A statement from Invesco defending Mark Barnett’s contrarian style does not gel with the decision of the Edinburgh Investment Trust board to replace him with another manager that also favours unloved areas of the UK market.
Barnett was sacked by the trust’s board on Wednesday after delivering “another weak result for the company” which extended its underperformance to beyond three years. He is to be replaced by Majedie Asset Management CIO James de Uphaugh.
The trust has now lost investors money over one and three years (-0.3%, -1.1% respectively) and is lingering at the bottom of the IT UK Equity Income sector on a five-year view, returning 11.4% against the sector’s 27.1% gains.
Edinburgh IT chairman Glen Suarez said Majedie and de Uphaugh had been chosen following “a thorough review and selection process” and touted de Uphaugh as a “highly experienced active manager with a flexible investment approach”.
“The board believes that James has the right approach to meet our company’s objectives of capital appreciation and dividend growth over the long-term,” Suarez said in a statement.
Majedie picks indicates board saw problem with Barnett’s stock selection
Thomas McMahon, senior analyst at Kepler Trust Intelligence, said the board’s decision to replace Barnett with another manager that has similar exposure to unloved areas of the UK indicates its problems with him were more over stock selection than style.
“James de Uphaugh has built up exposure to some similar sectors and stocks as those favoured by Mark Barnett in the portfolios he co-manages for Majedie, notably UK domestics and oil and gas,” McMahon said.
“However, the board clearly believes that James’ process and approach has a greater likelihood of picking the right stocks for when those unloved areas come back into favour – and tomorrow’s general election could well be the trigger for UK domestics at least.”
This contrasts with Invesco’s response to the sacking that suggested Barnett had been dropped due to his contrarian take on the UK.
It said in a statement: “We believe that there are compelling opportunities for investors who are able to look beyond the market’s short-term pessimism in selective areas of the UK market. The range and breadth of recent M&A activity from industrial and especially financial buyers is clear evidence that there is unrecognised value in the UK stock market.
“And while we acknowledge that capital appreciation has been challenging, income generation remains strong. We have carefully managed the company’s investments which have continued to generate meaningful growth in income that has supported the growth in dividends.
“At its core active equity investing is being prepared to take a longer view than the market. We believe there will be a revision of current market consensus and that we are on the cusp of this potential being realised.”
Perpetual Income and Growth holding out for Brexit bounce
Waiting for a potential Brexit bounce is one of the reasons the board of Barnett’s other trust – Perpetual Income and Growth – has decided to stick by him for now.
Barnett continues to believe the trust’s exposure to unloved domestic stocks will benefit from clarity around the Brexit negotiations, which chairman Richard Laing said may be easier to assess after the outcome of the general election.
And he added “while the investment company’s long-term performance remains poor” there has been some improvement on this front over the last three months.
“In light of this, and with the general election taking place this week, the board does not consider it appropriate to undertake a review of its investment management arrangements at the current time.”
The board of Perpetual Income and Growth has also been closely monitoring Barnett as the trust has fallen short of its benchmark and other peers in the IT UK Equity Income sector. The trust is fourth quartile over three and five years but on a three month-view it has landed in the top half of funds, returning 7.9% against the sector’s 5.1%.
Investec initiates ‘buy’ recommendation
Investec initiated a ‘buy’ recommendation on the Edinburgh Investment Trust with director of investment company research Alan Brierley praising the board’s “decisive action to reinvigorate the fortunes of the company”.
Brierley highlighted incoming manager James de Uphaugh’s style agnostic approach driven by fundamental company research, long-term track record against the FTSE All Share and Majedie’s “collegiate culture” as reasons to be excited by the change in leadership.
De Uphaugh runs the Majedie UK Focus and Majedie UK Focus funds that have combined assets of £8.5b, of which he directly manages £3bn.
Brierley notes he has co-managed the UK strategy since launch, and his sub-portfolio has outperformed the FTSE All Share by 3% per annum since the beginning of 2007.
“The new manager has a flexible, total return investment approach that favours neither value nor growth, and notably this has delivered superior long-term returns,” said Brierley. “We are supportive of these changes and initiate with a buy recommendation.”
Switching managers could bring greater alpha generation
Majedie is the fourth manager to be handed the reins of Edinburgh IT.
“Over the years the trust’s board has sacked almost as many managers as Roman Abramovich,” Jeffries said in a note commenting on the handover. “From Edinburgh Fund Managers, to Fidelity to Invesco and now to Majedie.”
McMahon said that statistically the change in manager should result in better alpha generation for investors in Edinburgh IT.
“Our research suggests that on average, when a board sacks the manager of a trust shareholders enjoy greater outperformance from their new manager,” he said.
“Based on manager changes over the past ten years, the majority of trusts have seen an improvement in alpha generated over the five years prior to the change. The average improvement has been 1.74% a year.”
