Results analysis: Edinburgh Investment Trust

• Edinburgh Investment Trust (EDIN) has released its half year results to the 30/09/2022 during which it delivered a NAV total return (with debt at fair value) of -8.2%, while the FTSE All-Share Index fell by 8.3%. Although EDIN only did marginally better than the benchmark index, James de Uphaugh and his team have built on the solid performance since they took over the management of the trust in late March 2020, since when they have generated a cumulative NAV total return of 41.2% while the FTSE All-Share Index has risen by 31.3%.
• The share price total return was -11% over the six months, reflecting the widening of the discount from 7.7% on 31/03/2022 to 10.6% as at 30/09/2022. This is in the wider context of the heightened market volatility following Russia’s invasion of Ukraine and slowing global growth in the face of rising inflation and interest rates, while at the close of this period UK markets were still reeling from the former Prime Minister’s ‘mini’ Budget. Over the period the board repurchased 1.89 million shares, equivalent to 1.1% of the equity capital.
• The end of this reporting period sees a significant change to the debt structure. In anticipation of the maturing of the company’s debenture on 30/09/2022, the board pre-arranged its refinancing, taking advantage of low interest rates at the time. The new debt structure with maturities up to 35 years are at weighted average interest rate of 2.44%, significantly lower than previously. Had the refinancing been agreed today, the board notes the interest rate achievable would be approximately 4.75%. The change in fair value of the debt has led to a c. 4% boost to NAV.
• The yield on the company’s shares based on the last four quarterly dividends paid was 4.5% as at 30/09/2022 Since then the board has declared the first interim dividend for 2023 of 6.4p that is due to be paid on 25/11/2022. This is 6.7% higher than the dividend paid at the same stage last year and an ongoing improvement since the 2020 pandemic lows. The management team note that the underlying income of the portfolio has been boosted by companies that pay dividends in non-sterling currencies and sterling’s weakness, something that could reverse in time.
• Chair of the board Elisabeth Stheeman said: “it is encouraging to see that over three years the company’s returns are now ahead of the index…. the company is in a strong position to take advantage of the attractive opportunities that are now arising, as well as to continue with the important business of working with existing holdings that underpin the income and capital value of the portfolio”

Kepler View

The strategy instigated by James de Uphaugh and the team for Edinburgh Investment Trust (EDIN) since they took over management two and a half years ago has worked wonders for the portfolio’s returns. Although this is a short period to judge success by, investors should be pleased with the significant outperformance, as they have generated cumulative NAV returns of 41.2% while the benchmark only rose by 31.3%. Understandably, the volatile and difficult market conditions have resulted in the portfolio dropping over the first half, nonetheless this was marginally better than the benchmark index.

The board believe that a well-managed, sensibly diversified equity portfolio should generate attractive returns over the medium term and as such, low-cost long-term borrowings should boost returns. In this regard we believe that the recent change to the debt structure positions EDIN very well for the long term. The board have done well to refinance maturing debt when interest rates were low, this has locked in a borrowing cost which looks extremely cheap at today’s rates and will allow the managers to invest in the portfolio when the recovery comes. When market optimism returns, the lower cost debt profile should mean a lower hurdle to jump over to generate outperformance.

EDIN’s discount has widened during these six months, we believe this is chiefly down to challenging market conditions rather than specifically a reflection on the trust. We expect that the board’s willingness to intervene and buyback shares is a positive signal, providing value to investors.  Meanwhile we note that the historic dividend yield of EDIN (c. 4.5%) is lower than the simple average of its peers, (though comfortably higher than the benchmark), we believe and agree with the board and management that a focus on generating attractive total returns through a combination of dividend income and capital growth is more sustainable and will serve investors better over the long run.

James and the team run a concentrated portfolio of around 40-50 stocks that are selected through a bottom-up fundamental analysis approach. They seek to identify companies whose medium-term earnings are mispriced. Aside from this there is no overarching style bias, making for a portfolio that can adapt to changing market conditions. James believes that UK stocks continue to trade at attractive valuations, even after a slight rotation to value stocks away from growth stocks. EDIN currently uses a modest level of gearing but the team seem intent on putting more of the cash balance to use in anticipation of UK and global markets eventually moving out of this ‘sticky’ phase. We believe that EDIN could serve as a core holding for investors looking for exposure to UK companies with the potential to deliver a mix of growth and income.

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