Schroder Oriental Income: Solid Performance And A 4.5% Yield

The £660m Schroder Oriental Income Trust (LON: SOI) has an unusual remit in that it mainly invests in dividend-paying stocks in the Asia Pacific region. It has just released its interim accounts to the end of February in which it made an NAV total return of 1.6% versus a 2.9% fall in the MSCI AC Pacific ex Japan index.

Manager Richard Sennitt has been running open-ended Asian income mandates at Schroders for over 20 years, although he has only been in charge of SOI since the start of 2021. During that period the NAV is up 6.8% compared with a 14.1% fall in the benchmark.

The recent outperformance was largely driven by an underweight position and strong stock selection in China. At 15.7% the country is almost 20% below the benchmark allocation, although there is a near five percent overweight in Hong Kong on account of the cheaper valuations.

Positioning And Outlook

Having an income focus means that the portfolio generally has significant sector and geographic over or underweights. At the end of March the largest overweights relative to the benchmark were Singapore, Hong Kong and Taiwan, while the key preferred sectors were real estate, financials and IT, with the largest underweight being consumer discretionary.

Sennitt’s biggest bet is the low allocation to China because he thinks that much of the upside from the reopening trade has already been priced in, with valuations well above historic levels despite factoring in a large recovery in profits. However, the stabilisation of the Chinese economy and rebound in consumption will have a positive impact across the region and will help other stocks in the portfolio.

It is likely that there will be further downward revisions to earnings as global growth slows and this would be expected to result in a period of inventory adjustment. Despite this, valuations for Asia are trading at or below long-term averages, which suggests a more constructive backdrop for the year ahead.

Attractive Yield

One of the most attractive features of the fund is the 4.5% dividend yield that is paid quarterly and which has grown strongly in the last few years. This makes it a decent option for income seekers who are looking to diversify their sources of yield away from more traditional areas.

The broker Numis says that the interim results show a solid period of outperformance that has continued post-period end. You can currently pick up the shares at a three percent discount to NAV and the active buyback programme should limit the risk of the discount moving significantly wider.

Schroder Oriental Income has an unusual mandate, which means that it can slip under the radar, but it is well worth considering if you are looking for a reliable source of income outside of the more customary areas. Over the last 10 years it has generated an annualised NAV total return of 7.4% per annum compared to 5.6% from the benchmark.