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Stifel upgrades Edinburgh after Barnett trust de-rates

Stifel upgrades Edinburgh after Barnett trust de-rates

Analysts at Stifel have upgraded Mark Barnett’s Edinburgh (EDIN) investment trust to ‘positive’ from ‘neutral’ as shares in the UK equity income fund trail at their widest discount in five years.

The £1.5 billion portfolio has had a poor couple of years, hit by share price falls in AstraZeneca (AZN), Capita (CPI), BT (BT), Next (NXT), Circassia Pharmaceuticals (CIR) and a number of the listed peer-to-peer lending funds in which it is a leading investor.

According to Morningstar data, at last night’s close of 706p Edinburgh shares stood more than 8% below their estimated net asset value (NAV). This is down from a 2% premium at the end of 2015 and compares to the average 4.5% discount on trusts in its UK Equity Income sector.

‘This de-rating is understandable given the relative performance of the shares over the past 18 months, with a significant lag behind the FTSE All Share Index,’ said Stifel’s Iain Scouller and Maarten Freeriks in a note published this morning.

‘However, we do think this is explainable by the high conviction stock-picking approach, the sector weightings and the focus on higher yielding equities which delivers the attractive 3.7% dividend yield.’

They note that last year’s dividend was covered 1.1 times by revenue earnings and that the trust boasts revenue reserves of £75 million, equivalent to 1.5 years of dividends.

In addition to the stock mishaps, Edinburgh’s performance has been held back by an absence of mining stocks, which rebounded last year, and a long-standing overweight to tobacco stocks which have been weak in recent months, the analysts said. 

‘Given the manager's strong long-term track record, we think the poor performance is a short-term sector/style related issue, rather than a long-term structural problem,’ they conclude.

Analysts at Numis Securities, who have rated Edinburgh a 'core buy' for three years, agree. 'It is always tempting to react to a period of underperformance by selling. However, we retain faith that the team’s
relative performance will improve.

'At a time when market valuations appear full, we favour buying investment companies with experienced active managers taking a long-term investment approach, rather than those focused on relative index weightings,' they said in a report this week.

Stifel pointed out that in its last financial year to 31 March Edinburgh’s NAV achieved a ‘decent’ total return of 14%, although this was less than two thirds of the FTSE All-Share’s 22%. In the past six months the NAV has yielded a total return, including dividends, of just 0.3%, again lagging the index’s 3.2%.

Over three years, the NAV is up 39.3%, according to Numis Securities data, just below the sector average of 40.7% but ahead of the All Share’s 36.3% gain. Shareholders’ actual returns, however, have been lower than this, at 31.4%, as investor enthusiasm for the stock has waned.

Longer term, the trust remains one of the sector’s best performers with a ten-year total shareholder return of 127% and NAV growth of 107%. However, credit for that is shared with Neil Woodford, Barnett’s former boss, who ran Edinburgh from September 2008 after the board sacked its previous manager Fidelity and switched to Invesco Perpetual. Woodford left Invesco in 2013 with the trust appointing Barnett in January 214.

Woodford has endured an equally difficult 12 months as we noted in Investment Trust Watch two weeks ago when Edinburgh’s discount hit nearly 9%.

Barnett forged his reputation on Perpetual Income & Growth (PLI), a rival UK equity income trust with higher exposure to smaller and mid-cap stocks, which he has run since 1999. Over 10 years it has delivered a 120.7% total shareholder return, but has struggled more recently with a three-year total return of 18.9% while its shares also trade on an 8% discount below their NAV.

On his open-ended funds – which since Woodford’s departure have included the flagship Invesco Perpetual Income and High Income – Barnett achieved a monthly Citywire performance rating of A, AA or AAA for much of 2010 to 2016 but lost his rating this year.


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