Results analysis: Schroder Oriental Income

• Schroder Oriental Income (SOI) has released its interim results for the period ending 29/02/2024. Over the period, the trust saw its NAV increase by 7.5% on a total return basis, which compares to a return of 1.9% for the MSCI AC Pacific ex Japan Index, the trust’s formal benchmark. The AIC Asia Pacific Equity Income sector delivered a weighted average return of 5.8% over the same period.
• The top performers in the period have been the region’s technology firms. This has been driven by the industry’s destocking trend and the increased proliferation of AI (Artificial Intelligence), which have led to an improved earnings outlook. Richard’s stock selection has led to an overweight which has been beneficial to performance, especially from stocks in Taiwan and Korea.
• Richard continues to have an underweight allocation to China. This has been a big contributor to performance following the country’s ongoing challenges which have contributed to the region underperforming global equities. However, the manager still generated positive alpha from his stock selection in China. To balance the risk of being underweight the region’s largest economy, Richard has an overweight to Hong Kong. This allocation was a drag on returns, though this was more than offset by strong stock selection leading to a positive overall return.
• Two interim dividends were declared in the period, matching the amounts of the prior year. Earnings growth has been modest in the region over the past couple of years, though Richard believes this could begin to pick up should interest rates in the US begin to fall. The manager is confident that underlying income remains robust enough to maintain the trust’s strong progressive dividend track record in the second half of the financial year. The trust has significant reserves to support this.
• Share price total returns didn’t keep up with the strong NAV performance meaning the discount widened during the period from 4.5% to 6.4%, though this has narrowed in the period post the interim statement.
• The trust’s chair, Paul Meader, reflected on the positive long-term outperformance of the trust stating: “Since inception, a shareholder has received a total return of 489.0%, whereas a passive investment in the Reference Index would have generated 288.5%”

Kepler View

We believe this interim statement is another demonstration of the benefits of an active management approach in Asia, and a testament to Richard’s stock selection approach. Whilst the region has been overshadowed by the strong performance of global equities, Richard has delivered significant outperformance of his benchmark, strong absolute returns and a diversified income source.

Performance has, again, primarily been driven by stock selection. This has been particularly impressive in the China and Hong Kong allocations in our opinion. Richard is underweight China due to his caution over the economic outlook, which aided relative performance, yet the companies he did hold have outperformed. Meanwhile, he his overweight Hong Kong to offset these risks which was a drag on performance, yet this was more than offset by positive stock selection. We believe this should provide investors with confidence in Richard’s ability to outperform over the long-term.

This ability could prove particularly beneficial when considering the outlook for the region. Richard highlights that aggregate valuations are back in line with long-term averages, though there is significant dispersion within the region which lends itself well to his active approach. He notes that the region’s prospects could be affected by changes in the interest rate cycle in developed markets, which could see the US dollar decline. We would expect this to be beneficial for Asia and in particular company earnings, providing support for the income picture also.

Schroder Oriental Income’s (SOI) dividend outlook remains strong. This has been supported by the trust’s large financials allocation, in particular in banks, due to the higher interest rate environment. The trust has an impressive track record of increasing the dividend for the past 18 years, and Richard believes the current outlook is supportive for this to continue. Company dividends are largely driven by earnings and an improving macro-economic outlook would be supportive. We believe SOI continues to provide investors with a diversified income stream to traditional asset classes.

Despite the strong performance in the period, the discount widened to 6.4%. Richard believes this is a reflection of the negative sentiment towards Asia though this could arguably reverse should macro-economic factors, such as the strength of the US dollar, begin to turn in Asia’s favour. Whilst the discount has narrowed in the period following the interim statement, we believe it still offers investors a potentially attractive entry point to a trust that has demonstrated the ability to outperform in a number of environments.  

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