Half-year Report

RNS Number : 1092Y

Schroder Oriental Income Fund Ltd

12 May 2016

 

12 May 2016

Half Year Report

Schroder Oriental Income Fund Limited (the "Company") hereby submits its Half Year Report for the six months ended 29 February 2016 as required by the UK Listing Authority's Disclosure and Transparency Rule 4.2. 

The Half Year Report is also being published in hard copy format and an electronic copy of that document will shortly be available to download from the Company's website http://www.schroderorientalincomefund.com. Please click on the following link to view the document:

The Company has submitted a pdf of the hard copy format of its Half Year Report to the National Storage Mechanism and it will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

Enquiries:

Louise Richard

Schroder Investment Management Limited                                    

Tel: [phone]

Half Year Report for the Six Months Ended 29 February 2016

Interim Management Report - Chairman's Statement

Performance

Asian markets were weak over the six months ended 29 February 2016, with the Reference Index, the MSCI AC Pacific ex Japan Index, producing a negative total return of 4.8% in local currency terms. Local currency strength turned this into a positive total return of 4.3% in sterling terms. Positive stock selection by our Manager helped the Company to outperform the Index, producing a positive net asset value total return of 8.6% for the period. The share price produced a total return of 4.5%.

Further details of investment performance, as well as portfolio activity, policy and outlook, may be found in the Manager's Review.

Dividends

The Company paid a first interim dividend for the year ending 31 August 2016 of 1.50 pence per share (2015: 1.50 pence per share) on 29 January 2016. The Directors have since declared the payment of a second interim dividend for the current financial year of 1.60 pence per share (2015: 1.50 pence per share), which will be paid on 20 May 2016 to shareholders on the register at the close of business on 13 May 2016.

Share capital

The Company's shares traded at an average premium to net asset value of 0.3% during the period and your Board continued to implement its active issuance policy. During the six months ended 29 February 2016, a total of 2,975,000 ordinary shares were re-issued from Treasury at a small premium to net asset value in order to provide liquidity to the market. Following these issues, the Company's share capital comprised 236,046,574 ordinary shares in issue and 895,000 shares held in Treasury. No further shares have been issued since the period end.

Gearing

The Company has in place a multi-currency revolving credit facility of £50 million. Gearing stood at 5.5% at the beginning of the period and had increased to 8.3% as at 29 February 2016. Average gearing during the period was 5.0%. The level of gearing continues to be monitored closely by the Board and managed as necessary.

Board refreshment

I reported in my year end statement that the Board had commenced the search for a new Director. I am pleased to confirm that Paul Meader joined the Board as a non-executive Director of the Company on 1 January 2016.

Mr Meader, 50, a Guernsey resident, is an independent director of investment companies, insurers and investment funds. Until the autumn of 2012 he was Head of Portfolio Management for Collins Stewart based in Guernsey, prior to which he was Chief Executive of Corazon Capital. He has 30 years' experience in financial markets in London, Dublin and Guernsey, holding senior positions in portfolio management and trading. Prior to joining Corazon he was Managing Director of Rothschild's Swiss private-banking subsidiary in Guernsey. Mr Meader is a Fellow of the Chartered Institute of Securities & Investments, a past Commissioner of the Guernsey Financial Services Commission and past Chairman of the Guernsey International Business Association. He is a graduate of Hertford College, Oxford.

Mr Meader also holds a number of directorships in other companies, several of which are publicly quoted, including investment companies Highbridge Multi-Strategy Fund Limited, ICG-Longbow Senior Secured UK Property Debt Investments Limited, JP Morgan Global Convertibles Income Fund Limited and Volta Finance Limited.

A resolution to appoint Mr Meader as a Director of the Company will be proposed at the Annual General Meeting to be held in December 2016.

In line with the Board's succession planning, one of the longer serving Directors will retire at this year's Annual General Meeting.

Outlook

The reality of Asia is that, abstracting from all the recent gyrations, stock markets are no higher than they were three years ago. UK shareholders have benefited from the rise in Asian currencies relative to sterling, and it is pleasing to report on further outperformance of the Reference Index, but the long-term logic of any Asian equity investment relies on the region solving some of the issues - for example deflation, China's economic transition and low growth - that have caused the markets to stall.

The Manager's Review offers comfort on the value in the portfolio's holdings. The continued growth of the

Company's revenue also supports our commitment to an income strategy, to give shareholders a different way of investing in Asia's future. It would be reassuring, however, to see greater stability in global markets, allowing the local markets to restart their upward trend.

Principal risks and uncertainties

The principal risks and uncertainties with the Company's business fall into the following categories: strategy and competitiveness risk; investment management risk; financial and currency risks; accounting, legal and regulatory risk; custodian and depositary risk; and service provider risk. A detailed explanation of the risks and uncertainties in each of these categories can be found on pages 18 to 20 of the Company's published Annual Report and Accounts for the year ended 31 August 2015. These risks and uncertainties have not materially changed during the six months ended 29 February 2016.

Going concern

Having assessed the principal risks and uncertainties, and the other matters discussed in connection with the viability statement as set out on page 20 of the published Annual Report and Accounts for the year ended 31 August 2015, the Directors consider it appropriate to adopt the going concern basis in preparing the accounts.

Related party transactions

Details of transactions with related parties, which under the Financial Conduct Authority's ("FCA") Listing Rules include the Manager, can be found on page 49 of the Company's published Annual Report and Accounts for the year ended 31 August 2015. There have been no material transactions with the Company's related parties during the six months ended 29 February 2016.

Directors' responsibility statement

The Directors confirm that, to the best of their knowledge, this set of condensed financial statements has been prepared in accordance with the Companies (Guernsey) Law 2008 and with International Financial Reporting Standards and that this Interim Management Report includes a fair review of the information required by 4.2.7R and 4.2.8R of the FCA's Disclosure and Transparency Rules.

Robert Sinclair

Chairman

11 May 2016

Interim Management Report - Manager's Review

The net asset value per share of the Company recorded a total return of 8.6% over the six months to end February 2016. Two interim dividends have been declared totalling 3.10 pence per share (3.00 pence per share last year).

The positive returns recorded by Asian markets over the first half of the Company's financial year are entirely thanks to the weakness of sterling. Underlying markets have been weak in local currency terms, particularly during the broader sell-off of global equities seen in January. This in itself partly reflected concerns surrounding the regional outlook, and more particularly a renewed bout of concern over the Chinese economy and currency. The offshore exchange rate for the Renminbi moved to a significant discount as investors speculated that a more dramatic adjustment in the currency was in the offing given dwindling foreign exchange reserves, capital flight, faltering exports and loosening in domestic monetary policy. Global concerns also played a part as growth has remained muted, commodity prices soft and adoption of Negative Interest Rate Policies (NIRP) in Europe and Japan did little to inspire confidence. 

A degree of stability in the closing months reflected a number of factors. Most critically, the US Federal Reserve signalled a softening in their monetary stance, partly in response to the challenges facing the global economy, and more specifically a number of emerging markets and commodity/energy exposed sectors. The US dollar weakened in sympathy, particularly against the yen despite (or possibly because of) the Bank of Japan's adoption of NIRP. Risk assets including Asian equities, along with commodity and energy prices, have responded positively to the perceived delay to tighter US monetary policy. Relaxation of dollar strength undoubtedly helped the People's Bank of China in its efforts to stabilise the currency. It has discouraged capital flight and facilitated policy loosening that has allowed credit to continue growing substantially in excess of nominal growth.

Currency moves have dominated market returns for the period as a whole, with five regional markets registering negative local currency returns, but offering a positive return in sterling. The Indonesian rupiah, New Zealand dollar and the Malaysian ringgit have been among the strongest performers. The New Zealand economy continued to perform well and attract investment flows from Asia, while the rupiah and ringgit bounced from what had become arguably oversold levels, helped in the former's case by signs of renewed political will to pursue economic reform and address infrastructure bottlenecks. Chinese equities yielded disappointing returns amid slowing growth, falling producer prices, currency pressures, and a raft of corporate developments raising significant questions over corporate governance.

Positioning and performance

The Company's total return was somewhat above the Reference Index return of 4.3% over the period under review. The main factors have been stock selection in Hong Kong, Singapore and Korea, with lesser contributions from Australia, Indonesia and Taiwan. The only market of significant shortfall in relative performance was Thailand where regulatory uncertainty and chaotic spectrum auctions impacted our telecom holdings. Within the telecom sector more broadly, strong performance in other markets, notably Hong Kong, more than offset this, while selection in financials, industrials, and consumer staples also added value. Country allocation was a small positive factor due to the underweighting of China, partly offset by the underweights in Korea and nil weight in Malaysia.

The main country exposures remain Australia, Hong Kong, Singapore and Taiwan. Within this group, we added to Australia and Hong Kong with marginal reductions in Taiwan and Singapore exposure. Direct exposure to China and Korea remains constrained by the paucity of solid dividend paying stock opportunities. Thailand remains our principal overweighting in emerging ASEAN. In terms of sector exposures, we reduced information technology exposure (mainly in Taiwan) and added to telecoms and financials. Effective gearing rose from 5.5% to 8.3%.

Investment outlook

Equity markets since the end of the half year have reflected upbeat sentiment, in direct contrast to the mood

prevailing in January. Consensus thinking appears to incorporate a list of positives, although whether they are internally consistent is open to question. One strand is the view that the Federal Reserve has become notably less hawkish on interest rates, due to the previous tightening impact of the stronger dollar and the (probably related) fact that there are fragilities surrounding the global economic picture, most notably in a number of emerging markets.

However, almost in the same breath, the optimists cite signs of a stabilisation in Chinese growth (amid more credit expansion, a stabilisation in foreign exchange reserves and a pick up in residential real estate activity), the easier credit conditions engendered by the weaker dollar, and the recovery in manufacturing sentiment indicators seen across most developed markets and many emerging markets.

There are important internal inconsistencies in the above. To hope for both a more dovish Federal Reserve and accelerating global growth is probably wishful thinking, unless, of course non-US economic activity can decouple from a slowing US. We view this as a low probability event. We can accept that the recent equity recovery has been underpinned by the reduction in a number of "tail risks" but still suspect that the picture remains of equity markets trading in a volatile but essentially side-ways pattern for some time yet. This reflects the conflicting pressures of debt constraints to developed market growth, fading confidence in the policies of central banks outside the United States, normalisation of rates by the Federal Reserve, and equity valuations globally that are neither unduly cheap nor particularly expensive.

This short-term lack of a positive inflection point in global activity coincides with the longer-term framework within which we are operating; that is continued low inflation, debt constraints to growth in the developed world, and a more secular slowdown in the trend of emerging market expansion. The latter is exacerbated by the unwinding of the over investment and credit expansion post the Global Financial Crisis, for which China remains the poster child.

Valuations around the region are, at least on the surface, cheap relative to history and compared to other markets. However, we see a challenging environment for corporate profits amid continued competitive pressures and beggar my neighbour monetary policies from major trading partners/competitors. China remains a key source of event risk.

The current bout of investor complacency fails to adequately reflect the fact that there is a renewed surge in credit growth which, while supporting near-term activity, is raising the long-term risks of a more severe slowdown, a surge in bad debts, and loss of control of the currency. The Chinese authorities still have the tools to handle a transition to a new growth model, but the more it is delayed the more difficult the adjustment will become.

Needless to say, we believe this remains an environment where our focus on visible and sustainable growth, sound balance sheets and good corporate management should stand the Company's portfolio in good stead. Capital discipline remains key as companies with stronger balance sheets will be better placed to exploit future investment opportunities. We also continue to see a good number of individual companies in the region reflecting balance sheet strength through positive dividend announcements, accompanied in some cases by share buybacks. We continue to be conscious of the need to maintain a balance between delivering near-term dividends but not overly sacrificing the scope for future growth, which is reflected in the broad sectoral exposure of the Company's portfolio.

Given the low underlying beta on the portfolio, we maintain a moderate level of gearing, with the major exposures in more mature markets such as Hong Kong, Australia, Taiwan and Singapore.

Schroder Unit Trusts Limited

11 May 2016

Statement of Comprehensive Income

		(Unaudited) for the six months ended 29 February 2016			(Unaudited) for the six months ended 28 February 2015			(Audited) for the year ended 31 August 2015
		Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair value through profit or loss		-	27,178	27,178	-	16,994	16,994	-	(46,719)	(46,719)
Net foreign currency (losses)/gains		-	(2,955)	(2,955)	-	4,025	4,025	-	5,968	5,968
Income from investments		8,562	-	8,562	8,480	-	8,480	23,002	-	23,002
Other income		4	-	4	7	-	7	9	-	9
Total income/(loss)		8,566	24,223	32,789	8,487	21,019	29,506	23,011	(40,751)	(17,740)
Management fee		(472)	(1,101)	(1,573)	(487)	(1,135)	(1,622)	(971)	(2,265)	(3,236)
Other administrative expenses		(322)	(2)	(324)	(317)	(3)	(320)	(620)	(5)	(625)
Profit/(loss) before finance costs and taxation		7,772	23,120	30,892	7,683	19,881	27,564	21,420	(43,021)	(21,601)
Finance costs		(78)	(183)	(261)	(185)	(431)	(616)	(311)	(726)	(1,037)
Profit/(loss) before taxation		7,694	22,937	30,631	7,498	19,450	26,948	21,109	(43,747)	(22,638)
Taxation (note 5)		(470)	-	(470)	(446)	(125)	(571)	(1,449)	-	(1,449)
Net profit/(loss) and total comprehensive income		7,224	22,937	30,161	7,052	19,325	26,377	19,660	(43,747)	(24,087)
Earnings/(loss) per share (note 6)		3.07p	9.75p	12.82p	3.17p	8.68p	11.85p	8.73p	(19.43)p	(10.70)p

The "Total" column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with IFRS. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period.

Statement of Changes in Equity

for the six months ended 29 February 2016 (unaudited)

	Share capital £'000	Treasury share reserve £'000	Capital redemption reserve £'000	Special reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
At 31 August 2015	148,880	(6,286)	39	150,374	95,104	21,979	410,090
Reissue of shares from Treasury	-	5,379	-	-	-	-	5,379
Net profit	-	-	-	-	22,937	7,224	30,161
Dividends paid in the period (note 4)	-	-	-	-	-	(11,558)	(11,558)
At 29 February 2016	148,880	(907)	39	150,374	118,041	17,645	434,072

for the six months ended 28 February 2015 (unaudited)

	Share capital £'000	Treasury share reserve £'000	Capital redemption reserve £'000	Special reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
At 31 August 2014	148,880	(29,447)	39	150,374	138,851	19,759	428,456
Reissue of shares from Treasury	-	2,746	-	-	-	-	2,746
Net profit	-	-	-	-	19,325	7,052	26,377
Dividends paid in the period (note 4)	-	-	-	-	-	(10,362)	(10,362)
At 28 February 2015	148,880	(26,701)	39	150,374	158,176	16,449	447,217

for the year ended 31 August 2015 (audited)

	Share capital £'000	Treasury share reserve £'000	Capital redemption reserve £'000	Special reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
At 31 August 2014	148,880	(29,447)	39	150,374	138,851	19,759	428,456
Reissue of shares from Treasury	-	23,161	-	-	-	-	23,161
Net (loss)/profit	-	-	-	-	(43,747)	19,660	(24,087)
Dividends paid in the year (note 4)	-	-	-	-	-	(17,440)	(17,440)
At 31 August 2015	148,880	(6,286)	39	150,374	95,104	21,979	410,090

Balance Sheet

at 29 February 2016 (unaudited)

	(Unaudited) 29 February 2016 £'000	(Unaudited) 28 February 2015 £'000	(Audited) 31 August 2015 £'000
Non current assets
Investments at fair value through profit or loss	470,628	474,273	431,088
Current assets
Receivables	3,923	1,456	3,090
Cash and cash equivalents	9,835	5,879	18,259
	13,758	7,335	21,349
Total assets	484,386	481,608	452,437
Current liabilities
Bank loans	(45,806)	(33,277)	(40,920)
Payables	(4,508)	(1,114)	(1,427)
	(50,314)	(34,391)	(42,347)
Net assets	434,072	447,217	410,090
Equity attributable to equity holders
Share capital (note 7)	148,880	148,880	148,880
Treasury share reserve	(907)	(26,701)	(6,286)
Capital redemption reserve	39	39	39
Special reserve	150,374	150,374	150,374
Capital reserves	118,042	158,176	95,104
Revenue reserve	17,644	16,449	21,979
Total equity shareholders' funds	434,072	447,217	410,090
Net asset value per share (note 8)	183.89p	200.62p	175.95p

Registered in Guernsey

Company Registration number: 43298

Cash Flow Statement

for the six months ended 29 February 2016 (unaudited)

	(Unaudited) For the six months ended 29 February 2016 £'000	(Unaudited) For the six months ended  28 February 2015 £'000	(Audited) For the year ended 31 August 2015 £'000
Operating activities
Profit/(loss) before taxation	30,631	26,948	(22,638)
Add back interest	261	616	1,037
Add exchange loss/(gains) on foreign currency bank loan	4,508	(3,903)	(5,807)
Add back (gains)/losses on investments at fair value through profit or loss	(27,178)	(16,994)	46,719
Net purchases of investments at fair value through profit or loss	(12,205)	(5,652)	(25,666)
Decrease/(increase) in receivables	1,369	1,139	(631)
Increase/(decrease) in payables	752	(2,543)	(2,564)
Overseas taxation suffered	(475)	(573)	(1,467)
Net cash outflow from operating activities before interest	(2,337)	(962)	(11,017)
Interest paid	(286)	(665)	(1,114)
Net cash outflow from operating activities	(2,623)	(1,627)	(12,131)
Financing activities
Net bank loans drawndown/(repaid)	378	(5,453)	4,094
Reissue of shares from Treasury	5,379	2,746	23,161
Dividends paid	(11,558)	(10,362)	(17,440)
Net cash (outflow)/inflow from financing activities	(5,801)	(13,069)	9,815
Decrease in cash and cash equivalents	(8,424)	(14,696)	(2,316)
Cash and cash equivalents at the start of the period	18,259	20,575	20,575
Cash and cash equivalents at the end of the period	9,835	5,879	18,259

Notes to the Accounts

1. Principal activity

The Company carries on business as a Guernsey closed-ended investment company.

2. Financial statements

The financial information for the six months ended 29 February 2016 and 28 February 2015 has not been audited or reviewed by the Company's Auditor. These financial statements do not include all of the information required to be included in annual financial statements and should be read in conjunction with the financial statements of the Company for the year ended 31 August 2015.

3. Accounting policies

The accounts have been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" and the accounting policies set out in the statutory accounts of the Company for the year ended 31 August 2015. Where presentational guidance set out in the Statement of Recommended Practice ("the SORP") for investment trusts issued by the Association of Investment Companies in November 2014 is consistent with the requirements of International Financial Reporting Standards, the accounts have been prepared on a basis compliant with the recommendations of the SORP.

4. Dividends paid

	(Unaudited) Six months ended 29 February 2016 £'000	(Unaudited) Six months ended 28 February 2015 £'000	(Audited) Year ended 31 August 2015 £'000
2015 fourth interim dividend of 3.40 (2014: 3.15p)	8,017	7,018	7,018
First interim dividend of 1.50p (2015: 1.50p)	3,541	3,344	3,344
Second interim dividend of 1.50p	-	-	3,353
Third interim dividend of 1.60p	-	-	3,725
	11,558	10,362	17,440

A second interim dividend of 1.60p (2015: 1.50p) per share, amounting to £3,777,000 (2015: £3,353,000) has been declared payable in respect of the year ending 31 August 2016.

5. Taxation

The Company has been granted an exemption from Guernsey taxation, under the Income Tax (Exempt Bodies) Guernsey Ordinance for which it is charged an annual exemption fee of £1,200 (2015: same). The tax charge comprises irrecoverable overseas tax deducted from dividends receivable.

6. Earnings/(loss) per share

	(Unaudited) Six months ended 29 February 2016	(Unaudited) Six months ended 28 February 2015	(Audited) Year ended 31 August 2015
Net revenue profit (£'000)	7,224	7,052	19,660
Net capital profit/(loss) (£'000)	22,937	19,325	(43,747)
Net total profit/(loss) (£'000)	30,161	26,377	(24,087)
Weighted average number of shares in issue during the period	235,280,228	222,513,535	225,115,369
Revenue earnings per share	3.07p	3.17p	8.73p
Capital earnings/(loss) per share	9.75p	8.68p	(19.43)p
Total earnings/(loss) per share	12.82p	11.85p	(10.70)p

7. Share capital

Changes in the number of shares in issue during the period were as follows:

	(Unaudited) Six months ended 29 February 2016	(Unaudited) Six months ended 28 February 2015	(Audited) Year ended 31 August 2015
Ordinary shares of 1p each, allotted, called-up and fully paid Opening balance of shares in issue, excluding shares held in Treasury	233,071,574	221,491,574	221,491,574
Reissue of shares from Treasury	2,975,000	1,425,000	11,580,000
Closing balance of shares in issue, excluding shares held in Treasury	236,046,574	222,916,574	233,071,574
Closing balance of shares held in Treasury	895,000	14,025,000	3,870,000
Closing balance of shares in issue, including shares held in Treasury	236,941,574	236,941,574	236,941,574

8. Net asset value per share

	(Unaudited) 29 February 2016	(Unaudited) 28 February 2015	(Audited) 31 August 2015
Net assets attributable to shareholders (£'000)	434,072	447,217	410,090
Shares in issue at the period end, excluding shares held in Treasury	236,046,574	222,916,574	233,071,574
Net asset value per share	183.89p	200.62p	175.95p

 

END

 

 

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