Edinburgh Worldwide Investment Trust

Transcription

1 Edinburgh Worldwide Investment Trust A broad global growth mandate pursuing the smaller businesses most likely to shape the world in which we live A well-established management team which has produced strong results via the Baillie Gifford Discovery OEIC, aided by the ability to gear up and take more aggressive positions. A secure management team fastened in for the long haul by the Baille Gifford partnership structure, overseen by an experienced board who together have more than 2m invested alongside shareholders Management and portfolio characteristics Edinburgh Worldwide Investement Trust (EWIT) 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. While the trust s objective remains the same to achieve long-term capital growth by investing primarily in listed companies throughout the world the trust s investment policy has changed to allow the managers to invest in companies at an earlier stage in the growth cycle. The result is a diversified portfolio of relatively immature, but highly entrepreneurial companies listed around the world, and the aim is to capture the greater share of the growth that these companies generate. However, while companies that the new trust invests in are generally much smaller, this is not a smaller companies fund. The maximum market capitalisation of a company at the time the trust invests is $5bn ( 3.2bn). This compares to the average market cap for the FTSE 250 of 1.6bn. It retains ten of the stocks held in its former incarnation which make up 20% of the total portfolio, and the managers are keen to stress that their aim is to buy the large companies of tomorrow, and hold on to them as they grow. The team try to take a long-term view of at least five years on their investments, paying no regard to the comparative index (the S&P Citigroup Global Small Cap Index) as evidenced by the trust s active share of 99%, and are willing to forfeit short-term profitability for strong growth prospects. Income is not a priority for the trust and, having paid dividends from its reserves last year, the board has said the trust will pay any future portfolio income as a dividend annually to shareholders, stressing that there is no intention to rebuild the reserve or maintain a dividend. In most cases the managers look for companies that are masters of their own destiny, and will grow irrespective of the global-macro outlook. They have a particular fondness for companies which can grow very rapidly by using new technology. Companies like Ocado which is not burdened by the problems which hamper more established players in this market who are supporting food halls whilst building websites to take custom away from the very same buildings. Technology is a dominant theme in the new portfolio and this bias toward tech can make the trust vulnerable in the 1

2 short term as the derating of tech stocks last year illustrated. Despite this, the managers believe that innovation and the global markets that new technology can enable, mean this type of company can grow over the longer term at a rate and to a scale which would have been unimaginable a few years ago. In the words of the board, the team s primary aim is to identify the smaller businesses most likely to shape the world in which we live. To us, this sounds like a perfectly encapsulated investment philosophy for an ultra-long investment strategy. Performance Since the managers took control of the Trust in January 2014, performance has been relatively pedestrian relative to the wider benchmarks. The portfolio was badly affected by the tech derating seen in the first quarter of The managers are clawing their way back relative to the Global Trust and OEIC peers. Certainly the NAV has demonstrated a relatively high beta to the market of 1.39 over the past year. 2

3 Given the relatively high weighting towards technology for a global fund, we compare the correlation over the last year of the NAV relative to the three technology investment trusts in the sector in the matrix below. We note that EWIT has a higher correlation (albeit not that high) to the large-cap tech specialists Allianz Technology Trust and Polar Capital Technology over Herald. HRI ATT PCT EWI HRI ATT PCT EWI Gearing & net currency exposure The trust uses structural gearing and is typically geared to the tune of up around 10%. Given the volatility of the new trust s portfolio, some might question this approach, but we believe structural gearing eliminating the risks associated with market timing is appropriate in the context of a growth portfolio aiming for the maximum long-term effect. The company has around 30m worth in a five-year fixed-rate multicurrency loan, drawn down in dollars, sterling and euros, repayable on 30 Sept The company s largest net currency exposure is to the US dollar, amounting to 112m in sterling terms. Alignment Edinburgh Worldwide is one of the smaller trusts in the Baillie Gifford stable at 234m but Baillie Gifford is a growth oriented house and we believe that the success of the trust, particularly given the attention it has received since the management changes were announced, has important implications for the manager s reputation, which it holds dear. The annual management fee is 0.95% on the first 50m of net assets and 0.65% on the remaining net assets. There is no performance fee. The trust has an experienced board, a number of whom hold seats on other investment trust boards, including JPMorgan s Mercantile investment trust and Murray Income. We are reassured that the board is heavily invested in the trust. Chairman David Reid holds nearly half a million shares in the trust. Henry Strutt holds 61,000 and Donald Cameron holds 35,000, putting the board s commitment of more than 2.7m at work in the trust as motivation for a positive outcome for shareholders. 3

4 Baillie Gifford s partnership structure also gives us confidence that the new management setup is stable. Douglas Brodie is a partner at the firm and the five strong Global Discovery team are all Baillie Gifford lifers, each joining the group direct from university. They have since their arrival at the group amassed more than fifty years of experience between them. Discount The Trust s discount consistently traded wider than 10% in the five years prior to the change in mandate. Indeed, the decision to change managers and broaden the mandate came about partly as a means to differentiate the trust and address this issue. As the graph below shows, the market initially reacted positively to the change, but the discount has drifted reaching its lowest point in January this year. Buyback authority exists, but historically the board has shown little willingness to use it, even when the discount was out beyond 13% in This is very clearly a risk for investors, given the current discount of 3%. However, we are confident that this highly differentiated trust will continue to attract long-term investors and so whilst there will inevitably be some road humps along the way, the trust s performance will be the key driver of discount levels. Conclusion Edinburgh Worldwide s board has a vision which we think is perfect for The Endurance Growth Portfolio. The company s object is to be invested in the smaller businesses most likely to shape the world in which we live. This is no modest boast, but we believe the investment horizon the managers will be employing stand them apart from many of their competitors. Some of the ingredients to the success that James Anderson has had with Scottish Mortgage sit within the Baillie Gifford model, and we are happy to back Douglas Brodie and his team with Edinburgh Worldwide. Their OEIC track record has been very impressive, and with the additional flexibility that the closed-ended structure lends to their investment style, as well as the gearing in place, the trust should deliver over the long run. 4

5 Objective: : To achieve long-term capital growth by investing primarily in listed companies throughout the world. Key information Ticker EWI Management Company Baillie Gifford & Co Sector Global Growth Benchmark S&P Global Small Z-Score (1 yr, cum inc) 2.41 Dividend yield 0.4% Dividend Frequency Semi- annual Market Cap 242.9m Net Assets (Ex) 251.1m Net Gearing Cum 110 OC (excl perf fee) 0.92% LSE turnover (1 yr daily m value) Disclaimer: This material is aimed only at providing information to professional investors. Kepler Partners LLP is not permitted to conduct investment business in the United Kingdom with retail clients and accordingly such persons should not access use this material. No information or opinions contained in this material constitute a solicitation or inducement by Kepler Partners LLP to buy, sell or subscribe for any securities mentioned herein or to provide any investment advice or service. Information contained herein may or may not have been prepared by Kepler Partners LLP, but is made available without responsibility on the part of Kepler Partners LLP, who neither assumes nor accepts any responsibility or liability (including for negligence) in relation thereto. No action should be taken or omitted to be taken in reliance upon the information herein. Opinions expressed are subject to change at any time. The material is based upon information which is considered reliable, but no representation is made as to accuracy, completeness or timeliness, and should not be relied upon. Past performance is not an indication of future performance. This document is a marketing communication under FCA rules and has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Kepler Partners LLP reserves the right to change the information available on this document without notice and expressly disclaim any obligation to keep the information on this document up-to-date, free of errors or viruses or to maintain uninterrupted access. Kepler Partners LLP may stop producing or updating any part of this document without notice. United States persons (as defined in Regulation S of the US Securities Act of 1933) and persons who are residents of the United States of America may not use this document or the information it contains. Information on this document may not be forwarded to any entity in the United States of America. Furthermore, the contents of this site are not intended for distribution to, or use by, any individual or entity in any jurisdiction where their distribution or use would be contrary to local law or regulation or which would subject Kepler Partners LLP to registration with the jurisdiction. You should be aware that any rules and/or regulations applicable to providing financial services (and the resultant investor protections that may be available), may not apply to persons who obtain information from the internet and its various applications, of which this material forms part. 5