Fund Review: Schroder Asian Income

The £396.3m Schroder Asian Income fund, and member of the Investment Adviser 100 Club, retains the straightforward aim it has had since its launch as an income-focused product in December 2006: to deliver an “attractive” yield to investors while also capturing the growth available in emerging market stocks across Asia. The fund’s historic yield has risen from 3.5 per cent to 4.6 per cent since 2006.

Although the fund was launched back in February 1990, it was not given an income remit until 2006. The fund’s process has remained almost unchanged since then, with Mr Sennitt taking a primarily bottom-up approach.

However, his team routinely reviews their outlook for each country in the region to help inform their conviction in their holdings, although it rarely leads directly to changes in the relative size of positions. “We come up with a view on these markets, but just because I am positive on a country it doesn’t mean I buy more or less,” Mr Sennitt says. “There is no point liking a country’s prospects, but buying companies you’re not really interested in.”

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One example of the manager’s preference for stockpicking over country allocation decisions is his exposure to Thailand. There have been weeks of political protests leading to a partial shutdown of the country’s capital city, Bangkok, but in spite of the tension this has caused Mr Sennitt is happy to have a higher exposure to the country than the fund’s benchmark, the MSCI AC Pacific ex Japan index. The manager says Thai companies “look good value”.

Since December 2006, the Asian Income fund has posted a 112.7 per cent gain, more than double that of its current benchmark. Since cutting Japan exposure in 2009 the fund is up 54.7 per cent versus the benchmark’s 29.5 per cent gain, according to FE Analytics.

But last year was “a tough year for Asia and for income”, Mr Sennitt admits, having seen his fund underperform its benchmark and the IMA Asia Pacific ex Japan sector in a calendar year for the first time since 2009. The Asian Income fund had ranked in the top quartile for returns in the sector in 2010, 2011 and 2012. The trigger for the sell-off was undoubtedly the emergence of ‘tapering’ as a concept in May, leading to speculation about when the US Federal Reserve would begin removing its stimulus for the US economy and subsequently raise interest rates.

Mr Sennitt says: “High-yielding stocks performed poorly post-tapering talks and that has acted as a headwind. It impacted more on highly-rated, high-yielding, low-growth stocks.” But the manager adds that the selloff in these names – typically seen as ‘defensive’ companies – was disproportionate, particularly given that interest rates are now not expected to rise until at least 2015. He says that he is “starting to find ideas in those high yield defensive names”.

“This time last year I was selling exposure to real estate investment trusts and defensive areas, and now selectively I can find value in some of these areas again,” Mr Sennitt says. “The shock for Asia was that [bond yields] moved up in the US and people’s expectations of interest rates dramatically shifted.”