Results analysis: Schroder Oriental Income

• Schroder Oriental Income (SOI) has released its financial results for the year ending 31/08/2023. Over the year, the trust saw its NAV decrease by 3.5% on a total return basis, which compares to a decrease of 8.1% for the MSCI AC Pacific ex Japan Index, the trust’s formal benchmark, marking another year of outperformance for the manager.  
• In absolute terms, performance was materially impacted by currency movements and the strengthening of sterling. A number of companies’ share prices have delivered a positive return in local currency terms, but when the impact of currency translation back to sterling was taken into account, these returns were negative. This also had an impact on the revenue generated by the trust.
• SOI has paid four quarterly dividends totalling 11.80p per share over the course of the year. This marks an increase of c. 3.5% on the previous year and the 17th year of consecutive dividend growth.
• The shares of the trust have remained at a discount throughout the year, ending the period at a discount of 4.5%. This is towards the lower end of the range the shares have traded at over the past five-years.
• The trust’s chairman, Paul Meader, has taken the opportunity “to commend our investment manager for achieving such consistent and considerable outperformance over recent years” and has said of the future, “I look forward with modest optimism… the fundamentals of the region, its companies and their strong dividend growth will once again attract international capital. The company is well placed to benefit from that trend when it arrives.”

Kepler View

In our opinion, managers Richard Sennitt and Abbas Barkhordar have navigated Schroder Oriental Income (SOI) admirably through the challenging 12-month period to August 2023 that this annual report covers. The region has been affected by changes in sentiment as investor attitudes have fluctuated due to a series of troubling factors, ranging from sky-high inflation and poor US-China relations to sharply rising interest rates.

These factors have led to fluctuating returns across the region which the managers believe is best demonstrated by the volatile performance of Hong Kong and China. These markets declined as zero-covid policies hampered the economy, and then recovered as these policies were lifted, before waning again as the recovery failed to materialise as expected. The managers have been underweight China which has helped performance. This has been supported by good company selection, investing in those which have enjoyed sustained benefits from the removal of the zero covid policies such as insurance. We believe this is testimony to the stock selection capabilities of the managers which has repeatably driven outperformance of the benchmark. Furthermore, the managers had notable weights in Korea and Taiwan, particularly in the technology sector which have been strong performers over the course of the year. The technology sector has also been through a journey in the year, struggling from slowing demand post-covid and a reduction in inventory, before recovering in certain sectors as enthusiasm around AI has led to an increase in demand for semi-conductors which the managers have benefitted from. We believe this is another example of the managers’ quality approach benefitting the trust across the cycle.

The absolute performance has been affected by a strengthening of sterling. This impact was profound enough to turn benchmark returns from a 1.9% gain in local currency terms to an 8.1% fall when translated into sterling. It led to every country in the region’s stock markets delivering negative returns when translated into sterling. However, the relative performance versus the index is impressive in our opinion. Richard and Abbas have outperformed by 4.6% largely as a result of stock selection which we believe is encouraging for the outlook.

The trust has once again managed to grow the dividend, representing the 17th consecutive year of growth. This, in our opinion, shows the strength of the process in identifying firms with sustainable dividends. This has come despite a number of headwinds impacting revenue, including currency translation and difficulties from the resources industry where revenue has been impacted by falling commodity prices, albeit from high levels in the previous year. However, this has been somewhat offset by financials which have benefitted from rising rates, translating into better margins, and allowing for higher dividend pay outs. Regardless, we believe this is supportive of the trust being a very good way of accessing the growing dividend culture in Asia alongside the economic potential in the region.  

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