Buy into low valuations via Edinburgh Investment Trust

But Richard Troue, head of investment analysis at broker Hargreaves Lansdown, says: “Edinburgh invests in solid UK businesses that will almost certainly survive Brexit. Some are more reliant on consumer spending, [but] others are truly international, or sell products we’ll still buy regardless of what happens, such as AstraZeneca (AZN) and BP (BP.). They’re out-of-favour, undervalued businesses that the fund's manager, Mark Barnett, thinks are well managed and in good financial health. This is important because, as well as aiming to grow your investment over the long term, Mr Barnett tries to pay high and rising dividends. The emphasis on unloved businesses, and a bias to companies reliant on the UK economy, hasn’t helped recent performance. But we don’t think these companies and this approach to investment will be out of favour forever. In the meantime, the trust is on an attractive discount and has the potential to pay good dividends while you wait patiently for long-term growth.”

Edinburgh was trading at a discount to NAV of about 6.3 per cent as of 11 January. If sentiment towards its holdings improves, the trust’s shareholders could benefit from both a rise in the value of the underlying holdings and its own share price. This could also result in the discount tightening or moving to a premium – something not unusual for an income trust.

“There is much to commend Edinburgh Investment Trust, including its good secondary market liquidity owing to its large size and attractive yield of 4.3 per cent, with a stated aim of increasing dividends by more than the rate of inflation,” comment analysts at Winterflood. “Its manager has increased exposure to stocks that offer a return which is uncorrelated to regular business cycles, so investors are likely to see natural divergences from the benchmark performance. However, we remain confident in Mark Barnett’s ability as a stockpicker over the long term.”

Mr Barnett has run Edinburgh Investment Trust for five years, but has a much longer record on other funds with which he has delivered considerable outperformance. He assumed responsibility for the management of Perpetual Income and Growth Investment Trust (PLI) in 1999, since when he has "developed an impressive record of outperforming the FTSE All-Share in NAV terms in 14 of the 16 calendar years between 2000 and 2015, a period that encompassed a range of market conditions," say analysts at Winterflood. "The annualised NAV total return was 10.7 per cent, compared with 3.8 per cent for the wider UK market during that time.”

Edinburgh Investment Trust’s holdings have an 82.6 per cent overlap with Perpetual Income and Growth's, according to Winterflood Securities, but the former trust is the cheapest way to access Mr Barnett, with an ongoing charge of 0.55 per cent.

There is no guarantee that Edinburgh Investment Trust's or its domestic-facing holdings' share prices will improve, and there is a risk they could do even worse. The trust’s discount has also been wider: its 12-month average discount is 8.4 per cent and at times last year it traded wider than 10 per cent. And the trust doesn’t have a formal discount control policy, so there is no guarantee its board will take action if this widens.

However, Edinburgh does not only invest in domestic-facing mid-caps – over 40 per cent of its assets are in large-caps, which tend to be more international. The trust is also actively managed by an experienced manager who could change its allocation if necessary. And the trust’s board has made share buybacks to control the discount up until now.

So if you want to take a contrarian bet on a market that is arguably undervalued, Edinburgh Investment Trust’s positioning, strong manager record and discount to NAV suggest it is a good way to do this. Buy.

Edinburgh Investment Trust

Source: Winterflood as at 14 January 2018, * Invesco

Performance

Source: Winterflood as at 14 January 2018

Top 10 holdings  (%)

Source: Invesco as at 30 November 2018

Sector breakdown (%)

Source: Invesco, as at 30 November 2018