Half Yearly Report

RNS Number : 7569L

Schroder Oriental Income Fund Ltd

29 April 2015

 

Half Year Report

Schroder Oriental Income Fund Limited (the "Company") hereby submits its Half Year Report for the period ended 28 February 2015 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 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]

29 April 2015

Half Year Report for the Six Months Ended 28 February 2014

Interim Management Report

Chairman's Statement

Performance

The Company's net asset value produced a total return of 7.3% and the share price produced a total return of 6.7%. This compares to a total return of 2.9% for the MSCI AC Pacific ex Japan (sterling adjusted) Index over the period.

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 2015 of 1.50 pence per share (2014: 1.50 pence per share) on 30 January 2015. The Directors have since declared the payment of a second interim dividend for the current financial year of 1.50 pence per share (2014: 1.50 pence per share), which will be paid on 30 April 2015 to shareholders on the register at the close of business on 17 April 2015.

Share Capital

The Company's shares mostly traded above asset value during the period under review as demand remained strong. The average premium to net asset value (excluding current year revenue) during the period was 1.2%. Since the period end, the Company's shares have traded at a consistent premium to net asset value.

Your Board has continued to implement its active policy on discount management and premium control during the period. A total of 1,425,000 Ordinary shares were re-issued from Treasury at a small premium to net asset value during the six months to 28 February 2015 to provide liquidity to the market. A further 800,000 Ordinary shares have been issued from Treasury since the period end. Following these issues, there was a total of 223,716,574 Ordinary shares in issue and 13,225,000 shares held in Treasury.

Gearing

The Company has in place a multi-currency revolving credit facility of £50 million. During the period under review, the average gearing represented 6.0% of net assets. The level of gearing continues to be monitored closely by the Board and managed as necessary.

Impact of the Foreign Tax Account Tax Compliance Act ("FATCA")

The United States has enacted provisions under FATCA which introduce reporting requirements to the United States Internal Revenue Service (the "IRS") for foreign financial institutions in respect of their investors who are resident in, or citizens of, the United States ("US Persons"). Under the Agreement between the Government of the United States of America and the Government of the States of Guernsey to Improve International Tax Compliance and to Implement FATCA, the Company has reporting obligations in respect of certain US Persons.

While the Company has very few investors that are reportable under FATCA, it has registered with the IRS and obtained a Global Intermediary Identification Number pursuant to the legislation. The Board is currently reviewing its full monitoring and reporting obligations with its advisers and I will provide further updates in my year-end Statement.

Outlook

The 10-year anniversary of the Company's launch is in two months' time, and - having launched in 2005 at £1.00 per share - there is a satisfying symmetry in the net asset value per share at the end of February 2015 being almost exactly £2.00.

Together with the dividend having been increased in each year, it is a reassuring affirmation of the logic behind the Company's launch. It also raises the question of whether the next decade can be as good. The Manager's Review discusses some of the short-term challenges to the region, but your Board remains optimistic that Asian income can play an important role in most investors' long-term portfolios.

The region continues to punch above its weight in terms of the number and variety of income producing shares, with over a third of all shares globally with a yield of 4% or more being listed in the Pacific ex Japan markets*. Perhaps even more intriguingly for the future, there are also a number of markets where the cult of the dividend has still to take a firmer hold.

Robert Sinclair

Chairman

29 April 2015

*Source: MSCI.

Manager's Review

The Company's net asset value per share recorded a total return of 7.3% over the six months to end February 2015. Two interim dividends totaling 3.0 pence per share have been declared for the period.

While the regional markets yielded a modest positive return in sterling terms over the first half of the fiscal year, in a number of key markets this was flattered by the weakness of sterling particularly vis a vis currencies which have broadly matched the dollar's strength such as those of Hong Kong, China, Taiwan, Thailand and The Philippines. Notable exceptions to this have been Australia, New Zealand and Malaysia where currencies depreciated versus sterling.

Regional returns were comparable with those elsewhere. Global markets were subdued given evidence of slowing economic activity in the United States, continued volatility in key commodity markets, and doubts over the resolve of the European Central Bank to commit to a quantitative easing programme. Asia has lacked catalysts given the subdued external environment. Growth has generally been sub trend and, in some markets, decelerating. However, while some regional monetary authorities (including China, India and Australia) have cut policy rates there has been no urgency to resort to more comprehensive stimulatory measures.

The Philippines, China and Hong Kong were the notable performers over the period. The Philippines is a major beneficiary of lower oil prices, growth momentum has remained impressive and overseas remittances have remained resilient. China has been buoyed by looser monetary policy (including rate cuts and reductions in the Required Reserve Ratio of the banks), and a shift in domestic savings towards the equity market. This increasingly influenced the Hong Kong market where mainland Chinese related stocks led the rally. Financial scandal and lower oil prices hit Malaysia, particularly the currency, while Korea fretted over a challenging export environment, not helped by concern over increased competition from Japan. In Australia, good returns in local currency terms were more than cancelled out by the weakness in the Australian dollar given the deterioration in the terms of trade and looser monetary policy.

Positioning and performance

The Company's performance was ahead of the reference index during the period, primarily due to strong stock selection, but with a modest positive impact from country weightings. The main contributors in terms of stock selection were Hong Kong, Taiwan and Australia, with lesser contributions from Thailand and Singapore. In terms of allocation, key contributors to relative performance were the nil weight in Malaysia, the underweighting in Korea and the overweighting in Hong Kong. The principal headwinds for the Company were stock selection in China, and also the underweight stance in that market.

The main country exposures remained Australia, Hong Kong, Singapore and Taiwan. Within these markets, we reduced Singapore and, to a lesser extent, Australia while adding to Hong Kong. We initiated a first holding in India, but otherwise exposure elsewhere was little changed. In sector terms, there were additions to consumer discretionary, banks and materials, funded by a reduction in industrials.

Investment outlook

The first quarter has been marked by yet more loosening of monetary policies world wide with over 20 central banks cutting policy rates in response to disinflationary forces which remain very much to the fore. Oil and industrial commodity prices remain soggy, as do soft commodity prices which play a more than proportionate role in emerging markets, both as exporters and given the larger share of budget they comprise for lower income consumers.

However, with sovereign bond yields now below core inflation in the G7 group of developed economies, and an estimated 30% of the euro area bond market now on negative yields, the extraordinary efforts of central banks are continuing to distort financial markets. The ECB decision to embark on quantitative easing is the obvious proximate cause, but aided and abetted by the other leading economies of the UK and Japan. Furthermore, with US growth coming in below expectations and a strengthening dollar effectively tightening policy, the Federal Reserve has sought flexibility in the timing of when active rate rises follow on from last year's ending of the asset purchase program.

Equity investors have drawn some comfort from the loose monetary environment, but this has been tempered by fears that, despite the best efforts of policymakers, the global economy remains in the grip of secular stagnation and deflationary conditions. We would not be as pessimistic, and hold to our view that we will see a period of steady low inflationary expansion. Fears of stagnation arise from mistaking lags for longer-term factors. In particular, the recovery of bank lending in a number of markets, especially in Europe, was bound to take time given the level of damage to both confidence and balance sheets wrought by the global financial crisis. Similarly the adverse effects of lower commodity prices have been quicker to hit resource dependent economies (particularly emerging markets where structural weaknesses were already apparent) than for the benefit to come through for energy/commodity consuming companies and consumers.

For the patient, we believe this is a fairly benign environment for Asian markets, meriting a balanced approach for income oriented portfolios between good quality but modestly cyclical companies in sectors such as consumer discretionary, industrials and IT on the one hand, and more defensive yield in areas such as REITs and telecoms. Weakening European currencies and a newly competitive Japan will present challenges for the region's exporters, so selectivity remains key.

Given the size of its economy, events in China may continue to dominate the headlines in the region. While growth would appear to be slowing markedly, domestic Chinese equity markets have continued to surge since the Company's year end amid loosening monetary policies and a speculative flurry of margin finance and a surge in equity trading account openings. Driven more by speculation than fundamentals, this is beginning to impact the Hong Kong market via the Shanghai/HK Connect with investors concentrating on arbitrage opportunities between A and H shares (the latter usually at discounts) irrespective of the quality or valuations of underlying investments. It is impossible to say when this phase will pass, but in the meantime we continue to stick to our fundamentally based discipline and find few domestic Chinese companies meriting inclusion in a quality income portfolio such as that of the Company.

More broadly, the region continues to offer a range of companies with attractive income characteristics across sectors and markets. Earnings growth may be modest, but balance sheets are healthy, cash flow generation good and cover satisfactory across the companies in the portfolio. We continue to be modestly geared, funding out of the Australian dollar where the balance of risk would still appear to be on the downside.

For Schroder Investment Management Limited

29 April 2015

Principal risks and uncertainties

The principal risks and uncertainties with the Company's business fall into the following categories: financial risk; strategic risk; and accounting, legal and regulatory risk. A detailed explanation of the risks and uncertainties in each of these categories can be found on page 15 of the Company's published Annual Report and Accounts for the year ended 31 August 2014. These risks and uncertainties have not materially changed during the six months ended 28 February 2015.

Going concern

The Directors believe, having considered the Company's investment objective, risk management policies, capital management policies and procedures, expenditure projections and the fact that the Company's investments 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 in 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 accounts.

Related party transactions

During the first six months of the current financial year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company.

Directors' responsibility statement

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

Statement of Comprehensive Income

		(Unaudited) for the six months ended 28 February 2015			(Unaudited) for the six months ended 28 February 2014			(Audited) for the year ended 31 August 2014
		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		-	16,994	16,994	-	(18,311)	(18,311)	-	28,387	28,387
Net foreign currency gains		-	4,025	4,025	-	1,194	1,194	-	210	210
Income from investments		8,480	-	8,480	8,050	-	8,050	21,074	878	21,952
Other income		7	-	7	11	-	11	24	-	24
Gross return/(loss)		8,487	21,019	29,506	8,061	(17,117)	(9,056)	21,098	29,475	50,573
Management fee		(487)	(1,135)	(1,622)	(423)	(987)	(1,410)	(887)	(2,070)	(2,957)
Performance fee		-	-	-	-	-	-	-	(1,786)	(1,786)
Other administrative expenses		(317)	(3)	(320)	(294)	(2)	(296)	(566)	(3)	(569)
Profit/(loss) before finance costs and taxation		7,683	19,881	27,564	7,344	(18,106)	(10,762)	19,645	25,616	45,261
Finance costs		(185)	(431)	(616)	(106)	(246)	(352)	(272)	(629)	(901)
Profit/(loss) before taxation		7,498	19,450	26,948	7,238	(18,352)	(11,114)	19,373	24,987	44,360
Taxation (note 5)		(446)	(125)	(571)	(580)	-	(580)	(1,571)	-	(1,571)
Net profit/(loss) and total comprehensive income		7,052	19,325	26,377	6,658	(18,352)	(11,694)	17,802	24,987	42,789
Earnings/(loss) per share (note 6)		3.17p	8.68p	11.85p	3.04p	(8.39)p	(5.35)p	8.12p	11.40p	19.52p

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 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	-	-	-	-	-	(10,362)	(10,362)
At 28 February 2015	148,880	(26,701)	39	150,374	158,176	16,449	447,217

for the six months ended 28 February 2014 (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 2013	148,880	(35,624)	39	150,374	113,864	18,393	395,926
Reissue of shares from Treasury	-	1,319	-	-	-	-	1,319
Net (loss)/profit	-	-	-	-	(18,352)	6,658	(11,694)
Dividends paid in the period	-	-	-	-	-	(9,843)	(9,843)
At 28 February 2014	148,880	(34,305)	39	150,374	95,512	15,208	375,708

for the year ended 31 August 2014 (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 2013	148,880	(35,624)	39	150,374	113,864	18,393	395,926
Reissue of shares from Treasury	-	6,177	-	-	-	-	6,177
Net profit	-	-	-	-	24,987	17,802	42,789
Dividends paid in the year	-	-	-	-	-	(16,436)	(16,436)
At 31 August 2014	148,880	(29,447)	39	150,374	138,851	19,759	428,456

Balance Sheet

	(Unaudited) At 28 February 2015 £'000	(Unaudited) At 28 February 2014 £'000	(Audited) At 31 August 2014 £'000
Non current assets
Investments at fair value through profit or loss	474,273	389,464	451,605
Current assets
Receivables	1,456	1,168	2,490
Cash and cash equivalents	5,879	13,948	20,575
	7,335	15,116	23,065
Total assets	481,608	404,580	474,670
Current liabilities
Bank loans	(33,277)	(28,013)	(42,633)
Payables	(1,114)	(859)	(3,581)
	(34,391)	(28,872)	(46,214)
Net assets	447,217	375,708	428,456
Equity attributable to equity holders
Share capital (note 7)	148,880	148,880	148,880
Treasury share reserve	(26,701)	(34,305)	(29,447)
Capital redemption reserve	39	39	39
Special reserve	150,374	150,374	150,374
Capital reserves	158,176	95,512	138,851
Revenue reserve	16,449	15,208	19,759
Total equity shareholders' funds	447,217	375,708	428,456
Net asset value per share (note 8)	200.62p	171.64p	193.44p

Cash Flow Statement

	(Unaudited) For the six months ended 28 February 2015 £'000	(Unaudited) For the six months ended  28 February 2014 £'000	(Audited) For the year ended 31 August 2014 £'000
Operating activities
Profit/(loss) before taxation	26,948	(11,114)	44,360
Add back interest	616	352	901
Less exchange gains on foreign currency bank loan	(3,903)	(1,435)	(109)
Add back (gains)/losses on investments at fair value through profit or loss	(16,994)	18,311	(28,387)
Net purchases of investments at fair value through profit or loss	(5,652)	(2,076)	(17,564)
Decrease/(increase) in receivables	1,139	387	(854)
(Decrease)/increase in payables	(2,543)	(2,420)	207
Overseas taxation suffered	(573)	(464)	(1,491)
Net cash (outflow)/inflow from operating activities before interest	(962)	1,541	(2,937)
Interest paid	(665)	(373)	(827)
Net cash (outflow)/inflow from operating activities	(1,627)	1,168	(3,764)
Financing activities
Net bank loans (repaid)/drawn down	(5,453)	3,136	16,430
Reissue of shares from Treasury	2,746	1,319	6,177
Dividends paid	(10,362)	(9,843)	(16,436)
Net cash (outflow)/inflow from financing activities	(13,069)	(5,388)	6,171
(Decrease)/increase in cash and cash equivalents	(14,696)	(4,220)	2,407
Cash and cash equivalents at the start of the period	20,575	18,168	18,168
Cash and cash equivalents at the end of the period	5,879	13,948	20,575

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 28 February 2015 and 28 February 2014 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 2014.

3. Accounting policies

The accounts have been prepared in accordance with International Financial Reporting Standard 34 "Interim Financial Reporting" and the accounting policies set out in the statutory accounts of the Company for the year ended 31 August 2014. Where presentational guidance set out in the Statement of Recommended Practice ("the SORP") for investment companies issued by the Association of Investment Companies in January 2009 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

	(Unaudited) Six months ended 28 February 2015 £'000	(Unaudited) Six months ended 28 February 2014 £'000	(Audited) Year ended 31 August 2014 £'000
Third interim dividend of 3.00p in respect of the year ended 31 August 2013	-	6,560	6,560
Fourth interim dividend of 3.15p in respect of the year ended 31 August 2014	7,018	-	-
First interim dividend of 1.50p (2014: 1.50p)	3,344	3,283	3,283
Second interim dividend of 1.50p	-	-	3,283
Third interim dividend of 1.50p	-	-	3,310
	10,362	9,843	16,436

A second interim dividend of 1.50p (2014: 1.50p) per share, amounting to £3,353,000 (2014: £3,283,000) has been declared payable in respect of the year ending 31 August 2015.

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 (2014: £600). The tax charge comprises irrecoverable overseas tax deducted from dividends receivable and capital gains tax.

6. Earnings/(loss) per share

	(Unaudited) Six months ended 28 February 2015 £'000	(Unaudited) Six months ended 28 February 2014 £'000	(Audited) Year ended 31 August 2014 £'000
Net revenue profit	7,052	6,658	17,802
Net capital profit/(loss)	19,325	(18,352)	24,987
Net total profit/(loss)	26,377	(11,694)	42,789
Weighted average number of shares in issue during the period	222,513,535	218,749,309	219,238,697
Revenue earnings per share	3.17p	3.04p	8.12p
Capital earnings/(loss) per share	8.68p	(8.39)p	11.40p
Total earnings/(loss) per share	11.85p	(5.35)p	19.52p

7. Share capital

The Company's shares in issue comprised the following:

	(Unaudited)	(Unaudited)	(Audited)
	28 February 2015	28 February 2014	31 August 2014
Ordinary shares, excluding shares held in Treasury	222,916,574	218,891,574	221,491,574
Shares held in Treasury	14,025,000	18,050,000	15,450,000
Closing balance	236,941,574	236,941,574	236,941,574

8.         Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	28 February 2015	28 February 2014	31 August 2014
Net assets attributable to shareholders (£'000)	447,217	375,708	428,456
Shares in issue at the period end, excluding shares held in Treasury	222,916,574	218,891,574	221,491,574
Net asset value per share	200.62p	171.64p	193.44p

 

END

 

 

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