267694 EdinburghIT AR 2024 WEB - Flipbook - Page 12
10 / STRATEGIC REPORT / THE EDINBURGH INVESTMENT TRUST PLC
PORTFOLIO MANAGER’S REPORT / CONTINUED
PORTFOLIO RETURNS AND ATTRIBUTION
The portfolio that James and Chris had in place this time last year
has delivered a fourth consecutive year of NAV outperformance.
Over the financial year, a diversified set of stocks – in keeping
with the aim of the investment process – has driven the
portfolio’s excess returns. Key outperformers included Marks &
Spencer (Retailers), BAE Systems (Aerospace and Defence) and
Centrica (Gas, Water and Multi-Utilities). These three stocks are
all excellent examples of businesses that were purchased when
out of favour, and which have enjoyed significant share price
appreciation as their operating models have been restructured
and improved. All remained prominent holdings at the year
end. Other significant contributors to excess returns came from
avoiding large index constituents whose share prices fell, such
as Diageo (Alcoholic Beverages), Reckitt Benckiser (Consumer
Goods), Prudential (insurance) and British American Tobacco.
On the negative ledger, the holdings in Anglo American
(Industrial Metals and Mining) and RS (Industrial Support
Services) were weaker, making them the two largest stockspecific headwinds. We also missed out on two index
constituents that performed well, namely Rolls-Royce
(Engineering/Aerospace) and RELX (Media).
TRANSACTIONS
Over the year, the largest purchases have been Verisk
Analytics (a US-listed business focusing on data analysis),
Haleon (Pharmaceuticals and Biotechnology), Lloyds (Banks),
Rotork (Electronic and Electrical Equipment – see below),
Diploma (Industrial Support Services), Rentokil (Industrial
Support Services) and Autotrader (Software and Computer
Services). All bar Haleon and Lloyds have been new additions
to the portfolio since January. The funding for these purchases
over the year came from sales or reductions in a wide range
of stocks, with the leading sales by value being BAE Systems
(Aerospace and Defence), WPP (Advertising), Weir (Industrial
Engineering) and Standard Chartered (Banks).
Rotork, a recent purchase, is an excellent example of
the features we find appealing in a company. Rotork,
is a market leading industrials company in flow control
and instrumentation products. It is exposed to attractive
long-term growth drivers such as oil and gas upstream
electrification, and industrial process automation. Rotork is
the market leader in pneumatic actuators and has a strong
long term track record of product quality and reliability.
Where it has had more challenges historically has been with
organic growth, which the new chief executive is addressing
through a strategy to focus the business on higher growth
business lines, reinforcing and improving the customer value
proposition, and improving innovation. If successful, this shift
in the business should lead to mid to high single digit sales
growth and gentle margin accretion over the medium term.
CURRENT SHAPE OF PORTFOLIO
The portfolio remains well diversified across stocks and
sectors with a range of different economic characteristics.
The most significant positions in the portfolio (which we
define those holdings whose weightings are most different
from that of the index) were three different retailers: Dunelm,
Marks & Spencer and Tesco, the energy company Centrica,
and the banking group NatWest.
The stocks where we have below average (versus the index
weight) zero holdings – which as noted in the attribution
section above can also be important for relative returns –
are AstraZeneca (pharmaceuticals), Diageo, RELX, HSBC
(banking) and Rio Tinto (mining).
At the year end we held 5.6% in non-UK stocks. We use this
element of the portfolio to gain access to businesses with the
kind of characteristics or features that we seek but which are not
available in the UK market. The principal non-UK holding was
Verisk Analytics, a world-leading data technology business, as
flagged above. Other holdings in this category included Novartis
(pharmaceuticals), Intel (semiconductors), and Newmont Mining.
DISTRIBUTIONS TO SHAREHOLDERS
As the Chair has written in her report, dividends paid to the
Company by investee holdings fell compared with the previous
financial year. This was a function primarily of lower special
dividends from the banks. For your Company, the revenue
received from dividends was £42.1m, which is equivalent to
3.6% of the NAV at fair value at the end of the period. Once
certain costs are deducted (such as a share of the running
costs of the Company and debt interest costs), the dividend
paid to Edinburgh’s shareholders is ‘uncovered’ by £3.3m.
However, a growing number of companies choose to return cash
to shareholders through share buybacks. We estimate that the
‘buyback yield’ of the portfolio at the year end was approximately
2.3%. This figure does not form part of your Company’s accounts,
as the cash spent on buybacks has by definition been returned
to ex-shareholders. Nonetheless, the process of buying back
shares, as long as it is done at prices that enhance value, benefits
the shareholders that remain.
As Portfolio Managers of the Company, we think carefully
about the portfolio’s balance of returns coming from dividends
or share buybacks: we are not trying to maximise short term
income performance by investing in high yielding shares, as this
could challenge the ability of the Company to generate strong
longer-term NAV total returns.
