Mark Dampier: Keep a clear head on the Edinburgh Investment Trust, with or without him
Friday 25 October 2013
A little over a week ago it was announced that Neil Woodford is to leave Invesco Perpetual after 25 years with the firm. Mr Woodford is the finest fund manager of his generation, in my view, and his funds are held by thousands of private investors. The implications of the announcement are therefore huge.
The biggest uncertainty at the moment surrounds Edinburgh Investment Trust, which Mr Woodford and Invesco Perpetual inherited from Fidelity in September 2008. It is managed along similar lines to his Invesco Perpetual Income and High Income funds, both of which will pass to Mark Barnett, a colleague of Mr Woodford's for the past 17 years and a successful fund manager in his own right. The future management of Edinburgh Investment Trust, on the other hand, remains uncertain.
Contrary to the beliefs of some, I am not anti-investment trusts. Far from it – I hold them in my own portfolio. I am well aware of their disadvantages, though, and they are not as simple as many commentators make out.
First and foremost, they are companies in their own right, listed on the stock market just like Vodafone or Tesco. This means that supply and demand, as well as investment per-formance, will have an effect on their share price.
With investment trusts, it is possible for the share price to rise above the net asset value (NAV). This is referred to as a premium.
Similarly if the price falls below net asset value, the trust is said to be at a discount. A large discount could well indicate a bargain; many investors would jump at a chance to buy £1 worth of assets for 80p. Conversely, buying £1 of assets for £1.10 should be less attractive.
Supply and demand for investment trusts can be heavily influenced by news flow. The effect of this was highlighted by Mr Woodford's resignation, following which the share price of Edinburgh Investment Trust fell by 10 per cent.
The trust had traded on a premium for some time, which is not surprising given Mr Woodford's strong track record. It highlights the danger of buying on a premium, though: sooner or later something will happen and the share price will take a hit.
Furthermore, premiums are often an indication that the overall sector in which a fund sits is in fashion. As an investor, you should really seek the unfashionable, unwanted and unloved funds and sectors to pick up a real bargain.
Presently, many income-producing assets are in vogue, mainly because interest rates remain at record lows. This has even driven investors towards alternative asset classes. Infrastructure investment trusts, in particular, are now trading at large premiums to NAV – far off bargain territory in my view.
As for Edinburgh Investment Trust itself, it is likely that the board will approach Mr Woodford to continue to run the fund. As an independent board they can do this, but my own view is that Mr Woodford is unlikely to accept.
The trust has the aim of growing the dividend in line with inflation, which is more restrictive than he tends to prefer and means there are less growth-focused stocks than in his other funds. In addition, investment trusts involve more meetings and are more time-consuming from the fund manager's perspective, while Edin-burgh Investment Trust also has some baggage in the form of expensive debenture debt.
It will also be intriguing to note what happens with the Invesco Perpetual Income and Growth Investment Trust and Keystone Investment Trust, both managed by Mr Barnett. He has considerable experience and has done a stellar job on these funds. However, with the additional responsibility of the Invesco Perpetual Income, High Income and UK Equity Pension funds, it is difficult to see how he can retain all his other funds. It should prove fascinating to see what evolves over the next six months.
I hope my comments are construed as constructive. While investment trusts can be good, they are not necessarily as straightforward as some media commentators make out. While there is this uncertainty in the market, I would expect the discount on Edinburgh Investment Trust to widen, potentially producing a bargain buying opportunity in due course.
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