One of the consequences of star manager Neil Woodford's departure from Invesco Perpetual was uncertainty over the future of the funds he ran, including IC Top 100 Fund Edinburgh Investment Trust (EDIN) which moved out to a discount on the news. Even after it was announced that his colleague Mark Barnett, who also has a strong performance record, would take it on from 28 January, investors still had concerns and the trust has mostly traded at a discount to net asset value (NAV) since last October. It is currently on a discount of 1.53 per cent, compared with its 12-month average premium of 0.11 per cent.
- Trading at a discount
- Fee cut
- Performance fee scrapped
- New manager has strong record
- Manager runs a lot of money
- Potential pressure to focus on his open-ended funds
IC Tip Rating
Tip style: INCOME
Risk rating: MEDIUM
Timescale: LONG TERM
The trust invests primarily in UK securities with the long-term objective of beating the growth in the FTSE All-Share Index, and growing dividends by more than the rate of UK inflation.
Investors worry if Mr Barnett is managing too much money to do a good job with Edinburgh, and whether he will give the four investment trusts he runs enough attention now that he runs the much larger (and more lucrative for Invesco Perpetual) open-ended funds, Invesco Perpetual Income (GB0033053827) and High Income (GB0033054015). Mr Barnett runs other trusts including IC Top 100 Fund Perpetual Income & Growth Trust (PLI), which had been outperforming Edinburgh while Mr Woodford managed it.
However, analysts at Winterflood argue these fears were overplayed and point out that Edinburgh has a higher yield of 3.81 per cent than Perpetual Income & Growth's 3.1 per cent, and that it is larger with a market capitalisation of £1.19bn as opposed to £889m for Perpetual Income & Growth. Edinburgh has also proposed a full-year dividend of 23.5p - an increase of 3.1 per cent on last year.
Since 1 April, Edinburgh has cut its management fee from 0.6 to 0.55 per cent of its market cap, and scrapped its performance fee. By contrast, Perpetual Income & Growth charges 0.75 per cent of gross assets plus a performance fee capped at 0.75 per cent.
Edinburgh has also redeemed some of its expensive debt - £100m with an 11.5 per cent rate - which its board says "will represent a material saving in interest costs".
"Mr Barnett heads up a well resourced team and has a well established investment approach," adds Winterflood.
Numis says: "We had been wary of recommending Edinburgh until the management arrangements were clear, but it now shares the same management team as Perpetual Income & Growth, with a more competitive fee structure."
Mr Barnett has implemented changes such as reducing AstraZeneca (AZN), BT (BT.A), Capita (CPI), GlaxoSmithKline (GSK) and Reckitt Benckiser (RB.) so the trust has fewer very large individual positions representing over 5 per cent of the portfolio. He has made new investments in companies including Babcock International (BAB), Beazley (BEZ) and BP (BP.).
Mr Barnett says: "The portfolio will continue with a strong preference for companies that have proven ability to grow revenues, profits and free cash flow in what is a fairly low growth world. We favour management teams that are fully cognisant of the need to deliver sustainable, long-term dividend growth."
However, fund information company Morningstar has downgraded its rating on the fund from Gold to Bronze.
"Mr Barnett's assets under management have increased by over £20bn," says Jackie Beard, director of closed-end fund research at Morningstar UK. "This may affect his investment process and portfolio construction, along with changes to his team. However, the closed-ended nature of this fund gives some comfort that Mr Barnett can stay true to his investment style."
Edinburgh's discount to NAV is not as wide as when we tipped the trust as a 'buy' in January (read the tip).
But if Mr Barnett continues to perform well with Edinburgh Investment Trust it may move back to a premium. So with attractive yield, good manager and lower fees, this could be a good moment to get in. Buy.
EDINBURGH INVESTMENT TRUST (EDIN) | |||
PRICE: | 608p | GEARING: | 117% |
AIC SECTOR: | UK Equity Income | NAV: | 617.42p |
FUND TYPE: | Investment trust | PRICE DISCOUNT TO NAV: | 1.53% |
MARKET CAP: | £1.19bn | YIELD: | 3.81% |
No OF HOLDINGS: | 53* | ONGOING CHARGE: | 1.10% |
SET0UP DATE: | 1 March 1889 | MORE DETAILS: | invescoperpetual.co.uk |
Source: Morningstar & *Invesco Perpetual
1-year share price return (%) | 3-year cumulative share price return (%) | 5-year cumulative share price return (%) | |
Edinburgh Investment ord | 2.811 | 48.631 | 153.286 |
FTSE All Share TR GBP | 6.391 | 28.419 | 100.617 |
AIC UK Equity Income sector average | 11.328 | 53.698 | 163.922 |
Source: Morningstar, as at 11 July 2014
Top 10 holdings, as at 31 Mar 2014
Holding | % |
British American Tobacco | 6.2 |
Roche | 5.3 |
Imperial Tobacco | 4.9 |
GlaxoSmithKline | 4.9 |
British Telecom | 4.8 |
AstraZeneca | 4.5 |
Reynolds American | 4.5 |
BAE Systems | 4.2 |
Reckitt Benckiser | 3.4 |
Rolls-Royce | 3.1 |
Sector breakdown
Sector | % |
Healthcare | 23.3 |
Consumer goods | 21.4 |
Financials | 18.1 |
Industrials | 17.1 |
Utilities | 6.9 |
Telecommunications | 5.9 |
Consumer services | 5.1 |
Oil & gas | 2.2 |