Schroder Income Growth 12 August 2022
This is a non-independent marketing communication commissioned by Schroder Investment Management. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Schroder Income Growth (SCF) aims to generate real income growth and capital growth primarily from UK-listed companies. It is managed by Sue Noffke, the lead manager, together with Andy Simpson and Matthew Bennison. They are supported by two analysts, James Goodman and Tom Grady. In addition, the managers draw upon the extensive analyst resources of the wider group. They run a relatively concentrated but diversified portfolio of between 35 to 45 stocks, taking a fundamentals’-based bottom-up process to stock selection aiming to identify mispriced opportunities without a style bias or macro bias. ESG considerations play an important role in the portfolio management process and the managers collaborate with in-house ESG specialists and tools.
The team aims to balance paying a covered current dividend yield greater than the index with growing the dividend over time. In this regard they have been successful, as we discuss in the Dividend section. SCF has a historic dividend yield of 4.2%, higher than that of the benchmark index and its equity income peer group. The trust has almost a year’s worth of income in its reserves and has a consistent track record of raising the ordinary dividend every year since launch. Additionally, its dividend growth has beaten inflation easily over the long-term. Indications are that dividends for the trust will grow again in 2022, however beating today’s high inflation could be a challenge over the short-term. SCF’s total return since Sue took over in July 2011 is comfortably higher than the benchmark’s. Its performance over a five-year period is roughly in line with the benchmark, although better than the peer group.
SCF trades at a Discount of 2.1%, close to the average of its peer group, and has a current gearing level of 12%. SCF has an ongoing charges figure of 0.79%.
We think Schroder Income Growth could be attractive for income-seeking investors as it offers a yield higher than that of the FTSE All-Share and its peer group average, with strong reserves to support the payout in future. SCF has been consistent in raising the ordinary dividend since its launch in 1995 and has achieved its target easily of growing real income over the long term. The overall performance has been good too, the trust beating the benchmark over the long-term on a total return basis. The portfolio is agnostic regarding style and macro factors and the team’s strength is in stock-picking. Historically, the majority of outperformance has been generated from stock selection, with the mid-cap area being a significant contributor. Sue points out that UK markets are still relatively unloved by international investors, potentially creating attractive opportunities.
While real income growth may not be achieved over the short-term due to the current high inflation levels, we think SCF is well placed to produce long-term real income growth. Portfolio income should be relatively resilient through the presence of companies that have inflation-linked pricing structures, although if current levels of inflation are maintained, even this may not be enough.
Once the persistent level of modest gearing is accounted for, SCF has a beta of 1.16 over the past five years meaning that it has been taking on a fair amount of systematic risk. In theory, SCF should do well in a rising market while being exposed to downside moves, with the gearing contributing.
- Consistent track record of income growth easily beating inflation over longer-term
- Deep knowledge and experience of the management team combined with access to analytical resources of the wider group
- Aligned to long-term structural growth themes to allow income growth
- Short-term inflation likely to be higher than income growth
- Gearing can magnify downside
- Mid-cap overweight may bring volatility