Rees, head of research on the firm’s multi-asset funds, says a trust like Schroder Oriental Income can not only diversify investor’s income away from the usual UK names but can also smooth income returns over time – a major advantage in Asia where equities have tended to be volatile.A key characteristic of investment trusts is that they are able to hold some of their income back in years where markets are strong and dividend pay-outs are robust in order to continue to deliver a sustainable yield in the tough times.
“If you’re an investor who is looking for diversified income that makes this more attractive than an open-ended fund,” he said.
The trust’s attractive 4.02 per cent yield is something that makes the £429.8m Schroder Oriental Income trust one of Brewin Dolphin’s favoured trusts in the sector, says fund analyst Michael Paul.
Paul says the trust aims to provide a total return for investors through investment in Asian companies which have attractive yields.
He points out that the manager, Matthew Dobbs, uses a barbell approach, investing in steady, high income companies without much growth outlook and balancing those quality stocks with more growth orientated holdings.
These growth stocks, he says, may have a lower dividend but offer the possibility of growing that dividend over time.
“Matthew Dobbs is an experienced investor. He has a quality bias. He looks for high quality companies but he has a contrarian streak when he’s making his investments,” he said.
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
The analyst adds that Dobbs is able to take advantage of the deep resources of Schroders’ analyst team.
While the manager himself is based in London, Schroders has a dedicated team of analysts on the ground in Asia which Dobbs is able to draw from for ideas to put in the portfolio.
When asked what role the trust would play in an investor’s portfolio, Paul says the dividend overlay would help to lower the risk profile in a fund while helping to diversify the income stream.
For investors with a longer term view, the trust also affords exposure to growth in the Asia Pacific region.
“For long-term investors it’s a very high quality trust. We encourage our managers to pick it up,” he said.
Schroder Oriental Income is trading on a discount of 1.19 per cent, making it cheaper than both its one and three year averages.
Earlier this year, the trust’s discount widened to as much as 5.65 per cent while its premium has a one-year high of 2.3 per cent high.
Cantor Fitzgerald’s Charles Tan says investors should be wary of the trust’s reliance on financial stocks and REITs (Real Estate Investment Trusts) for yield.
“What happens when thing don’t go as swimmingly as they have for the last couple of years. Those financials and REITS might not look so attractive,” he said.
“The Hong Kong dollar is pegged to the US dollar, so if interest rates rise that will negatively impact Hong Kong REITS, which Schroder Oriental Income holds a lot of.”
The trust’s largest holding is the Hong Kong based Fortune Real Estate investment Trust, making up 5 per cent of the portfolio.
The trust has been a strong performer over the long term, returning 154.72 per cent since launch in July 2005. This outstrips the MSCI Asia Pacific ex Japan index, which made 112.19 per cent.
However, the nature of income funds means they often give up some upside in exchange for yield.
As a result, the trust has trailed its predominantly growth-oriented peers in the IT Asia Pacific ex Japan Equities sector over the period.
Performance of trust, sector and index since July 2005
Source: FE Analytics
Richard Curling, who runs the five FE Crown rated Jupiter Monthly Income fund, is the only manager to hold the trust in his top 10.
The trust has ongoing charges of 1.63 per cent, including a performance fee, and yields 4.49 per cent.
