Edinburgh Investment Trust produced a positive net asset value (NAV) total return for the six months to 30 September 2016 of 6.8% (debt at par) and 6.6% (debt at market), compared to a return of 12.9% by the FTSE All-Share Index, the Company’s benchmark. The share price total return (share price with dividends reinvested) for the period was 11.1%, with the Company’s share price ending the period at 724.0p, an increase of 8.9% from the year end share price of 665.0p. The Board has declared a first interim dividend of 5.4p (2015: 5.2p), an increase of 3.8%.
The demand for shares in the market resulted in the discount (with NAV at par) of the Company narrowing from 6.4% at the year end to 2.5% on 30 September 2016. With debt at market value, the shares at this time were trading at a discount of 0.2% (31 March 2016: 4.4%).
The Company’s performance was held back by its zero weighting in the mining sector and the absence of a holding in HSBC and Royal Dutch Shell. These share prices rose strongly, benefiting from weakened sterling (which declined by 8.8% against the US dollar over the period) and, in the case of Royal Dutch Shell, from the recovering oil price. The zero weighting in UK domestic banks was, however, beneficial to portfolio performance.
The holdings in the tobacco sector again delivered a positive contribution to performance, helped by their international exposure, but also from continued positive news flow. British American Tobacco is seeing the benefits of its focus on key brands – its Global Drive Brands posted a 10.5% volume increase in its Q2 earnings report. Imperial Brands’ half year results confirmed a 10% interim dividend increase as it reaps further benefits from last year’s acquisition in the US of brands (including Winston) and manufacturing facilities.
AstraZeneca, another US dollar beneficiary, announced plans to file its injectable asthma treatment drug with US and European regulators later this year, after favourable trial results. The failure of Bristol-Myers’ lung cancer study was also seen as positive for AstraZeneca’s combination therapy cancer drugs.
Other significant positive contributions to portfolio performance came from the holdings in BP, Burford Capital, Compass, HomeServe and Rentokil Initial.
The portfolio’s holdings in domestic sectors, notably those particularly exposed to the fall in sterling and perceived challenges to the UK economy, performed poorly in the aftermath of the referendum. The stock market was also inclined to de-rate companies which warned of lower profits – delivering a “double-whammy” impact on the share price via a fall in both earnings forecast and P/E ratios.
Notable amongst these was the holding in Capita, which fell sharply in value as it downgraded full-year earnings forecasts, blaming a slow-down in specific trading businesses, one-off costs and problems with a major contract with TFL – along with delayed client decision-making since the EU referendum.
The holdings in the travel sector – easyJet and Thomas Cook – warned of the negative impact of weaker sterling and were additionally impacted over the period by concerns over terrorist activity and by air traffic control strikes. There was some respite for Thomas Cook shareholders towards period end as the company confirmed full year profit guidance. The benefits of the measures the company has taken over the past two years are offsetting a challenging trading environment.
Other domestically focused holdings to deliver negative share price performance included Derwent London, N Brown, GAME Digital, BT and TalkTalk Telecom.
The share price of Circassia Pharmaceuticals fell sharply on news that its cat allergy drug had failed to meet the primary end point of Phase III trials. While this was very disappointing and surprising news – the drug had performed well in Phase II trials – it is noteworthy that Circassia Pharmaceuticals retains significant cash on its balance sheet and that, over the past year, the company has also made significant diversification into respiratory drugs, devices and technologies.
EDIN : Edinburgh Investment Trust misses out on mining bounce