ANNUAL REPORT AND ACCOUNTS
Schroder Oriental Income Fund Limited (the “Company”) hereby submits its Annual Report and Accounts for the year ended 31 August 2022, as required by the Financial Conduct Authority’s Disclosure Guidance and Transparency Rule 4.1.
The Company’s Annual Report and Accounts for the year ended 31 August 2022 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company’s webpages www.schroders.co.uk/orientalincome . Please click on the following link to view the document:
http://www.rns-pdf.londonstockexchange.com/rns/2938F_1-2022-11-3.pdf
The Company has submitted its Annual Report and Accounts to the National Storage Mechanism, and it will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism .
Enquiries:
Matthew Riley
Schroder Investment Management Limited
Tel: 020 7658 6596
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Chairman’s Statement
Dear Shareholder
The Company’s financial year, to 31st August 2022, saw us witness two very different environments in the global economy and financial markets. The autumn period through to the end of 2021 saw continued strong economic growth, growing inflationary pressures, bond market stability and equity market euphoria. 2022 started with a sharp reversal of market sentiment, exacerbated in February by the invasion of Ukraine. As global energy prices and inflation rose ever higher, so did bond yields and equities fell sharply.
Against this backdrop, the Company produced an encouraging, albeit modest, positive net asset value (“NAV”) total return of 2.5%. In 2021, Asia had not experienced the same euphoria in equity markets as elsewhere, as the shadow of China’s policy choices lay across the region. Similarly, the falls in 2022 have been more muted than in the US and Europe but, nonetheless, the MSCI AC Pacific ex Japan Index (in sterling terms) still fell by 7.7% over the financial year to 31st August.
As I have mentioned before, this index is an interesting yardstick but it is little more than that. It is not the key driver of how our portfolio is invested. Instead, Richard Sennitt and Abbas Barkhordar seek to build a diversified portfolio of quality, income generating companies based on fundamental stock analysis. They do not slavishly follow macro themes. However, the reasons for the material outperformance during the year are noteworthy and are well explained in the Manager’s Review on page 6 of the 2022 Annual Report. What I do want to highlight is the growing dividend stream received by the Company which has underpinned another increase in our own dividend to shareholders to 11.40 pence per share. During 2020 and 2021, we dipped modestly into our revenue reserves until the COVID storm abated. We believed that, with generally low payout ratios and good fundamentals, our portfolio companies would recommence dividend growth when confidence or, in certain cases, regulation permitted. So it has proven and the Company’s dividend for this financial year is back, once again, to being well covered, allowing us to replenish our revenue reserve as well as increase the total dividend to you. This year’s increase represents an 8.6% rise in the dividend since last year and is the 16th consecutive dividend increase since the Company’s launch in 2005.
That said, a modest health warning is warranted. The Company’s revenue is accounted for in sterling and our dividend to you is paid in sterling. Our underlying revenue from our portfolio has grown well in local currency terms this year, which is heartening, but the significant weakness of sterling during the year (and subsequently) has flattered both our NAV performance and our revenue when translated into sterling terms. We don’t seek to predict or to hedge the vagaries of sterling but the performance of the currency can have a material impact on shareholder total returns and our revenue. For many years it has been a wind at our back. Any reversal of recent sterling weakness would, conversely, act as a headwind in the future.
So far, I have focused on our NAV performance. Our share price has tracked this fairly closely during the financial year and generated a total return (dividends reinvested) of 1.2%. However, the discount that arose in 2020 has persisted, ending the period at 4.8%. This follows many years when the Company’s share price traded at a modest premium and the Company issued shares at a premium. Emerging or widening discounts are not unique to the Company: the average discount across the investment trust sector is now wider than during the global pandemic. However, as I noted in this year’s Interim Report, the Board does not believe that our discount is justified given our strong performance, attractive yield and relevance within client portfolios. So we have been willing to continue to repurchase shares when there has been a mismatch of supply and demand in the market. During the financial year, a total of 6,265,000 shares were repurchased at an average discount of 5.1%. Since the financial year end, markets have fallen again and volatility has risen. Discounts of investment trusts have widened further, sometimes markedly. Our discount has crept out to around 5-7%. We have redoubled our efforts accordingly and will continue to repurchase shares when we believe that it is in the best interests of shareholders.
In addition to financial performance, investors are increasingly focused on how results are achieved, to ensure that their funds are being invested in responsible companies and that returns are sustainable. You will be pleased to hear that this is also a focus of the Board and the Manager, and details of how Environmental, Social and Governance (“ESG”) considerations are factored into investment decisions is covered on pages 14 to 17 of the 2022 Annual Report.
Aside from this, there are two other items that I would like to highlight. Firstly, as announced in the Interim Report published in May, Schroders has agreed to reduce the performance fee payable by the Company. This has had no impact on the year just past because the total return was below the hurdle rate to trigger any performance fee. But, the benefit of the increase in that hurdle from 7% to 8% and the reduction of the cap to 0.65% (from 0.75% previously) will be felt in future years. It represents a notable financial improvement to shareholders and the Board would like to thank Schroders for this.
Secondly, we have been delighted to welcome Isabel Liu to the Board. Isabel joined in November 2021 and is already making a notable contribution to our discussions. Her extensive knowledge of China and the region is generating lively and relevant debate around the board table. Our succession planning over the last five years has enabled us to build a genuinely diverse board with different experience, backgrounds and perspectives. We were supportive of the FCA’s initiative to enshrine diversity into the Listing Rules and are pleased to be able to adopt these changes early. Our report on diversity can be found on page 19 of the 2022 Annual Report. This year also saw us conduct a board review, externally facilitated by Stogdale St James. I am pleased to be able to report that this found that your board achieves the high standards we outline in our Purpose, Values and Culture on page 18 of the 2022 Annual Report.
Looking forward, it is easy to despair. Without doubt, the economic environment will get worse before it gets better. A global recession seems likely, even if it may prove shallow. But, financial markets are forward looking and have already discounted much bad news. Looking more specifically at Asia, caution seems warranted in relation to investment in China. Politics, zero-COVID and economic vulnerability, especially to a highly leveraged property market, suggest a bumpy ride ahead for Chinese investments. But aside from China, the region represents something of a haven and, whilst China is important, it is not all of Asia. Many economies outside of China are thriving and represent increasingly attractive alternatives for production, investment and growth. Equity valuations in the region are not demanding and offer interesting opportunities. Our portfolio is well diversified, tilted away from China and focused on companies with strong and reliable fundamentals. Of course, in the short term, equities could fall further. Yet, we see no reason why our portfolio should not prosper in the medium term and generate growing dividends and attractive total returns. Recent events in the UK place into even sharper focus the importance of a globally diversified portfolio for all types of investors, including income investors. Schroder Oriental Income seems to me to have a well deserved place amongst that diversification.
The Company’s Annual General Meeting will be held at 4.30pm on Monday 5th December 2022 at Schroder’s offices, 1, London Wall Place. Our investment managers, Richard Sennitt and Abbas Barkhordar will be giving presentations at an investor webinar on Tuesday 29th November 2022 at 10.30 am (which can be signed up to via the Company’s website, http://www.schroders.co.uk/orientalincome), and at the Company’s Annual General Meeting and I would encourage you to come and listen to them. We hope to welcome many of you to the AGM in person and to hear your thoughts and questions.
Paul Meader
Chairman
3 November 2022