Schroder Income Growth 04 February 2020
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Schroder Income Growth. 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 from a portfolio of primarily UK companies. Managed by Sue Noffke, who is supported by Matt Bennison and Andy Simpson, SCF typically consists of a portfolio of around 40 companies, selected without reference to any particular stylistic bias. The managers aim to ensure the majority of portfolio differentiation to the benchmark FTSE All-Share Index is driven by stock-specific factors.
Presently yielding c. 4.0% (as of 24/01/2020), SCF has successfully grown its dividend every year since launch, averaging growth of c. 5.4% p.a. over the past three years to the end of financial year 2019. At the same time, SCF has seen growth in its revenue reserves in recent years, with revenue reserve cover of 1.01x the 2019 dividend. In our view, this provides a strong cushion to help ensure dividends continue to grow in the near future.
Since Sue took over lead management of the trust in 2011, there has been a gradual but sustained repositioning in the investment strategy. There is now less of a focus on producing the maximum level of yield, with Sue instead looking to generate a superior yield relative to the benchmark index whilst also looking to ensure greater portfolio-level dividend growth.
Incorporating ESG considerations into the analytical approach, the managers of SCF are able to draw on significant internal resources, utilising various internal equity analytical teams as sources for idea generation. The trust typically invests in companies in the FTSE 350, but has the ability to invest in smaller companies and overseas; however, Sue and the team presently identify the UK market as highly attractively valued, and are nearly wholly invested in the UK.
This positivity on the market outlook is also reflected in the gearing, with c. 15% of net gearing in place as of 24/01/2020; this was sharply increased in Q1 2019 from having previously been c. 8% net geared. This has helped relative performance, which in turn has piqued wider interest in the trust, helping narrow the discount from over 9% six months ago to c. 0.8% (as of 24/01/2020).
Schroder Income Growth (SCF) continues to offer a slight yield premium to the FTSE All-Share Index, and the substantial level of revenue reserves should mean the trust is better positioned than the wider market to continue to grow income distributions. With index-level payout ratios elevated and dividend cover low, factors such as a rally in sterling could prove a headwind to dividend growth amongst the wider market, but the domestic tilt currently held in SCF should further insulate it from these effects; the converse is, of course, true and a substantial sterling sell-off would be a relative headwind to performance.
Generally speaking, SCF will likely see stronger relative returns if we see an environment of UK-relative economic outperformance, but an absence of a strong global reflationary cycle. The gearing in place should help the managers participate more fully in any market upside, but the current level of discount is at a level where, following strong relative performance in 2019, any mean-reversion in relative returns would likely be exacerbated by a widening discount.
|Strong track record of dividend growth, supported by a deep revenue reserve
|Narrow discount is reflective of recent strong returns, and could be vulnerable to any setback
|Access to a deep pool of analytical resources
|Gearing can exacerbate the downside (as well as amplify the upside)
|Trust structure well suited to low-turnover approach
|Relatively high charges