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.
Income investing can often seem like a drab affair for UK investors. Financials and oil majors may be reliable but they aren’t businesses that are likely to stoke a huge amount of enthusiasm.
Asian markets show that you can invest for income but also gain access to more innovative businesses. This may sound counterintuitive, partly because we’ve come to think of tech firms as not paying dividends but also because of a similar stereotype about Asian companies.
This view doesn’t hold up when you look at the facts. For example, more than 50% of the total returns that the MSCI AC Pacific Ex Japan NR delivered in the two decades up to the end of 07/11/2023 were from dividends being reinvested.
This was substantially higher than the S&P 500, where dividends accounted for approximately 28% of the index’s total return over the same period. In other words, the proportion of total returns in a two-decade long period attributable to dividends was higher in Asia than it was in the US.
Schroder Oriental Income (SOI) illustrates how investors can take advantage of this. The trust, which is managed by Richard Sennitt, focuses on investing in a set of quality Asia-Pacific companies with long term growth prospects, that also have the potential to pay a sustainable rising dividend.
The aim is for the trust to generate an attractive dividend as part of a wider total return strategy. As at 13/10/2023, the trust had a nearly 5% yield on a trailing twelve-month basis.
The trust’s portfolio today is also indicative of the fact that you can invest in a wide range of types of businesses in Asia including those that are more growth-oriented and still generate an attractive dividend yield. For example, just over a quarter of the trust’s portfolio was invested in the information technology sector at the end of August 2023.
A large proportion of that weighting was in the Taiwan Semiconductor Manufacturing Company (TSMC). The company has seen its dividend increase considerably since it started regularly paying dividends some 20 years ago and has been a SOI holding for over 10 years.
Another major holding in the sector is Samsung Electronics. This Korean company also improved its dividend track record that, like TSMC, it has balanced against reinvestment to deliver strong total returns for shareholders.
This is not to say that the entire portfolio is invested in technology stocks. Many companies are more of what you’d expect for a trust seeking to deliver income as part of its total return strategy. For example, the trust is currently overweight financials.
However, these companies tend to have a very different profile to their UK-listed peers and are typically less leveraged. For example, SOI currently has a large overweight position to Singapore. That includes holdings in telecoms business Singtel and financial services group OCBC Bank.
Both companies do most of their business in Southeast Asia and Australasia. OCBC is particularly interesting in this regard, as it provides indirect exposure to the ASEAN region, but with a strong level of corporate governance.
Like their more tech-oriented peers, these are still large multinational companies. But their revenues and, as a consequence, the dividends they pay, are influenced by very different factors compared to the London-listed dividend stalwarts that appear in so many UK income investors’ portfolios.
As a result, SOI doesn’t just offer income investors an attractive yield, driven by some exciting businesses. It also provides income investors with the opportunity to diversify their existing portfolios – something that should never be overlooked.
Our analysts say: “We think that SOI is an attractive way to access the compelling opportunity of the growing dividend culture in Asia, alongside the economic potential, through Richard’s natural income growth approach. The trust has one of the best track records in the sector since inception, and has performed well since Richard took over as lead manager in December 2020.
“Despite this, the trust has fallen to a discount below its long-term average. We note the trust has traded at a premium on multiple occasions in the past five years and also has typically traded at a narrower discount than its sector average, which is no longer the case. For both reasons, we think the current rating could be an opportunity and, in our view, if sentiment changes towards the sector, this anomaly could change quickly.”
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