The Edinburgh Investment Trust’s lack of exposure to mining stocks weighed on its performance over the past year, Mark Barnett has said.
Writing in the trust’s annual results, Mr Barnett said share prices in mining stocks, as well as HSBC and Royal Dutch Shell, had risen strongly because of the weakened sterling and recovering oil price.
The £1.7bn trust, which is currently a member of the FTSE 250, saw its net asset value increase by 14.4 per cent compared with a return of 22 per cent by the FTSE All-Share index.
Mr Barnett said: “The absence of mining stocks had benefited the portfolio’s performance over the previous two years, but the recovery across the sector in the past year meant that the portfolio missed out on one of the major positive trends of the past 12 months.
“While perhaps not a bubble, the valuation of the sector now looks extended and vulnerable to a pull-back in key commodity prices.
“Supply discipline has improved following the shock of the 2011-2015 downturn, but demand growth in China remains under pressure.
“I am not planning to change my position and expect some unwinding of the recent commodity share price gains.”
Mr Barnett added that the trust’s holdings, which are primarily UK-based, were hit by a “double whammy” impact associated with the fall in sterling.
He said: “The portfolio’s holdings in companies particularly exposed to the fall in sterling and perceived challenges to the UK economy performed poorly in the aftermath of the referendum.
“The stock market was also inclined to de-rate companies which warned of lower profits – delivering a ‘double-whammy’ impact on the share price via a fall in both earnings and price/earning ratios.”
Mr Barnett added that he felt following last year’s Brexit referendum that the fall in sterling was “excessive” and its implications were being “over-simplified”.
To that end he added some “less fashionable” positions in domestic stocks such as real estate, retail, travel and leisure, and financials at lower prices while raising money and taking profits from internationally focused companies which had received a boost from sterling’s movements.
Among the new investments were Aviva, Next, Secure Trust Bank and Hadrian’s Wall Secured Investments.
This year the trust paid out three interim dividends of 5.4p and a final dividend of 9.15p a share, with the latter increased by more than the former so shareholders could “benefit from the current year’s particularly buoyant net revenue returns”.
damian.fantato@ft.com
