Josef Licsauer
View profile
Updated 27 Oct 2023
Save Article Download

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.

  • Schroder Income and Growth (SCF) has published results for the full year period ending 31/08/2023. Over this period, the trust saw NAV total returns of 4.2% and a share price total return of -3.0%, which compares to 5.2% total return from the FTSE All-Share Index. NAV total returns remain comfortably ahead of the index since Sue Noffke took over management in 2011, with the trust delivering 128.5% compared to 103.5% for the benchmark.
  • The board has also increased the dividend for the 28th year running, 13.2p to 13.8p per share, an increase of 4.6%. The increase came despite a fall in the total income received from the portfolio, as the trust utilised its revenue reserves to help fulfil its primary objective of real growth of income above the levels of inflation over the longer term.  
  • SCF’s discount to NAV averaged 1.6% during the financial year but widened towards the latter part of the year to 8.9%. The board didn’t buy back any shares during the period, though the board continues to monitor the discount closely, and has stated it will ‘take appropriate action as required’. At the time of writing, as of 26/10/2023, SCF’s discount has widened slightly to 9.9%.
  • Over the period, SCF’s average gearing was 12.0%, increasing slightly towards the end of the FY to 13.7%, which is broadly in line with the average across the peer group.
  • Chairman Ewen Cameron Watt commented, “We are confident in your manager and their abilities to deploy their investment approach and exploit the market inefficiencies to drive returns over the long term. … We base such confidence on the record since Sue Noffke and her team took over managing the portfolio in 2011.”

Kepler View

As the Schroder Income Growth Fund (SCF) chairman notes, rising interest rates and sluggish global growth have made the navigation of equity markets a challenging task over the year. UK equity markets have been no exception. SCF has felt the pressure with its NAV total returns over the latest FY, to the end of August 2023, underperforming the FTSE All-Share Index slightly, by 1.0%, though its absolute returns were positive.

SCF focuses on generating real growth, in both the income and capital over the long run. So, while short term performance may be a little disappointing during a tough period for the small and mid-caps which the trust is usually overweight, its long-term performance remains very strong, outperforming the benchmark by roughly 25%, since 2011, when Sue Noffke took over management. Despite being out of favour over the short term, we think exposure to medium and small companies should help deliver income and capital growth over time.

The long-term outperformance has been driven by astute stock selection in the UK medium and small cap space, but is also down to the way Sue and her team focus on exploiting market inefficiencies through companies they believe boast strong fundamentals that the market has failed to value appropriately. The diversity of the characteristics associated with different stocks, be that income generation or low correlation against inflation, means the underlying portfolio is designed to benefit from multiple forms of returns in a cycle and to perform in a variety of market environments.

Over the period, SCF benefited from strong performance from Whitbread, Hollywood Bowl and Pets at Home, and not owning a number of staples companies such as Diageo or Imperial Brands. The underperformance against the benchmark came primarily from the omission of some strongly performing industrial names, and its larger weighting to basic material companies compared to the index. While a larger allocation to medium and smaller sized companies has helped SCF’s performance historically, returns have lagged those of the larger FTSE 100 more recently, which hurt performance.

Over its latest FY, the board has increased the dividend for the 28th year running, this time by 4.6%, despite a drop in total income earned. The fall in earnings was driven primarily by lower commodity prices, which effectively halved the income received from the mining sector, a non-payment of a dividend from insurance company Direct Line and a few corporate management teams pivoting from special dividends towards share buybacks. The board made a modest contribution from reserves to deliver the increased dividend, and the payout was 95% covered by earnings. The board decided it was the right move to ensure fulfilment of the objective of achieving real growth of income above the levels of inflation over the longer term. We note after the payment of this dividend, the trust retains 0.78 times the full year payout in reserve, providing some security to future payouts. The board notes this is not the first time they have had to dip into reserves over the past 28 years, and that the underlying dividend growth across the portfolio was healthy despite some individual events.

We think that Sue and the team’s high-conviction approach to running the portfolio has rewarded investors well over various time horizons and is an attractive proposition for income investors looking for real growth in income and capital over the long term. We also think that UK equity valuations are very cheap versus its history and other equity markets, so the propensity for equities to return to long-term average valuations, or ‘mean reversion’, could, in conjunction with SCF’s wide discount, present an opportunity for long-term patient investors.

Press continue to read the full article...

Kepler Trust Intelligence provides research and information for professional and private investors. In order to ensure that we provide you with the right kind of content, and to ensure that the content we provide is compliant, you need to tell us what type of investor you are.

Continue

Welcome to Kepler Trust Intelligence

Please enter a valid email address
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid email address
{{item.msg}}
Please check your email. If an account exists you'll be sent instructions on how to reset your password.
To ensure that we are able to provide content which is appropriate for you, please tell us a little about yourself.
Please choose an option
{{item.msg}}
Please enter a company name
{{item.msg}}
Please enter a location name
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a platform
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a trust
{{item.msg}}
?
The information contained herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States to or for the benefit of any United States person (being residents of the United States or partnerships or corporations organised under the laws thereof). The investment funds referred to herein have not been registered in the United States under the Investment Company Act of 1940 and units or shares of such funds are not registered in the United States under the Securities Act of 1933.
Please confirm
{{item.msg}}
Please select an option
{{item.msg}}
See benefits
A free Kepler Trust Intelligence account allows you to access premium content including the ‘Kepler View’ – our verdict on the trusts we cover – and historical research so you can see how our view has changed over time. An account also unlocks useful facilities like the ‘follow’ button which lets you keep track of the trusts you’re interested in and as a logged in user you can also download PDFs of our research, and choose the layout of the page you’re reading to suit your preference. We will not share your details unless you give us permission to do so, and we won’t bombard you with emails – we only send one a week.
Please select an option
{{item.msg}}
Please enter your first name
{{item.msg}}
Please enter your last name
{{item.msg}}
Please enter a valid email address
An account already exists with this email - have you forgotten your password?
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid password
{{item.msg}}
How will this information be used? Your answers help us to tailor our content to relevant investment trusts, and to ensure that the asset allocation and portfolio strategy research we produce is appropriate to our userbase.
Our Website uses Cookies Cookies are small text files held on your computer. They allow us to give you the best browsing experience possible and mean we can understand how you use our site. Some cookies have already been set. You can delete and block cookies, but parts of our site won’t work without them. By using our website you accept our use of cookies. For further information please refer to the Kepler Privacy Notice.
Need help?

One more thing...

Did you know, you can 'follow' individual trusts on Kepler Trust Intelligence? Use the functions below to set up alerts and we'll send you research and updates on your chosen trusts.

Suggested trusts to follow

Browse all funds
Need help?
Current Site Kepler Trust Intelligence is produced by the investment companies team at Kepler Partners and is the UK’s premier source of detailed qualitative research on investment trusts. Absolute Hedge is a market leading UCITS research database providing proprietary research on funds, themes and strategies in the UCITS space. Kepler Liquid Strategies is a Dublin domiciled UCITS fund platform featuring a number of best-of-breed fund managers. Kepler Partners is a corporate advisory and asset raising boutique specialising in the regulated funds market in Europe and investment trusts in the UK.