David Kimberley
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Updated 31 May 2022
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Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Edinburgh Investment Trust. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

  • Edinburgh Investment Trust (EDIN) has released its financial results for the year ending 31/03/2022. The trust delivered outperformance of its benchmark, with a NAV total return of 14.1% over the period, compared to a 13.0% rise in its benchmark, the FTSE All-Share Index. This marks the second full-year period since Majedie/Liontrust and James de Uphaugh were appointed to manage the trust. Both full-year periods have seen total NAV returns in excess of the benchmark’s, despite extremely challenging market conditions.
  • Total share price returns for the period were lower at 10.6%, reflecting a widening of the discount over the period. The discount at 31/03/2022 stood at 7.7%, wider than the 4.5% that it finished the prior financial year on. Since the period end it has narrowed to approximately 7.4%, as of 26/05/2022.
  • The trust's board are taking steps to prevent the discount widening further and began a buyback programme at the start of 2022. By the end of the financial year, the board had bought back 1,104,800 shares, representing c 0.64% of the shares in issue.
  • Total dividends per share rose to 24.80p for the year, a 3.3% year-on-year increase compared with the ordinary dividends paid in the prior financial year. Revenue per share rose by 38.2% year-on-year to 22.41p. This reflects the growing strength of the companies in the portfolio, after a difficult couple of years in which dividend payouts fell. EDIN retains a robust revenue reserve of £50.8m, which can be used to smooth out any short-term drops in income from the portfolio.
  • Chairman of the board Glen Suarez said: “I am pleased to report that the Company has recorded its second consecutive year of strong investment returns – both absolute and relative to the comparator index…the Company is in the fortunate position of owning a distinctive set of businesses that are performing strongly on the world stage. Their robust underlying operational progress, combined with attractive starting valuations, should underpin attractive returns to shareholders over the long term.

Kepler View

We think Edinburgh Investment Trust (EDIN) remains an appealing option for investors looking for a core UK equity holding in their portfolio. No style reigns supreme, with trust manager James de Uphaugh presiding over a portfolio that typically holds a mix of value, growth, and recovery stocks. Although two years is not really a long enough period by which to judge performance, the strategy James and his team have managed since 2003 has proven successful and looks well placed to navigate the mix of inflation and political instability we’re seeing now.

For much of the past decade, the seemingly unstoppable rise of richly valued growth stocks meant other strategies, like those pursued by EDIN, were shunned by many investors. The crimping of UK share prices in the years following the Brexit vote only served to make matters worse for managers focused on London-listed companies. As such, current market conditions represent something of a sea change. In our view, it's hard to see the previous dynamics coming back into play any time soon, and so trusts in EDIN’s position look much better-positioned to surmount the problems the world is likely to be facing over the next couple of years. As the manager writes in his report to shareholders, “the UK equity market is in the foothills of a multi-year rehabilitation”. Major holdings such as Shell, NatWest, and BAE Systems, for example, look capable of passing costs on to customers, and may even benefit from higher commodities prices and rising rates.

The trust has seen a small increase of 0.8% in NAV total return terms year to date (according to data from JPMorgan Cazenove), in-line with the benchmark. The manager clearly feels comfortable about the ability of the companies in the portfolio to deliver returns for shareholders, having added to several existing positions over the past couple of months.

Gearing was used to make some of those purchases. Fortunately, gearing levels for the trust – currently at just under 5% - are relatively low. Keeping some powder dry may be a positive moving forward as the manager can continue to add to existing positions or take new ones if markets remain volatile and price drops mean opportunities present themselves. There is also the benefit of substantially cheaper long-term debt replacing the outgoing debenture this September. The UK equity market also continues to trade at an average forward price-to-earnings ratio that is lower than all other major markets, suggesting there are still plenty of opportunities to be found.

Despite active discount management that started in the new year, the trust has seen its discount widen to 7.4% as of 26/05/2022. We note that market volatility this year has led to discounts across the investment trust sector widening. Should market conditions return to a more stable footing, and confidence returns to the UK market, the discount might be expected to narrow.

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