The board of Schroder Income Growth (SCF ) is taking action following a challenging six months, with a manager fee cut and the introduction of a single-digit discount policy.

From September, Schroders’ fee will reduce from 0.45% to 0.4%. This will be charged on the lesser of market cap or NAV (previously it was charged on NAV). Coupled with the scrapping of a separate fee for administration services, the board estimates this will cut costs by more than £300,000.

The move follows a challenging period for the £205m UK equity income trust. Over the six months to the end of February, its net asset value (NAV) grew by 2.9%, lagging a 5.2% rise by the FTSE All-Share index.

Its shares were up only 1.8% over this period, while its discount widened to 11.6%. Its discount has since narrowed to 8.7% but remains much wider than the average trust in the AIC’s UK equity income sector at 3.2%.

In a bid to tackle the trust’s persistent discount, the board is introducing a discount policy to keep the discount to NAV in a single-digit range, which means they will take a more aggressive approach to buybacks.

Trusts like Baillie Gifford UK (BGUK ), Henderson European (HET ), Montanaro UK Smaller Companies (MTU ) and European Smaller Companies (ESCT ), recently took similar action, albeit under pressure from activist investor Saba Capital.

Over the six-month period, the board bought back around 211,000 ordinary shares, equating to 0.3% of the share capital for £611,000. This has stepped us since the end of February: a little under 374,000 shares have been purchased for £1.1m.

The board also announced the appointment of Matthew Bennison as co-manager. He will join long-serving manager Sue Noffke, with whom he currently manages the open-ended £560m Schroder Prime UK Equity fund.

Dearth of special dividends

Over the six months to the end of February, the trust’s revenue after tax had fallen 7.1% versus the same period last year, while investment income was down 3.9%. This was largely down to companies opting for share buybacks rather than paying special dividends or significantly increasing their dividends.

Noffke noted that no special dividends were paid over the six-month period, which is the first time that has happened in 10 years. Meanwhile, ordinary dividend income generated was flat. Companies, representing 61% of the portfolio bought back shares during the half-year.

Fortunately this didn’t dampen Schroder Income Growth’s dividends, with first and second interim payments of 3.25p per share, up from 2.50p per share in 2024.

Reflecting on the trust’s half-year performance, Noffke said mid and small-caps had disappointed over the period, particularly those with domestically-oriented business models. Nevertheless, she said this is where the most attractive opportunities currently lie.

She highlighted veterinary business Pets at Home (PETS), housebuilder Taylor Wimpey (TW/) and utility company SSE (SSE) as performance detractors over the period.

Meanwhile, financials boosted returns with banks Standard Chartered (STAN), Lloyds (LLOY), NatWest (NWG) and private equity firm 3i (III ) all performing well.

Over the six-month period, Noffke sold out of automotive distributor Inchcape (INCH), property company British Land (BLND) and power company Drax (DRX).

A new position was initiated in International Airlines Group (IAG) where the manager expects to see healthy earnings growth and free cash flow over the coming years.

‘The impact of the Covid pandemic has led to reduced capacity, and ongoing supply chain challenges are limiting the availability of new aircraft.

‘This supply constraint coincides with increasing demand for air travel, driven by rising consumer spending on holidays and a recovery in business travel, especially long-haul flights. As a result, airlines, including IAG, are enjoying strong pricing power,’ she explained.

Noffke also bought into drinks mixer Fevertree (FEVR), where she believes the distribution arrangement in the US with Molson Coors ‘should underpin cash generation coming back to shareholders’.

Tariffs take toll

Since early April, markets have been shaken by US president Donald Trump’s trade tariff announcements. Schroder Income Growth has been affected by the fallout, with an NAV fall of 0.6% between the end of February and 12 May.

In the short-term, Noffke notes that consumer and business sentiment has declined, which means slower growth is expected.

‘The rest of world could see a slowdown in the rate of inflation - from falling energy costs, exchange rate movements, and as goods previously destined for the US get redirected to other countries.

‘Interest rates outside of the US could fall further and faster than previously anticipated,’ she explained.

Noffke suspects central banks around the world stand ready to respond with accelerated rate cuts, if necessary.

If the uncertainty created by the tariff announcements cause even a minor reallocation by investors away from the US, the manager suspects it could spell good news for the UK.

‘The UK equity market has been long unloved. At current prices it trades at valuations which are a 20% discount to both its own long run history and other international equity markets,’ she said.

‘It would not take much, for even a small move out of US equities were it to be redirected towards the UK market, to move the dial on valuations.’

Over the past three years, Schroder Income Growth’s shares are up 17%, which compares to a 28.3% gain by the average trust in the AIC’s UK equity income sector.

Schroder Income Growth currently yields 4.8% and is one of the AIC’s ‘dividend heroes’ having raised its dividend for 29 consecutive years.