Schroder Income Growth (SCF)

27/10/2023

Results analysis from Kepler Trust Intelligence

Schroder Income and Growth (SCF) has published results for the full year period ending 31/08/2023. Over this period, the trust saw NAV total returns of 4.2% and a share price total return of -3.0%, which compares to 5.2% total return from the FTSE All-Share Index. NAV total returns remain comfortably ahead of the index since Sue Noffke took over management in 2011, with the trust delivering 128.5% compared to 103.5% for the benchmark.

The board has also increased the dividend for the 28th year running, 13.2p to 13.8p per share, an increase of 4.6%. The increase came despite a fall in the total income received from the portfolio, as the trust utilised its revenue reserves to help fulfil its primary objective of real growth of income above the levels of inflation over the longer term. 

Kepler View

SCF focuses on generating real growth, in both the income and capital over the long run. So, while short term performance may be a little disappointing during a tough period for the small and mid-caps which the trust is usually overweight, its long-term performance remains very strong, outperforming the benchmark by roughly 25%, since 2011, when Sue Noffke took over management. Despite being out of favour over the short term, we think exposure to medium and small companies should help deliver income and capital growth over time.

The long-term outperformance has been driven by astute stock selection in the UK medium and small cap space, but is also down to the way Sue and her team focus on exploiting market inefficiencies through companies they believe boast strong fundamentals that the market has failed to value appropriately. The diversity of the characteristics associated with different stocks, be that income generation or low correlation against inflation, means the underlying portfolio is designed to benefit from multiple forms of returns in a cycle and to perform in a variety of market environments.

Over the period, SCF benefited from strong performance from Whitbread, Hollywood Bowl and Pets at Home, and not owning a number of staples companies such as Diageo or Imperial Brands. The underperformance against the benchmark came primarily from the omission of some strongly performing industrial names, and its larger weighting to basic material companies compared to the index. While a larger allocation to medium and smaller sized companies has helped SCF's performance historically, returns have lagged those of the larger FTSE 100 more recently, which hurt performance.

We think that Sue and the team's high-conviction approach to running the portfolio has rewarded investors well over various time horizons and is an attractive proposition for income investors looking for real growth in income and capital over the long term. We also think that UK equity valuations are very cheap versus its history and other equity markets, so the propensity for equities to return to long-term average valuations, or 'mean reversion', could, in conjunction with SCF's wide discount, present an opportunity for long-term patient investors.

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