Schroder Oriental Income (SOI) invests in high-quality Asian businesses which are paying (or have the potential to pay) an attractive dividend. Manager Matthew Dobbs helped launch the trust in 2005 in order to take advantage of a growing dividend culture in Asia. The trust has since generated strong dividend growth, and – as we discuss in the Dividend section – currently yields 4.4%.
Thanks to the presence of highly cash-generative technology stocks in Asia, the trust offers diversification to the typical sectors heavily weighted by UK equity income investors. Stocks such as TSMC and Samsung offer exposure to secular growth stories which contribute to SOI’s differentiated total returns, as well as attractive and growing dividends.
Matthew draws on the work of a large analyst team spread across Asia, which – alongside his 30 years of experience in the region – gives him an advantage in identifying high-quality companies. Notably, the analyst team are tasked with finding high-quality companies first, with Matthew then selecting those offering the attractive dividend prospects.
Over the past five years the market has been led by non-dividend paying internet retailers (Alibaba, Tencent), which has created a stylistic headwind. In the same period, however, the performance has been close to that of the index, with periods of significant outperformance. Following the emergence of the coronavirus pandemic, the discount has widened out to 7.3% compared to a five year average of 0%.
In our view Schroder Oriental Income is an ideal long-term holding for investors who want a growing income stream, or who want the total return potential that comes from reinvesting and compounding a growing dividend. This could be an investor in drawdown who needs their capital to grow while they live off their income. Alternatively, it could be an investor at an earlier stage of life who wants to grow their investment pot with the lower beta, steadier returns achievable from an equity income product.
For income investors, we think the diversification SOI offers to the typical sources of dividends in the UK Equity Income sector is a key attraction. The UK market is light on tech, but SOI owns a number of companies right at the heart of emerging technologies – such as TSMC, Samsung and Hong Hai Precision. These companies offer strong capital growth potential as well as attractive dividends and are arguably resilient to a turn in the economic cycle.
In our view SOI fully deserves the premium rating which it has historically enjoyed. We view the current 7.3% discount as an attractive buying opportunity; particularly given that, as Matthew says, we may be past the peak of the coronavirus crisis in China and the long-term structural attractions of the region remain.
|High dividend with strong growth potential||Typically trades close to par, so unlikely to interest discount players|
|Diversifies typical equity income exposures with access to high growth sectors||The gearing, although modest, could magnify losses in a down market|
|Hugely experienced manager backed up with large, well resourced analyst team||High exposure to emerging markets which can be volatile|