Sue Noffke, manager of the Schroder Income Growth Fund, is backing the UK – one of the most unloved markets in the world – as she prepares the portfolio for a Brexit bounce.
She can invest up to one-fifth of the trust in overseas equities but is firmly backing Britain ahead of its anticipated exit from the European Union.
“With overseas exposure, we have the ability to go up to 20%, but at the moment it’s very much smaller,” she told delegates at Sub35’s AlphaBeta Brewery event. “We’ve taken that down to about 3% because we see a lot more opportunity from a valuation point of view in the UK itself, both currency and stock valuations.”
She urged the audience to remember that politics and the UK economy are not necessarily representative of the opportunity set of the UK stock market.
A lot of international businesses are quoted in the UK – almost three-quarters (73%) of the revenues of companies that make up the FTSE All-Share come from beyond British shores. “People are constantly surprised [by this], even really experienced investors,” she said. “This picture is something that you really need to bear in mind; the stock market is not the same as the domestic economy.”
While 70% of the UK economy is dominated by the UK consumer, her trust has large exposure to sectors such as oil, mining and financials.
That said, she has been pivoting the portfolio towards domestic names over the past 12 months. She has initiated new positions in Tesco, Whitbread, Crest Nicholson, Pets at Home and Hollywood Bowl, adding 7.5% to domestic stocks in total and moving from a neutral position to being “positively exposed”.
She pointed to Whitbread improving its financial flexibility after selling Costa Coffee to Coca-Cola for a “fantastic price” of $5.1 billion (£4 billion), allowing it to focus on its long-term organic growth, both in the UK and Germany, a new market for the company.
Growing income
Though Noffke is the only named manager, she is part of a four-strong team that runs the trust. It draws on the collective insights and experience of the broader investment community at Schroders, including pan European analysis and global investment teams.
Her primary goal in running the trust, which she has done since 2011, is to provide investors with an income stream that is growing faster than the rate of inflation. The fund has an unbroken 23-year record of annual distribution increases ahead of the rate of inflation. The focused portfolio of 45 stocks currently yields a net 4%.
Investment trusts can hold revenues in reserve to grow their dividend payments even when the income their holdings generate falters, and Schroder Income Growth has 11 months’ last year’s annual dividend in reserve.
“That gives end investors and wealth managers like yourself a lot of comfort about how sustainable that dividend is even in turbulent times,” Noffke told delegates.
The trust is about 10% geared, out of a maximum 20%. It is trading at a discount of around 5% to its net asset value, slightly narrower than the UK equity income sector average.