Edinburgh Investment Trust Plc - Half-year Report
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The Edinburgh Investment Trust plc
Half-yearly Financial Report for the six months to 30 September 2020
|Total Return(1)(2)(3) (with dividends reinvested)||Six Months to
30 September 2020
|Net asset value (NAV) – debt at market value||+7.8|
|FTSE All-Share Index||+7.0|
The Company’s benchmark is the FTSE All-Share Index.
|Capital Return(2)||At 30 September 2020||At 31 March 2020||Change %|
|Net asset value – debt at market value||512.83p||490.40p||+4.6|
|FTSE All-Share Index(1)||3,282.25||3,107.42||+5.6|
|Discount(2)(3) – debt at market value||(13.6)%||(11.5)%|
|Gearing (debt at market value) (2)(3) – gross gearing||12.7%||13.4%|
|– net gearing||12.4%||8.3%|
|Retail Price Index(1) – annual change||1.1%||2.6%|
|Six months to 30 September
|Revenue return per ordinary share||9.9p||17.2p||-42.4|
|First interim dividend(4)||6.00p||6.40p||-6.3|
(1) Source: Refinitiv.
(2) These terms are defined in the Alternative Performance Measures, including reconciliations in the 2020 Half-Yearly Financial Report. NAV with debt at market value is widely used by the investment company sector for the reporting of performance, premium or discount and gearing. Further details are provided in the Alternative Performance Measures on pages 77 to 79 of the Company's 2020 annual financial report.
(3) Key Performance Indicator.
(4) Dividends declared in respect of the financial year.
I am pleased to report an encouraging start to the management of your Company by the new portfolio manager, James de Uphaugh, and his colleagues at Majedie.
The six month period covered by this report has been one in which lives have been affected by the COVID-19 pandemic. Despite the many difficulties faced by individuals, businesses and governments, equity markets have produced a positive return compared with the position at the time of the Company’s year-end in March. This is welcome after the previous sharp falls in value. At the time of writing, markets are again exhibiting a higher level of volatility, reflecting the decision of some western governments to place economies in various degrees of lockdown to suppress the second wave of COVID-19 pandemic.
I would like to take this opportunity to remind you why my fellow Directors and I appointed James and his colleagues. We felt the Company would benefit from their pragmatic style and deep understanding of the
UK equity market. Working closely with an established team of fund managers and analysts, James brings to our Company a flexible, total return approach to managing the portfolio. James invests in both ‘growth’ and ‘income’ businesses. He can also allocate up to 20% of assets to non-UK listed businesses.
The Board maintains a medium-term perspective and believes that manager skill should be assessed over a minimum period of three years. Majedie maintains a similar time horizon when assessing businesses. We are confident that this approach will enable us to rebuild the Company’s investment track record.
It is therefore encouraging to note that over the first six months of Majedie’s tenure the Company’s Net Asset Value (NAV) is ahead of the benchmark in terms of total return. While this is plainly a short period, it is good to have made a positive start. The Manager describes the performance drivers in more detail in his report. From the Board’s perspective, we are pleased to see attractive total returns coming from the many different types of stock held in the portfolio. This reflects the well-diversified nature of the Company’s assets.
Over the past three years, NAV total return has been -23.5% cumulatively, with the Company’s benchmark index returning -9.3% over the same period. Over the past five years, NAV total return has been -8.4% cumulatively, with the Company’s benchmark index returning 18.6% over the same period. In all these cases, the NAV is stated after deducting debt at market values.
Total Returns (with dividends reinvested) to 30 September 2020
|NAV (debt at market value) (%)||7.8||-19.1||-25.1||-23.5||-8.4||90.1|
|Share Price (%)||5.7||-20.8||-27.5||-26.8||-21.0||62.1|
|FTSE All-Share Index (%)||7.0||-16.6||-14.4||-9.3||18.6||63.9|
Capital Returns (excluding dividends paid) to 30 September 2020
|NAV (debt at market value) (%)||4.6||-22.9||-31.5||-32.5||-24.6||26.0|
|Share Price (%)||2.1||-25.0||-34.5||-36.3||-35.9||6.2|
|FTSE All-Share Index (%)||5.6||-19.2||-20.5||-19.0||-1.6||14.5|
Note: Majedie received portfolio from the transition managers from 27 March 2020
My fellow Directors and I are extremely conscious that we have not had the opportunity to meet shareholders face-to-face since the onset of the pandemic in March. Alas it does not look as if this situation will change soon. However, we recommend to you the Company’s website as a means of keeping up to speed on developments. The site contains a range of materials on Majedie’s management of the portfolio and on their investment views. Shareholders may sign up on the website to receive announcements by email. We recorded a video (which is still available on the website) to coincide with the Annual General Meeting in July, and we have today posted another video update from James de Uphaugh to the website to accompany these results. I hope that we can return to some form of in person communications before too long. In the interim, I welcome all comments and questions from shareholders.
Shareholders may have read the update on the Board’s dividend decision, which we published earlier this month on 3 November. We are pleased to be able to maintain the overall dividend for this financial year at the same level as last year. 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. We have been able to maintain the dividend by drawing on the Company’s substantial revenue reserves. These have made up the shortfall in the Company’s earnings, which has arisen because of the substantial dividend reductions across the UK market in which we invest.
While we are keeping the total dividend per share unchanged for the current financial year, we are also re-setting the dividend for future years to a level that is more sustainable and offers the potential for future dividend progression.
Even before the current economic crisis, the overall yield on the UK market had become increasingly dependent on a small number of businesses and sectors. The effect of the crisis caused by the COVID-19 pandemic, and ongoing structural changes to the economy, has been to further erode the income available from the UK equity market. While there remain elevated levels of uncertainty over the speed at which market earnings and dividends will recover, the Board concluded that the previous level of dividends is unlikely to be sustainable. The Board has therefore re-set the annual ordinary dividends to 24.0 pence per share, a level from which we believe it can grow progressively in future years.
As the Manager notes in his statement, he is encouraged by the resilience of the businesses in the portfolio and their medium-term prospects. As such, he has modestly increased the level of financial gearing in the portfolio. He is managing a fully invested portfolio: gross gearing on 30 September was 12.7%. With only a modest cash position, the net gearing position was 12.4%. These two numbers compare with 13.4% and 8.3% respectively at the end of March. The Company’s gearing is entirely a function of the debenture borrowings. The manager also has access to a bank facility of up to £50 million, although this is currently undrawn.
Buybacks and Discount
The Company’s shares traded at an average discount of 12.5% to NAV over the period. The UK equity income sector, in which your Company sits, has been out of favour in part because of the dividend cuts instigated by a wide range of businesses this year. The discount of the sector as a whole has widened, and your Company has not been exempt from this trend. To help offset this, we continued to buy back shares. Over this period we bought back 1,841,000 shares (1.07% of the Company) which will be held in Treasury and be available for issuance at a premium in the future. With greater clarity now in place with the new dividend policy, we are encouraged that the discount has narrowed since the end of September. As at 17 November 2020, the last available date before signing this statement, the discount stood at 10.6%.
The portfolio contains a diversified range of businesses, both UK and non-UK listed, that are performing well operationally despite the evident short-term economic uncertainty arising from the COVID-19 pandemic. The holdings in the portfolio are also attractively valued. The last fortnight’s news on COVID-19 vaccine developments is plainly helpful and has boosted equity markets. A Brexit trade deal with the EU would also generate greater international interest in the UK stock market. Combined, all these features leave your Company well placed to generate attractive medium-term returns.