Edinburgh Worldwide Investment Trust chair Henry Strutt highlighted a shift by investors away from growth and towards value stocks as one of the main reasons for the firm’s underperformance following its results for the 2022 financial year.
The trust suffered a 40.3% net asset value (NAV) per share decline over the 12 months to 31 October 2022, while its S&P global small cap benchmark was down just 6.8% over the same period.
Strutt pointed to Ocado, Upwork and Codexis as the trust’s top detractors, while Spacex was pinpointed as a positive contributor.
He said: “While disappointing, this set of results should be assessed in the context of the longer-term performance, in particular the general volatility experienced during and after the Covid pandemic.”
In 2020, the trust posted a 57.8% increase in NAV per share against its benchmark’s 0.4% rise.
Strutt continued: “Conversely there was significant underperformance in the year to 31 October 2022 as markets focused on the potential negative implications of higher interest rates for growth stocks, leading to a shift into value stocks.”
Edinburgh Worldwide’s investment objective is the achievement of long-term capital growth by investing primarily in listed companies globally.
Over the year, nearly 13.5 million shares were bought back at a cost of £25.3m. Meanwhile, its share price dropped 46%.
The ups and downs of 2022 are evident in the £789m trust trading at a discount of 12.7% – having been as high as a 5.5% premium and as low as a 20.1% discount.
Lead manager Douglas Brodie pointed to volatility experienced on a global level as another contributor to the trust’s poor performance, with events such as the Covid pandemic and the war in Ukraine shifting investors attentions towards short-term resiliency rather than long-term growth.
“This instability will ultimately pass but it is sculpting a new investment backdrop, one where capital is less freely available, the hurdle rate for returns is higher and the tolerance of uncertainty is lower… This adjustment phase is shortening the time horizon of many investors and lulling them into a mindset where the near-term resiliency of what they invest in is viewed with higher priority than its long-term relevance.
“For an investment strategy such as that pursued by Edinburgh Worldwide, this adjustment in the backdrop has been painful. We are unashamedly long-term growth focused investors; we respect resilience in our holdings but what excites us is their relevance and long-term impact,” Brodie continued.
“By pointing our analytical focus lower down the market capitalisation spectrum, we seek to identify high potential growth businesses when they are early in their lifecycle and benefit from the compounding of long-term growth off a low base. Past investments in businesses such as Tesla and Dexcom clearly illustrate the potential returns available through such an approach.”