Posts Tagged ‘Edinburgh Investment Trust’

Edinburgh IT and its NAV (feat. Trustnet vs AIC)

April 10, 2009

A recent comment of mine on investment trusts at The Fool, it received a chunky number of recs:
http://boards.fool.co.uk/Message.asp?mid=11479983&sort=whole#11480217

You’re right to be put off [by Edinburgh Investment Trust].

First a point on how Trustnet measures discount/premium to NAV. Trustnet’s figures measure NAV with debt at par (nominal) value whereas others, including the AIC, measure debt at fair (market) value. For investment trusts with little or no debt this makes little difference. Edinburgh IT just so happens to be one of the most indebted investment trusts out there [1]!

The level of debt, via debenture stock, outstanding at Edinburgh leads to a large swing in discount/premium depending on how you value the debt. An idle look at the AIC’s website ([2]) currently shows a premium of nearly 10% while Trustnet shows a small discount. The AIC figure itself is misleading, imho, since it doesn’t take into account accumulated income. Edinburgh IT release NAVs daily based on par and fair value, cum and without income [3]. If this is all rather confusing the AIC have a good explanation of net asset values on their website [4].

Using March 11th as an example the Edinburgh share price finished the day at 297p, the following day Edinburgh released NAV figures that were between 270.71p and 318.39p, quite a difference! Personally I use the debt at fair value and cum income (for income ITs where this is going to skew the figure). For Edinburgh this was 282.06p on March 11th, still a premium of 5.3%.

So why the drastic reduction in discount for Edinburgh recently? Three factors stand out for me:

1. The appointment of Neil Woodford as fund manager.

2. The protection of income, in the short-term at least, that most Investment Trusts offer as they have a revenue reserve.

3. The structural advantage that a discount to NAV offers to the underlying yield – if you buy on a 10% discount you’re effectively buying a 10% higher underlying dividend (excluding charges).

2 & 3 can be applied to all Growth & Income investment trusts and most are now trading at a premium to NAV for these reasons. Personally I think its a little silly buying an Investment Trust on a 5% premium when, once the stockmarket recovers, you’re likely to see that premium become a 10% discount. For those reliant on a steady and increasing income such as retirees the peace of mind may be worthwhile but even then its difficult to justify.

I’d avoid Edinburgh right now. The downside risk is far higher than buying into Woodford’s Invesco Perpetual (High) Income funds which don’t have the leverage and aren’t in danger of reverting back to a high discount to NAV.

mm

[1] See pages 45-47 of the EDIN annual report available at:
http://investmenttrusts.invescoperpetual.co.uk/portal/site/iptrust/investmentrange/investmenttrusts/edinburgh/#

[2]AIC’s pricing for EDIN:
http://www.theaic.co.uk/Search-for-an-investment-company/Company-profiles/Conventional-companies/Performance/?company=59

[3]EDIN NAV news releases:
http://www.theaic.co.uk/en/Search-for-an-investment-company/Company-profiles/Announcements/?nav=1&company=59

[4] The AIC’s explanation of NAV:
http://www.theaic.co.uk/en/Guide-to-investment-companies/Glossary/?exact=1&filterBy=SearchTerm|Net+asset+value