Schroder Income Growth 26 January 2024
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Sue Noffke has been the lead manager of Schroder Income Growth (SCF) since July 2011 and focuses on achieving two main objectives – providing real income growth, meaning it exceeds the rate of inflation, and growth in investors’ capital. Sue and her team invest predominantly in UK stocks, ensuring that the portfolio blends companies that have sustainably high yields with lower-yielding companies offering much stronger future growth prospects. Each company also needs to showcase traits the team deem desirable, such as healthy finances, proven management or a strong competitive advantage others in the industry may struggle to compete with (see Portfolio). The team are stock pickers at heart, valuing the importance of fundamental, bottom-up analysis and placing a strong emphasis on exploiting market inefficiencies, whereby a company, which in their view has strong fundamentals, has been valued inappropriately by the market.
Under Sue’s tenure, this strategy has proved effective, comfortably outperforming the index, buoyed by strong stock selection in small- and medium-sized companies, the latter in particular. Over the last 12 months, however, SCF has lagged the index, largely down to its bias towards these companies. They are tied more closely to the prospects of the UK economy, so the adverse investor sentiment associated with weak economic issues led to valuations falling as a result, although as sentiment has improved since October, performance has picked up a little (see Performance).
SCF boasts a premium Dividend yield to the market, and over its latest financial year increased dividends by 4.6%. The board has increased dividends for 28 consecutive years and feature on the AIC ‘Dividend Heroes’ list. At the time of writing SCF is trading at a wider Discount to both its five-year and AIC sector average, though this has narrowed meaningfully since October, owing largely to the bounce back in the FTSE 250.
SCF has been awarded a Kepler Income & Growth Rating for 2023.
We think that SCF is well positioned to deliver on its objectives of a growing income and capital growth. Sue Noffke is an experienced manager and has cultivated an investment approach which has rewarded investors well over time. She is supported by a strong team and has access to vast resources at Schroders, which allow her to fish for opportunities across the whole market, including areas the more traditional equity income strategies avoid, such as the lower-yielding companies further down the market cap scale (see Portfolio). In our view, being able to balance companies with lower yields and those with higher, yet sustainable yields, offers good diversification from an income perspective as well as differentiating it from many peers in the sector.
This is an interesting time to be allocating to the UK, in our view. UK equity valuations are sitting at historic lows . The trust’s higher Gearing is worth bearing in mind, which adds to risk. However, while SCF is sitting at wider discount to its historic average, it has narrowed materially since October 2023, given the uptick of performance from the FTSE 250. If this rebound continues, then the discount could continue to narrow, acting as an extra kicker to returns, which, coupled with its strong Dividend and long-term Performance record, could indicate a potentially good entry point for long-term investors wanting access to the UK market.
- Experienced lead manager with access to a deep pool of resources at Schroders
- Track record of outperformance of index and income growth ahead of inflation under manager’s tenure
- Well-diversified list of UK businesses that also derive significant revenues overseas
- Greater exposure to small- and medium-sized companies may bring more sensitivity to the UK economy
- Large-cap outperformance may put pressure on the trust
- 14% gearing will magnify gains on the upside but also losses on the downside