The Edinburgh Investment Trust ticks off strong year with double digit NAV return

The Edinburgh Investment Trust (EDIN) announced its annual results for the year end 31 March 2023. The NAV total return over the period was 13.4%, exceeding the 8.4% return of the benchmark index. The share price total return was 8.9%. Dividends for the financial year were up 3.8% compared with the previous year, equivalent to a yield of 3.9%. During the year, the company also announced a change to its management team, from James de Uphaugh and Chris Field to Imran Sattar and Emily Barnard.  A new management fee was also agreed resulting in a pro-forma 11% reduction in the annual management fee. Despite positive performance, share price discount to NAV widened to 11.5% from 7.5% reflecting widening discounts in the sector.

Key contributors to performance included Marks & Spencer (Retailers), BAE Systems (Aerospace and Defence) and Centrica (Gas, Water and Multi-Utilities). These three stocks are all examples of businesses that were purchased when out of favour, and which have enjoyed significant share price appreciation as their operating models have been restructured and improved. All remained prominent holdings at the year end. Other significant contributors to excess returns came from avoiding large index constituents whose share prices fell, such as Diageo (Alcoholic Beverages), Reckitt Benckiser (Consumer Goods), Prudential (insurance) and British American Tobacco.

On the negative ledger, the holdings in Anglo American (Industrial Metals and Mining) and RS (Industrial Support Services) were weaker, making them the two largest stock-specific headwinds.

Commenting on the performance, new portfolio manager Imran Sattar noted:

“It is a great honour to take over as the management team of the Company. Emily and I were fortunate to work closely with James and Chris, and we look forward to building on the strong foundations and excellent track record that they put in place.

“UK equities are out of fashion, for a host of well-rehearsed reasons. Quite what the catalyst for an improvement in fortunes will be is hard to say, but strong businesses generating attractive returns don’t go unnoticed for long. We believe the UK equity market offers a compelling universe of businesses at attractive valuations. Further, some of the very best investment opportunities arise when sentiment is poor. It strikes us that we are in one of those times now.

“Over the financial year, a diversified set of stocks has driven the portfolio’s excess returns. Key outperformers included Marks & Spencer, BAE Systems and Centrica. These three stocks are all excellent examples of businesses that were purchased when out of favour, and which have enjoyed significant share price appreciation as their operating models have improved.

“We are mindful of changing expectations for the path of interest rate normalisation, as inflation remains more entrenched than expected. This period of heightened monetary policy uncertainty coincides with a period of elevated geopolitical risks – making a flexible and pragmatic approach important. We expect risks to remain high, with 2024 seeing a significant number of elections globally – most notably the US, India, and the UK. China continues to face growth headwinds as the economy seeks to transition from investment-led to consumption-led growth.

“With the elevated uncertainty, our focus remains on owning businesses where growth is helped by exposure to structural growth tailwinds, or where there is a change in industry structure or company strategy which will enable future profit growth. Our confidence in the portfolio comes from owning strong businesses, managed by intelligent management teams executing on their business plans to drive total shareholder growth.”

EDIN : The Edinburgh Investment Trust ticks off strong year with double digit NAV return