Edinburgh Investment Trust Half Yearly Report - Flipbook - Page 8
6 / STRATEGIC REPORT / THE EDINBURGH INVESTMENT TRUST PLC
PORTFOLIO MANAGER’S REPORT
FOR THE PERIOD ENDED 30 SEPTEMBER 2023
MEETING THE COMPANY’S
OBJECTIVES
JAMES DE UPHAUGH
PORTFOLIO MANAGER
To meet the Company’s two investment
objectives, we take a total return approach.
By this, we mean seeking an attractive
combination of capital and income. We
apply a flexible investment process, with
an open-minded approach to investments,
delivered through a team approach. Within
the Company’s investment portfolio, we aim
to deliver exposure to a diversified range of
economic and market themes. As the Chair
has noted in her statement, I will retire in 2024.
Being the Portfolio Manager of your Company
for the last three and a half years has been a
highlight of my career. While I will miss the
engagement with shareholders and the Board
alike, I am delighted that my longstanding
colleague Imran Sattar will be the next Portfolio
Manager. The same investment process and
collegiate team approach will remain in place
once Imran takes over next year.
PERFORMANCE REVIEW
The equity market backdrop improved over
the period, principally because inflation
has dropped from the previous elevated
double-digit levels. This has enabled the Bank
of England to slow the pace of interest rate
rises. Nonetheless, the higher level of interest
rates looks likely to persist for some years to
come. This means a changed environment for
investing when compared with the very low
levels of interest rates that have prevailed for
most of the period since the 2008/09 global
financial crisis.
The total return for the portfolio over the
six month reporting period was modestly
positive, and a little ahead of the index return.
Reflecting the diversified portfolio, the
contributors to returns came from a broad
selection of holdings. Prominent stocks
included Centrica (gas supply), Marks &
Spencer (retail) and Admiral (insurance). As
is sometimes the case, avoiding large index
constituents that fall in price can also help
relative returns. Diageo, Prudential and British
American Tobacco fell into this category over
the last six months.
On the negative ledger, the electrical
distribution group RS continues to grapple
with unexpected management change and
less than sparky trading. WPP was also weak
– we have since reduced the holding. NatWest
has been caught up in the general change in
sentiment towards banks – a reaction to the
Silicon Valley Bank collapse earlier in the year,
combined with the self-made difficulty of the
unplanned departure of its chief executive.
TRADING ACTIVITY
In aggregate, activity has been relatively low,
with portfolio turnover of 7%. Over the full
tenure of our appointment, annual turnover has
been 25% implying a typical holding period for
each stock of four years. The biggest purchases
in this period have been Lloyds Bank, Haleon,
Marks & Spencer and Publicis.
We would highlight the purchase of Haleon,
which we believe has arrived on the market
at too low a price following its demerger from
GSK. Demergers are typically of interest to us
– they tend to be unloved assets that come
to the market without all the excitement of a
normal flotation. The purchase was funded by
a sale of Reckitt, which is now struggling to
generate positive underlying sales growth.
The biggest sales were WPP, Standard
Chartered, Shell and Tesco. The sale of WPP
funded the Publicis investment – WPP has
greater exposure to legacy advertising which
faces greater challenges, whereas Publicis has
made some bold but prescient moves to build
up its exposure to the increasingly important
‘data’ side of the advertising market.
BORROWINGS
As the Chair has noted in her statement, the
fair value of the debt has further reduced over
the period in line with the bond market. We
ended the period with net gearing (i.e. after
adjusting for cash balances) of 4.1%. As the last
practical date before signing this report, net
gearing was 5.6%. Were we to have had a fully
invested portfolio (i.e. no cash and all the debt
invested in the equity portfolio) at the end of
September, gearing would have been 5.8%. We
are firmly of the view that there is significant