ASX BRIEFS

ATLAS FUNDS MANAGEMENT - Targeting Income In A Volatile Market

• Andrew Musgrave

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A reliable pay cheque from shares sounds like a dream, but it doesn’t have to be. We sit down with portfolio manager Phil Cornet from Atlas Funds Management to unpack a straightforward idea with powerful outcomes: hold quality Australian dividend payers and sell call options over them to target a 10% annual cash yield, paid quarterly. It’s a candid look at how buy-write strategies trade some upside for steadier income and lower volatility, and why that swap can make sense when multiples stretch and nerves fray.

Phil walks us through the mechanics of covered calls in plain English, the role of option premiums in smoothing returns, and the clear limitations when markets surge. We dig into their stock selection process across the ASX 200, blending a quantitative dividend-and-liquidity screen with qualitative checks on balance sheets, earnings durability, and industry structure. Instead of big sector bets, the portfolio spreads across GICS groups and stays underweight tech where dividends and liquidity are thin, aiming to deliver market-like breadth with a calmer ride.

We also talk practicalities: who uses a strategy like this, how advisers and institutions blend it with growth allocations, and what realistic distribution targets look like in shifting rate and volatility regimes. With a benchmark tied to RBA cash plus 3%, the fund sets a clear income bar above term deposits, while acknowledging the inevitable trade-offs in runaway bull markets. If you value dependable cash flow, franking potential, and measured risk-taking over chasing every last uptick, this conversation offers a grounded blueprint for income from Australian equities.

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Andrew Musgrave

Welcome again to ASX Briefs, and today we're joined by Phil Cornet, the portfolio manager at Atlas Funds Management, to discuss the strategy behind the Atlas Australian Equity Income Fund. The fund targets a 10% annual cash yield through a combination of high-quality dividend-paying Australian equities and an active buy-right option strategy, aiming to deliver stable income and manage downside risk. Phil, great to have you with me today and welcome to the ASX Briefs Podcast.

 

Phil Cornet

Thanks for having me and great to be here.

 

Andrew Musgrave

Now, Phil, to begin with, can you give us a quick overview of the Atlas Australian Equity Income Fund and what sets it apart?

 

Phil Cornet

Sure. The fund, as the name suggests, is all about providing our investors with income. So, the asset class we use to get the income is the Australian equity market. Looking at the Australian equity market and using a buy-right strategy to deliver in enhanced yield. So we target 10% yield from our strategy. It's roughly comprises of a 4% dividend yield, with which most investors on the ASX would be familiar with. It's been it's been ranging, well, from sort of 3.5% to 5.5% over the last few decades. Let's call it 4% for the portfolio we have, and then we target an additional 6% yield from implementing the buy-right strategy.

 

Andrew Musgrave

Okay, and many investors, particularly retirees, are looking for a stable income, particularly with their superannuation funds. How does this strategy actually address that need?

 

Phil Cornet

Well, we pay quarterly distributions. So again, investors looking for income. They get a quarterly distribution the last year or so. It has been 7% per annum. That's before franking. Any franking's calculated. We don't calculate franking for our investors because every investor is slightly different in their tax circumstance. So that's 1.75% a quarter. And for superannuation investors, it's rather important to have that consistent deliverable income to fund a lifestyle that they're looking for in retirement. It's also quite handy for non-for-profits or philanthropic organizations who importantly need to spend some of their money for their cause, for their for their charity to maintain their tax status. So, something that can deliver them income and also not lose any capital.

 

Andrew Musgrave

Okay, now you mentioned the buy-right strategy. So, can you explain how this actually works in practice?

 

Phil Cornet

Sure. So, it's a very well-established and well-researched strategy, the buy-right fund. It has lots of different ways of being implemented, but it is effectively buying a portfolio of stocks and selling calls against those holdings of the portfolio. So, the fund receives premium for the options that they sell against the share portfolio. They are also receiving the dividends that those companies pay. So, this is the additional yield that we are targeting, 6% on top of the 4% dividend yield. The payoff for this additional yield, though, is you're paying away or selling away your upside. That additional yield you receive that is effectively being paid to the investor for giving away some of that upside. So, it's important for investors to realize that you are selling away some of the capital gain that you could get by being invested in the Australian share market. And most importantly, with regards to that, active fund management of the buy-right strategy with a good understanding of the market, the equity market, and a good understanding of the listed derivative market is important when optimizing returns in the strategy.

 

Andrew Musgrave

Okay, and how has this strategy been performing in the current market environment of higher volatility and interest rates?

 

Phil Cornet

Well, yes, the current share market certainly has been volatile. Major concerns and negative returns globally due to many concerns regarding geopolitical unrest, trade wars, tariffs, and deglobalization, to name a few. But generally, the buy-right strategy has struggled to keep up with this rampaging bull market that we've had over the last six months. So, to summarize the buy-right strategy, it'll outperform in a down market. It'll outperform in a flat market, it should keep up in a rising market, but in a rampaging bull market, like I said, you're getting rewarded to sell away some of that upside. It's very difficult for the buy-right strategy to keep up with a market that is up 25% from its liberation day lows.

 

Andrew Musgrave

Yeah, okay. And your portfolio is concentrated into about 22 holdings. So, can you walk us through how the quality filter model and the portfolio metrics work together in determining which companies make it into the fund and which get excluded?

 

 

Phil Cornet

Absolutely. Well, we start with a screening process or a quantitative process looking at the whole of the ASX 200. We're looking for names that can reach that 4% dividend yield. So that we  expect a stock to pay us a dividend. We expect a stock to be earning income, which is not the norm, particularly in the US market, but also in Australia, there are a number of companies that are not earning profits at the moment and are not paying dividends. So, for starters, we do a quantitative screen, what stocks can pay a good dividend, but most importantly as well, they need to have a liquid, deep, listed derivative market. So, the options that we aim to sell over our holdings, then there needs to be liquidity in those. So, we target that 10% hurdle that we're aiming to deliver on the strategy. And then once it gets through that quantitative phase, we put it into a qualitative model where we rely on our chief investment officer, Hugh Dive, and also our analyst Michael Haynes to put a qualitative overlay over that stock selection process. So, do they have high debt? Are their earnings at risk? Are they in structural decline? Multiple factors that we use to put a qualitative overlay over that quantitative hurdle of 10%.

 

Andrew Musgrave

Okay, now Atlas avoids strong sector tilts and instead targets the best in class across GICS sectors. So given the current macro environment, higher rates, sticky inflation, and slowing growth, which sectors are you overweight or underweight and why?

 

Phil Cornet

That's a good question. And it is also a good point of difference with respect to the Atlas Australian Equity Income Fund. We are not targeting tilts per se. We are looking at delivering ASX returns with higher income and lower volatility. And in doing that, we make sure that we have representation in all of the GICS sectors across the ASX 200, and we use our QFM model and our portfolio metrics to pick best in class within those sectors. So, a good example of this is we are not going to have an underweight in any sector in particular. We're not we're not going to take resources over financials. We're going to be represented in both. And we do a qualitative analysis to pick the best versions of that that fit our 10% yield strategy. Again, have liquid, deep option markets. And then we want to be represented, as I said, in all those GICS sectors. There is one exception, there is one GICS sector that we're not. We're in energy, we're in financials, we're in industrials, we're in consumers, but there is one sector that just doesn't get through the quantitative process that we use, and that's the internet or the tech sector. A lot of these names are still not in the of the phase of actually paying dividends or earning profits. So that is one sector that we actually are not represented in, but all other GICS sectors we have a holding in with our relatively concentrated portfolio.

 

Andrew Musgrave

Now your strategy seems well suited to retirees and income seekers, but how are the institutional or advisor-led investors using the fund? Are they blending it with growth strategies or using it as a core income allocation?

 

Phil Cornet: 

An interesting question. And I'd definitely be interested to hear from institutional investors and dealer groups as to their thoughts with regards to this. You know, the fund exhibits qualities of an equity fund with lower volatility, less downside, but also less upside in a rampaging bull market. But it also displays that quality of an income fund where you're paying regular distributions to investors. And again, this is a distribution that has the added benefit of franking. Note for investors that franking has been has become a little bit harder to find since APRA last December decided to end the bank hybrids market, which was a very popular instrument for income investors who chased those bank hybrids for franked regular distributions. So, with regards to what bucket we belong in, it's an interesting question. And I don't think it's one that's strictly defined. For instance, one Atlas investor currently puts us in their alternative allocation given the lower beta and the lower volatility of the returns that the fund exhibits.

 

Andrew Musgrave

Okay, now you target a 10% running cash yield and 7% distribution. So, how sustainable is this in the scenario where market volatility normalizes or dividend growth slows?

 

Phil Cornet

Atlas has looked at the income environment for the fund over a number of cycles and believes it's achievable in most cycles. That said, the most difficult time to deliver that style of income has been over the last 10 years, where we've seen very low interest rates and subdued volatility basically due to the support of government and the support of central banks around the world post-GFC. But that said, at a time where we don't see rates coming back or returning to their all-time lows. For instance, you know, the RBA was well below 1% there for a little while. We don't see that happening again in any time soon. But we remain confident that the yield we will provide will be substantially over where the cash rate is, and hence that reflects our benchmark, which is actually not an equity benchmark. It is RBA cash 300 basis points or 3% benchmark. So again, we will deliver you better income than you'll find in a term deposit and various other income instruments.

 

Andrew Musgrave

Okay, now just to wrap things up, what's your outlook for the next 12 months and how are you positioning the fund?

 

Phil Cornet

Atlas remains pretty cautious. It's been a remarkable rally experienced over the last six months with multiples stretched, not just in the US, which we seem to hear every day, but also here in Australia and around the world. That said, I remain a substantial investor in the fund personally, and the ASX remains a high-yielding equity market. It also exhibits defensive qualities. So typically, if global asset prices are coming off, often Australia outperforms in that environment, and the high-yielding nature of the Australian market also makes it makes it attractive. And that's why I also think that the buy-right strategy suits the Aussie equity market so well.

 

Andrew Musgrave

Okay, Phil, well it's been great to chat today, so thanks for your time, and we look forward to further updates from Atlas Funds Management in the upcoming months.

 

Phil Cornet

Thank you very much for having me.

 

Andrew Musgrave

That concludes this episode of ASX Briefs. Don't forget to subscribe, and we look forward to catching you on our next episode.