Get bargain growth and income with Edinburgh IT

The trust has underperformed the average return for UK equity income investment trusts and the FTSE All-Share index over one year, but it has still made a double-digit positive return of 13 per cent over this period - the underperformance is largely because it has no exposure to mining shares.

Mr Barnett commented in the trust's report on its financial year ended 31 March 2017 that: "The absence of mining stocks had benefited the portfolio's performance over the previous two years, but the recovery across the sector in the past year meant that the portfolio missed out on one of the major positive trends of the past 12 months. While perhaps not a bubble, the valuation of the sector now looks extended and vulnerable to a pullback in key commodity prices."

Edinburgh also beats its peer group average and benchmark, the FTSE All-Share index, over three years, and Mr Barnett has a strong longer-term record on funds such as Perpetual Income and Growth Investment Trust (PLI), which is well ahead of the FTSE All-Share and its peers over five years in terms of its NAV return.

However, Edinburgh is currently the cheapest way to access Mr Barnett's stockpicking skills as it has a relatively low ongoing charge of 0.6 per cent - lower than those on the other funds he runs.

"We retain Edinburgh Investment Trust on our recommended list, which shares the same management team, headed by Mark Barnett, as Perpetual Income and Growth, but with a more competitive fee structure," say analysts at broker Numis. "The valuation-driven approach focuses on stockpicking within a top-down macro framework, and Edinburgh's portfolio bears little resemblance to the FTSE All-Share, being overweight tobacco, pharma and consumer goods."

Edinburgh has 15 per cent of its assets in international equities, such as US tobacco companies Reynolds American (RAI:NYQ) and Altria (MO:NYQ), and Swiss pharmaceutical company Roche (ROG:VTX). Anda number of its shares make substantial portions of their revenues in dollars or euros so should benefit from Sterling weakness. This also means that these companies, and the returns Edinburgh gets from them, should be less affected if the UK economy faces problems due to the forthcoming departure from the European Union.

Edinburgh has a yield of 3.4 per cent and has increased its dividend for the past 12 consecutive years. For the year ended 31 March 2017 it paid a dividend of 25.35p a share, an increase of 1p or 4.1 per cent on its previous financial year, in line with its objective of growing its dividends in excess of the rate of UK inflation.

This was paid entirely out of revenue, which has increased consistently over the past four years. The trust also has a revenue reserve equivalent to 90 per cent of the dividend due for its last financial year, according to Numis, so it has the ability to cover shortfalls. This is one of the highest levels of revenue reserve among UK equity income investment trusts.

There is no guarantee that Edinburgh's performance will bounce back and that its discount to NAV will tighten - it has traded at wider levels to which it could return.

The trust also has expensive debt to service - a £100m debenture with a coupon of 7.75 per cent, which doesn't mature until 2022.

However, Edinburgh's performance appears to be bouncing back - it has beaten its peer group average and benchmark over six months in terms of its NAV performance. If its share price performance catches up with its NAV its discount will tighten. And its debt has not prevented it from paying attractive and increasing dividends.

So if you want a trust that consistently raises its dividend run by a manager with a strong long-term performance record at what seems like a good price, then Edinburgh Investment Trust is worth consideration. Buy.

Tip style: INCOME

Risk rating: HIGH

Timescale: LONG TERM

Source: Winterflood *Invesco Perpetual **AIC

Performance

Source: Winterflood as at 4 July 2017

Top 10 holdings as at 31 May 2017 (%)

Source: Invesco Perpetual

Sector breakdown (%)