Schroder Oriental Income 16 January 2024
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.
The manager of Schroder Oriental Income (SOI), Richard Sennitt, looks to capture the improving dividend culture of the Asia Pacific region to create a portfolio that can provide an attractive and growing income, as well as deliver capital growth over the long term.
SOI has performed well in the past year primarily through good stock selection and supported by an underweight allocation to China. Stock selection has driven returns over the long term too, with the trust significantly ahead of the benchmark over five years. The market has fluctuated significantly in the past year due to macro-factors which have impacted the outlook for earnings and valuations (see Performance).
Despite this, portfolio activity has been limited in 2023. Richard has rotated within sectors rather than making broad changes. The macro-gyrations are having knock-on effects on dividend forecasts, which is having an influence on allocations, though the manager maintains a significant underweight to China, as well as an overweight to the financials and real estate sectors (see Portfolio).
The trust has delivered another year of Dividend growth in 2023. Income strategies in Asia have performed relatively well versus broad markets, and Richard believes there remain plenty of attractive income ideas at good valuations from a much wider and more diverse opportunity set in the region than in other geographies.
Despite the good performance, the trust’s Discount has widened to over one standard deviation wider than the five-year average. The board has been active in trying to limit the volatility of the discount by buying back c. 4% of the share count in the past 18 months.
We believe Asian income is an overlooked asset class. Not only does it offer a diversified source of income compared to other geographies, but the region arguably offers structurally higher growth potential for both capital and income. Richard highlights that the market also has a larger percentage of higher-yielding companies than developed markets, as well as offering better fundamentals such as lower gearing and sustainable payout ratios. As such, we believe the asset class offers an attractive, resilient and growing Dividend profile.
We think SOI offers an attractive way of accessing this asset class due to the impressive long-term, stock-selection-driven track record that Richard has achieved (see Performance). This has returned significant alpha over many years, including the most recent, which we consider to be particularly impressive due to the challenges in the region.
We believe the current level of Discount, at over one standard deviation wider than the five-year average, could offer a compelling entry point for long-term investors. Changes in the interest rate narrative could see a weakening in the US dollar next year, which would be supportive for the region as a whole. We think this could lead to discounts narrowing. The board has been very active in share buybacks, which we believe should be an encouraging sign, as well as providing support to prevent it widening further.
- Performance has been driven by good stock selection over many time periods
- Trust has an impressive track record of dividend growth with ample reserves
- Shares are trading at a wide discount to NAV
- China has an outsized influence on the region’s outlook and faces a number of challenges
- Trust levies a performance fee which may be off-putting to some investors
- India is not in the trust’s benchmark