This income fund has beaten City of London, so why the bigger discount?
Schroder Income Growth trust is more of a bargain than its better known rival and the 4pc yield is similar
“ILLOGICAL” discounts are what this column is always on the lookout for and one seems to have arisen on a highly regarded income-focused trust. Schroder Income Growth has a lower profile than some of its peers, which may help to explain why its shares currently trade well below the value of the trust’s assets despite an excellent record during the six-year tenure of Sue Noffke, the current manager.
The portfolio has even outperformed City of London, a widely admired and larger income trust, over that period. Under Noffke, the Schroder trust has performed better than City of London over one, three and five years, as well as beating the FTSE All Share index – against which it measures its performance – by a wide margin.
Over the five years to the end of May, Schroder Income Growth delivered a total return of 103pc, based on net asset value rather than share price, compared with 93pc from City of London, according to a research note from Stifel, the stockbroker.
Investors don’t seem to have noticed this outperformance, however, judging by the two trusts’ respective discounts.
City of London often trades at a premium – it is currently 2.1pc – while Schroder Income Growth’s discount, 7.8pc, is close to its deepest level for five years.
“Schroder Income Growth has [under Noffke] consistently outperformed both the fund’s benchmark and some of its premiumrated peers, such as City of London,” Stifel’s note said. “This discount differential appears unjustified and should narrow in time.”
It added: “We believe that the manager has the ability to continue outperforming, and as the track record receives greater recognition investors could benefit from any outperformance, as well as any discount narrowing.”
It described Schroder Income Growth as “a consistent outperformer trading on an illogical discount”.
The discount differential between the Schroder trust and City of London is all the more intriguing in light of the current similarity in the two portfolios. The top 10 lists of the trusts contain eight names in common: Shell, British American Tobacco, HSBC, Lloyds Banking Group, Glaxosmithkline, Vodafone, BP and Unilever.
There are differences, however. The Schroder fund is less diversified, with about 40 holdings, compared with more than 100 at City of London.
The yields are broadly in line, with City of London yielding 3.9pc and Schroder Income Growth producing 3.8pc.
City of London is widely known for its impressive dividend record: it has increased its annual payment to shareholders every year for the past five decades, which Schroder Income Growth could not possibly match, given that it was listed only in 1995. It can still boast an enviable 21-year record of dividend growth, however.
City of London is also substantially cheaper, with an “ongoing” charge of 0.43pc a year compared with 1pc for the Schroder portfolio.
This column is an admirer of City of London and its long-serving manager, Job Curtis of Henderson, and would happily tip it now if it were not for the persistent premium. But, for bargain hunters, the Schroder fund looks the better bet.
It has been held in Questor’s Income Portfolio, featured here on Fridays, since December last year on the basis of its solid performance as an income producer.
We tip it here today with that benefit in mind and the added attraction of a decent discount.
Questor says: buy Ticker: SCF
Share price at close: 288.9p Investment trust news The Aberdeen Emerging Markets trust will cut its management fee from 1pc of market value to 0.8pc of net assets, effective from Nov 1. There is also a performance fee, which will remain.
The trust currently trades at a discount of about 13pc.
It has also announced plans for a new dividend policy, with the payment to be funded through a combination of income and capital. Historically, the trust has not paid a dividend.