Since the announcement of the resignation of Neil Woodford a lot of concern and debate has surrounded the future of his two flagship open-ended funds, Invesco Perpetual Income (GB0033053827) and High Income (GB0033054015) (read our roundup on this). However, there are worries that five investment trusts might suffer as a result of Mr Woodford's resignation.
Mr Woodford runs IC Top 100 Fund Edinburgh Investment Trust (EDIN), while the managers who are going to take on Mr Woodford's open-ended funds, Mark Barnett and Ciaran Mallon, manage a further four investment trusts. Mr Barnett is responsible for IC Top 100 Fund Perpetual Income and Growth (PLI), Keystone Investment Trust (KIT) and the equities portfolio of Invesco Perpetual Select (IVPU).
Mr Mallon, who has already assumed the equities portions of Invesco Perpetual Monthly Income Plus (GB0033051334) and IC Top 100 Fund Invesco Perpetual Distribution (GB00B1W7J089) from Mr Woodford ahead of his departure in April, runs Invesco Income Growth Trust (IVI).
The future for Edinburgh Investment Trust is not yet clear. Investment trusts have independent boards who appoint the manager, and Edinburgh's board has not yet said if the trust will stay with Invesco Perpetual after Mr Woodford’s departure.
In a letter to shareholders the board said: "We would like to take some time to consider the options for the future management of [Edinburgh] before we make a decision, but in the meantime we are satisfied with assurances that we have received from Invesco Perpetual. We are also minded that, as has been the case since we appointed Invesco Perpetual, working with Neil is a highly experienced investment team backed by the resources of a global company."
Alternatives to staying with Invesco include appointing Mr Woodford after he sets up his own management company next year or moving to another fund management house. Edinburgh has moved managers twice in the last 10 years, most recently from Fidelity in 2008.
The uncertainty has caused Edinburgh's premium to net asset value (NAV) of around 4 per cent prior to Mr Woodford's announcement to move to a discount of 3.82 per cent. Analysts such as Morningstar - which had the trust's on their highest rating, Gold - have placed their rating on the fund under review.
If Edinburgh's board stays with Invesco, an obvious choice would be Mr Barnett.
Mr Barnett has a very strong performance record with his other trusts and open-ended fund, Invesco UK Strategic Income (GB00B1W7J535). Perpetual Income & Growth has beaten Edinburgh Investment Trust over one, three and five years in terms of NAV return, and one and three years in terms of share price return.
However, some of the concerns that relate to the open-ended funds also apply here: will Mr Barnett be managing too much money to do a good job with Edinburgh, and will he give the investment trusts enough attention when he is running the much larger (and more lucrative for Invesco Perpetual) open-ended funds? And if he is running four investment trusts, will he be able to differentiate one from another?
Mr Barnett does not necessarily draw a line between income and growth investing (Keystone is classified in the AIC UK Growth sector yet yields nearly 3 per cent), and runs his three current trusts in a similar style. Earlier this year he told Investors Chronicle that: "Income is not just about buying high yield, rather I am looking for a total return - a combination of income and growth."
Also, with more money under management, analysts are concerned as to whether Mr Barnett will be able to invest in small and mid-caps, which have helped the strong returns on Perpetual Income & Growth. This has about 35 per cent invested in this area, as opposed to Edinburgh's 14 per cent. If Mr Barnett does invest Edinburgh more in this area, the profile of the trust would change: small and mid-caps are more volatile and theoretically higher risk than large-caps.
But some analysts argue that this would not make Edinburgh higher risk.
"I don't think that Mark Barnett's approach is higher risk than Neil Woodford's," says Charles Cade, head of investment trust research at Numis Securities. "He does invest more in mid-caps, but his portfolio tends to be more diversified. The historic risk/return statistics are favourable: Perpetual Income & Growth has an NAV total return of 140 per cent over five years with NAV volatility of 12 per cent a year. This compares with a return of 117 per cent for Edinburgh with volatility of 13 per cent. For comparison, the FTSE All-Share has returned 102 per cent with volatility of 15 per cent a year."
There are significant sector weighting differences, with Mr Woodford taking much larger sector bets than Mr Barnett. For example, Edinburgh has 32 per cent of assets in health care, as opposed to Mr Barnett's 21.5 per cent. Mr Woodford top 10 holdings are also larger than Mr Barnett's, so Perpetual Income & Growth has less stock specific risk.
Mr Woodford and Mr Barnett also share unconstrained investment approaches and have similar macro views.
So could Edinburgh moving to a discount be an opportunity to buy into a trust, that whatever the outcome, looks like it will have a top flight manager?
"The de-rating of Edinburgh means that purchases that one might have delayed due to the premium rating can now be made," says Nick Sketch, senior investment director at Investec Wealth & Investment.
Investec has increased its stake in Edinburgh, taking its holding of the trust from 3 per cent of the shares to 4 per cent.
"It is now arguable that the fund is more accurately priced on the basis of recent, relatively weak performance from a still defensively aligned fund, higher stock-specific risk within the portfolio and Edinburgh's costly debt which has largely been ignored for some time," adds Paul Locke, analyst at Westhouse Securities.
He thinks that if Edinburgh leaves Invesco it would ignore the significant managerial ability there.
"Opportunities increasingly exist to tap into cheap stock in the UK Income Growth sector and on Edinburgh itself," he adds. "Forward scenarios include either moving the fund to a recently better performing manager, with less stock risk in the form of Mark Barnett, or shifting the fund (with a sizeable delay until he gets up and running) to Mr Woodford's stewardship, where investors will be happy and the fund will re-rate once more.”
Mr Cade says if Edinburgh's discount moves beyond 5 per cent you could consider buying, and suggests existing investors do not sell while it is at a slight discount, though is wary of Edinburgh until it is clear who will be running the fund after next April.
Other Invesco trusts
Because of the concerns over Mr Barnett, Perpetual Income & Growth has also moved to a discount of 4.72 per cent, having been on a slight premium.
However, Mr Sketch says: "We certainly don't expect Mark to neglect his existing investment trusts: we see no reason why that will happen and note that these and his open-ended fund remain his shop window for the next six months. A temporary discount (if that is what we get) does not damage the NAV which drives the long-term share price performance. More generally, Mark may not be able to run all the capital with exactly the same model portfolio and approach, but we don't see that as unmanageable problem."
Mr Cade continues to recommend Perpetual Income & Growth. "Mr Barnett will not neglect Perpetual Income & Growth because it is his key mandate and I don't expect the way he manages money will change much," he says.
Analysts have suggested that because of Mr Barnett's expanded responsibilities some of the trusts he runs could be merged, though there has been no suggestion of this via official statements from their boards.
Less well known is Invesco Income Growth, run by Mr Mallon, of which the NAV returns are not as strong as Perpetual Income & Growth's. "This trust is much smaller and run in a more mainstream way," says Mr Cade. "I've always preferred Perpetual Income & Growth as it is more flexible than Edinburgh as run by Neil Woodford, and is not so dogmatic in its sector bets."
However Mr Sketch argues that while "Mr Mallon has a natural approach that is more index aware than Mark or Neil, he is an able manager. Mr Mallon’s trust may get more attention in 2014 than in 2013, and when selecting funds, we should not completely ignore that Mr Mallon certainly will not be running too much money next year for his existing style to continue."
