Annual Financial Report

RNS Number : 3930S

Schroder Oriental Income Fund Ltd

06 November 2013

 



6 November 2013

ANNUAL REPORT AND ACCOUNTS

Schroder Oriental Income Fund Limited (the "Company") hereby submits its annual financial report for the year ended 31 August 2013 as required by the UK Listing Authority's Disclosure and Transparency Rule 4.1. 

The Company's Annual Report and Accounts for the year ended 31 August 2013 are also being published in hard copy format and an electronic copy 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:

http://www.rns-pdf.londonstockexchange.com/rns/3930S_-2013-11-6.pdf

The Company has submitted its Annual Report and Accounts to the National Storage Mechanism and it will shortly be available for inspection at www.hemscott.com/nsm.do.

Enquiries:

John Spedding

Schroder Investment Management Limited                Tel: [phone]

Schroder Oriental Income Fund Limited

Chairman's Statement

Performance

I am pleased to report that the Company's net asset value for the year ended 31 August 2013 produced a total return of 15.6% (2012: 12.3%) and the share price a total return of 13.0% (2012: 12.5%). These compare favourably with the reference index, the MSCI All Countries Pacific ex Japan Index, which produced a return of 11.3% for the period under review (2012: 1.9%).

The Investment Manager's Review provides a more detailed description of performance, market background and investment outlook.

Dividends

Revenue earnings per share for the year increased by 17.5% to 8.74p per share compared with 7.44p for the previous year. This is notwithstanding the impact on income from the substantial increase in shares in issue towards the end of the financial year, outlined below.

Earlier in the year, the Board announced a change in dividend policy with the effect that future dividends will be paid four times each year. A total of 4.45p per share has been paid in respect of the year ended 31 August 2013 and the Board has now declared a third interim dividend of 3.0p per share for the year. This takes total dividends per share for the year to 7.45p, an increase of 9.6% on total dividends of 6.80p per share paid last year. The third interim dividend will be paid on 29 November 2013 to shareholders on the register on 15 November 2013.

Issue of Shares

Demand for the Company's shares has continued to be strong during the year under review and the asset class has remained attractive for investors. The Board continued to issue shares at a slight premium to asset value in order to provide liquidity to investors and a total of 14,950,000 Ordinary shares were issued during the year (2012: 9,485,000).

Furthermore, in June 2013, the Company successfully completed a "C" Share issue and a total of 50,853,707 "C" shares were issued, raising a total of £50.8 million. The "C" shares were subsequently converted into 27,227,074 Ordinary shares on 1 July 2013.

A further 700,000 shares have been issued since the end of the year.

Share Issuance and Buy-Back Authorities

The Board is seeking to renew the existing authorities to pre-emptively issue and to buy-back shares in the Company and appropriate resolutions are included in the Notice of the Annual General Meeting. The Board believes that these authorities are valuable tools in the continuing management of the share price volatility relative to net asset value per share.

Gearing

During the year under review, the Company renewed the revolving £25 million multi-currency credit facility with Scotiabank Europe PLC, and subsequently increased it to £50 million as net assets had substantially increased. Gearing stood at 2.7% at the beginning of the year and had decreased to 2.1% at 31 August 2013. The level of gearing continues to be monitored closely by the Board and managed as necessary.

Outlook

While it is satisfying to see another double-digit rise in the NAV last year, Asian stock markets have moved out of favour since the middle of the year. The Manager's Review discusses the markets' concerns, for example about Chinese growth and US monetary policy. Your Board recognises the likelihood of further market volatility, but continues to believe in the region's ability to grow faster than the West and for this to convert into opportunities to fund higher dividends.

The Company's dividend per share this year will be approximately 50% higher than in 2007, the year before the global financial crisis started. The Board hopes to be in a position to again grow this dividend materially over the next six years.

Annual General Meeting

The Annual General Meeting will be held in Guernsey at 12.00 noon on Wednesday 4 December 2013 and shareholders are invited to attend.

Robert Sinclair

Chairman

4 November 2013

Investment Manager's Review

The Net Asset Value per share of the Company recorded a total return of 15.6% over the twelve-month period to end August 2013. A third interim dividend of 3.0p has been declared, giving a total dividend of 7.45p, a 9.6% increase on last year.

Following the strong showing in the first half of the Company's financial year, the second half witnessed disappointing returns. For the period as a whole, regional markets offered a return of 11.3% in sterling terms, having been 21.7% up in the first six months. The correction in the middle of the year reflected a number of factors including the anticipation of "tapering" of asset purchases by the US Federal Reserve, a stronger dollar and sizeable investor redemptions from emerging market equities and bonds. These factors inevitably impacted the Asian regional stock markets given the importance of global investor flows, and the monetary linkages between the regional currencies and the US dollar which tends to be a safe haven during periods of uncertainty in the region.

Worries about tighter liquidity conditions in Asia coincided with downward revisions in regional growth forecasts and deteriorating leading indicators. This happened despite the stabilization in the developed economies, and reflected slowing domestic confidence and continued caution in the corporate sector. The exception has been China where a relaxation in credit and selective infrastructure spending has stabilized growth, but at the expense of further increases in debt.

The shift in investor sentiment post Bernanke's May tapering statement was most dramatic in emerging ASEAN markets. These had seen amongst the greatest declines in borrowing costs since the global financial crisis of 2008, and had been favourite destinations for foreign bond investors chasing returns in a low rate environment. Consequently, liquidation of exposure has hit the regional markets more than proportionately, and all except the Philippines registered sub par returns over the year, with Indonesia down almost 10% in sterling terms due to the weakness in the local currency, the rupiah.

Another notable feature of the year was the weakness in the Australian dollar, which fell 12% against sterling, a reaction to sharply lower commodity prices, a slowing economy and looser interest rate policy by the Reserve Bank of Australia undermining the interest rate support for the currency. The market still managed broadly to match the benchmark returns given a looser monetary backdrop and translation benefits for companies with international operations.

Fund Positioning and Performance

The Company outperformed over the year, with the main contributions coming from stock selection which was positive in every benchmark country. The major areas of added value were Korea, Singapore and Thailand, alongside smaller contributions from Indonesia and China. In terms of sectors, the big contributors were materials, consumer discretionary and telecoms. Country allocation was of little overall impact, although being underweight China detracted from relative performance.

The main country exposures in the Company's portfolio have remained Hong Kong, Taiwan, Australia and Singapore, although we made small reductions in the latter two while adding to China. However, we remain underweight the China market, along with Korea, where dividend yields remain scant. The only significant emerging ASEAN exposure has been Thailand. In sector terms, key exposures are financials (although we reduced the real estate exposure during the year), information technology, telecoms, materials and industrials.

Investment Outlook

There are some big questions facing Asia, as is usual in the wake of a significant correction in the regional markets. There are doubts surrounding growth and some of the regional currencies, but the most significant is the pace and extent of a US led tightening in credit conditions. A stronger US dollar and perception of tighter money are never good for Asian asset values, and it is difficult to paint a positive near-term picture. The concern over tapering may have been overdone in the short-term, but to an extent the genie is out of the bottle and will not be easily put back in. We are in an uneasy market phase where the best of liquidity is behind us, but earnings growth support is unclear. However, one should not lose sight of the fact that if higher US treasury yields are a harbinger of economic spring for the global economy, then plenty of Asian companies and markets stand to benefit.

While it is tempting to draw parallels with the Asian crisis of 1997/98, this ignores the very different fundamentals of the region. Most economies are in much healthier financial condition in terms of positive current accounts and trade balances, high foreign exchange reserves, lower external debt and strong government and corporate balance sheets. Also, equity markets do not look expensive in terms of historical valuations and there are plenty of attractive and well-covered dividends available. As the markets have corrected, we are seeing an increasing number of stocks at attractive discounts to analysts' fair value, while still conscious of the potential overhang from "hotter" money still sitting in the region.

Amid all the recent volatility, China has perhaps benefited from winning in the "least ugly" contest this year. A controlled capital account undoubtedly helps (at least in the short-term) during a time of dwindling global liquidity. Meanwhile, those looking for some kind of economic restructuring have drawn some modest comfort from recent pronouncements from the Chinese leadership on the need to promote consumption and services as key growth drivers. Those looking for growth have also responded to recent moves to institute some limited stimulus moves and a recovery in leading indicators. We remain concerned over the composition of growth, and still struggle to find Chinese stocks which are attractive from a bottom-up point of view. We remain underweight China and, while looking to add to strongly financed companies with attractive and expanding dividend capacity, we find more opportunities elsewhere in the region.

Schroder Investment Management Limited

4 November 2013

Principal Risks and Uncertainties

The Board has adopted a matrix of key risks which affect its business and a robust framework of internal control which is designed to monitor those risks and to provide a monitoring system to enable the Directors to mitigate these risks as far as possible and which assist in determining the nature and extent of the significant risks the Board is willing to take in achieving its strategic objectives. A full analysis of the Directors' system of internal control and its monitoring system is set out in the Corporate Governance Statement. The principal risks are considered to be as follows:

Financial Risk

The Company is exposed to the effect of market fluctuations due to the nature of its business. A significant fall in regional equity markets would have an adverse impact on the value of the Company's underlying investments. The Board considers the portfolio's risk profile at each Board meeting and discusses with the Manager appropriate strategies to mitigate any negative impact of substantial changes in markets.

The Company invests predominantly in underlying assets which are denominated in currencies other than Sterling and therefore has an exposure to changes in the exchange rates between Sterling and these currencies which have the potential to have a significant effect on returns. While the Directors consider the Company's hedging policy on a regular basis, the Company did not engage in currency hedging to reduce the risk of currency fluctuations and the volatility of returns which might result from such currency exposure during the current or prior year.

The Company utilises a credit facility, currently in the amount of £50 million, which increases the funds available for investment through borrowing ("gearing"). Therefore, in falling markets, any reduction in the net asset value and, by implication, the consequent share price movement is amplified by the gearing. The Directors keep the Company's gearing under constant review and impose strict restrictions on borrowings to mitigate this risk. The Company's gearing continues to operate within pre-agreed limits and will not exceed 25%.

A full analysis of the financial risks facing the Company is set out in note 19 on pages 35 to 39 of the 2013 Annual Report.

Strategic Risk

Over time, investment vehicles and asset classes can fall from favour with investors, and/or may fail to meet their investment objectives. This may be reflected in a wide discount of the share price to underlying asset value. Directors periodically review whether the Company's investment remit remains appropriate and they continually monitor the success of the Company in meeting its stated objectives. Further details may be found under the sections on "Investment Performance" and "Premium/Discount Management" above.

Accounting, Legal and Regulatory Risk

Breaches of the UK Listing Rules, Companies (Guernsey) Law 2008 or other regulations with which the Company is required to comply, could lead to a number of detrimental outcomes and damage the Company's reputation. Breaches of controls by service providers, including the Manager, could also lead to reputational damage or loss.

The Board's system of internal control seeks to mitigate the potential impact of these risks and it also relies on its advisers to assist it in ensuring continued compliance.

Statement of Directors' Responsibilities

The Directors are responsible for preparing the financial statements in accordance with applicable Guernsey law and generally accepted accounting principles.

Guernsey Company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors should:

·      select suitable accounting policies and then apply them consistently; and

·      make judgments and estimates that are reasonable and prudent.

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies (Guernsey) Law, 2008 (as amended). They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Each of the Directors, whose names and functions are listed within the Directors and Advisors section on the inside front cover, confirms that, to the best of their knowledge:

·      the financial statements, which have been prepared in accordance with International Financial Reporting Standards as adopted in the EU and with the Companies (Guernsey) Law, 2008, give a true and fair view of the assets, liabilities, financial position and the net return of the Company; and

·      the Report of the Directors includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

The Directors are responsible for the maintenance and integrity of the Company's website. Visitors to the website need to be aware that legislation in Guernsey governing the preparation and dissemination of the Annual Report and Accounts may differ from legislation in their jurisdiction.

Going Concern

The Directors believe that, having considered the Company's investment objective (see inside front cover), risk management policies (see note 19 to the accounts on pages 35 to 39 of the 2013 Annual Report), capital management policies and procedures (see note 20 to the accounts on page 39 of the 2013 Annual Report), expenditure projections, and the fact that the Company's assets comprise readily realisable securities which can be sold to meet funding requirements if necessary, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue the operational existence for the foreseeable future. For these reasons, they consider that there is reasonable evidence to continue to adopt the going concern basis in preparing the final statements.

Statement of Comprehensive Income

for the year ended 31 August 2013

			2013			2012
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments at fair value through profit or loss		-	28,283	28,283	-	23,242	23,242
Net foreign currency gains/(losses)		-	2,786	2,786	-	(308)	(308)
Income from investments		19,878	-	19,878	15,044	200	15,244
Other income		33	-	33	41	-	41
Total income		19,911	31,069	50,980	15,085	23,134	38,219
Management fee		(815)	(1,902)	(2,717)	(599)	(1,397)	(1,996)
Performance fee		-	(2,405)	(2,405)	-	(1,583)	(1,583)
Other administrative expenses		(614)	(5)	(619)	(476)	(7)	(483)
Profit before finance costs and taxation		18,482	26,757	45,239	14,010	20,147	34,157
Finance costs		(325)	(1,416)	(1,741)	(224)	(522)	(746)
Profit before taxation		18,157	25,341	43,498	13,786	19,625	33,411
Taxation		(1,586)	-	(1,586)	(1,052)	-	(1,052)
Net profit and total comprehensive income		16,571	25,341	41,912	12,734	19,625	32,359
Earnings per share		8.74p	13.36p	22.10p	7.44p	11.47p	18.91p

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 year.

Statement of Changes in Equity

for the year ended 31 August 2013

		Treasury	Capital
	Share	share	redemption	Special	Capital	Revenue
	capital	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 August 2011	19,918	-	39	150,374	68,016	15,723	254,070
Issue of Ordinary shares	14,791	-	-	-	-	-	14,791
Net profit	-	-	-	-	19,625	12,734	32,359
Dividends paid in the year	-	-	-	-	-	(10,896)	(10,896)
At 31 August 2012	34,709	-	39	150,374	87,641	17,561	290,324
Issue of shares	28,314	-	-	-	-	-	28,314
Issue of Ordinary shares on conversion of "C" shares	49,765	-	-	-	882	-	50,647
Issue and repurchase of Ordinary shares into Treasury	36,092	(36,092)	-	-	-	-	-
Reissue of Ordinary shares from Treasury	-	468	-	-	-	-	468
Net profit	-	-	-	-	25,341	16,571	41,912
Dividends paid in the year		-	-	-	-	(15,739)	(15,739)
At 31 August 2013	148,880	(35,624)	39	150,374	113,864	18,393	395,926

Balance Sheet

at 31 August 2013

		2013	2012
		£'000	£'000
Non current assets
Investments at fair value through profit or loss		405,696	299,377
Current assets
Receivables		1,674	1,160
Cash and cash equivalents		18,168	15,893
		19,842	17,053
Total assets		425,538	316,430
Current liabilities
Payables		(29,612)	(26,106)
Net assets		395,926	290,324
Equity attributable to equity holders
Share capital		148,880	34,709
Treasury share reserve		(35,624)	-
Capital redemption reserve		39	39
Special reserve		150,374	150,374
Capital reserves		113,864	87,641
Revenue reserve		18,393	17,561
Total equity shareholders' funds		395,926	290,324
Net asset value per share		181.46p	165.18p

Cash Flow Statement

for the year ended 31 August 2013

	2013	2012
	£'000	£'000
Operating activities
Profit before finance costs and taxation	45,239	34,157
Add back exchange (gains)/losses on foreign currency bank loan	(3,042)	444
Add back gains on investments at fair value through profit or loss	(28,283)	(23,242)
Net purchases of investments at fair value through profit or loss	(78,043)	(14,818)
(Increase)/decrease in receivables	(478)	610
Increase/(decrease) in payables	1,044	(578)
Overseas taxation paid	(1,615)	(1,233)
Net cash outflow from operating activities before interest	(65,178)	(4,660)
Interest paid	(1,267)	(562)
Finance costs paid relating to "C" shares	(877)	-
Net cash outflow from operating activities	(67,322)	(5,222)
Financing activities
Net bank loans drawn down	5,700	3,250
Issue of Ordinary shares	64,406	14,791
Gross proceeds of "C" share issue	50,854	-
Repurchase of Ordinary shares into Treasury	(36,092)	-
Reissue of Ordinary shares from Treasury	468	-
Dividends paid	(15,739)	(10,896)
Net cash inflow from financing activities	69,597	7,145
Increase in cash and cash equivalents	2,275	1,923
Cash and cash equivalents at the start of the year	15,893	13,970
Cash and cash equivalents at the end of the year	18,168	15,893

Notes to the Accounts

1. Accounting Policies

The accounts have been prepared in accordance with the Companies (Guernsey) Law 2008 and International Financial Reporting Standards (IFRS), which comprise standards and interpretations approved by the International Accounting Standards Board ("IASB"), together with interpretations of the International Accounting Standards and Standing Interpretations Committee approved by the International Accounting Standards Committee ("IASC"), that remain in effect and to the extent that they have been adopted by the European Union.

Where consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with presentational guidance set out in the statement of recommended practice for investment trust companies ("the SORP") issued by the Association of Investment Companies in January 2009.

The policies applied in these accounts are consistent with those applied in the preceding year.

The Company's share capital is denominated in Sterling and this is the currency in which its shareholders operate and expenses are generally paid. The Directors have therefore determined that Sterling is the functional currency and the currency in which the accounts are presented.

The accounts have been prepared on the going concern basis. The disclosures on going concern in the Directors' Report on page 17 of the 2013 Annual Report form part of these financial statements. The principal accounting policies adopted are set out below.

2. Income

	2013	2012
	£'000	£'000
Income from investments:
Overseas dividends	19,875	15,044
Overseas stock dividends	3	-
	19,878	15,044
Other income:
Deposit interest	33	41
Total income	19,911	15,085

3. Management and performance fee

		2013			2012
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Management fee	815	1,902	2,717	599	1,397	1,996
Performance fee	-	2,405	2,405	-	1,583	1,583
	815	4,307	5,122	599	2,980	3,579

The basis for calculating the investment management fee and performance fee is set out in the Report of the Directors on page 16 of the 2013 Annual Report.

4. Earnings per share

	2013	2012
	£'000	£'000
Net revenue profit	16,571	12,734
Net capital profit	25,341	19,625
Net total profit	41,912	32,359
Weighted average number of Ordinary shares in issue during the year	189,641,302	171,163,885
Revenue earnings per share	8.74p	7.44p
Capital earnings per share	13.36p	11.47p
Total earnings per share	22.10p	18.91p

5. Net asset value per share

	2013	2012
Net assets attributable to shareholders (£'000)	395,926	290,324
Shares in issue at the year end	218,191,574	175,764,500
Net asset value per share	181.46p	165.18p

6. Related Party Transactions

The Company has appointed Schroder Investment Management Limited ("the Manager"), a wholly owned subsidiary of Schroders plc, to provide investment management, accounting, secretarial and administration services. Details of the management and performance fee agreement are given in the Report of the Directors on page 16. The management fee payable in respect of the year amounted to £2,717,000 (2012: £1,996,000), of which £730,000 (2012: £532,000) was outstanding at the year end. The Company Secretarial fee payable to the Manager amounted to £75,000 (2012: £75,000) of which £29,000 (2012: £19,000) was outstanding at the year end. A performance fee amounting to £2,405,000 (2012: £1,583,000) is payable in respect of the year and the whole of this amount (2012: same) was outstanding at the year end.

If the Company invests in funds managed or advised by the Manager or any of its associated companies, any fees earned by the Manager from those funds is deducted from the management fee payable by the Company. There have been no such investments during the current or comparative year.

Details of Mr Sherwell's connections with the Manager are given on page 15 of the 2013 Annual Report.

The Directors of the Company received fees for their services and details are given in the Remuneration Report on page 19 of the 2013 Annual Report.

Details of Directors' shareholdings in the Company are given on page 15 of the 2013 Annual Report.

7. Status of announcement

2012 Financial Information

The figures and financial information for 2012 contained in this announcement are extracted from the published Annual Report and Accounts for the year ended 31 August 2012 and do not constitute the statutory accounts for that year.  The Annual report and Accounts for the year ended 31 August 2012 included the Report from the Independent Auditors, which was unqualified. 

2013 Financial Information

The figures and financial information for 2013 contained in this announcement are extracted from the Annual Report and Accounts for the year ended 31 August 2013 and do not constitute the statutory accounts for the year. The Annual report and Accounts for the year ended 31 August 2013 include the Report of the Independent Auditors, which is unqualified.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

 

 

END

 

 

FR FSUFIMFDSEIF