267694 EdinburghIT AR 2024 WEB - Flipbook - Page 22
20 / STRATEGIC REPORT / THE EDINBURGH INVESTMENT TRUST PLC
PRINCIPAL RISKS AND UNCERTAINTIES / CONTINUED
The Portfolio Manager’s style may result in a concentrated
portfolio with significant overweight or underweight
positions in individual stocks or sectors compared to the
index and, consequently, the Company’s performance may
deviate significantly, possibly for extended periods, from that
of the benchmark. In a similar way, the Portfolio Manager
manages other portfolios holding many of the same stocks
as the Company which reflects the Portfolio Manager’s high
conviction style of investment management. This could
increase the liquidity and price risk of certain stocks under
certain scenarios and market conditions. However, the Board
and the Portfolio Manager believe that the investment
process and policy outlined above should, over the long
term, meet the Company’s objectives of Net Asset Value per
share growth in excess of the benchmark and real growth
in the dividend per share. Investment selection is delegated
to the Portfolio Manager. The Board does not specify asset
allocations. Information on the Company’s performance
against the benchmark and peer group is provided to the
Board at each Board meeting. The Board uses this to review
the performance of the Company, taking into account how
performance relates to the Company’s objectives. The
Portfolio Manager is responsible for monitoring the portfolio
selected and seeks to ensure that individual stocks meet an
acceptable risk-reward profile.
As described in the investment policy, derivatives may be
used provided that the market exposure arising is less than
25% of the value of the portfolio.
Investment performance risk is included in the risk control
summary report that is prepared by the Manager and
reviewed by the Board at each meeting. The Board also
receives reports on the performance of the portfolio and on
compliance with the Company’s investment policy guidelines
from the Manager at each meeting. As part of an annual
assessment, the Board reviews the performance of the
Manager and the management contract at the Management
Engagement Committee meeting.
The Board also reviews the annual depository report and
report from the compliance department of the Manager and
any breaches of the investment policy, limits or guidelines
are reported immediately to the Board and Audit Committee
Chairs.
Investment risk is increased through the Company’s
borrowing, namely the £120m Unsecured Senior Loan Notes.
This facilitates additional investment exposure than would be
the case for an unleveraged portfolio; if the investments fall in
value, this will increase the adverse impact on performance.
On a routine basis the Board monitors the appropriateness
of gross and net gearing levels, and the amount of headroom
above minimum NAV levels as agreed with the lenders.
INCOME/DIVIDEND RISK
The Company is subject to the risk that income generation
from its investments fails to reach the level of income
required to meet its objectives.
The Board monitors this risk through the review of detailed
income and dividend forecasts and comparison against
budget. These are contained within the Board papers and
the Board considers the level of income at each meeting.
Revenue estimates are presented at each Board meeting and
Board committee meeting which determine the three interim
dividends and propose the final dividend.
The Board also takes into account the size of the Company’s
accumulated income and capital reserves which can be used
to supplement dividends for a period where income levels
alone do not cover the proposed dividend payments.
DISCOUNT CONTROL RISK
There is a risk that the Company’s prospects and NAV may
not be fully reflected in the share price from time-to-time
and that the Company’s objectives are no longer meeting
investors’ expectations.
The share price is monitored on a daily basis and, at the
request of the Board, the Company is empowered to
repurchase shares within agreed parameters which are
regularly reviewed with the Company’s broker. The discount
at which the shares trade to NAV can be influenced by share
repurchases. During the year, the Company repurchased
13,985,000 shares for holding in treasury (2023: 5,601,604).
Risk management activity includes systematic reviews of the
investment objective and investment strategy and regular
dialogue with major shareholders and marketing activities.
Share price and discount control risk is included in the risk
control summary report that is prepared by the Manager
and reviewed by the Board at each meeting. In addition,
the Board monitors the Company’s investment performance
against its stated objectives and peer group and reviews the
marketing report at every Board meeting.
