If there is one topic of conversation that is guaranteed to divide opinion, it has got to be Brexit. Some people think that it will be disastrous for the UK economy, whereas others believe it is the best thing that could have happened, and whichever of these views you subscribe to is likely to have a significant influence on your investment decisions.
One manager who is betting on a ‘Brexit bounce’ is Mark Barnett, whose responsibilities include the £1.36bn Edinburgh Investment Trust (LON: EDIN). Barnett believes that the best opportunities are to be found within areas such as the financials, consumer cyclicals and real estate sectors, which are all closely linked to the health of the UK economy, as the valuations of some of these companies have fallen to multi-year lows.
He thinks that the UK stock market will remain heavily influenced by changes in the sterling dollar exchange rate, which determines the value of overseas US earnings when translated back into pounds. This will fluctuate according to the progress of the Brexit negotiations and the perceived health of the UK economy.
UK stocks are not expensive compared to their historical valuations or relative to other major markets and Barnett attributes this to a Brexit discount that has been applied indiscriminately. In his opinion, this has created a number of compelling opportunities in well-managed domestically focused companies.
In common with all of his funds, he has put together a concentrated portfolio with the 10 largest holdings at the end of April accounting for 38.7% of the assets. These include the likes of British American Tobacco, BP, AstraZeneca, L&G, BAE Systems, Royal Dutch Shell and Hiscox.
The Edinburgh Investment Trust aims to generate capital growth in excess of the FTSE All-Share and to increase its dividends by more than the rate of UK inflation. Unfortunately, its recent focus on the domestic economy has resulted in underperformance relative to its benchmark, with the fund producing a negative NAV return of 5.9% for the year to the end of March.
Its performance during the period was negatively affected by a number of profit warnings from stocks such as the sub-prime lender Provident Financial, the high profile outsourcer Capita, as well as telecoms giant BT.
Despite the setbacks, Barnett remains convinced that his investment approach – which is based on fundamental company analysis with the aim of identifying stocks that can create a sustainable flow of dividend income – will deliver superior long-term returns.
The recent poor performance has led to a de-rating in the shares and these are now trading at a 9% discount to their NAV. Over the last 5 years, the annualised dividend growth was 3.1%, which was comfortably ahead of the annualised inflation rate of 2.3%, with the shares currently yielding an attractive 3.8%.
If you agree with Barnett that the fear about Brexit has gone too far, then the Edinburgh Investment Trust looks like a decent contrarian opportunity, otherwise you will probably not want to take the risk.