Different paths to equity income: A comparative manager lens

As investor demand for stable equity-derived income rises – particularly among retirees and defensive portfolios – fund managers have taken diverging paths to meet the same goal. But not all equity income strategies are created equal.

There are two main kinds of equity income strategies have two potential sources of income from their Some prioritise dividend growth while others monetise volatility through option overlays, selling put options over shareholdings to generate a source of return that is not correlated with traditional income sources.

In this article, we examine two distinct approaches through the lens of real-world fund examples. The first is a ‘dividend growth’ approach, as represented by the Lazard Defensive Australian Equity Fund (LAZ0022AU), and the other is a ‘buy-write’ approach, in this comparison featuring the J. P. Morgan Equity Premium Income Fund (listed on the ASX under the ticker JEPI)

The two randomly chosen funds are compared across four critical dimensions:

1. yield profile;

2. Participation in bull markets,

3. Downside capture, and

4. Capital growth trade-offs.

1. Yield profile

Lazard looks for high-quality Australian companies with robust balance sheets, earnings resilience, and a track record of growing dividends. The fund delivers a natural, sustainable yield typically in the 3.5 per cent–4.5 per cent range, derived from real cash flows. Because it avoids high-payout-ratio or cyclical stocks, income is consistent across cycles – supported by financial health rather than yield-chasing.

In contrast, the JP Morgan fund boosts income by selling call options over the holdings in a large-cap global equity portfolio. This results in headline yields often exceeding 6 per cent–8 per cent, depending on market volatility and option premiums. However, this income includes derivatives-based cashflow, not dividends alone. As such, income can fluctuate with volatility regimes and may include short-term capital gains or return of capital.

Lazard offers real, stable dividend income, while JP Morgan offers higher but structurally engineered income that is more variable and tax complex.

2. Participation in bull markets
While conservatively positioned, Lazard participates in rising markets – especially when led by ‘quality.’ It may lag high-beta rallies (e.g. tech-led surges) but retains capital upside through full equity participation and dividend reinvestment.

The buy-write overlay on the JP Morgan fund caps its upside. As markets rise, the sold call options limit further gains above the strike price. In strong bull markets, the fund consistently underperforms its underlying equities, sacrificing capital growth to deliver income. The fund thrives in flat or mildly positive markets but misses out during strong rallies.

For long-term capital appreciation and full market exposure, Lazard leads. JP Morgan is best suited to range-bound markets where income is the priority.

3. Downside capture

The Lazard fund’s quality bias and defensive sector tilt provide moderate protection in downturns. Its lower beta and focus on resilient business models allow it to typically outperform the broader market in selloffs, though it is not immune to drawdowns.

Covered-call strategies offer partial downside protection through the premium received for writing (selling) the option. In shallow corrections or high-volatility periods, the strategy often outperforms broad equities. However, in severe selloffs, the full equity exposure remains, and losses can accumulate quickly.

JP Morgan provides better insulation in sideways or mildly negative markets, while Lazard holds up better when quality defensives outperform in deeper drawdowns.

4. Capital growth potential

Lazard offers true capital appreciation over time. Compounding of growing dividends, reinvestment, and quality business exposure support long-term wealth creation with controlled volatility. The fund has demonstrated the ability to preserve capital and grow net asset value.

The fund sacrifices capital growth in exchange for higher current income. Over full cycles, upside is systematically traded away via the call overlay. This makes it suitable for income harvesting – not capital accumulation.

For clients seeking long-term growth with income, Lazard is superior. JP Morgan is best used in decumulation portfolios or income-focused mandates.

Conclusion

While both Lazard and JP Morgan aim to serve the income-conscious investor, they are optimised for different objectives:

• Choose Lazard for natural dividend income, quality exposure, and long-term capital growth.
• Choose JP Morgan for elevated income via option premiums, especially in sideways or low-volatility environments.

In a diversified income model portfolio, blending the two approaches may offer yield enhancement without fully sacrificing capital growth, while improving resilience across market regimes.