The perfect portfolio for the pandemic?

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The perfect portfolio for the pandemic?
Master Investor Magazine

Master Investor Magazine 60

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The new manager of the Edinburgh Investment Trust has just finished transitioning the fund that he took over from Mark Barnett and the timing could mean that he has the perfect portfolio to get through the crisis.

It is probably fair to say that most fund managers were unprepared for the devastating impact of the coronavirus and its effect on their portfolios. Like private investors they would have had to decide whether to crystallise losses to escape further downside or sit tight and wait for things to get better.

This is not the case for the £957m Edinburgh Investment Trust (LON:EDIN), where the management has been passed from Invesco’s Mark Barnett to James de Uphaugh of Majedie. The latter took over on 4 March and completed 98% of his intended trading in the transition period that finished on 25 March.

Massive upside potential

I have worked in transition management and undertaking this sort of process during such volatile times will have been far from easy, but there should be massive upside potential. The new man has now got the portfolio that he wants for the current environment and should have got some knockdown entry prices that bode well for the future.

Barnett was a value manager whose style of investing had been out of favour since the financial crisis and whose performance had been further undermined by some poor stock selection decisions. The fund’s new manager is rather different.

James de Uphaugh is Chairman and CIO of Majedie. He has a high conviction approach and has built a portfolio of around 40 positions based on bottom-up fundamental research. De Uphaugh is more style agnostic and is willing to hold a combination of growth, value and recovery stocks.

Given the current market backdrop he has decided to focus the larger positions on companies that are considered leaders in their fields that can survive the crisis and potentially strengthen their competitive positions. Examples include: the supermarket Tesco, medical provider Smith & Nephew and Hays Recruitment.

Positioned for the crisis

The largest sector overweights relative to the benchmark are: food & drug retailers, which sell the essentials; telecoms, which should benefit from the switch to home working; and defence, for the long duration of their earnings and US-listed gold stocks given the significant fiscal stimulus. Edinburgh’s main underweights include travel & leisure and tobacco.

As with all funds there is huge uncertainty about the dividend outlook so the manager has said that he will update his thoughts on this when the annual results are published in May.

One of the less attractive aspects is that there is an expensive £100m debenture with a coupon of 7.75% that matures in 2022. The aim will be to replace this with a cheaper option to enable the fund to more cost effectively continue its gearing strategy that currently stands at 5.7% net of cash.

In some ways the transition couldn’t have come at a better time as the fund should have the perfect portfolio for the crisis. The shares are trading on a hefty 13.5% discount to NAV, which should narrow if the new manager can turn around the performance.

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