The rally in beaten-up UK stocks over the past 18 months means there have been easy gains on offer for investors. A skew towards recovery plays has amplified the gains made by Edinburgh Investment Trust, which over the two years to the end of March generated a net asset value of just over 55 per cent, versus the 44 per cent turned out by the FTSE all-share.
That outperformance means Edinburgh Investment Trust, which for the past two years has been attempting to win back investors after a repeated weak performance as part of the Invesco stable, has helped narrow the discount attached to the shares versus the NAV.
Edinburgh has now become the only investment trust to be managed by Liontrust, which has itself been rapidly gathering assets, after the fund management group acquired rival Majedie. James de Uphaugh, portfolio manager, hopes what he calls Liontrust’s “distribution muscle”, will narrow that discount further.
Top holdings that include the energy giant Shell and the mining group Anglo American have propelled returns over the past two years thanks to sharply rising commodity prices, a tailwind that is unlikely to dissipate in the coming months. But longer-term, the question investors will naturally ask is, what drives performance once the extraordinary market conditions that have boosted value stocks recedes?
The spike in energy prices aside, a spate of takeover interest and activist intervention in UK companies could result in more durable growth in returns. Edinburgh has recently built stakes in GlaxoSmithKline as well as Unilever, which made a failed bid for the former’s consumer healthcare arm. There is also less exposure to highly-rated tech stocks and other blue-sky companies that have suffered the worst sell-off as interest rates have started to rise.
While the trust still has large holdings in classic value stocks, the list of top holdings has broadened to include names that are rated more for their growth characteristics, including the equipment rental business Ashtead and the industrial distribution specialist Electrocomponents. That shift in strategy also meant cutting the dividend to what the board viewed as a more sustainable level, from 28.65p in 2021 to 24p a share, still equivalent to a yield of almost 3.8 per cent at the current share price. That, plus the overhang from a consistent, historic record of underperformance, means it is unsurprising the trust trades at a wider discount than UK equity income peers such as City of London Investment Trust, which is known for increasing the dividend annually over the past 56 years.
The benefit of that cut? It gives the trust more room to manoeuvre in the companies it invests in, rather than being dependent on a smaller number of stocks, which could be paying out high dividends at the expense of reinvestment. Instead, the trust focuses on total return, rather than just the level of dividend it can pay out, aiming to beat the FTSE All-Share. Over the 12 months to the end of March, it generated a total NAV return of almost 25 per cent and a share price return of 27.9 per cent, against the 20.2 per cent delivered by the index.
In September old expensive debt will finally mature and is to be replaced with debt that will cost over 5 percentage points less to service, increasing the trust’s potential.
The trust now trades at a 7.7 per cent discount to the NAV, narrowing from a peak post-pandemic gap of almost 15 per cent in September 2020. But a broadening array of stocks being backed by the trust mean that could close further.
ADVICE Buy
WHY The shares offer a decent dividend yield, as well as more emphasis on capital returns than most equity income trusts
BMO Commercial Property
It didn’t take much imagination for real estate investors to guess which assets would weather the pandemic upheaval the worst. A combined weighting of almost half the portfolio towards the already-struggling retail sector and office assets, a sector that has a question mark hanging over when or if leasing activity will fully recover, means BMO Commercial Property still trades at a 14 per cent discount to net asset value at the end of December.
How to address that discount? Shift further into prime industrial and logistics assets, which accounted for 30.6 per cent of the portfolio by value, up from 19.1 per cent at the end of 2020. It’s easy to see the appeal of buying warehouses in light of an acceleration in ecommerce and urgency among companies to secure their supply chains.
Industrial assets, the hottest corner of the real estate market, have helped pick up the slack from retail and meant the trust managed a 3.9 per cent increase in net asset value in the fourth quarter. But that also means would-be buyers are forced to stump up more to secure assets from a pool being increasingly eyed by large institutional investors.
The better news about BMO’s retail and office weighting? It plays into the shift towards more lowly-rated, recovery stocks. The shares have already gained almost a tenth since the start of this year and 44 per cent since the end of 2020.
The scars of the pandemic are not fully healed. The rent collection rate during the final quarter of last year was nearing pre-2020 levels and at 93.9 per cent, stretching back to when coronavirus restrictions first came into effect. But monthly dividends are yet to be restored to the pre-pandemic level, when payouts equated to 6p a share annually.
In November the dividend was increased to 0.375p, equivalent to an annual payment of 4.5p and a yield of 3.9 per cent at the current share price. The potential for a further increase will be assessed as the trust reinvests the surplus cash from recent property sales, which last year included a supermarket and multi-let office building.
There is a good chance that the best of the shares’ recovery gains have already been banked.
ADVICE Hold
WHY Chance of a better dividend is there
