Schroder Income Growth 20 February 2023
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 Fund (LON:SCF) has an objective to generate real growth in income and capital. The lead manager is Sue Noffke and alongside her are co-managers Andy Simpson and Matthew Bennison. The team are essentially bottom-up stock-pickers seeking mispriced stocks. They run a concentrated portfolio of between 35 and 45 stocks, seeking to identify companies with strong fundamentals that the market has failed to value appropriately. Given the income objective, the team place an emphasis on balance sheet strength, cash generation and the potential of a company to pay sustainable long-term dividends.
Sue and the team are style-agnostic in their approach to running SCF’s portfolio. Any styles or themes that do emerge are as a result of the bottom-up stock picks. Investment themes that have emerged include a number of stocks involved in energy transition and infrastructure, and those which have inflation-protection properties or are resilient franchises. The team’s long-term approach lends itself well to the explicit integration of ESG analysis and focus on active ownership, as these are issues that tend to play out over years and not months.
The performance of SCF has been impressive, the trust beating the benchmark over the short, medium and long term (see Performance section) and its income generating capacity is strong. Its current dividend yield is approximately 4.2%, materially better than that of the benchmark. The underlying portfolio’s income has broadly recovered back to the pre-pandemic levels, ahead of the wider market and the dividends were fully-covered over the last financial year, whilst revenue reserves are strong. SCF sits amongst the AIC’s ‘Dividend Heroes’ list, having consistently raised the dividend every year, since launch in 1996, with a growth rate comfortably ahead of inflation (see Dividend section).
We believe the strong performance track record has helped SCF’s discount to narrow over the years, where it now trades around par. The latest gearing level is approximately 12% and its latest OCF is 0.74%.
Sue and the team’s high-conviction approach to running the portfolio has rewarded investors well over various time horizons. Their disciplined fundamentals-based valuation approach has resulted in well-timed entries and exits in key stocks, such as Shell, and positioned the portfolio well to meet some of the challenges investors are likely to face, including higher levels of inflation and the need to decarbonise and head towards net zero.
We believe the team have balanced the portfolio well to continue to deliver on its strong current level of income through the more resilient stocks amongst the financial sector, as well as utilities and energy sectors. Meanwhile, strong income growth and capital growth potential is found in the portfolio’s outsized exposure to the consumer discretionary sector and overweight exposure towards mid and small caps. Whilst there may be concerns in the market over growth stocks, SCF’s mid and small-cap positions have a tendency of not being expensively priced.
Overall, we believe that SCF is an attractive proposition for income investors looking for real growth in income and capital over the long term. We note that, thanks to the gearing, it has a high level of exposure to the market, which brings risks in falling markets but could benefit shareholders if the current renewed optimism about 2023 proves warranted.
- 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