Diversify into Asia with Schroder Oriental Income

Asia Pacific ex Japan is a region many advisers and analysts think could do well this year, as we recently reported in our Fund Tips for 2015.

A number of countries in the region could benefit from the fall in oil prices. "Price-earnings ratios are below their long-term average, and lower than they are in Europe and US, suggesting that now is an attractive entry point to the region," says Sam Murphy, analyst at Numis Securities. "What's more, healthy dividend growth is expected to continue, supported by earnings growth, as well as the potential for increasing payout ratios."

Schroder Oriental Income (SOI), which we last tipped in August 2013 for reasons including its strong track record and experienced manager (Read the tip) is a good way into Asian income.

The trust has beaten its benchmark, the MSCI AC Pacific ex-Japan Index, over one, three and five years, as well as its two most similar sector peers, IC Top 100 Fund Aberdeen Asian Income (AAIF) and Henderson Far East Income (HFEL).

Research by Numis also shows that Schroder Oriental Income has beaten a number of open-ended Asian income funds in net asset value (NAV) terms over one, three and five years.

Schroder Oriental Income has an attractive yield of 3.84 per cent and its dividend growth has been strong at 7.5 per cent a year since launch in 2005. "Revenue reserves of 5.7p (equivalent to 0.75 years dividend), suggest Schroder Oriental Income's dividend is secure," adds Mr Murphy.

The trust provides exposure to Asian domestic growth and its manager, Matthew Dobbs, who has managed the trust since launch, focuses on quality companies with strong balance sheets, sustainable earnings, cash flows and corporate governance - bought at attractive valuations.

Some investors are concerned about the outlook for China, but this trust does not have a great deal of exposure to the country, focusing instead on Australia, Hong Kong and Singapore. It is also overweight Thailand relative to its benchmark because Mr Dobbs finds companies with attractive yields there and thinks the country should benefit from a more stable political environment following last year's military coup.

Thailand, Singapore and Hong Kong are among the largest net importers of oil in Asia so could benefit from the lower price, although this is not so good for producing nations such as Australia and Malaysia.

Schroder Oriental Income is at a slight discount to NAV at time of writing, in contrast to a number of trusts with attractive yields which trade at premiums, in some cases very high ones. Schroder Oriental Income has at times traded at a slight premium to NAV over the past few years, although tends to trade at around par.

The trust has a performance fee, but this is capped at 1 per cent of net assets - and even with this the ongoing charge still only adds up to 1.34 per cent.

So with a strong track record, attractive yield and exposure to areas with good prospects, this trust looks like a good option for income and growth. Buy.

Source: Morningstar and *Schroders as at 26 January 2015

Performance

Source: Morningstar as at 23 January 2015

Top 10 holdings as at 31 December 2014

Geographic breakdown