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Mark Dampier: My concerns about Woodford’s Edinburgh Investment Trust

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A little over a week ago it was announced that Neil Woodford is departing Invesco Perpetual after 25 years with the firm.

In my view, Woodford is the finest fund manager of his generation, and his funds are held by thousands of private investors. The implications of the announcement are therefore huge.

The biggest uncertainty currently surrounds Edinburgh Investment Trust, which he 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 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 supply and demand, as well as investment performance, will move their share price. With investment trusts it is possible for the share price to rise above the net asset value. 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 to its NAV. 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 influenced heavily by news flow. The effect of this was highlighted by Woodford’s resignation, following which Edinburgh Investment Trust’s share price fell 10 per cent. 

The trust had traded on a premium for some time, which is not surprising given 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 the sector itself 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 currently trading at large premiums to NAV – far off bargain territory in my view.

As for Edinburgh Investment Trust, it is likely the board will approach Woodford to continue to run the fund. As an independent board, they can do this. My own view is that he 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 Edinburgh Investment Trust has some baggage in the form of expensive debenture debt. 

It will also be intriguing to note what happens with Perpetual Income & Growth Investment Trust and Keystone Investment Trust, both managed by 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.

Mark Dampier is head of research at Hargreaves Lansdown

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