Bargain Hunter: signs of a turnaround and wider discount than rivals

Two trusts have seen performances improve under new management, but are trading on sizeable discounts.

Both Edinburgh (LSE:EDIN) and Temple Bar (LSE:TMPL) investment trusts have seen their performances markedly improve under new management, but continue to trade on discounts wider than other UK trusts.

Edinburgh, which was taken over by Majedie last March following a long period of underperformance, has under its new management produced a net asset value (NAV) return of 49% versus 39% for the FTSE All-Share Index. However, its performance has fallen short of the 55% return from the UK equity income peer group.

James de Uphaugh, fund manager of the trust, earlier this year told interactive investor’s Funds Fan podcast that he had restructured the portfolio to have a “blend of investment styles”. Under its previous management group, Invesco, the trust had a value focus. It was formerly managed by Mark Barnett and, prior to that, Neil Woodford.

The trust was also rejigged under Majedie to have a high-conviction approach of 40 to 50 holdings. Last November, the board announced a dividend cut and noted that future dividends will be paid at a “sustainable” level.  

Its top three holdings, at the end of May, were Ashtead Group (LSE:AHT), Royal Dutch Shell (LSE:RDSB) and Anglo American (LSE:AAL).

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Edinburgh is trading on a discount of 6.6% (as at market close on 9 July). This is smaller than its 12-month average discount figure of 8.9%, but wider than the average UK trust discount of 4.8%.

Winterflood, the investment trust analyst, which supplied the NAV performance figures, last week added Edinburgh to its list of recommendations. The analyst noted “while it remains early days, we see scope for Edinburgh to be re-rated from its current discount level, particularly if UK equities continue to return to favour and the fund keeps performing”.

It added that the trust’s large size (£1 billion market cap), low fees (0.43% a year ongoing charges figure) and prospective dividend yield of 3.8% make it an attractive option.  

Investec Securities also has a ‘buy’ rating for Edinburgh. In a research report at the end of May, the firm said: “The manager notes that a 12-month period is too short to assess their performance, and we agree. However, we believe that the company has taken great strides forward notwithstanding the most challenging of environments.

“Looking forward, as the UK begins to recover from its pariah status, we see the potential for more supportive tailwinds. Solid foundations have been put in place, and the challenge now is to build on these.”

Temple Bar is another trust that has been rejuvenated under new management. The trust, which invests in UK value shares, was taken over by RWC Partners at the end of October last year. Previously, it had been managed by long-standing manager Alastair Mundy of Ninety One (formerly called Investec).

Mundy stepped down from managing the trust last April for health reasons, leading the board to search for a replacement and appoint a different fund management group.

Ahead of RWC Partners being appointed, Temple Bar had been hit hard by how the UK market responded to the coronavirus crisis. From the start of 2020 to the beginning of September, its share price halved.

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Since RWC Partners took over the trust (30 October 2020), performance has markedly improved. The trust’s share price has risen 58% versus 48% for the UK equity income trust peer group. Signs of a market rotation taking place following announcements about viable vaccines in November has proved a helpful tailwind. The trust re-entered the FTSE 250 in March.

Temple Bar is trading on discount of 7.2%. Its 12-month average discount figure is 8.4%. Again, its current discount compares favourably to the average UK equity income trust discount of 4.8%.

Last autumn, the board of Temple Bar announced a 25% dividend cut at the same that it revealed it would be changing fund management group.

Its top three holdings, at the end of May, were Royal Mail (LSE:RMG), Anglo American (LSE:AAL) and BP (LSE:BP).

A key difference for investment trusts versus funds is that a trust typically has an independent board of directors overseeing it and ensuring that it is managed according to shareholders' interests. In most cases, the directors will appoint an external fund manager to run the trust. If the manager doesn't do a good job, the board can fire and replace them.

On the whole, investment trust sackings are few and far between, typically amounting to three or four per year. When sackings occur, a complete change of investment approach can follow. Even when this is not the case and the investment objective broadly remains the same, a high level of turnover is likely as the new management group puts its own stamp on the portfolio.