Investment Trust Bargain Hunter: top investor slips to 6% discount

Boasting assets of £1.4 billion, the Edinburgh Investment Trust is one of the largest in the closed-ended fund universe and is popular with income investors, given that its aim is to grow dividends in excess of the rate of UK inflation over the long term.

Manager Mark Barnett took over from Neil Woodford in January 2014 and has delivered a strong showing. According to FE Trustnet, on a three-year view the trust’s net asset value (NAV) is up 39.9 per cent, while the share price has gained 34.2 per cent. This is comfortably ahead of the pack – the average UK equity income investment trust is up 18.5 per cent in share price terms.

The last 12 months, however, have been less plain sailing. Barnett has slipped down the league table due to the trust’s zero weighting to the mining sector, which has benefited from the pound’s decline and an oil price recovery from a low of $30 dollars a barrel a year ago, trading around $50 today. Over the past year Edinburgh’s NAV return stands at 12.3 per cent, placing the trust in 19th place out of 24 in the Association of Investment Companies UK equity income sector.

As a result the trust’s discount has widened and currently stands at 6 per cent. This compares favourably to Edinburgh’s one-year average discount figure of 3.1 per cent and also looks attractive versus rival income funds.

When taking a quick look at the sector as a whole, there’s only a small handful of trusts that are trading on a wider than usual discount. Standard Life Equity Income, a previous bargain hunter tip, stands out. It is trading on a discount of 10.4 per cent, more than double its one-year average discount figure of 3.6 per cent.

Stockbroker Killik thinks Edinburgh’s current discount has entered bargain territory.

In its daily note (today on 20 March) the firm said: ‘The portfolio underperformed the benchmark index, due largely to the underweight exposure to the mining sector. The share price has lagged that of the NAV over the last three months, causing the discount to widen to 6 per cent; this is towards the bottom-end of the medium term discount range (see chart) and a small discount to the rest of the UK equity income sector.’

For some time Barnett has been concerned that too many risks are not being priced into equity markets, which continue to ride high, with the FTSE 100 up 20 per cent in price terms over the past year. Last November, when Edinburgh released its half-year report, he said one of his main concerns is the lack of overall profit growth from UK companies.

His exposure to the FTSE 100 is therefore below the UK equity income sector average at 51 per cent, while an above-average 16 per cent is in overseas companies. The latter are mostly big US tobacco companies, which make a valuable contribution to the trust's income.

Banks remain off the menu, with Barnett instead preferring to hold various other financials such as Provident Financial.

Our Investment Trust Bargain Hunter series can be found here

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