US Edition
The dominance of a small number of American technology stocks has pushed just about every other market into the shade recently, and that’s particularly the case when it comes to anything related to Asia.
Fears about China, its spluttering economy and rumblings over its position towards Taiwan have held back investors who look towards Asia as a potential investment opportunity.
While Asian nations have long been associated with faster economic growth than the West can manage, the attractive levels of income generated by companies in the region are often overlooked.
Approaching 60pc of the companies that belong to the MSCI All Countries Pacific ex Japan index (which includes Australia) yield more than 3pc, which is comparable to that seen in Europe and the UK, both of which are seen as high-yielding markets.
This provides rich pickings for Richard Sennitt, manager of the Schroder Oriental Income investment trust, who took over as its lead manager in 2020 following the retirement of his veteran predecessor, Matthew Dobbs.
Sennitt worked alongside Dobbs for many years and has also successfully managed an open-ended equivalent of the trust for more than 20 years, which made him the natural successor when Dobbs stepped down.
Sennitt has continued the trust’s prudent approach with a focus on high-quality companies able to deliver rising dividends, identified by the significant resources Schroders has on the ground in the region.
This approach has paid dividends (excuse the pun): performance looks very favourable against the benchmark since Sennitt took over and indeed since the trust’s listing in 2005.
Income seekers will have been happy with the steadily rising divis, which have grown at an average of just over 4pc a year over the past five years, while dividend cover of 1.25 times should give investors confidence that there is scope for this growth to continue.
While investors who seek capital growth may be put off by the trust’s focus on income, its long-term total returns are a reminder that reinvesting income, if not needed, can be a highly successful investment strategy.
Looking ahead, the headwinds in the region, principally from China, have resulted in a significant valuation gap between Asia and global markets.
The Asia Pacific region is trading on a price-to-earnings ratio of just under 16, which compares favourably with around 20 for global stocks and 23 for American equities.
Perhaps more interestingly, the region is also cheap relative to its own history, trading below its 30-year average on both an earnings and “price to book” basis.
Investors worried about the risks of China may be reassured to hear that Sennitt has significantly less exposure to the country than his benchmark index, favouring instead Singapore and Hong Kong, and to a lesser degree Taiwan and Australia.
In any case, the Chinese stock market’s plethora of low-yielding internet, ecommerce and consumer companies precludes it from being a natural hunting ground for the trust.
As a result, the portfolio is tilted towards less volatile parts of the market such as financials, which not only helps the yield but also reduces the portfolio’s volatility.
This has been seen over the course of numerous market sell-offs: the trust has consistently outperformed its benchmark in falling markets. In addition, its Australian exposure via miners and banks also provides natural diversification.
One fly in the ointment for this trust is the presence of a performance fee on top of the annual management charge. The fee has recently been challenged by the board and is now less generous for the fund manager.
In an ideal world it would be removed completely but at least the board is moving in the right direction. It is also proactive when it comes to buying back the trust’s shares, which assists in keeping the discount in check and should help to provide a floor at around 5pc.
As a way to diversify a portfolio’s sources of income or to provide less volatile exposure to Asia’s growth potential, the trust has broad appeal. Add in lower valuations in the region compared with developed markets, experienced management and a proactive board and you get a trust that deserves a closer look.
Questor says: buy
Ticker: LON: SOI
Share price at close: 238.5p
Ryan Hughes is head of investment partnerships at AJ Bell, the stockbroker
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