Questor: time to shed struggling Edinburgh Investment Trust?

Richard Evans 21 November 2019 • 6:00am

Scotland Edinburgh views — Producing a reliable and growing income is one of Edinburgh’s key goals Credit: Fotolia

Questor investment trust bargain: poor returns largely down to aversion towards domestic British stocks and, in recent months, the injurious 'Neil Woodford effect'

In the three years since we tipped Edinburgh Investment Trust it has lost about 13pc for readers. Time to sell and put the money into something more promising?

Let’s look at the reasons for the fund’s poor performance.

The first is that the type of stock favoured by the manager, Mark Barnett of Invesco, is currently unpopular. Edinburgh has heavy exposure to British stocks that depend on the domestic economy, and these are the very shares most shunned by investors while Brexit remains unresolved.

Mr Barnett is also, to a degree, a “value” investor, a style that has, as we discussed last week, been out of favour for a long time.

Something else has weighed on Edinburgh over the past few months: the Neil Woodford debacle. Mr Barnett, who took over as the trust’s manager when Mr Woodford left Invesco to start his own company, is seen as his protégé, so some of the negative sentiment towards him has spread to the Edinburgh manager.

To what extent this is fair is debatable. Analysts at JP Morgan Cazenove, the broker, writing shortly after the publication of Edinburgh’s annual report in June, said: “Neil Woodford used to run Edinburgh before setting up his own firm.

"Mark Barnett took over Edinburgh and ran it initially with a similar approach but the more recent issues that have brought down Woodford are not applicable to Mark Barnett and Edinburgh – the overlap (in stocks held by both Edinburgh and the Woodford Equity Income fund) is a relatively small number of names accounting for only around 15pc of Edinburgh.

“What Neil Woodford and Mark Barnett do have in common is a reputation built up during their common time at Invesco, and poor performance over the past few years as their style is out of favour.”

Conflicting diagnoses

The trust’s board is taking a keen interest in the portfolio’s performance and Mr Barnett’s work.

In the annual report it said: “In the light of the underperformance during the past three years, the board stepped up its scrutiny of the way that the portfolio is managed: probing once again the nature of investment, risk management and challenge processes.” The board concluded that “we continue to believe that Mark’s approach is the right one”.

However, JP Morgan Cazenove said Edinburgh’s poor performance relative to peers “must be put down to poor stock selection”, and added that “whilst the board is supportive of Mark Barnett they will not have unlimited patience”.

The broker said there had been a trend towards investment trust boards setting performance targets for struggling managers and then, if they continued to underperform, offering shareholders a full or partial exit at a price near to the trust’s net asset value – in other words, at a premium to the share price given the current discount of 11.3pc.

A change of manager would be another option for the board.

Amid all the discussion of the fund’s investment style and any connections with Neil Woodford it is easy to forget that producing a reliable and growing income is one of Edinburgh’s key goals.

Although Mr Barnett used the trust’s annual report to express his frustration at what he saw as the market’s undervaluation of some of his holdings, he was also at pains to emphasise his efforts to pick stocks that should be able to grow their dividends.

This was reflected in the trust’s decision to raise its annual divi by 5.3pc to 28p. This was more than covered by its income of 28.7p, although that did represent a fall of 2pc from the previous year. The current yield is 4.7pc. The trust is also cheap: the ongoing charge is 0.56pc a year and there is no performance fee.

Questor believes it would be the wrong time to sell Edinburgh. We see domestic stocks as undervalued and poised for a “Brexit bounce” but, if we are wrong and the fund continues to underperform, the board’s ability to change manager or offer shareholders an exit at close to par value should also boost the shares.

Questor says: hold

Ticker: EDIN

Share price at close: 596p

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