Schroder Income Fund – Research Update

Kevin Murphy and Nick Kirrage took over management of the Schroder Income Fund on 18 May 2010; we recently met up with them to see how they were getting on.

Prior to taking on full responsibility for the fund they had worked with the previous managers very closely as part of the Schroder Specialist Value UK Equity Team. They’ve also built a strong track record managing the Schroder Recovery Fund since 01 July 2006. They’ll continue to manage the Recovery Fund alongside the Income Fund.

When the announcement was made we didn’t feel existing investors should have cause for concern. We see no reason to alter our stance following the recent meeting. The two funds have a great deal in common and are managed using a similar approach which has proved successful in the past. Approximately 80% of the shares held in the Income Fund are also held in the Recovery Fund.

Given the overlap no significant changes are expected to either the objective or style of the Income Fund. The managers will continue to focus on achieving a rising income with the potential for capital growth over the long term. However, this is not guaranteed and the value of any investment will fall in value as well as rise.

Kevin Murphy and Nick Kirrage will concentrate on companies with lower levels of debt and which are able to generate large amounts of cash. They believe companies exhibiting these characteristics will be better placed to grow their dividend over the long term.

They currently have over 30% of the fund invested in the financial sector believing many banks to have stable and profitable core businesses. They also believe the Financial Services Authority (FSA), the regulator, has conducted adequate tests to ensure banks are better prepared to cope with further weakness in the economy.

They are also positive on healthcare companies, including pharmaceutical giant AstraZeneca which currently yields approximately 4.4% and is the fund’s largest holding at around 5.2% of the portfolio. The fund also retains the maximum 20% exposure to non-UK holdings, which include cash, bonds and overseas stocks. This diversifies the fund but adds additional risks.

One significant change they have made since taking over is increasing the fund’s weighting in BP from around 2% to just under 4% of the portfolio. They considered the large falls in the share price to represent a good buying opportunity despite the company’s announcement it was to suspend its dividend payment. They retain the belief that despite the scale of the disaster BP remains highly cash generative and is strong enough to thrive once again.

Given the experience of Kevin Murphy and Nick Kirrage and their familiarity with the process used on the Income Fund we have confidence in their ability to achieve good returns over the long term. We therefore believe existing investors should generally continue to hold. Although not currently, please note the fund can be concentrated which increases risk. This fund is not currently on the Wealth 150 list of our favourite funds in each sector.

Past performance is not a guide to the future. Source: Lipper Hindsight