we say discretionary and technology, you can even lump in some communication services the Googles and the Metas of the world that have been moved over to the communication services sectors. They are having a tough go and a lot of it is a retrapment of the PE multiple expansion that existed. The S&P, obviously, as everyone's talked about the large weighting that you have in the MAG-7, which we'll highlight here as well but when you look at a sector perspective, there's really been a strong turn in that healthcare movement to healthcare staples. Real estate, energy, dividend-paying value-oriented companies has been pretty solid this year and we're seeing a continuum play out in today's pullback.

Speaker 3: 29:57

Yeah, jeff, I think that the average investor I mean we're all getting thrown. You know it's like a new headline every single day, something else that there's uncertainty around, and so I think you're obviously seeing sentiment shift. You're seeing people sort of shift their behaviors, you know, take some profit from their portfolios that they've experienced over the last couple of years, with, you know, being exposed to the Mag7 and tech and you know a lot of great stories there. But this market, you know, coming into 2025, I think you know a lot of people had some pretty high expectations also on the way the S&P was going to go this year. You know we were on with Michael at the beginning of the year kind of talking about that and talking about what sector some of these strategists had favored and what the outlooks were, and I think it's really, you know, maybe surprised some people at just sort of the turns that we've experienced here in February and March experience here in February and March, and so you know it, I think really sets our portfolio up to be having this discussion and to be talking about ways to find, you know, maybe a more consistent approach to generating yield and having, you know, exposure to other parts of the market.

Speaker 3: 31:09

So you know also Goldman Sachs, I think they came out with an article I want to say it was sometime last year a white paper that sort of shocked a lot of people because they were talking about a projection of forward returns for the next decade being around 3%. This is the study that they featured in that article and again it reflected a lot of the uncertainty of the future. Now, if you go kind of to the next slide here, this is really where the foundation of that thought came from is that we have been in a, you know, relatively expensive market. If we think about the average multiple on the S&P over the long term being around 16 times. You can look at the middle of this chart here. What have we always said? That average long-term returns for the market has been is around 10%. That makes sense when you're in a higher multiple market, where we've been for the last couple of years. Look to the left side of that chart where the S&P is trading over 20 times, forward returns have tended to be more muted. They tend to stay in that kind of low single digit range three to 6% and so that's really the foundation of where that Goldman white paper came out with this projection going forward. And if you believe that, and if you believe that to be the case going forward, then it really begs to be thinking about income also as a piece of total returns. So whether you carve a strategy like DivP out to have as part of your core portfolio as an income sleeve, or you're using it alongside other equities as a means to have both high income and some moderate growth to aid to that total return, it has a place in both areas.

Speaker 3: 32:52

The yield environment has also been changing has a place in both areas. The yield environment has also been changing. We're in now a declining interest rate environment and we saw in the third quarter of last year when the Fed began cutting interest rates. The third quarter was a very strong quarter for both value stocks and dividend stocks.

Speaker 3: 33:09

What this study shows is that when there has been a decline in the 10-year by 1%, it's typically those parts of the market that outperform. So what's shown here is the S&P 500, shown on a dividend yield and a valuation level broken down in quintiles, and if you look at the highest quintile of dividend payers in the S&P, those have been some of the stronger performers when yields are falling, as has been more of the value-oriented parts of the market. That continues to play out. We haven't seen a cut yet this year from the Fed, but we're seeing the projections change day-to-day as to what's going to happen with the Fed. Nonetheless, we still are in this falling rate environment to be thinking about. So we think that our style and our factors are really set up nicely in this market.

Speaker 2: 34:03

Just want to kind of, as we're ending our prepared remarks here, just sort of a reminder. The strategy is focused on income. The generation of that income has been very consistent over time. The one thing I want to highlight here to keep in mind is, when you think about covered call writing strategies, everyone focuses on the income that's generated. You should also keep in mind the taxation of that income that's generated. So our dividends are all qualified dividends, so you're going to be taxed at the QDI rate, the lower tax rate that exists for non-qualified accounts. The premium income is taxed as ordinary income, that short-term capital gain. So that'll be consistent. But many, many, almost the majority of almost all the other covered calls that we come across who are just writing on the index, tend to generate almost all their income from option premium income, which is all taxed at ordinary income. So when you're talking about taxable accounts, you know there is that after tax return that you should consider and I like our approach. If you look at this over time, we generally are running around 50, 50, 50% of the 50 to 55% of the income come from dividends qualified dividends and the other remaining portion coming from premium income.

Speaker 2: 35:13

The final thing I'll highlight here is like look, how have we done. You know, for those who are out there using covered call writing strategies in the derivative income bucket, you know you'll be familiar with names like JEPI and QILD and JEPQ etc. We said, well, why don't we just sort of highlight, you know, how have we done during this market pullback, because that's what's on people's mind and what we're being asked about. So this is a look at year-to-date through again. Last Friday is when we actually finalized this PowerPoint. It's probably playing to our advantage again today with today's market, but our enhanced equity income ETF DIVP is actually up 4.4% through last Friday. That's ahead of the Russell. It's ahead of Schwab US Dividend, which is a very popular dividend-oriented strategy. Devo is another one that does option writing on the S&P kind of orientation companies. You have Jeffy here, pretty much flat, and then you have the cows, which is also a very, very popular ETF down two and then all the way over to QYLD, the NASDAQ, so anything sort of tracking the NASDAQ is down at least five. So you're talking about a 9% delta between what the NASDAQ is doing on covered calls and our strategy.

Speaker 2: 36:21

Now our point here is simply to sort of diversify no different than you do. Large-cap growth and large-cap value when you're out, doing an allocation for someone for their portfolio is don't just own one covered call writing ETF. The yields are about the same but you get certain underlying risk profiles that are different by the underlying stocks that we own. So do we like QYLD? Absolutely. We think we actually complement that very well. Look at a portion of your QYLD and while you're generating that income, maybe you think of diversifying off of some of those positions and adding a DIVP position toward making that asset allocation a little bit more conservative, especially during this upcoming market and everything. We just sort of covered that Cathy went through on details. So with that I think we're done with our prepared remarks. Michael, I'll turn it back to you.

Speaker 1: 37:09

I see some questions. Looks like, Cathy, you had started answering some of them. Let's talk about if it's worth thinking about this in terms of comparing it against other covered call strategies, meaning should somebody think about this as a total substitute for that type of an approach or can it be a complementary dynamic against other types of popular funds?

Speaker 2: 37:31

I would say we liken the idea to be a complement. They serve a purpose, no different. I mean you're owning the QQQ. Say you're on the QQQ, it does covered call writing. One of the questions that comes up all the time is like why not just own the QQQ and take a withdrawal from the returns you get in the market, because your volatility is pretty. The correlation there, I was just told, is about 80% or 90% to the actual Q. So I'm not sure what downside you're sort of protecting there, but you are generating that strong income, which they do do.

Speaker 2: 38:02

I don't think it's a one or another. I don't think it's a one or another game, michael. We don't see that and you know what we don't see it from. We don't. We hear this from the advisors that we work with. So this isn't us telling you this.

Speaker 2: 38:12

The advisors that we work with at Cullen is they use this as a complement, mostly on their fixed income side. You know that's complementing a portfolio of maybe it's munis and maybe it's high yield bonds or whatever they might have inside of their core portfolio. That they're basically taking a 5 or 10 percent allocation of that 60 percent fixed income bucket and they're going to add something that can generate higher income than usually. The ETFs that are in there that are not covered call and yet you have concern of equity. So while you take on equity-like characteristics, there's a portion of your portfolio that could appreciate over time, versus a lot of times in fixed income. It's hard for the underlyings to sort of appreciate.

Speaker 2: 38:52

So I would recommend and what I see advisors using and what they tell me is a compliment versus a replacement. If you want to do it, we're OK with that. They have to make that call. If the NASDAQ market rallies tremendously, then the NASDAQ is going to outperform us. So that's why it's a blend of the two, I think. Kathy, anything you want to add to that.

Speaker 3: 39:10

I think you hit it, jeff. I mean, this derivative income group has so many different approaches to options and so many different styles of underlying portfolios to within there. Some of them are just broad indexes that do index calls on SPY, you know. And so for us I think you know we're very clearly value. We've got, you know, two buckets of income coming in from dividends and options. We have a conservative track record that shows that downside protection, so it works alongside a lot of those other peers that we have.

Speaker 3: 39:46

One interesting thing I think I've seen is blending this with direct indexing strategies that are very tax efficient, that are broad market exposure, and then having an active portfolio. That's going to be, you know, in the ETF is going to be more tax efficient than your traditional mutual fund, but we'll be able to kind of, you know, have a sleeve that's more active and income focused. So those two ideas go well together. We see people put us in income models alongside, you know, munis, preferreds, covered call portfolios. There's a lot of different plays that you can build out with something like this, but I think we're very clear in the approach and what we're trying to achieve too.

Speaker 2: 40:27

I've been having a lot of conversations on this, michael. I'll just do one more quick point here is this is the kind of strategy that advisors have done for client accounts for decades. I mean, this is nothing new that they haven't been doing for literally decades. They would have a group of high quality, dividend paying large cap, behemoth, mega cap stocks and they write a covered call option to generate additional income for the client. Now they might write longer than we write, but it's the same kind of concept and what we found is just a lot of work for them to do it. Many of them still do it. We sort of. That's how we came about this.

Speaker 2: 40:58

We've run a US dividend strategy at our firm. That's $16 billion in assets for 35 years. Those clients came to us and asked for more income, so then we started to write some options on some of those portfolios and it started to become too much one-off so we decided to make a strategy out of it and then that strategy we've been running for 14 years and now we have an ETF out of it. So we don't look at the market and say, hey, we should do this because we think this will raise money. We are asked to do this by the clients who already own what we manage, and we now bring it into an ETF format.

Speaker 1: 41:29

I feel like we should touch on volume liquidity because I'm always blown away that still to this day, some people don't quite understand how the ETF mechanics work. In terms of volume not equating to liquidity. Yeah, still relatively small compared to a lot of these other competitors that you're showing here, and I think you're going to get obviously a lot more flow. But how should allocators think about positioning if they see the volume the way it is?

Speaker 2: 41:57

I made the ETF myself. I basically have learned. I'm smiling because I feel like I've answered this question a thousand times, I know, but it's like that's the game now.

Speaker 2: 42:06

I'm happy to do it again. I'm not surprised because when I first started to get involved with ETFs, I thought the same thing, like others. There's 2,000 shares trade. If I go buy 10,000 shares, I'm going to move the stock price. It's just trying to understand how ETFs fundamentally work and I'll just give you a quick explanation.

Speaker 2: 42:25

If this was a mutual fund and we had $10 million in it and you gave us $10 million, the next day, I'm going to get cash of $10 million. So now the portfolio is 50% in cash and I have to scramble to invest all that cash over the next couple of days. And if the market moves like it is, one way or the other, there's a cash drag that exists. So in mutual funds I would agree Smaller mutual funds getting big flows it can affect what happens inside the portfolio. I just have not been able to see that at all, and I've been told by 100 people it doesn't affect it on ETFs. And let me tell you why and I've been told by 100 people it doesn't affect it on ETFs. And let me tell you why Because if you go out and do a trade and there's not enough shares that exist in the marketplace today, all that's going to happen is our lead market maker is going to create more shares. They're going to give you those shares and what they give us when you make that investment is they will give us our current portfolio holdings as we weight it in each position. They're going to give all that to us in stock. So if we own 32 stocks and let's say each position is 3%, we tell them our portfolio every single night. So what they're going to do, they track it every single day and throughout the day. So when a creation basket happens if it happens at, let's see, it's 215 today they're going to look at the price for each of those stocks. They're going to multiply it by the 3% weighting and that is going to be how much dollar amount is going to be generated. And they're going to go out and buy those stocks and they're going to deliver those stocks to our portfolio. We have no cash drag. I am given the portfolio in kind in the cities that I own the next day. So there is no cash drag, and therein lies why the volume is not a big deal. The concern that some people have will be that is there a spread between the bid and the ask is then becomes a concern for people. So if I go in the marketplace and I put a big trade in for more volume than I'm seeing on a daily basis, am I going to move it? No, no, all that's going to happen is when that trade goes through, the lead market maker is going to price it based upon the securities in the portfolio and 215 today, and they're going to give you that price on the market. Now I do recommend doing I like doing limit orders at the asset. Usually it's what the advice that I've been given for the year, two years I've been kind of involved in the ETF space, but the volume and the spread issue should not be something that holds people back from buying either smaller or newer ETFs.

Speaker 2: 44:52

Now our ETF. It just hit a one-year track record. We run $160 million mutual fund version of this. We have a $1.8 billion SMA. The ETF is in the same trade rotation. So when a portfolio manager comes in and they want to buy XYZ stock, the ETF is treated just like the mutual fund, just like all the SMAs we have. It's in the throw of things. So they're just really Michael, from my seat and from what I see and I buy this ETF sort of on a daily basis. I want to see how it goes. I do not see any concern for lower volume ETFs. If this was small caps, maybe, market markets, maybe I might be a little bit more concerned, because if a big flow of money comes in, they have to go and buy those underlying stocks. We are buying the mega of the mega large cap value stocks. There's so much float out there that you're just not going to move the prices by the volume that we get.

Speaker 1: 45:44

I smile too when I get those kinds of questions. It's okay.

Speaker 2: 45:48

It's on people's mind and I love it because they're-.

Speaker 1: 45:50

But even I smile.

Speaker 2: 45:50

it's okay, it's one way to get it's how it works and it's an education thing. I've had very sophisticated advisors. They know everything about the markets and stuff and it's just new. So it's just about giving people a little bit more education of how it actually works. But I'm happy to answer those questions.

Speaker 1: 46:05

I am curious also and maybe Het, this is good for you I mean just any sort of sense as far as people's maybe misperceptions or wrong ways of thinking about cover call strategies. I mean, again, it's been out there for a while but I'm sure that people get certain aspects of it wrong from a risk going forward perspective.

Speaker 3: 46:23

I think it's more of just, you know, people are very enticed by super high distribution rates and, just to be aware, you know of that, even with like closed end funds, to be aware of leverage that could be as part of that, like I mentioned.

Speaker 3: 46:38

But some of the covered call ETFs, they publish these super high 10% plus yields and it doesn't really match up with, again, the longer term total performance, the total returns of them. So just be aware, I think in any sense, you should unpack it a little bit further to look at what's in that underlying portfolio. How are they using the options? How aggressive are they being with options as well? Because I think that a lot of times we think covered calls being the most conservative part of you know, an option trading strategy. Well, it can kind of depend, though you know what all is in that portfolio in total to depend though you know what all is in that portfolio in total. So do your due diligence, really look at it, ask these questions, you know, and really kind of poke around to be sure you understand what you're investing in.

Speaker 2: 47:25

Mike, I'll kind of add. There's two things I sort of noticed. One is you know, with a covered call writing strategy, you remember at the end of the day the portfolio is 100% invested. Well, 99.5% invested in equities. Right, when we do the call writing, that sits on the account as an accounting cash component that someone's paid us an option premium and while it helps to return right, because we collect those option premiums, if the market drops 10%, you know we're 100% equity invested, it's going to drop. And the same thing holds for some of these other, all the kind of covered call, kind of writing, covered call writing strategies. You're basically fully invested.

Speaker 2: 47:59

The other thing, too, is you're starting to see yields. I would say premiums compress a little bit as there's a lot of say copycats that have come into the JEPI world. If you look historically in JEPI, when they first came out they had a great yield. It was like 12%. It was super impressive. It was during COVID, it was amazing. But now they're down to like 7.5%, 8% and I think, as you have more and more people writing and doing these and various firms keep coming out with them, there's just not that rich premium that maybe once existed. Inside of that there's great liquidity Don't get me wrong there but maybe that is starting to get pressed a little bit. That's why we like the individual names, because we're looking for volatility at the individual name and not have to worry about how it's working on an index.

Speaker 2: 48:46

The other thing, too, is with these options and Kathy mentioned it when you force a distribution, so say, we told you that we want to generate 8%, but the portfolio generated 7%. In order for me to get the 8%, I'm giving you a return of capital and we have to disclose that on our website and other places. And I've read other firms' websites and there is return of capital on some of them. So it's worth paying attention to. Is it bad? Is it negative? I'm not sure. You're getting your own money back and it's coming in the form of income to you, but you should be aware of exactly what Cathy said. What we do is we only pay out what we make, so we're not going to have a consistent monthly income. It's going to fluctuate each and every month. Some months are higher because quarterly dividends paid out much more on March than they do in June. So there'll be some fluctuation, and we also ran our ETF here to pay monthly distributions. We wanted to have it like a bond investor. Get used to that monthly income that's coming through.

Speaker 1: 49:41

I did see a question from someone the ticker of the equivalent mutual fund.

Speaker 3: 49:45

Yeah, that ticker is E-N-H-N-X. E-n-h-n-x that's the Cullen Enhanced Equity Income Fund, and all of our information is actually on our website, which is cullenfundscom, so that's where you can go to download fact sheets, learn more about DivP and our managed accounts that we have at Schaefer Collins, so we offer a number of different vehicles for our strategies.

Speaker 2: 50:10

We're going to find our contact information there too. If you want to email us directly, happy to get you what you need.

Speaker 1: 50:15

And then another question I don't think you addressed this Is there a way that some of these attendees can get a copy of the slides or presentation? By the way, folks, I'm going to have this as an edited video webinar on my YouTube channel, but for those that actually want to see the PDF itself, yeah, absolutely Do you, Michael, or they can just.

Speaker 3: 50:32

Yeah, we also love it If you are using any covered call strategy currently and you want to ask us how does DivP compare to that? How does it look blended together? We love doing those projects to provide you with some observations as to how we can fit into your client account. Feel free to send that our way too. We'd love to do some analysis and kind of give you some thoughts.

Speaker 1: 50:56

By the way, I will add real quick I think that's actually. I'm glad you mentioned that, kathy, because the if you're talking about some of these other funds that have significant assets, you're not going to be talking to the two main architects of the strategies like you would here. I think that personal touch is actually increasingly important.

Speaker 2: 51:13

I was going to say Michael, to make it easy for anyone just watching this. There you can see in the background the name of our firm. So just shoot me an email and we'll get you the PDF of the PowerPoint.

Speaker 1: 51:22

And again, folks, this is a CE credit-approved webinar. I will email everybody to get relevant information from all of you so I can submit it to the CFP board. Any final parting thoughts here, especially given market volatility, which makes covered call strategies even more interesting.

Speaker 2: 51:37

Well, the only thing I would add is, you know if we're new to anyone viewing here, we're obviously here talking about our covered call writing strategy. We have some really strong performing international and emerging market strategies that I'd be happy to show. We're very known for dividend investing and while the world is getting a little bit more conservative, you know international when you go to the international markets and emerging markets. Value historically has outperformed growth in those markets. And while we're here to talk about a covered call, we have a lot of really good offerings that we'd love to talk to you about and maybe highlight some things that might be more applicable if this maybe isn't one of them for you.

Speaker 1: 52:08

Appreciate those that attended Again. This will be an edited video slash webinar on the YouTube Lead Lag Report channel. Those that again are looking for the CE credits you'll hear from me soon enough and hopefully we'll do more of these going forward. Thank you, jeff. Thank you Kathy.