Edinburgh Investment Trust has announced results for the six months ended 30 September 2015. The FTSE All-Share Index delivered a negative total return of -7.2% over this period but Edinburgh’s net asset value total return was +1.1% and, as the fund moved from trading on a 3.5% discount to a 1.7% premium, shareholders got a return of +6.6%. The interim dividend has been upped from 5p to 5.2p.
The Board increased the maximum amount of debt that the fund can have from £100m to £150m. They say there is no intention though to increase the fund’s gearing levels.
Mark Barnett’s manager’s report says the key contributors to the Company’s outperformance were tobacco companies, in particular the holdings in Reynolds American and Imperial Tobacco. During the period under review, Reynolds American saw its share price rise by over 25% after the company’s proposed acquisition of US tobacco company Lorillard met with final approval from the US Federal Trade Commission. This saw Reynolds acquire Newport, a dominant menthol cigarette brand in the US, which strengthens its market position there. Meanwhile, Imperial Tobacco, as part of the deal, acquired some US brands from Reynolds (including premium brand Winston) as well as Lorillard’s US based salesforce. Dividend growth and profit margins remain healthy across the tobacco majors, in spite of the continuing volume decline in global cigarette sales, as product innovation, tobacco quality improvements and cost rationalisation have helped to enhance pricing power in many territories.
Also contributing strongly to performance were some of the investments in the financial services sector. The Company’s holding in Amlin, a Lloyds insurance market investment vehicle, received a takeover approach from Japanese company Mitsui towards the period end, resulting in a significant uplift to its share price. He was fully supportive of this acquisition proposal as the price paid reflected a full valuation for the business. The share prices of Beazley and Hiscox, also in the non-life insurance sector, both rose during the period on the back of positive half-year results, and amid growing takeover speculation.
Another strong contributor to performance from within the other financials sector was Provident Financial. A long-term holding in the portfolio, Provident Financial specialises in the non-standard lending market and has two main lending divisions – Vanquis, a non-standard credit card business, and CCD, its consumer credit division, primarily made up of the home collected credit business. The latter has improved profitability in recent years, by being more stringent on credit quality and through technology-derived efficiency gains. The company has expanded into complementary areas of credit, both organically through the creation of Satsuma Loans, its online short-term loan business, and by acquisition, with the purchase of Moneybarn, a company specialising in car finance. Provident Financial has been quick to adapt its business model to advances in technology and changes in customer borrowing habits. Profit margins are high and stable, while default rates remain low and within the management team’s expected range.
The portfolio continues to have no exposure to banks or mining companies, mainly because of the uncertainty on the future direction of dividends as a result of regulatory restrictions in the case of banks, and uncertainty over future commodity prices in the case of mining companies. It was in part having no exposure to these sectors that helped drive the Company’s outperformance of its benchmark during the period under review.
Among the detractors to performance over the period were Rolls-Royce, BP and Drax. Rolls-Royce continued to disappoint in share price performance terms. The appointment of Warren East as chief executive in July saw him make a further downward revision of the expected full-year pre-tax profits and cancel the share buyback. Headwinds for its marine business, a slowing production line for
the Airbus A330 and lower-than-expected demand for engines to power business jets have weighed on the company’s share price. However, East was keen to emphasise his belief in the long term prospects for the business as a whole, citing “exceptional technology and outstanding long-term prospects”.
A decline in global energy prices was in part responsible for falls in the share prices of BP and Drax. BP announced an increased dividend with its second quarter results and gave further details around the substantial restructuring agenda and opportunities within the business, with chief executive, Bob Dudley, predicting that oil prices would stay ‘lower for longer’. The continued fall in
wholesale electricity prices weighed on Drax and its share price declined further on news in the Chancellor’s summer budget statement that the UK government would cut its renewable energy tax break by removing an exemption that hitherto had allowed companies including Drax to pay a lower rate of tax.
EDIN : Edinburgh Investment Trust holds up well and moves to