Schroders Regulatory News (SOI)

Schroder Oriental Income (SOI)

24/05/2024

Results analysis from Kepler Trust Intelligence

Schroder Oriental Income (SOI) has released its interim results for the period ending 29/02/2024. Over the period, the trust saw its NAV increase by 7.5% on a total return basis, which compares to a return of 1.9% for the MSCI AC Pacific ex Japan Index, the trust's formal benchmark. The AIC Asia Pacific Equity Income sector delivered a weighted average return of 5.8% over the same period.

The top performers in the period have been the region's technology firms. This has been driven by the industry's destocking trend and the increased proliferation of artificial intelligence. Richard's stock selection has led to an overweight which has been beneficial to performance.

Richard has an underweight allocation to China which has been a big contributor to performance following the country's challenges. However, the manager still generated positive alpha from China. Richard has an overweight to Hong Kong which was a drag on returns, though this was more than offset by strong stock selection leading to a positive overall return.

Two interim dividends were declared in the period. Earnings growth has been modest in the region, though Richard believes this could begin to pick up. He is confident that underlying income remains robust enough to maintain the trust's strong progressive dividend track record.

The discount widened during the period from 4.5% to 6.4%, though this has narrowed in the period post the interim statement.

The trust's chair, Paul Meader, reflected on the positive long-term outperformance of the trust stating: "Since inception, a shareholder has received a total return of 489.0%, whereas a passive investment in the Reference Index would have generated 288.5%"

Kepler View

We believe this interim statement is another demonstration of the benefits of active management in Asia, and a testament to Richard's stock selection approach. Whilst the region has been overshadowed by global equities, Richard has delivered significant outperformance, strong absolute returns and a diversified income source.

Performance has primarily been driven by stock selection. This has been particularly impressive in the China and Hong Kong allocations in our opinion. Richard is underweight China, which aided relative performance, yet the companies he did hold have outperformed. Meanwhile, he his overweight Hong Kong which was a drag on performance, yet this was more than offset by positive stock selection. We believe this should provide investors with confidence in Richard's ability to outperform over the long-term.

Richard highlights that aggregate valuations are back in line with long-term averages, though there is significant dispersion which lends itself well to his active approach. He notes that the region's prospects could be affected by changes in the interest rate cycle in developed markets. We would expect this to be beneficial company earnings, providing support for the income picture also.

SOI's dividend outlook remains strong, supported by the trust's large financials allocation. The trust has an impressive dividend growth track record and Richard believes the outlook supports this. We believe SOI continues to provide investors with a diversified income stream to traditional asset classes.

Despite the strong performance in the period, the discount widened in the period which Richard believes reflects the negative sentiment towards Asia which could arguably reverse. We believe the discount offers investors a potentially attractive entry point.

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