Schroder Oriental Income (SOI) has consolidated its position at the top of the Asia Pacific Equity Income sector with an impressive 51.7% investment return in the year to 31 August.
This was a strong result that beat the 43.9% return of the MSCI AC Pacific ex-Japan index and reflected fund manager Richard Sennitt’s stock picking skills, particularly in rampant IT and AI companies, but also his decision to underweight China, whose economy continued to disappoint.
There was further good news as the £958m investment trust, which has been shortlisted for a QuotedData “Investors’ Choice” award, declared a 20th consecutive year of rising dividends, making it one of the “dividend heroes” of the Association of Investment Companies.
A final dividend of 5.8p will take the total pay-out to 12.8p per share, up 4.9% on last year.
However, after a few “lacklustre” years in dividends from its companies, SOI’s distribution was uncovered by earnings per share which rose to 11.76p from 11.59p.
Like stable mate Schroder Income Growth (SCF) earlier this week, SOI’s chair Nick Winsor said the company had “significant” undistributed reserves with which to keep growing the dividend, even if investment income was insufficient on its own.
Schroders will be paid a £5.7m performance fee on top of its £6.6m base fee in response to the 7.8% outperformance of the benchmark. This is an increase from £4.8m and £4.9m in the previous year. However, it is the last 10% performance fee it will receive as the funds group agreed to drop this a year ago.
The total return SOI’s shareholders received came in at 56.9%, higher than the underlying growth in net asset value. This was due to a narrowing of the share price discount to 2.1% from 5% as investors chased the shares and also the board bought back 7.5m of stock to balance supply and demand.
The returns were generated with modest gearing, or borrowing, which dipped to 2.7% from 3.9% during the period.
Sennitt said the returns were driven almost entirely by an intensification of the AI theme as semiconductor suppliers in South Korea and Taiwan benefited from extraordinary growth in sales to US internet “hyperscalers” and AI developers.
The manager said he had taken some money out of IT, selling some smaller positions earlier in the year and more recently reducing the mega caps TSMC and Samsung Electronics as well as ASE and MediaTek.
IT is now his largest underweight, with 5.9% less than the MSCI benchmark at 30 September. However, it is still by far his largest sector accounting for 41.6% of net assets.
Sennitt said he had also avoided Indian IT service companies and other e-commerce, travel and ride-hailing businesses seen as AI “losers”, explaining SOI held “relatively little exposure to these areas, in part due to many of them being low dividend payers”.
He lowered his underweight to China as the year progressed, introducing Weichai Power and China Mengniu Dairy to the portfolio and adding to existing positions in the country. At the end of September he held 15.5% in China compared to the 21.9% index weighting, although this was partly offset by his being “overweight” to Hong Kong with 6.7% versus the benchmark’s 3%.
He and Winsor agreed that long-term prospects for Asia remained “compelling”.
Our view
Matthew Read, senior analyst at QuotedData,said: “These are a very strong set of results from Schroder Oriental Income, with its NAV outperforming the benchmark by a decent margin despite the extraordinary concentration of Asian market gains in AI-related stocks. We are pleased to see that stock selection, rather than simply riding the technology boom, was the main driver of outperformance. It is also interesting to see that the manager has been taking profits in semiconductor stocks and increasing exposure to less fashionable areas, reflecting concerns about the sustainability of AI-related earnings growth.
“With its 20th consecutive annual dividend increase, SOI is now an AIC Dividend Hero. The removal of the performance fee is also welcome, particularly given the substantial fee generated this year. With Asian valuations still looking reasonable and signs that dividend growth is picking up across the region, there is plenty to be positive about, especially if the market rally broadens beyond technology.”
