THE manager of the £1.5 billion Edinburgh Investment Trust said he will continue to favour businesses in controversial sectors such as tobacco and oil and gas to provide a degree of protection from expected volatility in the UK market in the months ahead.
Invesco Perpetual’s Mark Barnett said the UK stock market has “fluctuated within a 10 per cent range” over the course of 2018, with the pattern expected to “continue for the foreseeable future”.
Despite the volatility, the high-conviction trust marginally outperformed its benchmark index, the FTSE All-Share, in the six months to the end of September, generating a net asset value total return of 8.7% against the index’s 8.3%.
Mr Barnett said the portfolio’s investments in the industrials sector were the biggest contributors to performance during the six-month period, with shares in defence giant BAE Systems in particular receiving a boost after it won a £20 billion contract to provide the Australian government with a fleet of warships. The trust has a £48 million position in BAE, which is one of its top-ten holdings.
British American Tobacco, on the other hand, which is the trust’s second largest investment at £92.5m, was one of the biggest drags on returns.
“British American Tobacco has provided exceptional returns to the portfolio over a number of years. However, the shares have come under notable pressure in recent months, as the stock market has continued to focus on concerns over the outlook for next-generation products,” Mr Barnett said.
He added that the company had suffered after rival Philip Morris International announced its intention to sue for copyright infringement in relation to British American Tobacco’s cigarette alternative Glo.
Despite this, Mr Barnett said the “steep decline in the valuation” of the tobacco sector means it is looking more and more attractive as a long-term investment.
Looking ahead, Mr Barnett said that economic indicators “point to continued steady, if unspectacular, economic growth in the UK”, adding that “it is reasonable to expect the UK economy to be more resilient than most forecasts assume”.
As a result he said he would continue to invest in stocks that “offer an absolute return that is not correlated with regular business cycles” while also favouring industries such as oil and gas and tobacco “which remain attractively valued in a market driven by short-termism”.
The discount at which the trust’s shares were trading widened over the period, going from 8.7% at the end of the last full year to 9.8% at the end of September.
The trust’s board announced an interim dividend of 6.25p, up from 5.8p at the same point last year.
Invesco Perpetual has managed the trust since 2008, when it took it over from Fidelity Investments. The latter inherited the portfolio from Edinburgh Fund Managers in 2002, shortly before that business was taken over by Aberdeen Asset Management.
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