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New Edinburgh manager de Uphaugh bullish on ‘front foot’ recovery

29 July 2020

Edinburgh investment trust’s new manager James de Uphaugh promises the portfolio he has overhauled since taking it on from Mark Barnett and Invesco is ‘jammed’ with companies that will excel.

Edinburgh (EDIN ) investment trust’s new fund manager James de Uphaugh has promised the portfolio he has overhauled since early March is ‘jammed’ with companies that will excel in the post-pandemic environment.

With the £809m trust trying to re-rate its shares after five years of poor performance under former Invesco manager Mark Barnett, Majedie’s de Uphaugh struck a bullish tone as he addressed investors by video at its annual general meeting last week.

Talking up the chances for a ‘V’-shaped recovery the fund manager focused on Europe’s improved economic prospects with Germany turning on the stimulus taps.

‘I’m convinced that companies will emerge to a radically different competitive environment. There’ll be those on the front foot and the walking wounded,’ he said, recalling his promise to investors in late March that the reshaped holdings list was ready for ‘corporate Darwinism on steroids’.

De Uphaugh emphasised the landmark nature of the of the EU’s €750bn recovery fund, which will see the European Commission borrow on capital markets for the first time, while reminding investors that the trust can make up to 20% of investments overseas.

Currently, that stands at about a tenth of the fund, chiefly including gold miners, European telecoms companies and a semi-conductor name.

‘Germany is in full on stimulus mode. As Scholz, the finance minister, said, Germany wants to exit with a “kaboom”,’ said de Uphaugh, adding that there had been ‘something of a regime change in Frankfurt’.

Taken together, he argued that the growing consensus on the need for stimulus in Europe meant the continent now looked less politically than the conflict-riven US.

He also referred to a speech last month given by Bank of England chief economist Andy Haldane, saying the UK economy was so far exhibiting signs of a quick ‘V’-shaped recovery.

Reflecting that confidence, the trust is currently fully geared, which enhances returns in rising markets as well as losses when stocks falls. Net gearing stood at 10.7% at the end of June.

Buying Rio, selling Glaxo

The manager also provided an insight into how the portfolio had continued to pivot since March, although investors were once again asked to wait until November for more clarity on dividends.

Among a raft of purchases and reductions, de Uphaugh picked out Rio Tinto (RIO) as a stock he had been buying. He estimated the miner would yield around 7% this year – helped by a higher iron price with production in Brazil hobbled by the virus – making it a ‘proper dividend aristocrat’ in the context of this year’s widespread cuts.

Rio Tinto today declared a higher interim dividend despite lower profits, while Link Group said the payout would see it become the UK’s fourth biggest dividend payer this year for the first time.

UK pharmaceutical giant GlaxoSmithKline (GSK) has been sold down, as de Uphuagh explained he and deputy manager Chris Feild had ‘greater enthusiasm’ for some European pharmaceutical names such as Roche (ROG.S). Going back into the Swiss company’s shares actually represents an about-turn from the previous disposal of the company, which had been backed by Barnett.

BP (BP) was also reduced, with the manager highlighting the oil major’s excessive levels of debt and uncertain future as it tries to pivot to a lower carbon future. Shell (RDSB) remains one of the trust’s top positions, at 4.5% at the June according to the latest factsheet. 

The manager and chairman Glen Suarez reiterated that shareholders would have to wait until interim results in November for clarity on the outcome a review of the trust’s dividend, given expectations of lower income levels in the UK market and a strategy that focuses on total return rather than income.

Edinburgh has revenue reserves, which investment trusts accumulate out of whatever income they do not pay out directly to investors each year, equivalent to 1.1 years’ dividend, according to broker Numis Securities.

The manager also emphasised his interests was ‘aligned’ with shareholders, as he had begun to invest in the trust himself. According to London Stock Exchange filings, de Upaugh purchased £42,00 pounds of Edinburgh’s shares on 30 March and £23,000 on 3 July.

Over the past three months, Edinburgh’s shares have rallied 5.2%, modestly outperforming the FTSE All-Share’s 4.2% rise.

The legacy of Barnett’s poor latter record continues to weigh on the shares, however, as they trade at a wide 13% discount below their net asset value.

The other trust in the AIC’s UK Equity Income Sector which Barnett ran, Perpetual Income and Growth (PLI), today announced a merger with Murray Income (MUT), creating a new £1bn rival, comparable in size to Edinburgh, as well as ending speculation that Majedie was set to win that mandate too.

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