Edinburgh Investment Trust 01 November 2022

James de Uphaugh and Chris Field took over the management of the Edinburgh Investment Trust (LON:EDIN) in March 2020 when the management contract was awarded to Majedie Asset Management. They have refreshed the portfolio using bottom-up fundamental analysis to focus on companies whose medium-term earnings’ growth has been underpriced by the market. So far, their performance record has been excellent, the trust having returned NAV total returns of 44.6%, outperforming both the FTSE All-Share Index and the average of the Morningstar Equity Income Peer Group (see Performance section).

Majedie was acquired by Liontrust Asset Management in April 2022, but there remains total continuity with the way the portfolio is managed. The vast majority of the investment team that works on EDIN came over from Majedie and now can leverage the greater resources of Liontrust. James and Chris target a 40 to 50-stock portfolio, aiming to find companies whose earnings’ potentials have been mispriced by the market and which can grow their dividends sustainably from cash flows. While the portfolio has some value plays and growth exposure through mid-caps, we believe that there is no overriding style bias. The managers see a variety of underlying themes in the market which they are trying to benefit from (see Portfolio section).

EDIN pays dividends quarterly and these amounted to 24.8p for the last financial year, equivalent to a 4.3% yield.

The trust is benefitting now from the retirement of an old, expensive debt facility with a rate of 7.75%. The new borrowing costs are much cheaper at approximately 2.4% (see Gearing section). EDIN is modestly net geared at just 4.5%, trades at a discount of approximately 8.1% and has an OCF of 0.51%.

We believe that James and Chris have done an excellent job to turn around the performance of the portfolio. While their stock picks have been the key drivers of the outperformance achieved, going forward we believe the cheaper borrowing costs they have locked in will also prove beneficial when the market turns and the managers are ready to deploy less-expensive gearing. The widening of EDIN’s discount has clearly been driven by market conditions, as discounts have widened across the board. However, we note that the managers’ three-year anniversary on the trust is coming up early next year and, if numbers remain strong, this could be supportive of a narrower rating once the immediate economic volatility has settled.

We believe EDIN is well positioned to be a core holding for investors seeking a balance between capital growth, current income and income growth. The managers do not take aggressive style biases and we believe this is likely to remain so, given their balanced total-return approach. This should help reduce the risk of the portfolio and is appropriate given the highly uncertain nature of the current economic backdrop. Whilst we believe it is unlikely over the short term that the dividend growth will match current inflation levels, we remain confident that the short-term conditions will give way to a brighter outlook in time, for which investors could be well rewarded from EDIN’s total return approach.