Schroder Oriental Income 02 November 2022

Schroder Oriental Income (SOI) aims to capture the full growth potential in Asian markets from both a capital and income perspective. The trust offers a natural income from businesses listed in the Asia Pacific region, with high earnings growth and rising payout ratios translating into rising dividends, as well as rising share prices. The historical yield is 4.5%, with the trust having delivered dividend growth each year since launch in 2005. As we discuss under Dividend, a further increase this year looks highly likely given the strong earnings growth already evident in the portfolio.

Asian markets offer an attractively diversified set of dividend opportunities, with technology hardware featuring highly in SOI’s portfolio, something which would not be usual in a UK equity income fund. This is balanced with traditional income sectors such as financials and materials – with the Australian diversified miners falling in SOI’s universe. This combination has helped deliver attractive returns since the reflationary rally (see Performance).

SOI is managed by the very experienced Richard Sennitt. Richard has over 28 years’ investment experience, and has also managed the open-ended Schroder Asian Income Fund since 2006. At the end of 2020 he took over from Matthew Dobbs as manager of SOI, but the process remains the same. It is still supported by Schroders’ large analyst team based in Asia and remains centred around their in-depth fundamental research (see Management).

SOI hasn’t recovered the premium rating it largely held pre-Covid despite strong recent performance, and it trades on a 4.8% discount. However, we note that SOI did very briefly trade above par after the reflationary rally.

We think SOI is an attractive way for investors to earn a high and growing dividend. The Asian focus brings capital growth potential that the UK and Europe may not be able to provide, while also bringing geographical diversification and sectoral diversification – notably through the high exposure to dividend-paying technology companies. While Richard also runs an open-ended fund to the same strategy, the ability of the investment trust to build up reserves has allowed it to grow its dividend when underlying revenues have fallen, giving it a notable advantage. Additionally, the trust’s modest but persistent gearing levels allow for greater long-term growth.

In recent years many trusts have offered an income paid from capital, but SOI’s strategy is to focus on a natural income. This has resulted in a consistently growing dividend with more stable long-term returns, which we think may appeal to many income investors.

At the time of writing, fears of a global recession haunt markets. It is certainly true that the outlook is cloudy. However, Richard points out that Asian countries are generally in a much stronger position than they were in past crises, with better current account balances and less dollar-denominated debt. Additionally, SOI has a number of defensive features, such as its focus on companies with strong balance sheets and resilient earnings. Furthermore, the current discount of 6.6% offers some compensation for the risks, with SOI having a history of trading on a premium when risk appetite is higher. The board also uses buybacks when it sees fit to support the rating and NAV-per-share return.