Why The Edinburgh Investment Trust plc Is A Contrarian Buy

Is The Edinburgh Investment Trust plc (LON:EDIN) a good bet even without Neil Woodford?

Owain Bennallack

Owain is a magpie of the investing world -- and not because he gets into a flap. Almost any style of investing might suit him, depending on the bigger picture, and he's held all sorts of companies. Paraphrasing Keynes, he says: “When the market changes, I change my mind -- what do you do?” That said, Owain is usually a buyer of equities, where he prefers lightly geared, modestly rated companies, and is increasingly on the lookout for Buffett-style intangible quality. He aspires to buy-and-hold: his best investment ideas are worth much more than he sold them for. Then again, his worst investment went bust due to management fraud!

Published 5 November, 2013 3:59 pm GMT

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Given the popularity of Invesco Perpetual’s famed fund manager Neil Woodford, it’s not surprising investors have been thrown into a tizzy by the announcement he’s to leave the company in early 2014.

Woodford manages billions of pounds in his Invesco Income and High Income funds, although not as much as he did — savers have reportedly already drawn £1 billion or more from the funds he oversaw.

I think if it gets away with losing a billion or two in assets under management, then Invesco will count itself lucky. Woodford is probably the closest thing the UK has to Warren Buffett in terms of popular appeal — at least since Anthony Bolton left the scene — and Invesco must have been terrified that one day he’d head off to do his own thing.

Well, now it’s happened, leaving his employer and his investors wondering what to do next.

Do they still Trust him?

Vast tracts of forest have already been chopped down to print newspaper and magazine articles advising Woodford’s followers on alternative funds. However, much less attention has been paid to a different vehicle he also manages — the Edinburgh Investment Trust (LSE: EDIN).

On the one hand, that’s not surprising. Investment trusts have traditionally had a narrower appeal than standard unit trusts, because financial advisors and many of their clients find them complicated. The trusts are companies owned by their shareholders, so they don’t tend to spend much on advertising, either. Neither factor makes them popular fodder for the financial press.

Then again, this is still a £1.1 billion fund we’re talking about. If anyone else was managing it, their departure could be big news in and of itself.

From expensive to a cut-price bargain

It’s not as if Woodford’s departure has gone unnoticed by its shareholders — or those thinking of buying into Edinburgh.

One of those complications of investment trusts I mentioned is that they can trade at a premium or a discount to their net assets. In other words, you might pay £1.10 (a premium) or 90p (a discount) for the same assets.

Income trusts like Edinburgh have had a very strong run in the last few years, as people have been desperate for income due to lower interest rates on savings. As a result, many now trade at a premium to what they’re theoretically worth.

Edinburgh enjoyed this run, too. According to Morningstar, the trust was on a premium to net assets of 4% before Woodford dropped his bombshell.

After the announcement, Edinburgh’s share price immediately fell from a few pennies over £6 to a low of £5.60. This 7% price fall came despite no change in the assets owned by Edinburgh – which are mainly shareholdings in giant companies like GlaxoSmithKline and AstraZeneca whose dividends fuel its own pay-outs to shareholders.

Also, Edinburgh has a healthy cash buffer to smooth any hiccups in dividends received from month to month. Again, these reserves are unchanged. Woodford is leaving — but it’s not like he’s absconding with the cash!

The share price has recovered to around £5.70, but they are still on a discount to net assets of around 3.5%, compared to a premium of 4% before the news broke.

Get paid to wait for whatever is next

I think this swing is purely down to sentiment. This makes Edinburgh shares more attractive than they were before, not less.

Invesco is a massive fund house packed with managers, and while Woodford’s record is good he’s hardly unique in running a successful equity income trust. Many have done it, including his co-worker Mark Barnett, who has been tipped as one candidate to replace him. Barnett has actually outperformed Woodford in recent years.

What’s more, even the greatest fund manager fans would probably concede that the fortunes of individual income trusts will move in tandem with the fortunes of dividend paying shares in general, and with the wider demand for yield, as much as the decisions of managers, in the short term at least.

My conclusion is that if one wants to buy into a portfolio of blue-chip dividends assembled by one of Britain’s top stock pickers that’s likely to be steadily managed after his departure, you can now do so at a more reasonable price than before, and enjoy a higher dividend yield — very nearly 4% — as a bonus.