Results analysis: Edinburgh Investment Trust

• Edinburgh Investment Trust (EDIN) has delivered strong outperformance of the benchmark in the year to 31/03/2023, with a NAV total return of 7.9% comparing to a 2.9% total return for the FTSE All Share Index. EDIN’s share price return was 8.4%.
• EDIN has outperformed the FTSE handsomely since James de Uphaugh was appointed manager in March 2020, with a NAV total return of 65.9% and share price total return of 75.5%, both well above the 47.4% total return of the benchmark.
• For the 2023 financial year, the board has proposed a final dividend of 6.7p a share, which should mean total dividends rise 5.6% compared to 2022. At the time of writing the historic yield is c. 3.9%.
• During the year the board refinanced EDIN’s long-term debt at much more attractive terms, the new borrowings being taken out at 2.44% p.a. compared to the rate of 7.75% on the previous debt.
• During the year the discount varied from a low of 12.0% to a high of 4.8% and finished the year at 7.5%. At the time of writing it stands at 7.9%. The board has used periodic share buy backs, repurchasing 3% of the company's shares in 2023. Repurchases have continued in the new financial year. Although the board have not given a specific target level for the discount, they have reiterated their policy of buying back shares “while the discount persists” and remain active in marketing the shares to help narrow the discount.
• Chair of the board Elisabeth Stheeman said: “Despite the ever-uncertain economic outlook, there is enthusiasm about the underlying prospects for the stocks in the company's portfolio. The manager's approach of maintaining a diversified portfolio is therefore an important feature that should help protect shareholders' capital over time. We believe the company is well positioned to deliver to shareholders attractive total returns."

Kepler View

These are good results which contribute to a strong track record since the change of management in March 2020. Pleasingly, the drivers of return have been diverse at the stock level in the period under review, with BAE Systems, Natwest and Centrica amongst the biggest contributors, along with Greggs, Standard Chartered and Weir. James has positioned the portfolio to have exposure to multiple themes. While holdings in banks and energy-related names, sectors benefitting from high inflation or high rates, have helped returns in the recent past, the portfolio is also exposed to an improving picture for the UK consumer, with James arguing a peak in inflation and interest rates is likely to relieve the pressure on households over the coming year. Meanwhile, the UK remains cheap versus international peers, after being out of favour for a number of years. This could provide further impetus behind Edinburgh Investment Trust’s (EDIN) returns, with the potential for an improving economic backdrop to see that valuation differential close.

One major supportive factor for the trust going forward is the improved gearing position. The trust had suffered in the past thanks to having very expensive long-term debt. The board arranged cheaper debt to replace it in late 2021, locking in a highly advantageous rate before the cost of debt rose once more over 2022. This means James has plenty of cheap cash to put to work in the market, which should be supportive of returns over the course of a cycle as markets rise. NAV returns of the trust have benefitted over 2022 as rising interest rates cut the fair value of this newly rearranged debt, adding 4 percentage points to NAV total returns.

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’ focus on identifying multiple drivers of growth should help reduce the risk of the portfolio and we think is appropriate given the uncertain nature of the current economic backdrop. The first three years under the new manager have shown the strengths of the new strategy, with the trust outperforming in a volatile period which has seen multiple rotations in style. We interpret the narrowing of the discount over the past three years as investors responding to this strong performance and the improved balance sheet.

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