Alarm bells are not ringing yet for Edinburgh (EDIN) shareholders but the £1.1bn UK equity income investment trust has just recorded its second period of underperformance under fund managers Imran Sattar and Emily Barnard.
Their underweight to banks, the absence of Rolls-Royce‘s (RR) stunning recovery from the portfolio and the unexciting performance of Haleon (HLN), the Sensodyne toothpaste to Panadol headache pill healthcare company, contributed to a 7.9% total underlying investment return in the six months to 30 September.
The growth in net asset value (NAV) fell some way short of the 11.6% total return from the FTSE All-Share though shareholders weren’t so far behind with a 10.2% return that reflected a narrowing in the gap – or discount – to 7.6% between Edinburgh’s NAV and its share price.
There was better news on the dividend where the company last month declared a 10.1% increase in its first quarterly payout to 7.6p per share. It is targeting total dividends for the year 31 March 2026 of 32p, also up 10% on last year’s 28.8p distribution, putting the shares on a 4% yield.
Total dividends for the half year are notionally 15.2p (although the first interim dividend has only just been paid and the second doesn’t arrive until February). These are not quite covered by earnings of 14p per share, up from 13.1p a year ago.
Chair Elisabeth Stheeman said the balance of 1.2p per share would be funded from revenue reserves, effectively capital or investment profits. She said the board was comfortable with paying a “modestly uncovered” dividend as it was increasingly common for UK companies to make distributions to shareholders through share buybacks as well as dividends.
As buybacks did not form part of income, it was valid for Edinburgh to fund the dividend partly through capital. “This is sustainable as we expect capital growth from the portfolio over the medium to long term,” she said.
This raises the question of performance. Liontrust managers Sattar and Barnard took over in February 2024 after the retirements of James de Uphaugh and Chris Field who had run the portfolio since March 2020.
They have continued the high-conviction, flexible and broadly style-neutral approach of their predecessors, but have not had a brilliant start. In the last financial year to 31 March, their first 12 months in charge, net asset value rose 8.3%, behind the 10.5% return of the FTSE All-Share. Prompted by the board’s share buybacks, the narrowing discount saved the day, however, with shareholders receiving an 11.3% total return that beat the index.
Since Liontrust replaced Invesco in at the depth of the pandemic in March 2020, the trust has stabilised and generated a total annualised investment return of 15.4%, easily ahead of the All-Share’s 13.1%. It’s a good result but relies on the contribution of de Uphaugh and Field. In the competitive UK Equity Income sector, Edinburgh will not want the gap that has emerged over one year against its main rivals to extend much longer. The latest 12 months’ data show the 44-stock portfolio is up 8% over 12 months, ten percentage points below the All-Share’s 18% return and seven percentage points behind the average 15% return of its peer group.
For their part, the fund managers are upbeat on prospects, saying they “continue to identify many opportunities to invest in high quality businesses in the UK at attractive valuations”, such as Marshalls, the building products manufacturer and distributor they have reinstated, and Trainline, the rail ticketing platform across Europe, which they both bought on share price weakness they judged as excessive. Should stock picks like this pay off, previous outperformance should resume.
Our view
James Carthew, head of investment company research at QuotedData, said: “Liontrust took on the job of managing Edinburgh in the midst of the market panic around COVID and the market’s recovery from that flatters its absolute returns. However, this in no way diminishes its achievement of outperforming the All-Share by an average of 2.3% per year. Shareholders should also be very happy with the dividend increase. However, most UK equity income trusts have been racing away this year – outperforming US equities by miles – and a lack of Rolls Royce and an underweight position in banks has held this trust back.”
