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Edinburgh Investment Trust: June 2022 update

Senior Investment Analyst Joseph Hill shares our analysis on the manager, process, culture, ESG integration, cost and performance of the Edinburgh Investment Trust.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

  • James de Uphaugh is an experienced investor and leads the Liontrust Global Fundamental team
  • The trust has performed well since De Uphaugh took over as lead manager in March 2020
  • The focus is on providing a balance between longer-term income and capital growth

How it fits in a portfolio

Edinburgh Investment Trust invests mainly in larger UK companies with an aim to provide a balance of long-term income and capital growth. The trust has a twin objective of increasing Net Asset Value (NAV) more than the FTSE All Share index and growing dividends per share faster than the rate of UK inflation. It could therefore fit as part of an income-focused investment portfolio or add exposure to larger UK companies in a broader, diversified portfolio.

Investors in closed-ended funds should be aware the trust can trade at a discount or premium to NAV. At the time of writing the trust is trading at a discount of 7.4% to NAV.

Manager

In March 2020, the board of Edinburgh Investment Trust appointed Majedie Asset Management’s James de Uphaugh as lead manager and Chris Field as deputy manager of the trust.

In April 2022, Liontrust acquired Majedie at which point all members of Majedie’s investment team moved across to Liontrust, including De Uphaugh and Field.

De Uphaugh, who was previously Chairman and Chief Investment Officer at Majedie after co-founding the business in 2002, now heads up the Liontrust Global Fundamental Team. Before co-founding Majedie he was a Managing Director at Mercury Asset Management (subsequently acquired by Merrill Lynch and now BlackRock), having joined Mercury Asset Management in 1988.

Field, who was previously Executive Director at Majedie, is also now a member of the Liontrust Global Fundamental team. Before co-founding Majedie he was a Director at Mercury Asset Management. He joined Rowan Investment Managers (a predecessor firm to Mercury Asset Management) in 1980.

The managers benefit from the support of a wider investment team of fund managers, analysts and responsible investment specialists. There’s an embedded culture of ideas sharing, diversification of thought, collegiate interaction and peer challenge. This ensures that only the best ideas from across the whole team are incorporated into the trust.

As with any investment trust the board oversee the management of the company for its shareholders. With seven members it has a broad range of financial and investment experience which should ensure it’s able to hold the trust managers to account. Elisabeth Stheeman will replace departing Chairman Glenn Suarez later this year.

Process

Edinburgh Investment Trust mainly invests in larger UK companies with a small allocation to overseas companies. The objective is for returns to come from a balance of long-term capital and income growth. This approach limits the reliance on either income or capital to drive returns which could result in a smoother ride. The trust tends to be concentrated with around 40-50 holdings. This means each one can have more of an affect on performance, though this approach increases risk.

De Uphaugh is not wedded to a single investment style. He looks for good quality companies with sustainable business models and quality management teams whose shares are attractively valued and can be bought for less than the company’s true worth. He can invest in companies growing strongly, or in those going through a restructuring or recovery. He considers the state of the economy, geopolitical developments, as well as company specific characteristics when making investments. He’s patient and aims to invest for the long term, which means he doesn’t buy and sell companies frequently. De Uphaugh invests a relatively small portion of the trust’s assets overseas, at its financial year end in March this figure stood at 12%.

There are a number of themes in the trust such as supply chain resilience, users of data analytics, cookie cutter expansion models and Darwinism (businesses gently beating the competition).

The manager is positive on the medium-term prospects of the UK market after years of being unloved, seeing the current low valuations compared to other markets as a function of past challenges. He’s optimistic about the opportunity set ahead of what he sees as a multi-year rehabilitation for the UK market.

In the year to the end of March 2022, De Uphaugh made a number of changes to the portfolio. The largest purchase was in Pharmaceutical group GlaxoSmithKline amid optimism the forthcoming demerger of the business’ consumer health unit will release value and support greater investment in the pharmaceutical pipeline. De Uphaugh also invested in the information, data and analytics company Ascential based on his support for the company management’s digital strategy to drive growth.

Some other investments were sold. Rio Tinto was sold over a few concerns, including the direction of future iron ore prices. De Uphaugh also sold the trust’s position in the bank Barclays citing the potential for future downward pressure on investment banking fee income.

The trust can borrow money to invest with the intention of increasing returns (known as gearing), but this could magnify losses in a falling market and increases risk. The manager can also use derivatives, which if used adds risk. The level of gearing as of the end of March (the end of trust’s financial year) was 4.4%. In addition, there may be some investment in smaller companies which, by their nature, can be higher risk and illiquid investments.

Culture

Liontrust gives managers the freedom to manage their funds according to their own investment and market views. The company simply asks managers not to deviate from their investment processes. Each manager's portfolios are regularly checked by other senior managers at Liontrust to ensure they're staying true to their investment processes.

We like that all Liontrust fund managers invest a significant amount of their own money into the portfolios they run, and their incentivisation is tied to the performance of the funds they manage. We think these factors help to align their interests with those of investors. The team produces regular insight articles which are available via the Liontrust website.

ESG integration

The manager thinks that ESG (Environmental, Social and Governance) factors have financial implications for the trust’s investments so incorporates ESG factors into company analysis. De Uphaugh prioritises and engages with companies on material ESG issues and the outcomes from these engagements inform ongoing conviction and investment decisions.

Liontrust gives fund managers the freedom to run their portfolios according to their own investment and market views. This freedom means there are no views imposed on managers. As a result, the quality of ESG integration varies across the firm. Some managers have chosen to fully integrate ESG, while others are still developing their approach.

Cost

The annual ongoing charge to March 2022 was 0.52%. Investors should refer to the latest annual reports and accounts, and Key Investor Information Document for details of the risks and charging structure.

If held in a SIPP or ISA the HL platform fee of 0.45% per annum (capped at £200 per annum for a SIPP and £45 for an ISA) also applies. Our platform fee doesn’t apply if held in a Fund and Share Account. Part or all of the annual charge is taken from capital rather than income generated, increasing the potential for your investment’s capital value to be eroded.

Performance

The trust has performed well since De Uphaugh took over as lead manager in March 2020, albeit this is a short period of time. From 4 March when the investment trust board appointed Majedie as Investment managers of the trust, Edinburgh Investment Trust has delivered a return of 28.93% to investors, which compares favourably with the FTSE All Share return of 17.74%. De Uphaugh also has a good longer-term record as a manager of other funds, although this shouldn’t be used as an indication for future returns and past performance is not a guide to the future.

Over the 12 months to the end of March, the trust’s NAV rose 14.1%, while its share price rose 10.6%. This compares with a return of 13.0% for the FTSE All Share index. The weaker share price performance compared to NAV is explained by a widening of the discount the trust traded on over the year. Since the start of 2022 the board have been buying back shares in the trust to narrow the discount.

Over the same period, the biggest contributors to performance were commodity metal miner, Anglo American, defence company BAE Systems and food retailer WM Morrison (acquired during the period). The largest negative contributors to performance came from holdings in paper producer Mondi, recruitment company Hays and engineering firm Weir.

After resetting the dividend in 2020/21 at a lower level, the board has proposed a total dividend for the year to the end of March 2022 of 24.8p per share. This is a 3.3% increase on the previous year, excluding special dividends. As was the case last year, this dividend payment is partially funded by using some of the trust’s revenue reserves. This method of boosting the income paid to investors is used by investment trusts during tougher times for the market, using reserves that have been accumulated during the good times. Please remember that dividends are variable and not guaranteed.

Annual percentage growth

May 17 – May 18 May 18 – May 19 May 19 – May 20 May 20 – May 21 May 21 – May 22
Edinburgh Investment Trust -6.97% -10.23% -18.82% 47.05% 5.89%
FTSE All Share 6.53% -3.17% -11.16% 23.13% 8.27%

Past performance is not a guide to the future. Source: Lipper IM to 31/05/2022. Please note the current trust manager has managed the trust since March 2020.

FIND OUT MORE ABOUT EDINBURGH INVESTMENT TRUST INCLUDING CHARGES

VIEW EDINBURGH INVESTMENT TRUST KEY INFORMATION DOCUMENT

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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