Edinburgh Investment Trust – update

Invesco’s Mark Barnett has been under the spotlight, but we believe the longer term prospects of this investment trust remain strong.

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  1. Rob Morgan

Mark Barnett, the fund manager that took over management of Neil Woodford's funds at Invesco, has sought to distance himself over his predecessor’s current troubles. He emphasises his more balanced approach should not be compared to Mr Woodford's more aggressive stance on UK domestic exposure and higher-risk emerging firms.

Holdings in unquoted companies (not listed on any stock exchange) in Invesco High Income and Invesco Income  funds are between 4% and 5%, far below that of Mr Woodford’s. Meanwhile, in Edinburgh Investment Trust, a constituent of our Foundation Fundlist of preferred investments across the major sectors, there is no exposure to unquoted stocks, and relatively little exposure to smaller companies overall.

It is fair to say Mr Barnett has been through a difficult period of performance – albeit not on the scale that Mr Woodford has endured. They share a philosophy of focusing on long-term investing, often going against the consensus and current trends. So while he doesn’t face the structural issues Mr Woodford has encountered, Mr Barnett has some holdings in common with the Woodford range of funds, especially in domestically-focussed UK companies where they both believe there are good opportunities.

This has rightly drawn scrutiny from investors, but it’s important to emphasise that Mr Barnett has stuck mainly to larger, stable stocks in areas such as tobacco and pharmaceuticals and limited exposure to smaller firms. Meanwhile, Mr Woodford has increasingly prioritised earlier-stage business and has been more concentrated in UK domestic names such as housebuilders. Over the years the structure of their funds has diverged markedly having been much closer when Mr Woodford launched his new investment company in 2014.

The difference in approach can be seen in the significant contrast in top ten holdings where there is only one in common (latest available data, source: FE Analytics):

We estimate the overlap between Woodford Equity Income and Edinburgh Investment Trust is around a quarter by weight. This is biased towards larger, more liquid stocks, in terms of overall size, even though in terms of numbers of holdings the overlap is concentrated towards the smaller stocks. In summary, Mr Barnett has taken a far more balanced and diverse approach than Mr Woodford, so although there is some stock overlap, portfolio construction is radically different.

Latest news-flow indicates a number of Mr Woodford’s positions are being sold down to provide liquidity for his investors. The stocks where there is overlap with Edinburgh Investment Trust could therefore be subject to near-term price swings. However, Mr Barnett is under no pressure to sell any of his positions in this Trust. This is a closed-ended investment where investor flows have no impact on the day-to-day running of the portfolio.

Our view

In the shorter term, this Trust may face a period where heightened price movements affect a portion of the stocks it holds in common with the Woodford range of funds. However, we do not think this affects longer term prospects. Mr Barnett is well positioned to ride out any volatility with a far more diversified portfolio and very limited exposure to early stage stocks. We do not believe his investment process and stock selection is compromised, and we continue to be drawn to his long term investment record and experienced team. We therefore retain the fund on our Foundation Fundlist.

It is also worth observing that the Trust’s share price is trading at a discount to net asset value of around 9% at the time of writing. This potentially provides additional value and yield, as well as lower charges, compared with Mr Barnett’s equivalent open-ended funds such as Invesco High Income; although there is no guarantee this discount will close and it could work against investors if it widens. It should also be noted the Trust uses some gearing (borrowing to invest) with the goal of enhancing returns and this increases risk.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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