Investments 

Gearing helps Schroders Income Growth trust outperform

Gearing helps Schroders Income Growth trust outperform

The use of gearing offset a weaker investment performance to boost the returns for the Schroder Income Growth Trust.

Data from FE Analytics showed the trust returned 6.8 per cent in the year to 31 August, compared with 4 per cent for the AIC UK Equity Income sector average.

Gearing, when money is borrowed by trusts to buy more investments, can boost performance because the borrowed cash is put into the market it means each shareholder effectively has more capital invested in the trust than they actually put in.

This means if an investment goes up in value the investor makes more, but if an investment falls in value those losses are amplified for the end investor.

In the results statement for the year to the end of August, the trust's manager, Sue Noffke, said: "The company's outperformance against the index reflected the twin benefits of positive sector allocation and the use of gearing in a rising market, offset to some degree by negative stock selection."

She added: "Income from investments fell 4.3 per cent from last year's level. There were two factors, of broadly equal weight, behind the reduction. Firstly, the contribution from special dividends fell sharply to around half the level received in the prior year, and one third of the peak level of dividends in the year to end August 2016.

"This reduction was not unexpected as we have cautioned for some time that the level of special dividends within the market and the portfolio had been at unsustainable levels and was likely to fall back.

"Secondly, exchange rate movements over the course of the year were detrimental to income, in contrast to the prior year when they were favourable. The US dollar weakened against sterling from the start of the period through to the spring of 2018 before strengthening over the course of the summer months.

"This impacted the sterling receipts of income from companies that declare their income in dollars (AstraZeneca, BP, HSBC and Royal Dutch Shell) as most of this dividend income for the year was translated at less favourable exchange rates.

"These factors more than outweighed strong dividend growth from miner Rio Tinto, UK house builders Bellway and Taylor Wimpey, property companies Assura and Unite and insurance company Aviva."

The board agreed to extend the gearing facility of the trust, which comes to £20m a year, for a further year.

Alongside the results statement, the board of the trust announced that the fee paid by investors is being reduced. The previous fee was 0.75 per cent, the new fee will be 0.65 per cent on the first £200m of assets, and 0.55 per cent on the subsequent amounts.

david.thorpe@ft.com

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