Behind the trust: Schroder Oriental Income Fund Limited
The Asia Pacific region brims with opportunity for those looking for strong total returns and an attractive income stream, as the Schroder Oriental Income Fund proves
Asked to name a region around the world known for its ability to generate a good level of income for investors and chances are you won’t say Asia.
While not historically seen as a main port of call for income investors’ capital, the Asia Pacific region has upped its game in the dividend stakes in recent years. Asian companies are increasingly returning cash to shareholders by way of dividends.
While it’s important to appreciate that stock market investing is always subject to volatility, in recent years the MSCI All Countries Pacific excluding Japan Index has often yielded roughly the same, if not a bit more, than indices in the UK – the best-known stock market for its income credentials. Dividends in the Asia Pacific are often significantly above those offered by many other markets, such as US or global equities.
The case for investing in Asia remains strong. The region is forecast to enjoy higher economic growth than many other parts of the world over the medium to longer term. Favourable demographics and a growing middle class in Asia are expected to continue to fuel strong domestic consumption – increasing the prospects for both capital and income growth from Asia Pacific companies.
The Schroder Oriental Income Fund allows investors to access these very trends. It is the largest and most liquid investment trust in the AIC Asia Pacific Equity Income sector and offers UK income seekers an effective means to diversify away from their home market.
Since its inception in July 20051, the trust has typically outperformed the MSCI All Country Pacific excluding Japan Index by a clear margin, particularly over longer time periods, and significantly outpaced the FTSE 100 Index, handsomely rewarding investors for the higher risk they assume when investing in Asian markets.
How does the trust put capital to work for the benefit of its shareholders and what makes it a worthy addition to an investor’s portfolio today?
What does the trust do?
The trust seeks to generate good total returns by investing in Asia Pacific companies that offer attractive yields. These companies can either be based in countries within the Asia Pacific or derive a significant proportion of their revenues from the region.
Although its investment strategy does not seek benchmark outperformance per se, it references performance against the MSCI All Country Pacific excluding Japan Index, which captures large and mid-cap stocks across seven emerging market countries and four developed market countries in the Pacific region: China, Indonesia, Korea, Malaysia, the Philippines, Taiwan and Thailand, as well as Australia, Hong Kong, New Zealand and Singapore. With 1,156 constituents, the index covers around 85% of the free float-adjusted market capitalisation in each country2.
The trust has an impressive long-term track record in both absolute and relative terms, outperforming the reference index in rising markets and preserving capital in falling ones.
It has also consistently increased the dividends paid to shareholders since inception, including during the Covid-19 dividend drought. Having increased its dividend for the 17th consecutive year in 2022, it ranks among the AIC’s next generation of dividend heroes3– investment trusts that have increased their dividends for between 10 and 20 years.
How does it do it?
The trust employs a bottom-up, stock-picking approach to investing in dividend-paying stocks in the Asia Pacific region. Led by veteran fund manager Richard Sennitt, the team taps into the Asian growth story by focusing on quality companies that already pay an attractive level of income, as well as the income payers of tomorrow.
This approach helps the trust to maintain income growth. Another important aspect for those seeking a reliable income stream is its closed-ended structure. Investment trusts can retain up to 15% of their income annually4, allowing them to build up reserves during plentiful years of dividend growth to bolster payouts during leaner periods.
Dividend flows in Asia were much more robust during the Covid-19 pandemic than in traditional equity income markets such as the UK and the trust only had to employ a very small amount of its revenue reserves5 to continue to grow its dividend. Since then, growth in dividend receipts from its investments has resumed, paving the way for the board to continue to grow dividends.
The trust represents the fullest expression of Schroders’ proven Asian equity capabilities. The research-intensive process benefits from a wealth of local expert knowledge and a large team of skilled professionals analysing investment opportunities both on the ground in Asia and in London.
The result is a ‘best ideas’ portfolio of 60-80 names spread over multiple countries and in a range of industry sectors.
Why invest?
There are many compelling reasons to invest in the Schroder Oriental Income Fund:
1. Reliability of income
Half of companies in Asia yield 3% or more6, giving the manager a strong universe of companies to pick from. In addition, payout ratios in Asia do not look extended versus some other markets and companies in Asia have low borrowing. This bodes well for the trust to continue its strong track record of dividend growth. Robust revenue reserves give the trust a solid foundation for continued income growth7.
2. Dividend diversification
Asian equity income is an attractive diversifier for traditional UK income investors. The Asia Pacific region offers a compelling way for investors to diversify at both geographical and sector levels. Dividends in Asia come from a wide range and large number of companies, whereas in the UK they are highly concentrated in a handful of sectors and stocks. In September 2022, shares in the trust yielded 4.4%, making them well suited to retired investors who often target an income of around 4%.
3. Focus on quality
Asian markets typically have a higher risk/reward profile than western ones. The manager mitigates the risk of investing in Asia by focusing on quality companies. He favours those with strong balance sheets, steadily growing earnings and robust dividends. The inherent strength of this approach has been proven to shore up defenses in difficult markets, such as the sell-off that accompanied the onset of the Russia-Ukraine crisis in early 2022.
4. Structural growth drivers
The manager picks well-managed companies with attractive and growing dividends that are driven by structural growth trends. In recent years, that has led to significant overweight positions in technology, financials and real estate stocks, which make the trust well placed to capitalise on the growing prominence of world-leading technology companies in Asia, such as chipmakers, and the region’s young population. More than 60% of the world’s youth lives in the Asia Pacific8, which parlays into rising demand for consumer goods and banking services.
5. Relative economic strength
Asian economies are growing faster than those in other parts of the world. While stock market returns are not necessarily linked to economic strength, it underpins prospects for Asian company earnings and more capital being returned to shareholders by way of dividends.
6. Experienced management
Sennitt joined Schroders in 1993 and has spent his entire investment career in Far Eastern equites. Although he has been at the helm of the trust for a brief time, since the end of 2020, Morningstar senior investment analyst Lena Tsymbaluk points to him being an ‘experienced and proven investor’9 and the continuity provided by him working closely with previous manager Matthew Dobbs for the 13 years prior to Schroders announcing Dobbs’ retirement.
7. Information advantage
While based in London, the manager draws upon the extensive resources of Schroders’ Asia Pacific equities research team. This comprises around 4010 analysts based in six offices across the region as well as Schroders’ London-based global sector specialists. In addition, a London-based data insights unit boasts 25 data scientists monitoring investment themes and screening for ideas. The strength of these resources gives the manager an information advantage in under-researched and inefficient markets.
8. Active ownership and ESG integration
The quality of management is important to the approach, therefore high value is placed on regular meetings with companies. Sennitt aims to be in Asia two to three times a year. He benefitted during the Covid-19 pandemic from corporate availability from the rise of online meetings.
In addition to fundamental financial analysis, Schroders’ proprietary sustainability tools and extensive engagement with Asian companies provide a wide range of metrics for its analysts to utilise in identifying the best opportunities for investment.
Click here to find out more about the Schroder Oriental Income Fund Limited >
The most up-to-date performance data can always be found on the latest company factsheet.
Reference index: MSCI AC Pacific Ex Japan NR GBP
[1] - From 28 July 2005 to 31 October 2021
[2] - MSCI AC Pacific ex Japan Index Factsheet, 29 July 2022
[3] - AIC Dividend Heroes
[4] - Investment trust tax rules
[5] - Schroder Oriental Income Fund Half Year Report and Accounts for the six months ended 28 February 2022, see Chairman’s Statement, p3
[6] - Schroder Oriental Income Fund AGM, December 2021, slide 12
[7] - Dividend cover is 1.1 years, higher than 0.70 years for both Henderson Far East Income and abrdn Asian Income, according to AIC data as of 09.08.22
[8] - United Nations
[9] - Morningstar analyst research, 21 October 2021
[10] - Schroders, December 2021, see p2 here. Includes Schroders’ local specialist team of nine equity analysts in Sydney, as well as a joint-venture team of eight Indian equity analysts at Axis Asset Management (Axis AMC) in Mumbai. The Axis AMC team is fully integrated and provides support and coverage for Indian stocks within the research universe.
Fund risk disclosures
Emerging markets risk: Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty and
operational risk.
Currency risk: The company can be exposed to different currencies. Changes in foreign exchange rates could create losses.
Concentration risk: The company may be concentrated in a limited number of geographical regions, industry sectors, markets
and/or individual positions. This may result in large changes in the value of the company, both up or down, which may adversely
impact the performance of the company.
Gearing risk: The company may borrow money to invest in further investments, this is known as gearing. Gearing will increase
returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail
to do so.
Counterparty risk: Investments such as warrants, participation certificates, guaranteed bonds, etc. will expose the company to the
risk of the issuer of these instruments defaulting on paying the capital back to the company.
Distribution risk: As a result of fees being charged to capital, the distributable income of the company may be higher but there is
the potential that performance or capital value may be eroded.
Important information
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Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registration No 4191730 England. Authorised and regulated by the Financial Conduct Authority.
Important information
This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
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Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
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Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.