Schroder Income Fund research update

Kate Marshall | Wed 20 May 2015

The links in this article will take you to Hargreaves Lansdown’s main website for more information. Please be aware that if you wish to join any of the benefits in your company Plan you must return to this website to apply.

Nick Kirrage and Kevin Murphy's naturally contrarian approach leads them to invest in undervalued companies. This is an approach they have honed over several years, having managed the Schroder Recovery Fund since 2006.

The duo subsequently took over management of the Schroder Income Fund five years ago, to which they apply a similar philosophy. This fund also has an income objective and currently yields 3.4% (variable and not guaranteed).

Nick Kirrage and Kevin Murphy follow a simple formula in managing the Income fund:

1. Protect and grow capital - by investing in undervalued companies where the managers see limited downside to the share price
2. Produce an above average dividend yield - through buying companies offering an attractive level of income
3. Grow dividends - by identifying companies paying a low dividend, but where the managers expect dividend payments to grow over the longer term

Nick Kirrage and Kevin Murphy believe one of the best sources of dividend growth is from companies which have previously cut their dividends, but are undergoing improvement and could increase payments in the future. The managers specifically seek businesses they expect will recover and grow their dividends much faster than the market expects.

The managers currently find value in the banking sector, an area where investors' perception remains poor. According to Nick Kirrage and Kevin Murphy, prior to the financial crisis, banks contributed over 25% of the UK market dividend, while today the figure is 11%. They believe banks will return to being natural dividend payers in due course and much of the money they used to pour into investment banking is now more likely to be distributed to shareholders through dividends. Current holdings include HSBC and Barclays.

Supermarkets are another area where the managers see opportunity. Positions including Tesco, Morrison's and Sainsbury's are currently held. While these supermarkets are currently battling with the discounters, such as Lidl and Aldi, the managers' analysis suggests the share prices of these companies currently offer significant value. Overall the fund is a concentrated portfolio, which enables each holding to make a significant impact on returns; however, this is a higher-risk strategy.

Our view on this fund

Nick Kirrage and Kevin Murphy have delivered a good return of 77.5%* since assuming responsibility for this fund. This is against 70.2% for the sector average and 62.9% for the FTSE All Share Index, although this does not provide a guide to the fund's future performance. We like the managers' investment style and we feel investors could be rewarded over the long term. That said, a recovery-style approach to investing can be risky, as companies can stay out-of-favour for long periods of time.

Past performance is not a guide to future returns. Source: Lipper IM* to 01/05/2015

The fund does not currently feature on the Wealth 150 list of our favourite funds across the major sectors. The IA UK Equity Income sector is highly competitive and we believe we already have a strong line-up of managers in this sector with more-established track records. We will, however, continue to monitor performance and inform investors if our views change.

The fund's charges can be taken from capital, which can increase the yield but reduces the potential for capital growth.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.