Schroder Oriental Income Ord

Richard’s strategy for constructing his portfolio is focused on individual company analysis first, rather than approaching the region from the top-down and picking specific countries or industries first. As we discuss later, this involves focusing on companies that have ‘quality’ factors, such as high levels of cash generation and experienced management teams, whilst also having a strong awareness of valuations. This has led to the fund often having some key characteristics that are likely to influence performance over time.

One of these is the fund’s value style, as a result of the valuation discipline. This has meant the fund does well in periods that support this investment style, such as high or rising interest rates, although can lag in periods where interest rates are low or falling. SOI is different to peers in that it still has what is considered a traditional equity income approach, therefore its performance versus the peer group may diverge, particularly when markets are being influenced by these investment styles.

Another factor is the bias towards large-caps companies from developed markets in the region, such as Australia and Singapore which is likely to support performance in more challenging periods. In addition, the higher dividend payers in these countries are often financial firms which are likely to outperform in higher interest rate environments. Conversely, the manager has historically been cautious on his China allocation which is likely to have an influence on performance versus the index as it is the largest economy in the region.

This performance profile can be seen in the chart below, with the fund performing well in relative terms in 2021 to 2023 when markets were weaker and when China was struggling. However, this hasn’t compromised performance since, with SOI broadly keeping up in the market recovery in the years since.

Richard uses bottom-up analysis to construct his portfolio, meaning he looks at the qualities of individual companies first, rather than looking at potential countries or industries and working down from there. This is aided by the large analyst team that Schroder’s has in the region across several offices. Examples of the factors they are looking for in potential holdings are resilient cash flows, high returns on investment and good management teams. All these are sought at attractive valuations, something Richard believes they can achieve due to the lower levels of research elsewhere in Aisa. This latter point means the fund is one of the more value-biased in the peer group.

Country and sector allocations will be an outcome of where Richard finds the best ideas. However, there is likely to be an underweight to China as some of the largest companies do not pay significant dividends, and as a result of the manager’s concerns over domestic regulatory and geopolitical uncertainties. The bias towards good management teams and dividend payers has also led to an historic tilt towards more developed Asian economies such as Australia and Singapore which helps further differentiate the portfolio from the index. The trust has often had a high allocation to technology firms. Whilst these are not the highest yielding firms, they are strong growth prospects which contributes to total returns and gives the fund a differentiator versus even more income focused funds in the sector.

• Asia could be exposed to further geopolitical risks
• Long-standing underweight to China could be a headwind if the countrycontinues to rally
• Valuation focus could mean missing out on more growth-driven parts ofthe economy