The Edinburgh Investment Trust plc
ANNUAL FINANCIAL REPORT
FOR THE YEAR ENDED 31 MARCH 2021
Financial Information and Performance Statistics
| Year Ended | Year Ended | |
| Total Return(1)(2)(3) (with dividends reinvested) | 31 March 2021 | 31 March 2020 |
| Net asset value (NAV) – debt at market value(1) | +34.8% | -26.7% |
| Share price | +46.4% | -29.4% |
| FTSE All-Share Index | +26.7% | -18.5% |
The Company’s benchmark is the FTSE All-Share Index.
| At 31 March | At 31 March | Change | |
| Capital Return(1) | 2021 | 2020 | % |
| NAV – debt at market value | 628.29p | 490.40p | +28.1 |
| Share price(2) | 600.00p | 434.00p | +38.2 |
| FTSE All-Share Index(2) | 3,831.05 | 3,107.42 | +23.3 |
| Discount (1)(3) – debt at market value | (4.5)% | (11.5)% | |
| Gearing (debt at market value) (1)(3) – gross gearing | 10.1% | 13.4% | |
| – net gearing | 7.1% | 8.3% |
| Year Ended | Year Ended | Change | |||
| Revenue and Dividends(3) | 31 March 2021 | 31 March 2020 | % | ||
| Revenue return per ordinary share | 16.21p | 27.83p | -41.8 | ||
| Dividends | – first interim | 6.00p | 6.40p | ||
| – second interim | 6.00p | 6.40p | |||
| – third interim | 6.00p | 6.40p | |||
| – proposed final | 6.00p | 9.45p | |||
| – total dividends (excl special dividend) | 24.00p | 28.65p | -16.2 | ||
| – declared special dividend | 4.65p | nil | |||
| – total dividends | 28.65p | 28.65p | nil | ||
| Retail Price Index (2) – annual change | 1.5% | 2.6% | |||
| Consumer Price Index (2) – annual change | 0.7% | 1.5% | |||
| Dividend Yield (1) | 4.8% | 6.6% | |||
| Ongoing Charges Ratio (1)(3)(4) | 0.43% | 0.55% | |||
Notes:
(1) These terms are defined in the Glossary of Terms and Alternative Performance Measures, including reconciliations, on pages 79 to 81 of the Annual Report. NAV with debt at market value is widely used by the investment company sector for the reporting of performance, premium or discount, gearing and ongoing charges. Dividend yield is inclusive of the 4.65 pence per share special dividend declared. The Dividend Yield excluding this special dividend is 4.0%.
(2) Source: Refinitiv.
(3) Key Performance Indicator.
(4) The Manager waived its investment management fee for the first three months of its appointment from 4 March 2020. The Ongoing Charges Ratio disclosed above show the actual charges incurred during the period. The pro-forma charges had the investment management fees not been waived over this period would have been 0.51% (2020 0.58%).
Chairman’s Statement
Dear Shareholder
This time last year I began this statement describing the challenging times that faced us both economically and socially. This year, those challenges are still here but we are beginning to see some light at the end of the pandemic tunnel. Still, I would again like to take this opportunity to say that I hope you remain safe and well.
Since this marks the first full year of Majedie Asset Management’s tenure as portfolio manager, I think it would be helpful to start with a reminder of the context in which we should think about how to evaluate the performance of the Company.
You will no doubt be aware that the Company has two objectives:
- An increase of the Net Asset Value per share in excess of the growth in the FTSE All-Share Index; and
- Growth in dividends per share in excess of the rate of UK inflation.
In the five years before the start of the current period, the Company met its objective in terms of dividends – in fact, dividends grew by 3.7% per annum compared with 2.6% per annum for the UK Retail Price Index in that period. However, over the same period the Company failed to meet the capital return objective and, perhaps more importantly, the Company’s total return fell behind the return on the benchmark. This was clearly unsatisfactory and, combined with fact that the UK equity market has been out of favour with investors for most of that period, contributed to a significant widening of the discount of the share price to NAV during 2019.
As I explained in last year’s annual report, in December 2019 the Board decided that this unsatisfactory performance was best addressed through a change of manager. Accordingly, following the consideration of a number of potential managers, including a “beauty parade”, the Board appointed Majedie Asset Management, and in particular James de Uphaugh, one of the co-founders of Majedie, as its portfolio manager.
We were impressed in particular by James’ emphasis on taking a ‘total return’ approach to stock selection and portfolio composition: to simplify considerably, this is an analytical approach that emphasises the long term returns from capital investment by companies as well as their immediate dividend paying capacity.
This was (and is) an important issue in current market circumstances. Many companies, such as banks, have been asked to reduce dividend payments because of pressures from regulators; competition (where, for example, the emergence of companies such as Amazon has seriously affected the profitability of high street retailers); environmental changes (such as those facing energy companies); and lastly the pandemic itself. It is worth noting that – while this is a worldwide issue – its impact on equity valuations is greater in the UK given the much larger weight of banks, retailers, and energy companies in indices than elsewhere. It is unlikely that total return expectations in the market have changed much but the market is increasingly giving value to companies which can show long-term returns from capital investment as well as to those that can produce sustainable dividends.
On top of this, shareholders will be aware that in the past year, the prospect of a gradual long-term rise in interest rates has begun to be priced in the markets. This has come through a rise in long term interest rates as well as through market talk – but as yet no tangible sign – of a sustained rise in inflation. A sustained rise in long term interest rates – and its consequence, a steepening of the yield curve – would represent a significant change in market conditions.
This is a difficult environment for all portfolio managers. The Board believes that James de Uphaugh’s style has the necessary flexibility to adapt as the market environment changes.
RETURNS
Against this background, I am pleased to report that the Company’s Net Asset Value (NAV) on a total return basis, i.e. including reinvested dividends, returned 34.8% over the financial year ended 31 March 2021 and the share price returned 46.4%. These compare with a total return of 26.7% for the FTSE All-Share Index. The equivalent returns on a capital only basis are 28.1% for the NAV, 38.2% for the share price, and 23.3% for the index. The difference between the NAV total return and capital return is explained not only by the dividends received by the Company, but also because the Company has been using some of its reserves to pay dividends to shareholders (discussed in more detail below). Over the past three years, the Company’s NAV return has been 1.8% cumulatively, with the Company’s benchmark index returning 9.9% over the same period. Over the past five years, the Company’s NAV return has been 10.3% cumulatively, with the Company’s benchmark index returning 35.7% over the same period. In all these cases, the NAV is stated after deducting debt at market values.
Further information on the portfolio, and contributors to returns, is set out in the Manager’s Report.
I would like to note that performance has come from a diversified range of stocks, with an additional boost from the effect of the Company’s borrowings. The portfolio is relatively concentrated, containing approximately 50 stocks. This means shareholders should expect performance to come in a lumpy fashion, as the last year illustrates: the bulk of the outperformance has come in the last six months, since the announcement of vaccines. Nonetheless, while still early days for Majedie in their role as the Company’s manager, I am delighted that they have made such a strong start – particularly given the challenging market backdrop.
DIVIDENDS
In November 2020, the Board announced a change in the underlying level of dividends to be paid to the Company’s shareholders: we explained at the time that this year’s first interim dividend – and the expectation for each subsequent interim and the final dividend – would be 6.00 pence per share, for a total of 24.00 pence per share. Last year, the equivalent figure was 28.65 pence per share. While this means we have not met the Company’s objective to grow the dividend per share in excess of inflation for the last two financial years, the Board believes this rebased level is a sustainable one from which the Company’s dividend objective can be met in the years ahead.
This rebasing reflects as discussed above the fact that the overall yield on the UK market had become increasingly dependent on a small number of companies and sectors and that many of these were facing pressures even before the impact of the COVID-19 related lockdowns. The effect of the crisis caused by the pandemic, added to the ongoing structural changes to the economy, was to erode the income available from much of the UK equity market. The Board concluded that the previous level of Company dividends was unlikely to be sustainable. While there remains uncertainty over the speed of the current recovery in market earnings and dividends, dividends from across the UK market are now more balanced.
The Board recognises the importance of dividends to shareholders, especially in an uncertain environment and at a time when other sources of income are under pressure. An attractive feature of investment trusts is the ability to use revenue reserves, built up in years when revenues exceed dividends paid to shareholders, to smooth dividend distributions in years when revenues are weaker. On this front, your Company is in a strong position. Reflecting this, the Board will use revenue reserves to maintain the total dividend per share this year at the 2019/20 level through the payment of a special dividend. Therefore, in addition to recommending a final dividend of 6.00p per share, which shareholders will be asked to approve at the Annual General Meeting, the Board has decided to pay a special dividend of 4.65p. This will supplement the underlying distribution of 24.00p and result in a total distribution of 28.65p, unchanged from the previous financial year.
SHARE PRICE DISCOUNT TO NET ASSET VALUE
It is encouraging that the discount has narrowed by 7% percentage points in the last 12 months. This reflects not only improved sentiment towards the UK market as Brexit-related uncertainty has receded and recovery prospects after the COVID-19 related shutdowns, but also an understanding and an appreciation of James’ investment style and approach.
The Board’s policy continues to be to manage the discount actively through share buy backs as appropriate. During the year we instructed the Company’s broker to repurchase 2,500,000 shares in the market. The amount and cumulative effect of these repurchases is noted in the table on page 15 of the Annual Report. The last buy back took place on 20 October 2020. At 25 May 2021, the last practical date before signing this report, the discount was 5.4%.
BORROWINGS
At 31st March 2021 the net debt of the Company, with the debenture at market value, stood at £76.5 million, resulting in gearing of the Company of 7.1% of net assets. All debt is currently achieved through the Company’s debenture, which is due for redemption in September 2022. The Board is considering how best to take advantage of the Company’s ability to borrow to enhance returns. This takes account of the Manager’s perception of gearing risk, the lower level of prevailing interest rates compared with the debenture’s coupon, the cashflows of the company and possible share-buy backs in the future.
REAPPOINTMENT OF MANAGER
The Board considers that the reappointment of Majedie is in the best interest of shareholders.
OTHER MATTERS
At an operational level, the change this time last year to the new manager and a new company secretary, PraxisIFM, proceeded smoothly. I would like to thank the many colleagues both at Majedie and at PraxisIFM who have worked so hard to deliver this result, especially given the difficult circumstances due to the pandemic.
ANNUAL GENERAL MEETING (‘AGM’)
Details of the AGM are given in the Notice of Annual General Meeting on pages 73 to 76 of the Annual Report. We are planning for this event to take place in person. We had our first in person Board meeting last week and we look forward to meeting as many of you as possible in person in Edinburgh on 22 July. We will revert to the pre-pandemic AGM format of an update from me and from the Manager, and allow plenty of time for questions and informal discussions between the Directors and shareholders. I very much hope as many of you as possible will be able to attend as it will be the first opportunity for shareholders to meet the new Manager. However, we recognise that some shareholders may not be able to join in person and in the Notice of Annual General Meeting we set out how shareholders can also submit questions in advance of the AGM and participate virtually. Should changes to the timetable for the lifting of gathering restrictions mean we are forced to amend arrangements for the AGM, we will notify shareholders via a regulatory announcement and give details of the new arrangements on our website www.edinburghinvestmenttrust.com. We also propose to have an Investor Day in London in September 2021, following on from the format we adopted in 2019.