Schroder Income: February 2026 fund update

• The fund management team has recently been through a period of change

• The managers use a contrarian and value-focused investment approach

• The fund has a long history of dividend growth

• This fund does not currently feature on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Schroder Income fund aims to provide income and capital growth over the long term by investing in UK companies. The fund managers use a distinct investment approach focused on undervalued companies and their contrarian approach means the fund can look quite different to the broader UK market (the benchmark) at times.

The fund could diversify an investment portfolio focused on income or sit next to funds using a more growth-focused approach.

Manager

The fund has been co-managed by Andrew Lyddon and Tom Grady since August 2025 and June 2025 respectively. The previous fund managers, Andrew Evans and Nick Kirrage, both left the business in 2025. It was disappointing to see two experienced investors leave and we removed the fund from the Wealth Shortlist as a result.

Lyddon joined Schroders in 2005 as a European equities analyst and has managed funds since 2010. He was a founding member of the Global Value Team in 2013. Lyddon’s previous fund management experience has mainly focused on European companies rather than those in the UK.

Grady joined Schroders in 2015 after beginning his career in accountancy. At Schroders he initially joined the Prime UK Equity team and spent several years analysing UK companies. Grady moved to the Global Value team in January 2025 before being promoted to co-manager of this fund shortly after. This is one of Grady’s first fund management roles.

Lyddon and Grady both manage other funds that invest in a similar way, although those funds don’t aim to provide an income like this fund.

Process

The investment process begins with quantitative screens designed to identify companies that have experienced large falls in share price or profits. This focus on out-of-favour companies that the managers believe can recover is called value investing. The managers aim to remove the impact of the economic cycle by looking at a company’s average earnings over longer periods. This narrows down a large selection of companies to those with low-priced shares relative to both the market and their own history.

The managers then research these companies with the aim of avoiding those that are ‘value traps’ – companies whose shares are less likely to recover. This research process involves building financial models, identifying key drivers of the business, and assessing balance sheet strength.

A company’s ability to provide an income is included throughout the process. The managers consider a company’s current dividend as well as the potential for the company’s profits to grow, which could lead to higher dividends in the future.

The fund is concentrated and currently invests in 43 companies. This higher-risk approach means each company can have a greater impact on the fund’s performance. The fund invests most in financials companies, which account for 25% of the fund, although this is less than the broader UK stock market. There are also meaningful allocations to consumer businesses. This includes defensive companies such as Tesco and Sainsbury, as well as more economically sensitive companies like Burberry and JD Sports.

Changes to the fund don’t happen often and the investment process remains the same as under the previous managers. This is reflected by the new managers only making one change to the fund since taking over. At the end of 2025, a new investment was made in drinks company Diageo. The valuation of the company’s shares reduced to a level the managers feel is attractive and doesn’t reflect the company’s potential.

Culture

Schroders is a UK-listed multinational asset management company that employs thousands of investment professionals across 38 locations around the globe. The business is home to many high-calibre fund managers, which this fund’s managers can call upon for support.

The Value team has seen an unusual amount of turnover in the last couple of years, with the departure of three experienced fund managers who we held in high regard. Despite that, the team continues to attract talent from other asset management groups. There is a new head of the team who has looked to streamline the way the team works. As a result, the emerging markets managers also left the business, allowing the team to focus solely on investing in developed markets.

The Value team has been a fixture at Schroders for many years and is well supported by the business. We hold a positive view of the investment processes used by the team but our conviction has been tested by the recent changes in personnel.

ESG Integration

Schroders has invested significantly in ESG (Environment, Social and Governance) resources and tools in recent years. Each investment desk has access to a variety of data sources that have been brought together into a proprietary platform called SustainEx, which allows investment teams to quantify a company’s positive and negative contributions to society. The ESG agenda at Schroders has significant support from senior management.

All Schroders funds were required to pass the firm’s inhouse ESG accreditation process by the end of 2020. All new funds must also be ESG accredited, and investment teams must reapply for accreditation on an ongoing basis.

The ESG accreditation process is managed by the Sustainable Investment team. They sit on the investment desk and are objective in their approach. There’s a set list of criteria that funds must meet to become accredited, and the process is substantial – no fund has ever gained accreditation on the first attempt. Fund managers are also expected to demonstrate improved levels of ESG integration over time. While this fund’s managers include ESG risks in their analysis of each company, they don’t exclude companies based on their sector, instead focusing more on a company’s recovery potential and ability to pay dividends. As a result, this fund isn’t managed to a sustainable mandate and companies in the fund include those which generate revenue from the sale of oil, alcohol, and tobacco.

The Schroders Sustainable Investment team acts as a focal point for ESG, proxy voting, and engagement. When it comes to proxy voting, Schroders has structured policies in place and is transparent on the reasons proposals have been voted against. On the ESG engagement side, the firm’s activities and outcomes are monitored, tracked and reported in its quarterly Sustainable Investment reports and annual Sustainability reports. There are also a range of ESG-related insight and thought leadership articles available on the firm’s website.

Cost

The fund usually has an annual ongoing charge of 0.81%, but we’ve negotiated a 0.31% saving so it’s available to HL clients for 0.50%. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP.

Our current platform charge of up to 0.45% per annum also applies, except in the HL Junior ISA, where no platform fee applies. From March 2026, the amount clients pay to invest with us will change. Find out more about these changes.

Please note the fund's charges are taken from capital rather than income. This increases the yield but reduces the potential for capital growth.

Performance

Over the 12 months to the end of January 2026, the fund returned 23.18%*. This was ahead of both the FTSE All Share benchmark and the IA UK Equity Income sector, which returned 21.15% and 17.38% respectively. Investors should be aware that not all of this performance can be attributed to the current managers given they took over in mid-2025. Past performance isn’t a guide to the future.

The value style of investing has been in favour in the UK recently and this aided the fund’s performance. The managers’ stock selection (the ability to invest in companies that go on to perform well regardless of their sector or style) has also been positive. This includes investments in financials companies, with asset management firms St James’ Place and M&G both performing well, along with insurance companies Prudential and Aviva.

Like all funds, some investments detracted from performance, including advertising agency WPP and materials company Mondi. Having no investments in Rolls Royce and pharmaceuticals company AstraZeneca also detracted, as both grew strongly over the past year.

Performance of the fund over the long term has been strong. While the new managers are following the same process that has generated this outperformance, they’ve only recently taken on the decision-making role for the fund. Their tenure has started positively but this is a short time period for judging performance.

In terms of Lyddon’s prior track record, he became manager of the Schroder European Recovery fund in 2018. Since then, returns have trailed the benchmark but he has outperformed the average peer in the IA Europe ex UK sector. Investors should note that while this fund uses a similar investment process, it doesn’t invest in UK companies.

At the time of writing, the fund has a historical yield of 3.78%. Income isn’t guaranteed, and yields aren’t a reliable indicator of future income.