Schroder Income Fund removed from ii Super 60 list

Underperformance and uncertainty over dividends results in removal from interactive investor’s rated list.

interactive investor, the UK’s second largest direct-to-consumer investment platform, has removed Schroder Income Fund from its Super 60 rated list after an extended bout of underperformance and uncertainty over future dividends.

The fund, which adopts a value-based approach to investing and was listed as an adventurous option in the UK Equity Income category on the Super 60 list, has struggled so far this year, returning -35% (to 31 October 2020) which puts it at the foot of the performance table among its peers in the Morningstar UK Equity Income sector. 

While the value approach has been out of favour this year and over the long-term, not only did the fund fail to achieve its target of beating its benchmark, the FTSE All Share index, over five years (-6.7% versus 8.9% respectively) - but also its peers over both short and longer time periods.

When it comes to income,  interactive investor is concerned over the fund’s ability to maintain its historic yield, 6.46% at present, amid the prevailing ‘dividend drought’ owing to the Covid-19 pandemic.

The decision was made in line with our Super 60 methodology - which is monitored continuously for events which include, but are not limited to, extended periods of underperformance and fund manager moves. The interactive investor team conducted a formal in-depth review of the investment process, the shape and quality of the portfolio positioning as well as sustainability of the current yield.

Dzmitry Lipski, Head of Funds Research, interactive investor, says: “We have been closely monitoring the fund’s performance and positioning over the past six months, but unfortunately its return profile continued to deteriorate further. It has been acknowledged that the appetite for cheaper stocks has decreased significantly over recent years, which had a big impact on the performance of value strategies against the broader market.

“However, while we may tolerate funds that underperform due to prevailing market environment, we are unable to endorse a strategy that has not been able to deliver due to stock selection. In addition, there have been significant outflows from the fund so far this year and while there are still no signs that we should be worried, if the trend is ongoing it would be more prudent to remove the fund now.”

On income, Lipski added: “There is no doubt that the fund’s historic yield is one of the highest in the sector, currently being 6.46%. This has been mainly due to investing in overlooked businesses that are willing to pay higher dividends to attract capital. However, this approach failed to support the overall total and risk-adjusted returns for investors.

“It should also be highlighted that given the dividend suspensions and cuts across the market this year, we should expect reasonable decline in the fund’s yield as well. In its latest Q3 dividend monitor report, Link Asset Services revealed UK dividends fell to its lowest since 2010 and forecast the 2020 pay-out overall decline to be between 44.6% and 45.2%.