The Edinburgh Investment Trust Plc Annual Financial Report 2022 - Flipbook - Page 12
10 / STRATEGIC REPORT / THE EDINBURGH INVESTMENT TRUST PLC
Portfolio Manager’s Report / continued
spending by western governments. Liberal democracy requires
defence – and a lot of catch-up spending is in order. BAE Systems
is a prime beneficiary.
Negative contributors to performance came from long-standing
positions in Mondi (paper production), Hays (recruitment) and
Weir (engineering) which had modestly weaker share prices and
all of which we remain happy to hold. Glencore, another large
mining group which performed well and was not held in the
portfolio, was also a negative contributor.
Over the two years since our appointment, the NAV has risen
24.0% per annum and the share price 27.3% per annum,
compared with the index return of 19.7%. Overall, we are
encouraged by the first two years under our tenure.
ACTIVITY OVER THE YEAR
The largest purchase over the year was in the pharmaceutical
group GlaxoSmithKline. The forthcoming demerger of GSK’s
consumer health unit should release value, in turn supporting
greater investment in the pharmaceutical pipeline which is
relatively weak. The company has also flagged a dividend cut
and this, along with the consumer health unit being demerged
with a meaningful proportion of the group’s debt, should leave
the remaining pharmaceutical business in a stronger long-term
position.
Another prominent purchase was Novartis, itself another large
player in the pharmaceutical sector. It has one of the broadest
product portfolios and pipelines, plus a strong record of
innovation. After a period of high single digit revenue growth,
sales growth has slowed and the shares have derated, providing
the opportunity to purchase a business that is still confident of
delivering 4% plus annual sales growth over the period to 2026
and above peer median growth thereafter.
Ascential has a fast growing and attractive digital commerce division
which helps brands understand consumer trends and optimise their
e-commerce execution on marketplaces like Amazon through data
and analytics. In July it made an acquisition of ASR following which
Ascential issued new shares to help fund the purchase. We support
the management’s digital strategy and added to the position
through buying some of the newly-issued shares.
Other prominent non-UK purchases were Intel and Thales. Intel
has a new CEO, a technologist, who has the aim of re-establishing
Intel’s industry leadership. We think he has a credible plan to
evolve their product offering. In the short term this reduces
profitability but longer term should improve returns as it reestablishes Intel’s competitive position. Thales is a leading defence
and aerospace group with a focus on communications, sensors,
flight management, surveillance, satellites and digital security.
Thales has a record of good organic growth and a strong order
book, while its shares languish on relatively low valuation metrics.
There is also an attractive dividend yield, and the company has
announced the intention to buy back shares.
We sold the holding in Associated British Foods. Much of the value
in this conglomerate resides in the medium term prospects for
Primark. We are doubtful that sales per square foot will recover
to match consensus expectations, as consumer consciousness
gradually embraces sustainability in clothing to the detriment
of volumes.
We also sold Rio Tinto. Its strategically important Australian iron
ore assets were milked under the previous management. The
group is now undergoing a cultural and capex reset under the new
CEO. Meanwhile a key determinant of the cashflows is the iron
ore price which has remained elevated because of Brazilian supply
issues. As this comes back on stream, against the backdrop of a
deflating Chinese property market, we see downside in the iron
ore price.
Sales have included Barclays – the CEO has left the business and
there may be future downward pressure on investment banking
fee income. We also sold NXP, the chip manufacturer for cars,
after a strong run in the shares.
CURRENT PORTFOLIO
The emphasis remains firmly on managing a diversified portfolio
with all-weather potential. In terms of traditional labels, we
hold a balance of ‘growth’ (examples include Ascential and
Electrocomponents), ‘value’ (Tesco, HSBC and Shell) and ‘recovery’
stocks (NatWest, Centrica).
More importantly, we tend to think about stocks in terms of
their financial and operational characteristics. As such, important
characteristics include Darwinism (businesses gently crunching
the competition such as Marshalls and easyJet), cookie-cutter
expansion models (Greggs and Ashtead), supply chain resilience
(Compass and Intel) and users of data analytics (Dunelm and
Weir). We look to blend these different features to produce a
portfolio that is ‘core’ in nature, with a bias towards mid and large
cap stocks.
Our ESG integration work is an important factor in the investment
case for each stock. Challenges such as the pandemic and war in
Ukraine highlight the importance of investing in robust businesses
that can address – and indeed capitalise on – these changes
while simultaneously managing ESG risks and opportunities.
Our thinking on each company’s approach to managing their
key issues has helped shape a portfolio of stocks of which some
– such as Anglo American and Shell – are generating attractive
shareholder returns in the face of some of these difficulties, as
well as making meaningful ESG strides forwards.
Taken together, these features should deliver a portfolio of
companies that have pricing power. With inflation running at
elevated levels, this is an important feature which should in
turn support Edinburgh Investment Trust’s ability to deliver a
shareholder dividend that has the potential to rise in excess of
core inflation over time.