Results analysis: Edinburgh Investment Trust

• Edinburgh Investment Trust (EDIN) has published its half year results covering six months to the end of September 2023. Over this period, the trust saw NAV total returns of 4.5% and a share price total return of 3.3%, which compares favourably to the FTSE All-Share Index total return of 1.4%.
• Performance since James de Uphaugh and Chris Field became managers in March 2020 has been impressive, with NAV total returns increasing 73.3%, comfortably ahead of the 49.5% total return from the FTSE All-Share.
• Over the period, the fair value of EDIN’s debt, which now has an average of 24 years to run at a blended cost of 2.4%, fell in line with bond markets, by roughly £10m, boosting the NAV by roughly 0.9%. Net gearing sat at 4.1% at the end of the period.  
• The board declared a first interim dividend of 6.7p per share, compared to 6.4p per share the previous year, representing an increase of 4.7%.
• Both James and Chris have announced their retirement from the industry, though James will continue managing EDIN until February 2024. From then, Imran Sattar, another seasoned investor at Liontrust, will become the lead manager of EDIN, with the message moving forward being one of continuity.
• Chair of the board Elisabeth Stheeman said: “Once in place as the company’s portfolio manager, Imran will continue to apply the same flexible investment process that has been the hallmark of the portfolio since March 2020.” She also noted: “It is pleasing to be able to record that the NAV return now also exceeds that of the index over five and ten years, albeit modestly in the case of the five-year return. The majority of this outperformance has come, as we would expect, from stock selection.”

Kepler View

These are good results for Edinburgh Investment Trust (EDIN), with NAV total returns comfortably ahead of the index, contributing to the strong track record since the change of management in March 2020.

Over his time as manager, James placed a particular emphasis on total return, seeking out companies offering both a growing dividend over time and some capital growth, preferring not to prioritise one over the other or get stuck chasing a higher yield. This is something Imran is set to continue with when he takes over. James also didn’t want to be wedded to one single investment style, instead preferring a balance of stocks that offer above-average earnings potential as well as some latent recovery, something that underpins his total return approach. As the chair notes above, a primary driver of the outperformance has come from the managers’ approach to stock selection and is evidenced by a number of different stocks, with multiple drivers of returns, contributing to returns, including Centrica and Marks & Spencer.  

Something that sets EDIN apart from peers is its exposure to mid-cap companies. While these companies offer more sensitivity to the market versus their larger counterparts, they tend to have better growth prospects, which lends itself to the managers’ total return ethos. It also further reflects the managers’ desire for businesses from all areas of the market to contribute to returns, not just the larger, well-established names everyone is familiar with. Moreover, having more exposure further down the market cap scale meant the portfolio wasn’t invested in some of the larger names that fell over the period, including Diageo and British American Tobacco. These omissions were supportive factors of outperformance.

Over the period, the board announced an interim dividend of 6.7p per share, which represents an increase of 4.7% from the previous year. Underlying earnings did fall over the period, but the year prior they welcomed several special dividends which helped boost the total income earned. While EDIN’s historical yield, roughly 4.1%, is not one of the highest in the sector, we would argue it’s in a more sustainable position versus history and offers potential for good long-term dividend growth, which should help deliver a stronger income stream, along with capital growth.

Overall, we think EDIN offers investors exposure to good quality companies, across a diverse range of sectors with the potential for earnings growth which should feed into rising dividends. In our view it’s well positioned to be a core holding for investors seeking a balance between capital growth, current income and income growth, and the managers’ focus on identifying multiple drivers of growth should help reduce the risk of the portfolio, which we think is positive given the uncertain nature of the current economic backdrop. If the strong run of performance continues and dividends continue to grow year-on-year, then we also think there is clear potential for the discount to narrow, which could also provide an extra kicker to shareholder returns.

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