IC Top 100 Funds update: Edinburgh ditches Barnett

Glen Suarez, chairman of Edinburgh, said: “Since 2018 we have worked hard to understand the causes of this underperformance, cognisant of the long-term investment objective of [Edinburgh] and the recent trends in the UK equity market. All good conviction fund managers experience periods of underperformance and a focus on long-term results requires shareholders sometimes to bear bouts of relative weakness – especially when a fund manager’s style is out of favour. However, [Edinburgh] has suffered from... large falls in prices of stocks... the cause of which is specific to each stock rather than resulting from broad market movements. These stocks have been a significant contributor to the weak performance and [have led us] to question the effectiveness of the investment process.”

These holdings included Provident Financial (PFG), Allied Minds (ALM), Burford Capital (BUR), Amigo (AMGO), Eddie Stobart Logistics (ESL) and Capita (CPI).

“We can understand Edinburgh’s board’s frustration with the period of underperformance, particularly given a number of stock-specific issues,” commented analysts at Numis. “Performance has also been impacted by overweight exposure to defensive sectors – tobacco, healthcare and insurers – little exposure to resources, and none to miners. Mr Barnett has also been unwilling to buy highly rated consumer goods businesses such as Diageo (DGE) and Unilever (ULVR), favouring more cheaply valued domestic stocks. Invesco recently announced that Martin Walker will become co-head of UK equities to help split the line management responsibilities. [But] the timing of the change is intriguing given that Edinburgh's bias towards value and UK domestic stocks has been a key driver of underperformance.”

Some analysts think that if there is a Brexit outcome markets consider favourable, UK domestic exposed stocks could rally and Edinburgh’s performance might improve. So David Liddell, chief executive of IpsoFacto Investor, believes that the trust’s board should have waited until at least six months after the election before changing manager.

But Iain Scouller, managing director of investment funds research at Stifel, said: “The [new] managers say they are attracted to domestic companies where material valuation gaps exist. It is also likely to be under-represented in large, highly rated 'dependable' growth stocks with perceived defensive qualities.”

The trust’s new manager, James de Uphaugh, is chief investment officer of Majedie Asset Management, and co-manager of the LF Majedie UK Equity (GB00B88NK732) and LF Majedie UK Focus (GB00B7S3QT06) funds. He and Edinburgh’s new deputy manager, Chris Field, will take a total return approach whereby income is one important component rather than the primary driver of investment return. Edinburgh’s board said that this aligns with the trust’s existing objectives – to outperform the FTSE All-Share Index on a net asset value (NAV) capital return basis over the long term and dividend growth in excess of the rate of UK inflation.

The new managers will hold around 40 positions and are expected to have more exposure to large-caps than the trust currently has. The Majedie team also includes environmental, social and governance considerations in their investment process.

But LF Majedie UK Equity has underperformed the FTSE All-Share index and Investment Association (IA) in UK All Companies fund sector average over one, three and five years to the end of November, although beats the index over 10. It is in the fourth quartile of the IA UK All Companies sector over one, three and five years.

LF Majedie UK Focus unperformed these benchmarks over one and three years, although beats the FTSE All-Share index over five and 10 years to 30 November.

Analysts do not expect the manager change to result in significant discount tightening. “Although Edinburgh benefits from a £1.1bn market cap and an attractive yield, it is in a highly competitive peer group,” said analysts at Winterflood. “So we would not expect an immediate significant rerating and believe it will take time for the new manager to establish a track record.”

At close of play on 10 December, the day before the announcement of the manager change, Edinburgh was on a share price of 604p and discount to NAV of 8.4 per cent. By close of play on 17 December it had risen to a share price of 633p, although was on a discount to NAV of 8.1 per cent, maybe because in the intervening period its share price and holdings, along with UK markets more widely, were influenced by news including the result of the general election and more detail on the Brexit process.

There will be no change to the trust’s dividend objective, but some analysts are concerned that the income and yield might not be as high because of the new managers' investment approach. Edinburgh had a yield of 4.5 per cent as of 18 December, according to Morningstar, but Majedie UK Equity's was lower at 3.31 per cent.

But Edinburgh will cut its fees: Majedie will receive an annual management fee of 0.48 per cent of Edinburgh’s market capitalisation up to £500m and 0.465 per cent on amounts above £500m. And as a contribution to the cost of changing manager Majedie will waive its fee for the first three months of its appointment.

At present Edinburgh pays Invesco 0.55 per cent of market capitalisation per year and has a low ongoing charge of 0.56 per cent – already lower than that of many other active funds.