Half-year Report

RNS Number : 2704Z

Schroder Income Growth Fund PLC

25 May 2016

 

Half Year Report

Schroder Income Growth Fund plc (the "Company") hereby submits its Half Year Report for the period ended 29 February 2016 as required by the UK Listing Authority's Disclosure and Transparency Rule 4.2. 

The Half Year Report is also being published in hard copy format and an electronic copy of that document will shortly be available to download from the Company's website www.schroderincomegrowthfund.com. Please click on the following link to view the document:

The Company has submitted a pdf of the hard copy format of its Half Year Report to the National Storage Mechanism and it will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

Enquiries:

Louise Richard

Schroder Investment Management Limited                               Tel: [phone]

25 May 2016

Interim Management Report

Chairman's Statement

Continuation vote

I am pleased to report that shareholders expressed overwhelming support for the continuation of the Company as an investment trust for a further five year period at the Annual General Meeting held on 15 December 2015. In line with the Articles of Association of the Company, a further continuation vote will be put to shareholders in 2020 and thereafter at five-yearly intervals.

Investment and share price performance

During the six months ended 29 February 2016, the market closed close to the same level at which it had started the period - despite experiencing, in the interim, volatility arising from uncertainty over the impact of global economic issues and the UK's upcoming EU referendum. This was reflected in the Company's results, with the net asset value producing a negative total return of 1.4%, broadly comparable to that of the FTSE All-Share Index, which fell by 1.2% over the period.

Market volatility however, had a significant impact on share prices, with widening discounts continuing to affect many investment trusts. As a result, the Company's share price declined by 8.5% in total return terms during the period as the discount widened from 1.5% at the start of the period to 8.7% as at 29 February 2016.

Revenue and dividends

One positive feature of the six months ended 29 February 2016 was a higher level of dividend income, with revenue per share rising 28.1% over the period, reflecting a 19.0% rise in income received from investments. Although this can be partially attributed to a small number of holdings, the portfolio nevertheless continues to explicitly target rising income.

Your Company paid a first interim dividend for the year ending 31 August 2016 of 2.00 pence per share (2015: 2.00 pence per share) on 29 January 2016. The Board has since declared the payment of a second interim dividend for the current financial year of a similar 2.00 pence per share (2015: 2.00 pence per share), which was paid on 29 April 2016 to shareholders on the register at the close of business on 15 April 2016. As in prior periods, the level of the two interim dividends so far declared this financial year should not be taken as being indicative of the total dividends that may be declared in respect of the full year.

Discount

Widening discounts affected many investment trusts over the period - and though the Board continued to monitor the position of the Company's share price relative to net asset value throughout, it was mindful of the negative trend across the sector - and no shares were bought back. Your Board will continue to monitor the Company's own discount relative to its peer group and to consider buying back shares when appropriate.

Gearing

The Company has in place a £20 million term loan, expiring in July 2017, and a £10 million revolving credit facility, with the latter remaining undrawn at 29 February 2016. Gearing decreased from 9.5% at the beginning of the period to 8.8% at the end, reflecting a slightly more conservative stance. The Board has established parameters with the Manager governing its level and use, which it keeps under regular review.

Outlook

With the payment of the fourth interim dividend last October, the Company has now increased its annual dividend in each of the 20 years since its launch. Pleasing as the landmark is, it is also a reminder of the challenge of maintaining this record, at a time when uncertainties facing UK companies seem relatively high. The portfolio's holdings have been chosen to provide a dividend stream above that of the UK average - the current yield of the Company's shares of 4.2% compares to the average of 3.7% by the FTSE All-Share Index; there is a more detailed discussion in the Manager's review as to the difficulty in identifying the limited number of companies capable of significantly increasing their dividends in the near future.

It is precisely this challenge, however, that is the Company's opportunity. The longer that interest rates and bond yields remain low, the more appealing investors are likely to find dividend yields that are both above average and growing over time. We look to our Manager to find the companies that will provide it, while acknowledging that issues like slowing growth and the EU referendum are likely to result in continuing short term volatility in the stock market.

Ian Barby

Chairman

24 May 2016

Manager's Review

In the six months to 29 February 2016 the Company's net asset value total return was -1.4%. This compares to a total return of -1.2% from the FTSE All-Share Index and -0.9% from the AIC UK Equity Income peer group average (source: Morningstar). The share price total return was lower, at -8.5%, as the discount to the net asset value widened over the period.

While the Company traditionally receives a relatively small part of its investment income in the first half of its financial year, a significant feature of the six months was a 19% increase in dividend income. The increase came mainly from three holdings: earlier payment of Rio Tinto's dividend, an increased holding in high-yielding Royal Dutch Shell, and a special dividend from GlaxoSmithKline. Excluding these three, the underlying picture was of broad increases across the portfolio, with any dividend cut being confined to Centrica.

Market background

The start of the period proved challenging for investors as pressures continued to be applied to commodities and emerging markets after the global sell-off in August, compounded by the US Federal Reserve's decision not to raise rates as expected, due to global growth concerns. The European Central Bank also failed to announce any extension of its quantitative easing.

Renewed steps by the Chinese authorities in January to devalue the renminbi rekindled fears that the country might be heading for a hard economic landing, which again cast a shadow on the outlook for global growth. However, markets recovered from their mid-February lows in anticipation of central banks loosening monetary policy, and the UK stock market ended the six months close to where it started. Sterling fell, however, reacting to the risk of a British exit from the EU following announcement of 23 June 2016 as the date for the referendum on membership.

Portfolio performance

Positive stock selection in the portfolio offset a small negative contribution from sector selection and gearing, to leave the NAV return close to that of the index.

The portfolio benefited from strong stock selection in food producers (Greencore - 'food-to-go' producer), and by being overweight the tobacco sector (particularly Imperial Brands) which performed well due to relatively attractive valuations compared to other staples. Our stock selection within banks also helped, largely by avoiding the shares of Barclays, Standard Chartered and RBS. Weak economic activity has provided a difficult trading environment for their investment bank arms, whilst they also face the prospect of reduced interest margins should interest rates remain lower for longer.

These positives were broadly offset by not owning brewer SABMiller when it was bid for, and disappointment from the holding in Pearson. The latter stemmed from weak US college enrolments, falling textbook sales and the threat from digital educational sources. Pearson has already taken steps to move away from paper-based literature and testing, and we take comfort from the group's strong balance sheet which supports its dividend.

The other disappointment was in the life insurance sector where Aviva, Legal & General and Prudential were affected by the general stock market weakness, concerns over credit exposures, and potential regulatory change. As with Pearson, however, we remain confident, believing that they are not over-exposed to commodity-based borrowers, while each company is well-capitalised.

Portfolio Activity

One benefit of the market volatility has been the opportunity to rebalance the portfolio on the margins, within the overall strategy of balancing higher-yielding shares providing safe income, with lower-yielding shares that offer the potential for faster-growing dividends.

New holdings in the latter category included Assura, which owns around 300 GP surgeries. It develops new centres on behalf of GPs and is looking to acquire more centres. Rents are underwritten by the NHS, and the leases are typically long term. Vacancy is low, and rent reviews should support double-digit dividend growth over the next 3-4 years.

The Company also bought Swiss pharmaceuticals company Roche, funded in part by reducing the holdings of AstraZeneca and GlaxoSmithKline. The potential lies in the drug pipeline where the next 12-18 months are key for approvals of a haemophilia treatment and innovative combination therapy cancer treatments.

As a final example, a new holding was started in luxury goods company Burberry. The shares have de-rated to attractive valuation levels as the market has focused on near-term trading and pricing issues, together with the slowdown in key emerging markets. We see potential for management reducing costs and, with the support of its strong balance sheet, the return of those proceeds to shareholders.

These new holdings were largely funded by reducing exposure to industrials IMI, BAE and Synthomer, where margins have peaked and share valuations are high. The exposure to European banks was also reduced.

Outlook

Aggregate market valuations are no more attractive now than at the start of the year - as profits downgrades come through and while the economy is being negatively affected by further austerity arising out of the Budget announcements and our proximity to Europe, where economic activity continues to remain subdued. Much of the uncertainty around the EU Referendum is currently expressed through the foreign exchange markets, with sterling weakening since the start of the year. This provides a risk to inflation but at the same time benefits a range of companies in terms of competitiveness and domestic revenue.

In the short term, the possibility of Brexit creates unwelcome uncertainty for both markets and businesses. Whilst domestic consumer cyclical businesses and financials are most exposed, the stock market is well diversified geographically, with 70% and 54% of revenues in FTSE 100 and FTSE 250 companies respectively, coming from overseas. Furthermore, whilst we are cautious over the potential impact on the overall market, we are comfortable with the stocks held in the portfolio and their ability to deliver capital and dividend growth.

Dividend outlook

Given the slow growth environment, weakness in profits and the already high proportion of profits paid as

dividends, we expect total market dividend growth to be below recent levels. While there are risks to the dividends of some of the holdings in the portfolio, we expect the portfolio's income to benefit from growth of the dividends of the lower-yielding holdings and maintenance of the dividends of higher-yielding holdings.

The depreciation of sterling is boosting the translation of dividends declared by companies in US dollars and Euros (40% of market dividends are from companies which declare their profits and dividends in US dollars). Whilst the Euro makes up a much smaller proportion of dividends, it is significant from the perspective of company profits. In addition, the Company held 5.5% of net assets in overseas stocks (listed in France, Sweden and Switzerland) as at 29 February 2016.

Special dividends are continuing to run at high levels, with those declared since the end of February already boosting this year's total to a level ahead of the whole of last year.

Investment policy

We continue to prioritise balance sheet strength and a company's competitive advantages. We remain disciplined in our portfolio construction and actively monitor the holdings, especially those that present difficulties, to ensure that our highest conviction ideas are held.

Furthermore, whilst a great deal has been made of the recent market volatility, historically we have used such periods as an opportunity to add new holdings to the portfolio, with the Company benefiting from a long-term investment horizon. The portfolio in aggregate continues to yield more than the cost of the Company's borrowing, supporting the continued use of gearing, which stood at 8.8% at the end of February. The goal remains long-term income growth above the rate of inflation.

Schroder Investment Management Limited

24 May 2016

The securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

Principal risks and uncertainties

The principal risks and uncertainties with the Company's business fall into the following categories: strategy and competitiveness risk; investment management risk; financial and currency risk; accounting, legal and regulatory risk; custodian and depositary risk; and service provider risk. A detailed explanation of the risks and uncertainties in each of these categories can be found on pages 16 to 18 of the Company's published Annual Report and Accounts for the year ended 31 August 2015. These risks and uncertainties have not materially changed during the six months ended 29 February 2016.

Going concern

Having assessed the principal risks and uncertainties, and the other matters discussed in connection with the viability statement as set out on pages 12 to 14 of the published Annual Report and Accounts for the year ended 31 August 2015, the Directors consider it appropriate to adopt the going concern basis in preparing the accounts.

Related party transactions

There have been no transactions with related parties that have materially affected the financial position or the performance of the Company during the six months ended 29 February 2016.

Directors' responsibility statement

The Directors confirm that, to the best of their knowledge, this set of condensed financial statements has been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (UK GAAP) and with the Statement of Recommended Practice, "Financial Statements of Investment Companies and Venture Capital Trusts" issued in November 2014 and that this Interim Management Report includes a fair review of the information required by 4.2.7R and 4.2.8R of the FCA's Disclosure and Transparency Rules.

Income Statement

for the six months ended 29 February 2016 (unaudited)

	(Unaudited) For the six months ended 29 February 2016			(Unaudited) For the six months ended 28 February 2015			(Audited) For the year ended 31 August 2015
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments held
at fair value through profit or loss	-	(4,436)	(4,436)	-	13,177	13,177	-	(1,426)	(1,426)
Net foreign currency losses	-	(6)	(6)	-	(22)	(22)	-	(16)	(16)
Income from investments	3,034	-	3,034	2,550	-	2,550	9,214	909	10,123
Other interest receivable and
similar income	4	-	4	7	-	7	10	-	10
Gross return/(loss)	3,038	(4,442)	(1,404)	2,557	13,155	15,712	9,224	(533)	8,691
Investment management fee	(372)	(372)	(744)	(389)	(389)	(778)	(789)	(789)	(1,578)
Administrative expenses	(182)	-	(182)	(192)	-	(192)	(356)	-	(356)
Net return/(loss) before finance
costs and taxation	2,484	(4,814)	(2,330)	1,976	12,766	14,742	8,079	(1,322)	6,757
Finance costs	(136)	(136)	(272)	(135)	(135)	(270)	(272)	(272)	(544)
Net return/(loss) on ordinary
activities before taxation	2,348	(4,950)	(2,602)	1,841	12,631	14,472	7,807	(1,594)	6,213
Taxation on ordinary activities (note 3)	-	-	-	(10)	-	(10)	(46)	-	(46)
Net return/(loss) on ordinary
activities after taxation	2,348	(4,950)	(2,602)	1,831	12,631	14,462	7,761	(1,594)	6,167
Return/(loss) per share (note 4)	3.42p	(7.21)p	(3.79)p	2.67p	18.39p	21.06p	11.30p	(2.32)p	8.98p

The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Company has no recognised gains and losses other than those disclosed in the Income Statement and Statement of Changes in Equity.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period.

Statement of Changes in Equity

for the six months ended 29 February 2016 (unaudited)

	Called-up		Capital	Share	Warrant
	share	Share	redemption	purchase	exercise	Capital	Revenue
	capital	premium	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 August 2015	6,869	7,404	2,011	34,936	1,596	128,122	7,227	188,165
Net (loss)/return on
ordinary activities
after taxation	-	-	-	-	-	(4,950)	2,348	(2,602)
Dividends paid in
the period (note 5)	-	-	-	-	-	-	(4,328)	(4,328)
At 29 February 2016	6,869	7,404	2,011	34,936	1,596	123,172	5,247	181,235

for the six months ended 28 February 2015 (unaudited)

	Called-up		Capital	Share	Warrant
	share	Share	redemption	purchase	exercise	Capital	Revenue
	capital	premium	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 August 2014	6,869	7,404	2,011	34,936	1,596	129,716	6,404	188,936
Net return on ordinary
activities after taxation	-	-	-	-	-	12,631	1,831	14,462
Dividends paid in
the period (note 5)	-	-	-	-	-	-	(4,190)	(4,190)
At 28 February 2015	6,869	7,404	2,011	34,936	1,596	142,347	4,045	199,208

for the year ended 31 August 2015 (audited)

	Called-up		Capital	Share	Warrant
	share	Share	redemption	purchase	exercise	Capital	Revenue
	capital	premium	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 August 2014	6,869	7,404	2,011	34,936	1,596	129,716	6,404	188,936
Net (loss)/return on
ordinary activities
after taxation	-	-	-	-	-	(1,594)	7,761	6,167
Dividends paid in
the year (note 5)	-	-	-	-	-	-	(6,938)	(6,938)
At 31 August 2015	6,869	7,404	2,011	34,936	1,596	128,122	7,227	188,165

Statement of Financial Position

at 29 February 2016 (unaudited)

	(Unaudited)	(Unaudited)	(Audited)
	29 February	28 February	31 August
	2016	2015	2015
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	198,471	217,797	204,829
Current assets
Debtors	1,437	892	1,709
Cash at bank and in hand	4,055	1,079	2,184
	5,492	1,971	3,893
Current liabilities
Creditors: amounts falling due within one year	(2,728)	(560)	(557)
Net current assets	2,764	1,411	3,336
Total assets less current liabilities	201,235	219,208	208,165
Creditors: amounts falling due after more than one year	(20,000)	(20,000)	(20,000)
Net assets	181,235	199,208	188,165
Capital and reserves
Called-up share capital (note 6)	6,869	6,869	6,869
Share premium	7,404	7,404	7,404
Capital redemption reserve	2,011	2,011	2,011
Share purchase reserve	34,936	34,936	34,936
Warrant exercise reserve	1,596	1,596	1,596
Capital reserves	123,172	142,347	128,122
Revenue reserve	5,247	4,045	7,227
Total equity shareholders' funds	181,235	199,208	188,165
Net asset value per share (note 7)	263.85p	290.02p	273.94p

Notes to the Accounts

1.         Financial Statements

The information contained within the accounts in this half year report has not been audited or reviewed by the Company's Auditor.

The figures and financial information for the year ended 31 August 2015 are extracted from the latest published accounts of the Company and do not constitute statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included the report of the auditor which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

2.         Accounting policies

Basis of accounting

The accounts have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice and with the Statement of Recommend Practice ("SORP") "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued in November 2014 and which superseded the SORP issued in January 2009.

All of the Company's operations are of a continuing nature.

The Company has adopted Financial Reporting Standard ("FRS") 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", FRS 104 "Interim Financial Reporting" and the amended SORP, all of which became effective for periods beginning on or after 1 January 2015. Some presentational changes are required, following the adoption of these new standards, however there has been no change to the way the Company measures the numbers in the accounts.

The changes to these accounts required by FRS 102, FRS 104 and the amended SORP may be summarised briefly as follows:

•        the reconciliation of movements in shareholders' funds has been renamed "Statement of changes in equity";

•        the balance sheet has been renamed "Statement of financial position";

•        the Company no longer presents a statement of cash flows or the related note, as it is no longer required for an investment   company which meets certain specified conditions; and

•        new notes have been included entitled "Called-up share capital", "Financial instruments measured at fair value" and "Events   after the interim period that have not been reflected in the financial statements for the interim period".

Other than these changes, the accounting policies applied to these accounts are consistent with those applied in the accounts  for the year ended 31 August 2015.

3.         Taxation on ordinary activities

The Company's effective corporation tax rate is nil, as deductible expenses exceed taxable income. Taxation on ordinary activities comprises irrecoverable overseas withholding tax deducted from dividends receivable.

	(Unaudited)	(Unaudited)
	Six months	Six months	(Audited)
	ended	ended	Year ended
	29 February	28 February	31 August
	2016	2015	2015
Revenue return (£'000)	2,348	1,831	7,761
Capital (loss)/return (£'000)	(4,950)	12,631	(1,594)
Total (loss)/return (£'000)	(2,602)	14,462	6,167
Weighted average number of shares in issue during the period	68,688,343	68,688,343	68,688,343
Revenue return per share	3.42p	2.67p	11.30p
Capital (loss)/return per share	(7.21)p	18.39p	(2.32)p
Total (loss)/return per share	(3.79)p	21.06p	8.98p

4.         Return/(loss) per share

5.         Dividends paid

	(Unaudited)	(Unaudited)
	Six months	Six months	(Audited)
	ended	ended	Year ended
	29 February	28 February	31 August
	2016	2015	2015
	£'000	£'000	£'000
2015 fourth interim dividend of 4.3p (2014: 4.1p)	2,954	2,816	2,816
First interim dividend of 2.0p (2015: 2.0p)	1,374	1,374	1,374
Second interim dividend of 2.0p	-	-	1,374
Third interim dividend of 2.0p	-	-	1,374
	4,328	4,190	6,938

A second interim dividend of 2.0p (2015: 2.0p) per share, amounting to £1,374,000 (2015: £1,374,000) has been declared payable in respect of the year ending 31 August 2016.

6.         Called-up share capital

	(Unaudited)	(Unaudited)
	Six months	Six months	(Audited)
	ended	ended	Year ended
	29 February	28 February	31 August
	2016	2015	2015
	£'000	£'000	£'000
Ordinary shares allotted, called up and fully paid: 68,688,343
(28 February 2015 and 31 August 2015: same) shares of 10p each	6,869	6,869	6,869

7.         Net asset value per share

Net asset value per share is calculated by dividing shareholders' funds by the number of shares in issue at 29 February 2016 of 68,688,343 (28 February 2015 and 31 August 2015: same).

8.         Financial instruments measured at fair value

The Company's financial instruments that are held at fair value comprise its investment portfolio. At 29 February 2016, all investments in the Company's portfolio were categorised as level (a) in accordance with paragraph 11.27 of FRS 102. That is, they are valued using quoted bid prices in active markets (28 February 2015 and 31 August 2015: same).

9.         Events after the interim period that have not been reflected in the financial statements for the interim period

The Directors have evaluated the period since the interim date and have not noted any significant events which have not been reflected in the financial statements.

 

END

 

 

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