Schroder Oriental Income - Annual Financial Report

 

Schroder Oriental Income 

Revenue, Dividends and Performance

In the 14 years since the launch of your Company, it has delivered both a high total return to shareholders and a consistent growth in dividends.

NAV total return to shareholders since launch has been 350%, an annualised return of 9.4%. By comparison, equity markets in the region (as measured by the MSCI AC Pacific ex Japan Total Return Index in sterling terms) have returned 267%. This significant outperformance in comparison to the equity markets of the region demonstrates the value that Schroders has added as investment manager and validates the total return oriented approach taken by the Company. The high level of total return is notable given that this period spans the financial crisis of 2008/2009 and subsequent smaller tremors in 2013 and 2015 and that Asian stock markets are today, in dollar terms, broadly where they were in 2017.

Since its launch in 2005 the Company has also demonstrated consistent dividend growth, with the dividend having been increased in each successive year.

As my predecessor described in last year's annual report, patience and a long-term perspective are key attributes of successful investment, and the above returns demonstrate that shareholders who have invested in the Company with this approach have been very well rewarded.

Dividends from our underlying investments have this year grown by 3.32% and this has allowed the Company once again to grow its own dividend. The Company has declared dividends totalling 10.1 pence (2018: 9.7 pence) per share in respect of the year, representing a yield of 3.8%, based on the share price of 264p at 6 November 2019. As in previous years, the dividend was more than fully covered by income and so we were once again able to add to the revenue reserve, which is available to supplement distributions in future years.

The NAV total return for the financial year to 31 August 2019 was 3.7%, an improvement from the prior year of 1.5%. The two factors driving this return were the performance of Asian equity markets and the Brexit related weakening of sterling. The share price produced a total return of 5.4%.

Share price premium issuance and entry to the FTSE 250 Index

The share price return was higher than the NAV return through to the end of the year. This premium enabled the Company to issue a further 8,585,000 ordinary shares during the year under review, on terms accretive to existing shareholders. This issuance benefits shareholders because it improves the liquidity of shares and reduces the ongoing charges per share by spreading the costs across a greater number of shares. The Company's shares have historically traded at a price close to their net asset value, and the board appreciates that this characteristic is valued highly by shareholders.

The success of the Company's strategy has been reflected in its own growth in shareholder equity. The Company has grown from a market capitalisation of £161m at launch to £687m at the time of writing. We are very pleased that the growth of the Company resulted in the Company being added to the FTSE 250 Index on 17 September 2019.

Gearing

The Company continues to maintain a credit facility, as detailed in the notes to the accounts. The gearing level increased slightly, beginning and ending the year at 4.5% and 5.3%, respectively. The Company's gearing continues to operate within pre-agreed limits so that net effective gearing does not represent more than 25% of shareholders' funds.

Engagement with the Manager 

In July, the board visited the Schroders offices in Singapore and Hong Kong; and met senior management of a selection of portfolio investee companies. These visits help us to gain a thorough understanding of the local expertise of the Manager and examine the investment process in greater detail, Following the visit, the board is confident that the depth of experience of the local Schroders teams will continue to reinforce successful outperformance over the long term.

The board also received presentations from the Schroders Environmental, Social and Governance (ESG) team. The board believes the Manager has significant experience in incorporating ESG considerations into investment decisions.

Management fee

The board negotiated a reduction in the annual management fee payable on net assets above £750 million from 0.70% to 0.65%.

Board composition and succession planning

In managing succession, the board has been mindful of maintaining the right mix and diversity of skills, experience and independence of thought whilst balancing fresh perspectives with corporate memory. As noted in last year's accounts I anticipate that I will serve as Chairman of the Company for a further year before leaving the board. Two new directors have been appointed in the last two years and we are seeking to appoint one more director within the next year.

Annual general meeting 

The Company's annual general meeting will be held at 4.00 pm on Thursday, 12 December 2019 at Schroders' Guernsey offices. The board acknowledges that it is difficult for shareholders to attend general meetings held in Guernsey but I would encourage all shareholders to participate in the meeting and note that they may wish to vote by completing and returning their form of proxy to the Company's registrar if they are unable to attend in person.

Outlook

Excellent as it is for the Company to have been successful enough to be included in the FTSE 250 index, it emphasises the need to repeat the factors behind that success: the sustained growth in the NAV and dividend, and the resulting investor demand that has increased the number of shares in the Company by three quarters since launch. At least in the short-term some of the favourable tail winds of recent years are under question. Trade and commercial differences between major powers have increased, Asian growth is slowing and the street protests in Hong Kong are impacting a stock market that is the Company's largest source of dividends.

These strike me, however, as almost inevitable challenges in the current investment environment. Slow growth and new political uncertainties are affecting markets worldwide and an appreciation of sterling could, as ever, have an adverse impact on the Company's returns. Where your Company has an advantage is a proven investment concept, with soundly financed Asian companies paying dividends that have continuing potential for growth. Yet again the Company has extended its record of increasing its dividend every year and, despite the challenges, there are simply too many good companies in the portfolio for me to be anything other than cautiously optimistic about the long-term outlook.