Schroder Oriental Income 23 May 2023

Schroder Oriental Income (LON:SOI) owns a relatively concentrated portfolio of equities from the Asia Pacific region, the strategy being to generate an attractive, growing yield as part of a total return strategy. The manager, Richard Sennitt, argues that the size of the Asian region is not matched by the level of research applied by investors. This means that there are market inefficiencies which he can exploit with a bottom-up, fundamentally-driven approach, aided by the considerable resources he has at his disposal at Schroders. Richard looks for firms with superior or improving return on capital invested, leading to a preference for quality companies at attractive valuations. These are compiled using an income lens, looking for the prospect of rising dividends over time (see Portfolio).

Richard notes that the opportunities to generate income from his portfolio have improved recently. Corporate profits have begun to recover from the impact of the Covid pandemic, which has fed through to dividends. Despite this, aggregate payout ratios in the region are relatively low and remain comfortably within the historical range, which provides confidence in their sustainability (see Dividend).

The recent market rotation to value has been beneficial for the relative Performance of the trust. On top of this, good stock selection has driven outperformance of the benchmark over both the long and short-term. This is despite the headwind of an underweight to China, which is partly as a result of the trust’s income mandate leading to an omittance of the large Chinese internet platforms. Despite the strong performance against both its benchmark and peer group, SOI has slipped to a wide Discount, relative to its own history and the peer group.

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 (see Portfolio). 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.

We think the Performance over the past 12 months has been particularly impressive, with stock selection offsetting the headwinds of structural underweights because of the income focus. Richard has highlighted that Asia is further ahead in the hiking cycle than developed economies and that lower debt profiles have put corporates in much better shape as a result. This has been supportive to corporate profits in the region, which has, in turn, led to an improvement in the Dividend outlook for the trust. As the reopening trade continues, it may continue to offer support to the trust, in both dividends and capital returns.

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.