Schroders
Updated 25 Oct 2024
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Disclaimer

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.

Artificial intelligence (AI) has become a major force in global stock markets, driving significant returns over the past couple of years. Although much of the attention has focused on Nvidia, the US technology company that designs the advanced chips which are essential for AI processing, there is a robust ecosystem of other technology companies that contribute at various stages of the AI value chain. Asia has become a pivotal hub in this AI revolution, and whilst the AI related revenues for many of these Asian companies are starting from a low base, it is a fast-growing area, often utilising leading-edge products and technologies, thus enhancing returns for companies that can successfully supply into the space. These include companies that not only fabricate and package the chips but also those that can supply the high-end servers required or fabricate parts and components to meet the demands of AI. These include items such as the power supply for servers which have to be able to cope with much higher loads than for ordinary applications. The Schroder Oriental Income Fund is strategically positioned to capitalise on this growing opportunity and is currently exposed to all of those areas.

It should be remembered that whilst AI should continue to be a positive driver for the IT sector it is not the only driver and the industry should continue to benefit longer term from positive trends around digitisation, cloud and 5G.

With more than 30% of its portfolio allocated to the Information Technology sector, the Schroder Oriental Income Fund is well ahead of its benchmark index (MSCI AC Pacific ex Japan Index, 26.3%). In recent years, this positioning has added value through outperformance and as a strong source of dividends and dividend growth.

Key technology holdings

As at 31 July 2024, the portfolio’s largest holding is in Taiwan Semiconductor Manufacturing Company (TSMC), which is viewed by many as the bellwether of Asian technology stocks. TSMC has performed well in recent years and strong corporate governance standards in Taiwan mean the company has been keen to ensure shareholders are well-rewarded for its success in terms of dividend income.

TSMC’s global leadership in advanced semiconductor technologies and strong relationships with customers such as Nvidia have seen it become a key player in the AI industry, supplying essential components for AI systems and thriving on growing demand for these burgeoning technologies.

Meanwhile, Samsung Electronics, is the second largest holding in the portfolio. Key drivers include its continued dominance in semiconductor memory chips. Samsung’s diversified business model also means it has exposure to the mobile, display and foundry sectors.

Elsewhere amongst the portfolio holdings is Hon Hai, not only a manufacturer of smartphones and other high end consumer products but also a manufacturer of servers key to the growth of AI and MediaTek, which has successfully forged a position as a global leader in mobile chipsets, which have the potential for greater AI-driven applications. As an asset light, cash generative business, it has also been steadily growing its dividend as it returns significant cash to shareholders.

Can the AI boom continue?

Although returns from Asian technology stocks have been strong in recent years, the key question for investors right now is, can the growth continue? Some industry commentators worry that the stock market’s enthusiasm for AI and technology may have fuelled an investment bubble, similar to the one that greeted the internet boom in the late 1990s.

For Richard Sennitt, portfolio manager of the Schroder Oriental Income Fund, there are reasons for cautious optimism.

“We remain positive about the role that Asian technology companies can play in AI’s continued development. We are still in the early chapters of the AI story, and there is plenty of growth and innovation still to come, with implications for all industries and, indeed, all parts of daily life. This will inevitably drive risk as well as opportunity. However, expectations in parts of the IT sector related to AI are now high and longer-term question marks around the monetisation of the technology remain. Therefore, one needs to be disciplined when assessing stocks associated with the theme. Whilst Asia remains an interesting way for investors to gain exposure to the AI theme the broader sector also has longer term attractions and on balance, valuations for Asian technology stocks as a whole have not yet responded to the extent that they have in the US."

Discipline is key

Nevertheless, investors should be mindful of potential volatility in the near term. Although Asian technology stocks have not risen as far or as fast as those in the US, they are unlikely to be immune should US technology stocks suffer a correction.

The best protection against this risk is a long-term, disciplined investment approach, such as the one that Richard adopts for the Schroder Oriental Income Fund.

“We are pragmatic stock pickers and aim to look beyond the day-to-day swings in sentiment to which markets have always been prone. We are looking for the genuine long-term winners across a wide range of sectors, and maintain a strong valuation discipline to ensure that, when we find them, we don’t overpay for them.”

Richard and his team focus on quality companies that have strong management, appropriate balance sheets and sustainable long-term competitive advantages. Richard draws on Schroders’ extensive research resources in Asia, where on-the-ground analysts engage directly with company management teams, ensuring that the fund remains focused on opportunities that can deliver attractive dividend profiles.

Having grown its dividend every year since its launch, this approach has served the Schroder Oriental Income Fund well in the past. Richard comments.

“We have a robust and repeatable investment process. The disciplined focus on valuation ensures we can adapt to evolving market conditions, allowing the portfolio to deliver its continued focus on income, while still being able to capture some of the best opportunities in Asia, in technology and beyond.”

We recommend you seek financial advice from an Independent Adviser before making an investment decision. If you don’t already have an Adviser, you can find one at www.unbiased.co.uk or www.vouchedfor.co.uk. Before investing in an Investment Trust, refer to the prospectus, the latest Key Information Document (KID) and Key Features Document (KFD) at www.schroders.co.uk/investor or on request.

For help in understanding any terms used, please visit address https://www.schroders.com/en-gb/uk/individual/glossary/


Risk Considerations: Schroder Oriental Income Fund Limited

China risk: If the fund invests in the China Interbank Bond Market via the Bond Connect or in China "A" shares via the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect or in shares listed on the STAR Board or the ChiNext, this may involve clearing and settlement, regulatory, operational and counterparty risks. If the fund invests in onshore renminbi-denominated securities, currency control decisions made by the Chinese government could affect the value of the fund's investments and could cause the fund to defer or suspend redemptions of its shares.

Concentration risk: The Company may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the company, both up or down.

Counterparty risk: The Company may have contractual agreements with counterparties. If a counterparty is unable to fulfil their obligations, the sum that they owe to the Company may be lost in part or in whole.

Currency risk: If the Company’s investments are denominated in currencies different to the currency of the Company’s shares, the Company may lose value as a result of movements in foreign exchange rates, otherwise known as currency rates.

Derivatives risk: Derivatives, which are financial instruments deriving their value from an underlying asset, may be used to manage the portfolio efficiently. A derivative may not perform as expected, may create losses greater than the cost of the derivative and may result in losses to the fund.

Emerging markets & frontier risk: Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty, operational and liquidity risk than developed markets.

Gearing risk: The Company may borrow money to make further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase by more than the cost of borrowing, or reduce returns if they fail to do so. In falling markets, the whole of the value in such investments could be lost, which would result in losses to the Company.

Liquidity Risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. In difficult market conditions, investors may not be able to find a buyer for their shares or may not get back the amount that they originally invested. Certain investments of the Company, in particular the unquoted investments, may be less liquid and more difficult to value. In difficult market conditions, the Company may not be able to sell an investment for full value or at all and this could affect performance of the Company.

Market risk: The value of investments can go up and down and an investor may not get back the amount initially invested.

Market Risk: The value of investments can go up and down and an investor may not get back the amount initially invested.

Operational risk: Operational processes, including those related to the safekeeping of assets, may fail. This may result in losses to the Company.

Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.

Private market valuations, and pricing frequency: Valuation of private asset investments is performed less frequently than listed securities and may be performed less frequently than the valuation of the Company itself. In addition, in times of stress it may be difficult to find appropriate prices for these investments and they may be valued on the basis of proxies or estimates. These factors mean that there may be significant changes in the net asset value of the Company which may also affect the price of shares in the Company.

Share price risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. This means the price may be volatile, meaning the price may go up and down to a greater extent in response to changes in demand.

Important information

This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.

The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.

Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.

Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.

Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.

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