Schroder Income Growth (SCF ) has said it is engaging with AstraZeneca (AZN), the £219m trust’s top holding, after the head of the drug giant’s China business was detained over allegations of importing illegal medicines into the country.

Co-manager Matt Bennison told Citywire he and lead manager Sue Noffke remained in the fact-gathering stage as information about the detention was limited.

Shares in AztraZeneca, which makes up 7.1% of the UK equity income fund’s assets, initially slipped 1.5% yesterday after chief executive Pascal Soriot confirmed the head of the company’s China business, Leon Wang, had been detained, and two current and two former executives were under investigation. The shares later recovered and are up 2% to £101.77 today but still 5.7% down in price terms this year.

Bennison said the pharmaceutical company, which in its third-quarter update raised guidance for the second time in less than four months as cancer medicine sales soared, was an example of an ‘elephant that can gallop’.

However, he said the UK was missing a trick as AstraZeneca said it would invest $3.5bn (£2.7bn) in the US to expand its research and manufacturing footprint by the end of 2026.

‘This is an example of where the UK has the opportunity to reform itself to create a more attractive business environment,’ Bennison (pictured below) said. ‘We want our companies deploying cash into the UK.’

The 5.1%-yielder delivered a 19% total investment return over the 12 months to 31 August, while the shares added 17.7%, both beating the FTSE All-Share’s 17% gain, its annual results to the end of August show.

Bennison said the managers’ decision to lift gearing, or borrowing, to 13% at the beginning of the trust’s financial year had been vindicated as it enhanced returns ahead of costs.

The trust’s borrowing levels remain as high as they can go. ‘It is a mark of our confidence in the opportunity set,’ he said.

However, the fund is not a big buyer of its own shares, which trade 10% below net asset value, twice its sector average discount. In April the board bought back shares for the first time in 16 years, acquiring 38,000 shares, its only such transaction in the 12-month period.

A bias towards small and mid-sized companies helped drive performance as the FTSE 250 and FTSE Smaller Companies indices (both excluding investment trusts) surged ahead of the blue-chip FTSE 100. Not owning Reckitt Benckiser (RKT), which faces litigation over its baby formula in the US, and being underweight Diageo (DGE), which has been knocked by weaker trading in Latin America, also supported relative returns.

Earnings per share tumbled 11.5% to 11.64p over the period, meaning the board had to dip into revenue reserves to cover the 14.2p dividend, as income from miners dropped and companies across the board favoured buying back their cheap shares over distributing income.

Bennison said on the whole he supported companies buying back shares instead of paying out dividends.

‘Each individual case has its own merits: it’s a good validation that UK companies have surplus cash and think their shares are cheap. If they think it’s the best capital allocation decision, that’s good,’ he said.

He pointed out that 60% of companies in the trust bought back shares this year, up from below 40% last year, which made him and Noffke think more acutely about capital allocation given they had to use revenue reserves to pay the dividend, which was lifted for the 29th consecutive year.

‘We think about things more as total return and we’re very pleased with it over the last 12 months and the long term,’ Bennison said.

Over the period, the managers sold Tesco (TSCO) over concerns that higher minimum wage – and subsequently concerns over the increase in employers’ national insurance contributions – would prove inflationary, squeezing margins in a competitive industry with little pricing power.

They sold their position in oil major BP (BP) but maintained their holding in Shell (SHEL), which makes up 6.5% of net assets.

They also exited payment system company PayPoint (PAY) over concerns its acquisition of Love2shop would bring greater regulatory scrutiny and risks.

Over the period, they also bought and sold Diageo as it became clearer the spirits industry faces greater headwinds to near-term growth from destocking than the pair had expected.

They invested in property developer British Land (BLND) and housebuilder Taylor Wimpey (TW), which are beneficiaries of the government’s plan to build one-and-a-half million homes, and healthcare companies Haleon (HLN) and  Smith & Nephew (SN), and added to GSK (GSK).

Other new positions include global automotive distributor Inchcape (INCH) and IT services company Computacenter (CCC). The pair added to Asia- and emerging markets-focused bank Standard Chartered (STAN), power generation company Drax (DRX) and defence services business QinetiQ (QQ) on share price weakness.

Since Noffke, Schroders’ head of UK equities, took over the trust in July 2011, underlying returns of 169% and shareholder returns of 156% are ahead of the FTSE All-Share’s 132%, according to Morningstar data. Bennison joined the Schroder Prime UK Equity team in 2017.