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Investment trust enjoys strong re-rating and moves from a long-standing discount to NAV to a premium
Thursday 08 Mar 2018 Author: Daniel Coatsworth

Investors regularly assume that all investment trusts pay a dividend because they benefit from having a diverse range of assets in their portfolios.

In reality 61 investment trusts don’t pay anything to shareholders at all. You simply own these types of trusts for capital gains.

Failure to pay a dividend should not be a reflection of a poor quality investment portfolio. It may simply be a result of investing in companies or assets which do not generate any income, such as small companies which are still growing and do not pay a dividend.

Baillie Gifford-managed Edinburgh Worldwide Investment Trust (EWI) is a great example. It aims to achieve long-term capital growth through investing in equities.

The investment trust did pay regular dividends up until 2015, upon which the net revenue return was in deficit, so it temporarily stopped returning cash to shareholders. It doesn’t like to dip into its revenue reserve to pay or maintain dividends.


The most recent set of full year results, published in December 2017, showed that Edinburgh Worldwide generated £1.268m income, mostly from dividends paid by its underlying portfolio and £0.1m interest from cash in the bank. It also had a £0.2m overseas tax repayment.

However, the revenue account for 2017 was running at a deficit after the deduction of operating expenses, hence why there is no dividend again.

You shouldn’t judge an investment trust purely on its dividend capability. You really need to look at net asset value (NAV) to see how the trust has managed to grow its portfolio.

In Edinburgh Worldwide’s case for its 2017 financial year, its net assets grew by 31.6% and its share price grew by 43%.

As for why the share price return is greater than the net asset value, you have to remember that investment trusts’ share prices don’t always move in line with NAV.

The shares can trade at a premium or discount to NAV; in Edinburgh’s case, a narrowing of its discount resulted in the share price return exceeding NAV.

Edinburgh Worldwide’s discount to NAV averaged 7.9% in the 2017 financial year and ended the period at 3.9%.



Its shares now trade on a 1.6% premium to NAV. Investors’ willingness to pay more for the shares than the value of the underlying assets (when also factoring in cash and debt) would suggest that the investment trust’s strategy is seen as attractive in the current environment.

Kieran Drake, an analyst at financial services group Winterflood, views the investment trust as an ‘attractive way’ to access global growth over the long-term. However, he says if there is an equity market downturn he would expect Edinburgh Worldwide to be vulnerable to underpeformance.

‘In the event of such a downturn we also believe that the fund would be exposed to downside discount risk, given its strong recent re-rating and the lack of a fixed discount target or history of share buybacks,’ adds Drake.

Unless the fund is running an ultra-cautious capital preservation strategy, a portfolio heavily populated with listed equities like Edinburgh Worldwide’s is always going to be susceptible to any market sell-off. That’s the risk you take from investing in the stock market.

Even capital preservation funds won’t be entirely immune from a downturn in the markets.


So why is Edinburgh Worldwide currently capturing investors’ attention? Net asset value has increased by 6.4% since the end of its 2017 financial year (31 October). In contrast, the FTSE All-Share has fallen by 4% over the same period.

Notable positive share price movements in its portfolio include Ocado (OCDO) whose share price has risen by 87% since the end of October 2017, thanks to striking international partnership deals in France and Canada. Ocado is one of the biggest holdings in the Edinburgh Worldwide portfolio.

Its third largest holding, LendingTree, has also enjoyed a share price rally, up 31% over the same period. LendingTree is a broker, acting as an online lending exchange that connects consumers with multiple lenders, banks and credit partners who compete for business.

‘Edinburgh’s managers look for companies that are innovating to solve large problems and reshape their industry,’ says Drake at Winterflood. He says Edinburgh Worldwide desires management who have a clear strategy for growth with requisite skills and vision.

He also says the trust’s fund managers want companies with an emerging competitive advantage with limited direct peers; and a business model with inherent scalability.

‘Edinburgh Worldwide Investment Trust has undergone a radical transformation since the appointment of Douglas Brodie and John MacDougall, who took control in January 2014 after responsibility for the trust was handed to Baillie Gifford’s Global Discovery
small-caps team, which they lead,’ commented research group Kepler last year.

MacDougall has since left the trust due to increased responsibilities within Baillie Gifford’s Long Term Global Growth team which manages investment trust Scottish Mortgage (SMT).

DISCLAIMER: The author owns shares in Scottish Mortgage referenced in this article

Edinburgh Worldwide will be presenting at Shares’ investment trust event in London on 15 March. If you would like to come along, please register for a free ticket at


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