Investors 'underwhelmed' by Barnett replacement on Edinburgh investment trust

However, the board's decision to appoint Majedie Asset Management (MAM's) CIO James de Uphaugh has been called "underwhelming" by some, while others have warned his value investment style bears a close resemblance to Barnett's.

Yesterday morning (11 December), it was announced that Barnett would exit management of the £1.3bn Edinburgh investment trust, following more than three years of poor performance as a result of stock selection issues and an out-of-favour investment style, according to the board.

According to FE fundinfo, the trust - which is trading on an 11% discount to net asset value (NAV) - has underperformed both its average peer in the IT UK Equity Income sector and its FTSE All-Share benchmark by 21 percentage points over three years with a loss of 1.6%.

Glen Suarez, chair of the investment trust's board, said it is "disappointed by another weak result for the company in today's interim results", and believes de Uphaugh is a "highly experienced active manager with a flexible investment approach".

De Uphaugh, who co-founded MAM in 2002, co-manages a total of six open-ended portfolios, and is sole manager of the LF Majedie UK Smaller Companies fund.

He will manage the Edinburgh investment trust as high conviction 40-stock portfolio. It will take a total return approach with equal consideration of both capital and income.

The transfer to Majedie will take place in Q1 2020.

Reaction

Reaction to the appointment has been mixed. James Carthew, head of investment company research at QuotedData, said that while the replacement of Barnett was not a surprise, "the choice of replacement is".

"Investors seems decidedly underwhelmed by the board's choice of Majedie Asset Management - probably as the performance of its UK equity funds has not been good recently," he explained.

"Getting Willis Towers Watson's stamp of approval does not mean much either, given the funds it advises (Alliance and Witan) are both lagging their benchmarks."

As such, he questioned whether the board "should be thinking about offering a cash exit to shareholders to allow them to switch to a manager of their choice".

The research team at Stifel, however, noted the new management team aims to grow the investment trust's dividend, which is already relatively high at 4.6% - which would be attractive for income investors.

"The Majedie UK team has a good long-term track record of outperformance, although interestingly its UK sub-portfolio has lagged the FTSE All-Share index in two of the past three years," it said.

"We think investors will be prepared to give the new team a chance, with scope for some narrowing of the 12% discount." As such, Stifel retains its Positive recommendation on the trust.  

Investment style

Ryan Hughes, head of active portfolios at AJ Bell, called the appointment of Majedie "interesting" given the team has a "clear value bias at present, which has caused its UK equity funds to underperform".

"This means that the team have a similar positioning to Mark Barnett at the moment, albeit without the small company exposure, so the change in manager will not represent a massive shift in the style of the portfolio positioning," he said.

However, Hughes also pointed out that, over five years, the LF Majedie UK Equity fund has returned 25.1% compared to the trust's 13.1% return - although both are trailing the FTSE All-Share's return of 37%. Over three years, the trust has lost 1.6% and the Majedie fund has returned 10.5%.

"Barnett has three months' notice to keep running the trust. If the election goes the way of the Tories today, we could see the much-anticipated 'Brexit bounce', with UK smaller companies rebounding on a more certain UK political outlook and outcome to Brexit, meaning Barnett's final quarter of performance could be more positive," he continued.

"Conversely, a hung parliament this week could do quite the opposite."

Thomas McMahon, senior analyst at Kepler Trust Intelligence, also noted that 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 - in particular UK domestics such as oil and gas.

That said, he added it is "interesting" that de Uphaugh's Majedie funds do not have significant exposure to tobacco, "a cheap sector that has been a big position in the Edinburgh investment trust under Barnett and has underperformed the broader index substantially".

"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," McMahon explained.

"James' existing experience with investment trust boards, as CIO of MAM which is the appointed manager of Majedie Investments PLC, should help enable a smooth transition.

"This appointment will also be a boost for MAM, which is partially owned by MAJE."

Additionally, the research team at JPM Cazanove, pointed out the Edinburgh investment trust's board has valued the MAM stake at a 35% discount to its "formulaic valuation" which, according to its research, would imply a multiple of 5-6x historic earnings.

"That seems conservative in our view and should AUM flows stabilise, noting that winning the Edinburgh mandate is high-profile public vote of confidence in MAM, we think there is considerable potential upside to the current MAJE NAV," it explained.

"Within the AIC Global sector Majedie Investments [MAJE] has a high UK weighting, making it something of a contrarian investment, in our view.

"Given the low valuation for the asset management business, and a current discount to NAV wider than the AIC Global sector average, we remain overweight."

McMahon added: "Our research suggests that on average, when a board sacks the manager of a trust. shareholders enjoy greater outperformance from their new manager.

"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."

Proactive IT boards

Sarah Godfrey, director and investment trust analyst at Edison, noted that boards have seemed "a lot more active this year in tackling underperforming strategies", citing European investment trust moving from Edinburgh Partners to Baillie Gifford, Jupiter UK Growth remaining under review, and Martin Currie Asia Unconstrained winding up.

She said: "The board of Edinburgh IT has shown it is willing to act decisively in the past, although it is interesting that having gone for big names before (first Fidelity and then Invesco Perpetual, specifically Woodford/Barnett), it has gone for a smaller firm this time.

"Some people have noted that Majedie's recent performance has been a bit underwhelming, but it seems to offer a flexible approach that might be more suited to the current changeable environment."

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• Topics
• Investment Trusts
• Mark Barnett
• CIO James de Uphaugh
• Majedie Asset Management