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A recent update from fund manager, Matthew Dobbs:

Performance year to date has been less defensive than one might have expected for Schroder Oriental Income Fund (SOIF). Despite being the epicentre of the epidemic, Chinese equity markets have proved quite resilient, partly thanks to continued outperformance from social media, e-commerce and online gaming names, including the market giants Tencent and Alibaba. This has continued the very concentrated market conditions we saw in the fourth quarter last year.
It is clear that the disruption caused by COVID-19 is greater than that of SARS in 2003. The disease is less lethal (in its current form) but with a greater infection window, greater volumes of people travelling, a health and safety obsession demanded by Western electorates, and social media, its disruptive power has been much more pervasive. The broader based recovery that one might have tentatively hoped for in the region has clearly been pushed back – and possibly cancelled. (Obviously, should the scare dissipate, a surge of catch up demand is also very possible)
Overall pay-out ratios in Asia are not particularly high relative to historical norms. Furthermore, corporate leverage in Asia is the lowest of any major region. Hopefully, these two factors give company management the confidence to maintain, if not increase, dividends.
The duration of the disruption is clearly crucial. In that sense, the GFC provides an instructive example. Asian corporates generally did a good job defending their dividends allowing pay-out ratios¹ to increase dramatically. However the key is that the GFC impact in Asia, while severe, was also relatively brief in duration. Although we believe the bulk of our underlying investments to be in companies with robust balance sheets and good margin structures, a prolonged period of low capacity utilization will inevitably influence dividend decisions, and it is worth recalling that the dividend payments in the region are weighted towards the second half of SOIF’s financial year (ends August).
Obviously we are trying to use the current disruption/dislocation as an opportunity to exploit anomalies. In general, that has included a reallocation from very defensive stocks which have held up, and buying those that appear overly impacted by investor caution. We have a preference for companies where operational sensitivity is balanced by strong balance sheets eg selected information technology, Macau gaming and specialist financials.
In terms of near term dividend resilience for SOIF itself, it is worth recalling that there is at least 8 months' worth of revenue reserve that can, should the Board so wish, be drawn upon to tide over temporary disruption that the COVID-19 may cause. We have been conscious throughout the life of the Fund that the build up of a substantial revenue reserve (a provision for a rainy day, if you like) is an important feature of the Investment Company structure.

1: Pay-out ratios: a metric showing the proportion of earnings a company pays shareholders in the form of dividends, expressed as a percentage of the company's total earnings.

Outlook on Asian Markets - Q1 2020

Q4 2019 Commentary

Market summary

Asia Pacific equities delivered a strong return in the fourth quarter, supported by easing geopolitical risk as the US and China reached a ‘phase one’ trade deal, which they signed after the end of the period, on 15 January 2020. US dollar weakness also provided support to returns.

Against this backdrop, China, South Korea and Taiwan all outperformed. In Taiwan, strong performance from technology sector companies boosted returns, as earnings expectations were revised upwards following solid third-quarter sales figures. In South Korea, the central bank cut interest rates by 25 basis points to 1.25%.

By contrast, Thailand recorded a negative return and was the weakest index market as third-quarter gross domestic product growth remained subdued, at an annual rate of 2.4%. The Philippines and Malaysia also finished in negative territory. Hong Kong was marginally weaker. Australia was also negative but, likewise, lagged the index.

Investment outlook

The fund (NAV) posted a marginal gain over the fourth quarter (0.3%) but underperformed the MSCI AC Pacific ex-Japan Net TR GBP index, which gained 3.3%.

On a country basis, the main reason for the underperformance was China, where both stock picking and an overall underweight detracted. An overweight and stock selection in Hong Kong was also a drag on returns.

On the other hand, stock selection in Taiwan was positive.

On a sector basis the fund benefited from stock selection in and an overweight exposure to information technology. On the other hand, stock selection in real estate, financials and communication services detracted.

Quarterly overview

Risk assets closed 2019 on a high note, following the agreement of the ‘phase one’ trade deal between the US and China in December. The backdrop of easy monetary policy globally has also been supportive, with the biggest cycle of interest rate cuts since the global financial crisis, coupled with balance sheet expansion from major central banks. This was starting to see a bottoming out in global growth with lead indicators starting to trough. However, very recently we have seen an outbreak of a novel coronavirus in China which has the potential at the very least to disrupt economic activity in China and more globally.

Given the strong performance of regional equities in 2019, valuations are now looking stretched in some sectors. Therefore, the uncertainty of the duration of the coronavirus outbreak will likely weigh on sentiment and markets in the near term.

Globally, while the phase 1 trade deal provided some relief the longer-term impact of deglobalisation and growing strategic rivalry between the two countries is another challenge that could drag on business sentiment.

In terms of portfolio strategy in Hong Kong, we remain overweight albeit at a reduced level. Although political protests and demonstrations have subsided they have had a major negative impact on local activity. Tourist arrivals and retail sales already collapsed and expectations are now for a more prolonged period of weakness that will start to impact the larger banking and property stocks. Consequently, the Hong Kong market has been a significant underperformer in the recent regional sell-off and, while showing value, remains hostage to political developments.

In China, not withstanding the impact of the virus outbreak, domestically focused stocks remain attractive in the long-term as drivers of growth in the country – demographics, urbanisation and industrialisation – endure despite trade-related ‘noise’. In Australia, the recent bushfires have resulted in massive property and environmental damage, which will likely result in a short-term hit to the economy albeit some stimulus measures are likely to offset that. We remain comfortable with our holdings in the market as these events, despite being unfortunate, tend to be transitory in nature, and do not change the long-term fundamentals of the companies we have in the portfolio.

Many technology stocks have been out of favour for the past two years as global smartphone sales have flattened in the absence of any new must-have software application prompting consumers to upgrade. However, the digitisation of the global economy continues to accelerate, which will be positive for key Asian technology stocks. The imminent launch of 5G networks in many Asian markets over the next two years should bolster demand and we see attractive opportunities for our preferred names in the IT sector.

Inflation and interest rates are likely to remain low. Against this backdrop, equity dividend yields offer attractive returns that are now well above risk-free rates in most Asian markets. Payout ratios remain modest, aggregate balance sheet leverage is below international averages and returns boosted by buybacks have been limited.

As a result, there is considerable potential for payouts to increase as companies become more willing to distribute surplus case to shareholders. In a low-growth world, the return likely to come from dividends becomes more important.

In terms of portfolio strategy, we maintain a bottom-up investment approach and we continue to look for good companies where we can see a strong income case and potential for capital growth.

Discrete yearly performance (%)

	Q1/2015 - Q4/2015	Q1/2016 - Q4/2016	Q1/2017 - Q4/2017	Q1/2018 - Q4/2018	Q1/2019 - Q4/2019
Share price	-2.4	35.9	14.8	-6.0	15.6
Net Asset Value	0.3	30.1	15.7	-6.9	14.0
MSCI AC Pacific ex-Japan Net TR GBP	-4.4	28.2	25.1	-9.2	15.7

Past Performance is not a guide to future performance and may not be repeated.
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. Some performance differences between the fund and the index may arise because the fund performance is calculated at a different valuation point from the index.

Source: Morningstar, net income reinvested, net of ongoing charges and portfolio costs and where applicable, performance fees, in GBP.

What are the risks?

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.

Investors in the emerging markets and the Far East should be aware that this involves a high degree of risk and should be seen as long term in nature. Less developed markets are generally less well regulated than the UK, they may be less liquid and may have less reliable arrangements for trading and settlement of the underlying holdings.

The Company invests in smaller companies that may be less liquid than in larger companies and price swings may therefore be greater than investment trusts, companies and funds that invest in larger companies.

The Company holds investments denominated in currencies other than sterling, investors should note that exchange rates may cause the value of these investments, and the income from them, to rise or fall.

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.

Investment in warrants, participation certificates, guaranteed bonds, etc will expose the fund to the risk of the issuer of these instruments defaulting. Deducting charges from capital can result in the income paid by the company being higher than would otherwise be the case and the growth in the capital sum being eroded.

As a result of the fees being charged partially to capital, the distributable income of the Company may be higher, but the capital value of the Company may be eroded.

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Please remember that 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.

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Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England.

Schroder Unit Trusts Limited is an authorised corporate director, authorised unit trust manager and an ISA plan manager, and is authorised and regulated by the Financial Conduct Authority.

Please note: for the Schroder UK Public Private Trust plc, the important information is below:

Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.

Schroder UK Public Private Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

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Schroder Oriental Income Fund Limited

"While by no means universal, many Asian companies are increasingly focused on dividends as a substantial contributor to shareholder returns."

Matthew Dobbs

Asian Equities Fund Manager and Head of Global Small Cap

Coronavirus update

A recent update from fund manager, Matthew Dobbs:

Outlook on Asian Markets - Q1 2020

Outlook on Asian Markets - Q1 2020

Outlook on Asian Markets - Q1 2020

Outlook on Asian Markets - Q1 2020

Outlook on Asian Markets - Q1 2020

Outlook on Asian Markets - Q1 2020

Outlook on Asian Markets - Q1 2020

Outlook on Asian Markets - Q1 2020

Q4 2019 Commentary

Market summary

Investment outlook

Quarterly overview

Discrete yearly performance (%)

What are the risks?

Portfolio holdings

Never miss an update

Latest insights

Learn more about our approach to managing investment trusts and access the latest ideas and opinions from our investment teams.

Contact Schroders

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