Buy income at a discount via Schroder Oriental Income

Looking beyond the UK, there are a far greater number of equity income sources, and this also achieves geographic diversification.

Asia might not seem an obvious investment destination given the current market turbulence, but equity income funds focused on this region have been a reliable source of income. Because of their attractive yields, Asian equity income investment trusts have often traded at premiums to net asset value (NAV), but as a result of the turbulence and poor sentiment towards Asia these have fallen from a premium or seen their discounts widening.

IC Top 100 Fund Schroder Oriental Income (SOI), for example, is on a discount to NAV of about 2.5 per cent, compared with its 12-month average level of about par. This trust also often trades at a premium to NAV. Schroder Oriental Income offers a yield of about 4.7 per cent and in its last financial year paid total dividends per share of 8p, an increase of 4.6 per cent on the 7.65p it paid out in its previous financial year.

The trust also has a strong performance record, beating MSCI AC Asia Ex Japan Index and the Association of Investment Companies (AIC) Asia Pacific - Excluding Japan sector average over one, three and five years - albeit with a negative return over one year. It also beats the other two Asian income investment trusts, Aberdeen Asian Income (AAIF) and Henderson Far East Income (HFEL), over these periods - and by quite a margin over five years.

When investor sentiment towards Asia improves Schroder Oriental Income might move back to a premium due to its attractive income stream.

"While on any meaningful discount this trust is attractive as the widening reflects sentiment on the region," says Ewan Lovett-Turner, director, investment companies research at Numis Securities. "It provides exposure to Asian domestic growth, and offers an attractive option for investors looking to diversify their sources of income as its dividend growth has been strong. The trust is managed by Matthew Dobbs, a highly experienced fund manager, who has a strong long-term track record."

And its discount is unlikely to widen much further as the board aims to keep it within 5 per cent over the longer term.

Schroder Oriental Income only has a small exposure to mainland China because other areas, such as Hong Kong, have more dividend-paying companies. Market falls in Hong Kong have not been as severe as in mainland China, and the trust has a bias towards quality companies with strong balance sheets, cash flows and corporate governance, which helped it during the Asian market volatility last year.

Schroder Oriental Income also has a reasonable ongoing charge of 0.87 per cent.

Market turbulence in China and Asia could continue for a considerable amount of time, and there is no guarantee that the trust's discount will come in or that it will return to making strong positive returns. Even if investor sentiment on Asia does improve, this could take some time.

But if you have a long time horizon, a high risk appetite and can stomach volatility in the short term, Schroder Oriental Income still seems like a good way to diversify your income. And if you want a reliable income and the potential for strong long-term total returns at a discount, now might be a good time to buy.

Source: Morningstar, *Schroders

Performance

Source: Morningstar as at the 8 January 2016

Top 10 holdings as at 30 November 2016 (%)

Top 10 geographic exposures (%)