Edinburgh Investment Trust (EDIN) has reported a 3.4 per cent increase in its net asset value (NAV) over six months to 30 September, slightly ahead of the FTSE All-Share up 1.9 per cent, while its share price rose 6.5 per cent. However the rise in share price ahead of NAV reinforces the trust's premium to NAV, which is now at around 6.67 per cent, wider than its 12 month average of 4.97 per cent.
Part of the reason for Edinburgh Investment Trust's popularity is its attractive 4.5 per cent yield (ahead of the FTSE All-Share's 3.7 per cent), as well as its highly regarded fund manager Neil Woodford. But is it still worth the premium?
Mr Woodford runs his funds in a defensive way which has worked well through difficult times but means his funds can lag in a rally. "Edinburgh Investment Trust has a defensive bias in the portfolio which has not been particularly helpful to relative performance over the last few months, but has worked well over the past three years," says Iain Scouller, head of the investment funds team at broker Oriel Securities.
Edinburgh Investment Trust has good longer-term numbers beating the FTSE All-Share over one, three and five years, and its peer group average over three and five years. Earlier this year the trust won the Investors Chronicle Best UK Equity Growth Fund Award (
More importantly, it could do even better. The trust has expensive debt arrangements which were put in place before Invesco Perpetual took over its management in 2008 but one of these expires in June 2014 which should cut the trust’s costs. "This should have a big impact on the trust's ability to generate revenue going forward," says Stephen Peters, analyst at broker Charles Stanley. "We are very pleased with the prospects for better dividend growth in future, plus the trust is large, liquid and should benefit from the Retail Distribution Review (RDR)."
The Financial Services Authority's RDR comes into force in January from when commission payments to financial advisers will be banned. This means advisers will not necessarily favour unit trusts and open-ended investment companies which pay commission until this point, but may also consider investment trusts. Because of this some people anticipate a rise in the popularity of certain investment trusts including Edinburgh which is focused on a core area for many investors (equity income) and managed by a high profile manager with an excellent long-term track record. Existing share holders could benefit from further share price appreciation.
Another consideration is Edinburgh's relatively high debt level of around 20 per cent which could cause the trust to have a setback should the shares it holds not do so well. The trust may favour defensive shares but high gearing is a fairly aggressive investment strategy.
The trust's board admits that the concentrated portfolio may cause short-term underperformance, while it has taken some big sector bets with nearly a third in healthcare and a quarter in consumer goods. However Mr Woodford has proved over the long-term that his investment approach works.
"Be wary of buying in at a big premium," says Mr Scouller. "Edinburgh has not been issuing shares (a tactic some investment trusts use to try and lower their premium). It could be better to buy into one of the open-ended funds Mr Woodford runs (Invesco Perpetual Income (Isin: GB0033053827) and High Income (Isin: GB0033054015). But if you are an existing shareholder and are happy with the performance and dividend level then you could stick with it. But if you think the premium is going to fall or you want to take advantage of a possible recovery in cyclical shares then you could switch."
Mr Peters adds that it is not a good idea to reinvest your dividends in a trust that trades at a premium, but a premium is less of an issue if you are a buy and hold investor, or both buy and sell at a premium.
That said, a number of other higher yielding trusts also trade at premiums and Edinburgh provides access to fund manager Neil Woodford at a cheaper price than his open-ended funds (Edinburgh’s portfolio is also very similar to these), with an ongoing charge of 0.72 per cent against 1.69 per cent for Invesco Perpetual High Income and 1.68 per cent for Invesco Perpetual Income. Keeping charges low is very important for long-term investors as they can significantly erode your returns.
EDINBURGH INVESTMENT TRUST (Ticker: EDIN, ISIN: GB0003052338) | |||
| PRICE | 486.5p | GEARING | 122% |
| AIC SECTOR | UK Growth & Income | NAV | 461.37p |
| FUND TYPE | Investment trust | PRICE PREMIUM TO NAV | 6.67% |
| MARKET CAP | £952.95m | YIELD | 4.50% |
| SET UP DATE | 1889 | MORE DETAILS | www.invescoperpetual.co.uk/investmenttrusts |
| ONGOING CHARGE | 0.72% | ||
Source: Morningstar
Performance over several periods vs benchmark
| Edinburgh IT share price total return | FTSE All Share Total Return | |
| 1 year | 11.54 | 9.64 |
| 3 years | 60.54 | 23.26 |
| 5 years | 39 | 11.19 |
Source: Morningstar as at 13 November 2012
TOP 10 HOLDINGS as at 30 September 2012
| Holding | % |
| GlaxoSmithKline | 9.0 |
| AstraZeneca | 8.9 |
| British American Tobacco | 7.1 |
| BT | 6.2 |
| Roche | 5.3 |
| Imperial Tobacco | 4.8 |
| Reynolds American | 4.7 |
| BAE Systems | 4.4 |
| Reckitt Benckiser | 4.2 |
| Capita | 3.7 |
Sector Breakdown as at 30 September 2012
| Sector | % |
| Healthcare | 31.1 |
| Consumer Goods | 24.9 |
| Industrials | 15.8 |
| Telecommunications | 9.9 |
| Financials | 7.2 |
| Utilities | 6.4 |
| Oil & Gas | 3.0 |
| Consumer Services | 1.6 |
| Basic Materials | 0.1 |
