Edinburgh Investment Trust 25 October 2023

For more than three years, James de Uphaugh and Chris Field have managed Edinburgh Investment Trust (EDIN). They’ve delivered strong results with a strategy of balancing stocks with above-average earnings potential with latent recovery stocks, all in order to deliver income and capital growth. They both recently announced their retirement and will hand the reins over to Imran Sattar in February 2024 (see Management section). The message behind the change is one of continuity, with Imran having worked with James and Chris for a number of years and taking a similar approach to management.

Over the last three years, James has invested predominantly in UK companies, with a small allocation to overseas businesses, to deliver long-term capital and income growth. He’s run a concentrated portfolio of 40-50 holdings, blending both income and growth opportunities, as well as targeting businesses with multiple drivers of returns over a cycle.

This strategy, which Imran intends to continue, has led to impressive results. EDIN’s NAV total returns have been ahead of the sector and index since March 2020 (see Performance section), driven largely by the manager’s astute stock selection. Imran believes there are some brilliant opportunities in the UK market currently and potentially amplified given some are sitting at more appealing valuations versus history.

EDIN yields 4.1% at the time of writing, and the managers report good growth prospects for the portfolio income in the medium term.

The trust has long-term, cheap structural debt, the board having refinanced it prior to last year’s rate hikes. Net gearing (with debt at fair value) was 4.2% as of the end of September 2023, and at the time of writing, EDIN’s discount is 9.7%, which is above the sector average.

In our view, EDIN’s flexible investment approach positions it well as a core holding for investors and should provide them with exposure to high-quality companies with good earnings growth that should deliver both capital and income returns. We think James and Chris have done an excellent job since taking over, so seeing the retirement of such seasoned management is disappointing. However, we are encouraged that their colleague Imran Sattar, another seasoned investor, will take over. Imran intends to stick to the same basic principles and is experienced in running money with a similar approach. The traits he seeks in each company are also similar to those preferred by James and Chris but given his investing track record, he may tilt slightly more— ‘tilt’ being the operative word—to growthier companies versus his predecessors (see Portfolio section).

While EDIN’s yield is not among the highest in the sector, we’d argue the prospects for income growth are favourable and should appeal to investors with a long-term time horizon. It’s possible that the yield being below the peer group average is responsible for the Discount being wider than the sector average. Therefore, we view the discount as highly attractive as a long-term entry point. Over time, we would expect sentiment towards UK equities to improve, while interest rates are cut and the yield on offer in safe assets falls. We think EDIN’s offer of income growth will seem more attractive over time, while the current portfolio has lots of growth potential too, particularly when the UK’s low valuations start to mean revert.