Edinburgh - a core holding for troubled times

The appointment of one of the UK's most successful and well-known fund managers, Invesco Perpetual's Neil Woodford, as manager of Edinburgh Investment Trust on 15 September has caused a certain amount of excitement in the investment trust world.

Mr Woodford describes himself as a member of "a dying breed of long term fund managers who are prepared to take stakes in businesses and sit with them over a good period". He built his reputation managing the gigantic £5.2 billion Invesco Perpetual Income fund, which is down 26 per cent in the year to end October, compared to a sector average of -36 per cent. Over the past 10 years, the compound outperformance by his Invesco Perpetual High Income fund relative to the UK Growth & Income sector and FTSE All Share is 8.6 per cent and 7.2 per cent respectively, and an exceptional level of consistency has been a feature.

The Edinburgh Investment Trust is one of the longest surviving investment trusts. Launched in March 1889, it invests in UK securities with the long term objective of achieving an increase of the Net Asset Value per share of more than the growth in the FTSE All-Share Index, plus growth in dividends per share by more than the rate of UK inflation.

Previously managed by Fidelity, the Edinburgh IT mandate was switched to Invesco Perpetual on 15 September and Mr Woodford says that by the end of the first week the trust was in the shape that he wanted it to be in. In one week, just short of a half of the inherited portfolio was sold and proceeds were reinvested. Exposure to financials, basic materials, industrials and consumer services was reduced while new investment focused on defensive sources of growth in the tobacco, pharmaceutical, telecoms and oil sectors.

Mr Woodford says: "Dividend paying capacity is what we're really focused on. Despite the fall in the oil price I'm still very positive about the cash resilience of these businesses, the asset resilience of these businesses, and their dividend paying potential. These are four sectors that we are very keen on where we have substantial weighting and expect them to do well over the next 3-5 years."

Wealth manager Collins Stewart points to the Edinburgh Investment Trust's attractive dividend yield - now 6.39 per cent. "The board have advised that they are confident of paying a dividend of at least the same amount as the last financial year. However, they have prudently noted that thereafter, the dividend policy will be determined largely by payments from underlying investments," says Alan Brierley, head of investment company research at Collins Stewart. "That said, we would note that Neil Woodford has an outstanding record of managing high-yield funds and that he has constructed a portfolio of companies that should be capable of growing dividends, even during what he expected to be a severe recession."

The question on investors' minds is whether Mr Woodford has got too much on his plate by taking on the additional assets of the Edinburgh IT. But Mr Woodford says: "The twin goals of delivering capital growth and income growth are what I've been doing on my retail funds over the last 20 years so this is a very familiar mandate and it fits in exactly with what I've been doing."

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