Since assuming management of the Company’s portfolio on 4 March 2020, we have repositioned its holdings into a portfolio of UK and overseas listed companies. James de Uphaugh is the Company’s portfolio manager and his colleague Chris Field is the deputy. In keeping with the Company’s requirements, at least 80% of the portfolio by value is in UK equities.
Despite the extremely volatile market conditions since 4 March the reorganisation process has largely concluded, with 98% of intended trading complete. The desired portfolio of shares is thus in place, bar a small rump of legacy positions. We worked closely with the transition manager over the period to ensure that if our views of individual investments changed, these were incorporated into the transition manager’s trading. Net of all costs, the portfolio performed in-line with the index over the period of the reorganisation (6 March to 25 March inclusive).
As the Company’s Chairman described when announcing our appointment in late 2019, at Majedie we take a flexible, total-return approach to investing. We believe investment flexibility – our approach of identifying and buying different types of shares according to the economic and stock market cycle – is well suited to highly uncertain market conditions. From December 2006 to February 2020, James’ portfolio outperformed the FTSE All-Share index net of fees by 2.8% per annum. In the notes at the end of this statement is a description of the investment process underpinning our management of the Company’s portfolio and the types of company in which we seek to invest.
Since the start of the reorganisation, unprecedented measures have been put in place across societies to address the COVID-19 pandemic and its very real healthcare consequences. These vital measures to protect the health and welfare of society are also having a significant economic impact. The financial wellbeing of many members of the global workforce and their families are directly affected. Attempts to address the economic impact are underway through monetary and fiscal stimulus on a scale that would have been unthinkable only two weeks ago. For all these reasons, we do not propose to indulge in a lengthy introduction to the new portfolio and its features. Shareholders and other interested parties will have more pressing concerns. The rest of this statement is therefore deliberately brief; the portfolio is set out in full at the end. Before that is a description of the current shape of the portfolio and our thoughts on the Company’s borrowings.
We have set out the portfolio by stock and major sector positions: these tables are at the end of this statement. The COVID-19 virus has imposed a hard stop on chunks of the UK and the developed world economies and we are in a period of extreme uncertainty that exposes weak links and interconnectedness. Companies have pulled all levers to conserve cash and increase liquidity. This includes passing dividends in many instances. Employment levels have mostly been maintained as government support schemes have in many countries been substantial. Against this backdrop we have constructed a diversified portfolio of shares, with a focus on companies with strong market positions. Many of the larger positions are holdings that we judge to be leaders in their fields. Examples include Tesco, Smith & Nephew, Hays and Marshalls: they and other holdings should emerge from this crisis in even stronger shape. Despite the massive monetary and fiscal stimulus, weaker companies are likely to close or be taken over at depressed prices. In short, the competitive landscape will tighten yet further: this will be corporate Darwinism on steroids. Our focus on strong and sustainable business models will be even more important than before the crisis.
Table 3 illustrates that amongst the largest sectoral positions we have are: the food retailers – selling essentials; telecoms – where the change in working habits brings home the consumer surplus and trading up to packages with higher speeds is likely; and defence – these are companies with long duration earnings. We have also modestly used our ability to buy non-UK listed stocks by investing in selected US-listed gold stocks as fiscal stimulus gets into full swing.
Given the highly uncertain outlook for dividends across the corporate sector, we will update shareholders on our thoughts on the Company’s dividend income outlook with the full year results in May 2020.
Following the payment of this financial year’s third interim and final dividends, payable in May and July 2020, the Board will review the Company’s dividend for the following year.
Overall, in these unprecedented times, we have worked hard to balance the portfolio across robust, well run businesses with strong management teams that we believe are well placed to ride out this volatility. We remain alert to the evolution of the market and will act swiftly to take advantage of attractive pricing opportunities or rebalance the portfolio as the situation dictates.
Historically, one of the advantages of an investment trust is the ability to borrow funds to boost long term investment returns. This relies on investment returns exceeding the cost of the borrowed funds (borrowings plus falling investment values boosts losses too). Despite the current uncertainty, we believe that borrowing against the assets of the Company (“gearing”) remains attractive strategically, and potentially tactically too after the recent market sell-off. The opportunity to invest in a number of shares with sustainable business models at highly attractive valuations may be a sound reason to deploy additional gearing in time.
The Company has in place a £100m debenture which matures in 2022. It carries an annual coupon of 7.75%. When this debenture matures in 2022, we anticipate looking to replace it with a similar instrument with a lower annual coupon.
In the meantime, shareholders should expect the portfolio to be largely fully invested and, through the debenture, to have inbuilt gearing. Current gearing (defined as the market value of the debenture divided by the Company’s Net Asset Value) is 13.2%. The level of gearing net of cash (or cash equivalent) is 5.7%.
We are also able to access a 364-day revolving credit facility at the Bank of New York Mellon. This facility is not currently being used but we stand ready to draw down on it.
From the end of this month onwards, we will revert to the Company’s usual practice of publishing the full portfolio at each month end, lagged by two months. A factsheet will be published monthly to the Company’s website: edinburghinvestmenttrust.com.
A statement to accompany the Company’s financial year end results will follow in May. We intend to use that statement to provide greater clarity on the outlook for the portfolio.
Our team of investors continues to focus on the rapidly evolving investment landscape and specific investment opportunities. Our workforce is at full strength and we are all working from home in a fully connected and compliant environment. This is a well-rehearsed procedure and is operating smoothly.
Lastly, at Majedie we have deliberately structured our own business to enable us concentrate on delivering long-term outperformance for clients. We are an independent standalone business, well financed with capital reserves many multiples of the regulatory minimum. We have a single focus on active equities. All staff are shareholders in our business: succeeding for clients matters across the organisation. In these highly uncertain times, we trust this stability and focus on Edinburgh Investment Trust’s portfolio will enable us to protect and grow the long-term value of the Company.
We look forward to speaking (if, alas, not meeting) with shareholders in the weeks ahead.
Majedie Asset Management Limited
27 March 2020
NOTES FOR EDITORS
Majedie investment process
As active managers, we believe that markets are inefficient and that equity values, ultimately, follow fundamentals. Where we believe we have an edge is in having a flexible yet repeatable investment approach to identifying these opportunities. Our combination of experience (James de Uphaugh has investment experience dating back to 1988), teamwork (James and Chris are supported by a larger team of investors and analysts, with a global perspective, operating a ‘one investment team’ ethos) and our proven investment process enables us to rigorously assess and identify undervalued opportunities, regardless of market and economic backdrop. We therefore expect our actively managed portfolios to generate sustainable outperformance for the Company over the long term, after fees.
We are primarily stock pickers. Around three quarters of our investment work is typically geared to company specific research. The balance is spent considering the political, economic and equity market backdrop; a higher proportion in times of macroeconomic dislocation, such as now. Our research is deep and fundamental, targeting shares with favourable risk/reward profiles. We take a global perspective. Major aspects of a company’s Environmental, Social and Governance profile are assessed as part of our work. Our flexible investment approach means we are not bound by a rigid or dogmatic style bias. We are open to holding shares with both ‘growth’ and ‘value’ characteristics, as well as those that we identify as having scope for recovery through management change, business transformation or an improving business environment. Clearly, an important dimension to our work in the months ahead will be identifying those companies with sufficiently robust business models, balance sheet and liquidity profiles to weather the current social and economic storm. We see a role in Edinburgh Investment Trust for both shares with attractive long-term earnings growth profiles, as well as businesses that may be out of favour but with the potential to recover. We also aim to hold businesses at attractive valuations. By blending together companies with these features, the overall portfolio should deliver attractive relative returns. In short, outperformance is expected to be driven by a long-term combination of corporate results exceeding medium term expectations, and revaluation.
Risk management is carefully integrated in our investment process. Never has it been more important than now. The downside is considered for each position: protecting the Company’s capital over the long term is critical. Thus those shares in which we consider the downside to be more limited typically represent larger positions in the portfolio. In addition, an Investment Oversight Committee, chaired by our CEO, governs a separate risk oversight process which provides further challenge of individual stock selection as well as macroeconomic and market risks.
Edinburgh Investment Trust plc
Glen Suarez (Chairman) via Tulchan below
Investec Bank plc
Tom Skinner + 44 20 7597 4000
Majedie Asset Management Limited
James Mowat + 44 20 7618 3900
Tulchan Group (Financial PR)
Simon Pilkington + 44 20 7353 4200
Lisa Jarrett-Kerr EIT@tulchangroup.com
Table 1: Portfolio at 25 March 2020 (weightings expressed as a percentage of gross assets)
|Royal Dutch Shell||5.2|
|Smith & Nephew||3.4|
|Legal & General||3.3|
|Direct Line Insurance||3.1|
|Associated British Foods||2.8|
|Royal Bank of Scotland||2.1|
|Lloyds Banking Group||1.8|
|Wm Morrison Supermarkets||1.2|
|Daily Mail & General Trust||1.2|
|Marks and Spencer||0.8|
|Raven Property 12% Cum Red Pref*||0.2|
Table 2: Top ten and bottom ten positions relative to the index weight
|Direct Line Insurance||+2.9|
|Legal & General||+2.7|
|Smith & Nephew||+2.7|
|Associated British Foods||+2.4|
|Royal Dutch Shell||-1.2|
|London Stock Exchange||-1.3|
|British American Tobacco||-3.4|
Table 3: Top ten and bottom ten sector positions relative to the index weight
|Food & Drug Retailers||+4.1|
|Aerospace & Defence||+3.7|
|Forestry & Paper||+3.2|
|Fixed Line Telecommunications||+2.9|
|Health Care Equipment & Services||+2.3|
|Pharmaceuticals & Biotechnology||-1.3|
|Real Estate Investment Trusts||-2.5|
|Gas, Water & Multiutilities||-2.8|
|Household Goods & Home Construction||-3.0|
|Travel & Leisure||-3.3|
|Equity Investment Instruments||-5.8|
 Source: Majedie/FactSet. Data from James’ sub-portfolio within the Majedie UK Equity strategy; to 29 February 2020, GBP, total return (with gross dividends reinvested). Since this return series is only available on a gross basis, a deduction has been made on an annual basis to provide an estimation for costs and charges using the proposed management fee rate, transaction costs and actual OEIC expenses. Past performance is not necessarily a guide to future performance.