Invesco’s absolute pledge for trust

Invesco promises significant changes as it takes over the Edinburgh Investment Trust from Fidelity. The emphasis will be on absolute returns, rather than income – and a higher fee.

Shareholders in the £1 billion Edinburgh Investment Trust (EIT) can expect significant changes to the portfolio following the adoption of Invesco Perpetual, as the new investment manager. Invesco assumed management of the fund last week, taking over from Fidelity International who resigned as managers after six years of running the trust.

Graeme Proudfoot, head of specialist funds at Invesco, says Neil Woodford will run the trust in a similar manner to the two open-ended funds he runs, the £8.7 billion High Income fund and £6.2 billion Income fund.

“There will be variations around the edges,” says Proudfoot, “namely because the investment trust can gear, but overall it will share commonality between Neil’s two income funds”. This, he says, will veer the fund significantly away from its old “risk-constrained” investment style.

Fidelity ran the trust using a multi-manager approach, with the aim of adding value through stock selection, but reducing the risk that individual managers may underperform. Simon Elliott, head of research at Wins Investment Trusts, says when Fidelity initially took over the trust in 2002, the assets were divided almost equally among four fund managers – two retail managers and two institutional balanced managers.

“However, the performance of the two balanced managers was highly correlated, and the board recognised that the structure was ‘probably too diverse to add significantly to return’,” says Elliott. “As a result, during September 2004 the portfolio was divided into three portfolios – growth, balanced and income, the last of which was managed by John Stavis.”

By March 2007, however, the assets of EIT were allocated to just two managers, Sam Morse and Stavis. They were chosen for their complementary investment styles, with Morse’s portfolio biased to holdings expected to increase dividends by more than the market average, and Stavis’ portfolio having a stronger income orientation.

However, in June this year the board announced that following Stavis’ decision to go on sabbatical it was looking at “a range of options” for the management of the income side of portfolio. When Fidelity and the board could not find a solution, Fidelity decided to resign as investment manager.

Elliott says: “We understand there was no formal beauty parade and the board considered a small range of options before appointing Invesco Perpetual. In our view EIT’s latest move marks the end of a disappointing chapter in its history. Since the appointment of Fidelity in August 2002, performance has been poor – with the net asset value up just 54% compared with 73% for the [FTSE] All-Share. The multi-manager approach has not been successful and the income portfolio has particularly struggled in the past 12 months.”

Proudfoot says Woodford has already started making changes, and that the resulting portfolio will be different to Fidelity’s.

“Under the old manager, EIT had a lot of emphasis placed on growing its dividend yearly,” says Proudfoot. “We are entering the situation with our eyes open. While now is not the time to be cutting the dividend and we understand the income requirement, over the long term, our emphasis will be on achieving absolute returns. It’s all about capital and income.”

Elliott says on the face of it, Woodford’s appointment is good news for EIT shareholders. “Neil has generated an enviable long-term track record through his consistent unconstrained approach, and we would expect the discount (currently 7.5% with debt at fair value) to tighten as a result,” he says.

However, Elliott adds shareholders should be aware of the changes that will take place. These have resulted in an uplift in the trust’s management fee from 0.26% of the trust’s market capitalisation under Fidelity to 0.6% under Invesco. In addition, there is a performance fee of 15% of any outperformance of the FTSE All-Share above 1.25% on a three-year rolling basis.

“We have put in place a fee structure that means we get paid if we get these returns and do not get paid if we do not perform,” says Proudfoot.