The Edinburgh Investment Trust plc (EDIN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. A very warm welcome to the Edinburgh Investment Trust Annual General Meeting of 2024. Welcome to those of you that are here in the room at the Balmoral Hotel and to those of you that are watching online. My name is James Mallott. I work for the [indiscernible] Trust, the investment management company responsible for the day-to-day management of your company's assets. In a moment, I will hand over to Elisabeth Stheeman, your Chair, who will take you through the formal proceedings of the meeting. But before that, just a few words from me on the rest of the agenda for today's meeting. On the screen, you can see that, firstly, Elisabeth will conduct the formal business of voting through the resolutions that the company has as is normal at this annual meeting. We will then move on to a presentation by your investment managers, Imran Sattar and Emily Barnard. They will talk you through the portfolio, their activity that they have taken -- undertaken on your behalf since becoming your managers earlier this year and the outlook for the assets and where we go from here. There will be plenty of time for questions. So please do feel free to ask questions, both for those of you here in the room and for those of you online who can submit questions electronically. I will compare the questions, and we'll manage the Q&A. And for -- we'll do our best to get through as many as possible in the event that we have more than enough time for, we will follow up with individual shareholders afterwards. We will then conclude for refreshments, at least for those of you that are here in the room, but first, Elisabeth.

Thank you, James, and good morning, ladies and gentlemen. Both those here in the room and those online, I'm Elisabeth Stheeman, the Chair of the Edinburgh Investment Trust, and I welcome you to the 2024 Annual General Meeting of the company. With me today are my fellow directors, Annabel Tagoe-Bannerman there at the end, and next to her Aidan Lisser, the Senior Independent Director of the company; then Steve Baldwin, the Chair of the Audit Committee; and Patrick Edwardson here right next to me, who is the Chair of the Management Engagement Committee. And we're very pleased that we have faced shareholders attending here in person in Edinburgh with some proceedings virtually via the company's website and the presentation will also be recorded and available on the website afterwards. So in accordance with the company's articles, I will act as Chair of the meeting and represent the proxy votes that have been submitted in advance. I can confirm that the quorum of shareholders is present and I declare the meeting is open. As mentioned by James, there will be a presentation today by Imran Sattar and Emily Barnard from Liontrust, our portfolio managers and that together that with all of today's proceedings, as I mentioned, will be recorded and available on the company's website. And as James mentioned, following the presentation, there will be an opportunity for shareholders to ask questions. So I now turn to the formal business of the meeting. I propose and given consent of the meeting that the notice of the Annual General Meeting be taken as read. Resolutions 1 to 11 are ordinary resolutions and in order to be passed, require a simple majority of the votes to be cast in their favor. Resolutions 12 to 15 are special resolutions and require at least 3/4 of the votes to be cast in their favor. Although we will be voting on each resolution today on a show of hands in accordance with best practice, the number of proxies lodged in favor of each resolution will be provided to shareholders. The proxy vote position will be displayed on the screen after each resolution and a schedule detailing this information will be published on the London Stock Exchange later today and shortly after on the company's website. I would also point out that only those who hold shares registered in their own name or have been appointed to represent a shareholder by valid proxy or have been properly appointed to represent a corporation in whose name the shares are registered may vote on a show of hands. So I now propose the resolutions as set out in the notice of the Annual General Meeting. And I should mention that as of next year, we'll do all resolutions in one guide this year, we'll just have decided to one last time to go to each of them one by one. So Resolution 1, to receive and consider the annual financial report for the year ended 31st of March 2024. I propose Resolution 1 that the annual financial report for the year ended 31st of March 2024 be received and adopted. Would those in favor, please raise their hands? [Voting]

Thank you. Would those against, please raise their hands? [Voting]

I declare the resolution as duly carried. Resolution 2, to approve the annual statement and report on remuneration for the year ended 31st of March 2024. I propose Resolution 2 that the annual statement and report remuneration be approved. Would those in favor, please raise their hands? [Voting]

Would those against, please raise their hands? [Voting]

I declare the resolution duly carried. Resolution 3, to declare a final dividend on the ordinary shares. Our proposed Resolution 3 to declare a final dividend of 6.9p per ordinary share. Would those in favor, please raise their hands? [Voting]

Would those against, please raise their hands? [Voting]

I declare the resolution duly carried. Resolution 4, to reelect Steven Baldwin as a Director of the company. I propose Resolution 4 that Steve Baldwin is reelected as a Director of the company. Would those in favor, please raise their hands? [Voting]

And would those against, please raise their hands? [Voting]

I declare the resolution duly carried. As the next resolution concerns my own reelection, I will hand over the chair to Aidan Lisser.

Good morning, everyone. Resolution 5 to reelect Elisabeth Stheeman as a Director of the company. I propose Resolution 5 that Elisabeth Stheeman, be reelected as Director of the company. Would those in favor, please raise their hands? [Voting]

Would those against, please raise their hands? [Voting]

I declare the resolution duly carried.

Thank you, Aidan, and thank you for your support. Resolution 6 to reelect Patrick Edwardson as a Director of the company. I propose Resolution 6 that Patrick Edwardson be reelected as a Director of the company. Would those in favor, please raise their hands? [Voting]

Would those against, please raise their hands? [Voting]

I declare the resolution is carried. Resolution 7 to reelect Aidan Lisser as a Director of the company. I propose Resolution 7 that Aidan Lisser is reelected as a Director of the company. Would those in favor, please raise their hands? [Voting]

Would those against, please raise their hands? [Voting]

I declare the resolution duly carried. Resolution 8 to reelect Annabel Tagoe-Bannerman as a Director of the company. I propose Resolution 8 that Annabel Tagoe-Bannerman to be elected as a Director of the company. Would those in favor, please raise their hands? [Voting]

Would those against, please raise their hands? [Voting]

I declare the resolution duly carried. Resolution 9 to reappoint PricewaterhouseCoopers as auditor of the company. I propose Resolution 9 that PricewaterhouseCoopers LLP be reappointed as auditor to the company. Would those in favor, please raise their hands? [Voting]

Would those against, please raise their hands? [Voting]

I declare the resolution duly carried. Resolution 10 to authorize the Audit Committee to determine the remuneration of the auditor. I propose Resolution 10 that the Audit Committee will be authorized to determine the remuneration of the auditor. Would those in favor, please raise their hands? [Voting]

Would those against, please raise their hands? [Voting]

I declare the resolution duly carried. Resolution 11, to authorize the directors to allot shares in the company. I propose Resolution 11 that the directors be authorized to allot shares up to 10% of the current issued share capital. Would those in favor, please raise their hands? [Voting]

Would those against, please raise their hands? [Voting]

I declare the resolution duly carried. Resolution 12 to approve the disapplication of preemption rights relating to the general authority to allot shares granted under Resolution 11. This is a special resolution. I propose Resolution 12 that the authority for the directors to disapply preemption rights relating to the general authority to allot shares granted under the Resolution 11 as set out in the notice of the Annual General Meeting be approved. Would those in favor, please raise their hands? [Voting]

Would those against, please raise their hands? [Voting]

I declare the resolution duly carried. Resolution 13, to approve the repurchase of ordinary shares. This is a special resolution. I propose Resolution 13 that the directors be authorized to repurchase ordinary shares of the company is set out in the notice of the Annual General Meeting. Would those in favor, please raise their hands? [Voting]

Would those against, please raise their hands? [Voting]

I declare the resolution duly carried. Resolution 14, to adopt the new Articles of Association of the company. Would those in favor, please raise their hands? [Voting]

Would those against, please raise their hands? [Voting]

I declare the resolution duly carried. And finally, Resolution 15 to approve general meetings to be called on not less than 14 days' clear notice. Again, this is a special resolution. I propose Resolution 14 that general meetings may be called on not less than 14 days. Clear notice is set out in the notice of the Annual General meeting. Would those in favor, please raise their hands? [Voting]

Would those against, please raise their hands? [Voting]

I declare the resolution as duly carried. That concludes the formal business, and I will now hand over to Imran Sattar and Emily Barnard to present on the portfolio.

Thank you, Elisabeth. Good morning, everyone. I'm Imran Sattar, your Portfolio Manager. I've been looking after the trust since October of last year as Deputy and as Portfolio Manager since the beginning of this year, I watched very closely with your previous manager, James de Uphaugh, for many, many years. And whilst I've been looking after the trust only for a short period, I have been managing U.K. equity portfolios for over 2.5 decades originally at BlackRock and now at Liontrust, and I'm delighted to be here with you this morning.

Good morning. I'm Emily Barnard. I have 9 years of investment experience. I've worked alongside Imran for the last 6, and I was appointed Deputy Portfolio Manager of Liontrust in February this year.

So the plan today is to give you an overview of how we invest. To talk a little bit about the performance of the portfolio, to give you a view of around the shape of the portfolio and to conclude on the outlook for markets and the portfolio. A reminder of the trust's objectives. It's firstly, to grow net asset value per share ahead of the benchmark, and that's the FTSE or share. Secondly, to grow dividends ahead of U.K. inflation. And we do that by building a high conviction portfolio of 40 to 50 stocks, principally invested in the U.K. stock market but with the flexibility to own up to 20% of the trust's assets in non-U.K. listed shares. This is a portfolio that has a total return approach driven by bottom-up, stock-specific fundamental research with risk management guardrails around that. We do have a modest amount of leverage on very, very attractive terms, both in terms of duration and cost, and we believe that will enhance returns. And what you see here, the approach is very much unchanged since we were appointed to run the trust over 4 years ago. We believe you have to have a flexible investment approach so that you can perform across market cycles. You will have all seen and read about market volatility and it's this flexible investment approach that has led us to navigate markets well over the last few years. And you will have heard something very similar from James de Uphaugh, the previous portfolio manager. We share a very similar approach to how we invest. Within this flexible approach, though, I do have a preference for companies that exhibit strong structural growth have high returns and have something special that protects those returns. It's what I call an economic moat, we'll come back to that. On to performance. I'm pleased to report that the performance of the trust during the financial year was strong. The net asset value rose by 14.3%, nicely ahead of benchmark. Within that, capital growth contributed just over 9% and income approximately 4%. The dividend was raised by the Board ahead of U.K. inflation, thereby meeting the second of the twin objectives. The prior 3 years were good too, and that means that since we were appointed over 4 years ago, the net asset value per share and the share price nicely ahead of benchmark. I'm also delighted to report that we've had a good start to the new financial year. So that's the first quarter of the trust's financial period ahead of benchmark too. But really, what's more important is how that's repeatable. And for us, it comes down to sticking to the investment process and philosophy. It served the trust so well over the last few years. So a quick discussion on what are the key drivers of performance during the financial year before we talk about the portfolio in more detail. It was principally stock-specific drivers that led to outperformance. So that's the likes of BAE Systems, the defense contracting business produced good profit and cash flow growth. Centrica, the diversified energy business that had a significant recovery in its profit after having had 2 tough years and M&S, that's seen a fabulous recovery in its fortunes in its profit and it's in its share price. And then finally, gearing also contributed nicely to performance. On the other side of the ledger, Anglo American, the diversified mining business detracted from performance. Now its mines had a shortfall in terms of production growth forecast and that will impact profits. However, since the financial year-end, the business has seen a big approach, and we're sticking with Anglo American. We think there's a lot of value to be unlocked there. RS Group, that's the industrial distribution business. Their profits also saw a shortfall and there was management change. There, the investment thesis have changed, and we've cut the position. Overall, a good year. So now let's have a look at the portfolio. You'll recognize many of the names here. And this is looking at the portfolio through a thematic lens. There are multiple themes that are key drivers of your portfolio. And we're just going to discuss some of those today. Starting top right in dark green consumer bifurcation. What we're finding is that consumer behavior is changing. The middle market is being squeezed and consumers are gravitating towards value for money on the one hand, and then luxury on the other. And we're playing this theme through a number of companies like Greggs, the food-to-go retail. It's a market share win, a fabulous business. Tesco, the leading U.K. grocery business, again, market share winner. Whitbread, that's the owner of Premier Inn the market-leading budget hotel operator, again, market share winner. And then 3i, that's the private equity business that has a significant stake in action the preeminent European discount retailer, fabulous growth asset, high returns, high margins, again, market share winner. So here, the consumer names that we own in the portfolio market share winning businesses, good returns and well set to continue to deliver. And then the next thing we're going to talk about is data and analytics. So that's one end from consumer bifurcation in the orange. It's an area you should expect to feature more and more in the portfolio. So we have companies like AutoTrader and Rightmove, 2 brilliant Internet platform businesses with growth, a powerful economic moat well set to continue to deliver good profit growth. Companies like LSEG, so that's the London Stock Exchange Group, and it's so much more than just the London Stock Exchange. It really is a global financial data powerhouse with good growth, great margins and much more to come. And then Relex, a fabulous data analytics business that owns very powerful data sets serving the legal, scientific and risk industries. Again, fabulous business. Those data sets are getting more and more essential for businesses and government because Relex has financial data tools and analytics that make that data more and more powerful. And these are all great examples of businesses that have good growth, high margins, high returns and importantly, an economic moat that protects those returns. And finally, on this slide, we're going to talk about self-help. So that's on the left-hand side, in dark blue, whilst we spent talking about quite a lot around companies that exhibit high returns, have structural growth, our fabulous businesses with powerful economic moats I did say we're flexible investors, and we find really interesting opportunities in this area. And self-help is around companies that are essentially in turnaround mode. So a couple of quick examples. Unilever the consumer goods business. It's a good business. However, it has lagged in terms of organic revenue growth and margins versus its peers. But we think with the new management team in place, we're excited that there's emerging signs of a turnaround. And then Rentokil, Rentokil is a global leader in pest control. It's a business that I've known for over a decade. It's run by a smart management team, but it's fair to say that the last 2 years have been a challenge. There have been some execution issues. Now with the smart management team and a team that recognizes the issues, we think that, that business has significant potential to turn around and become the great business that it was a couple of years ago. Looking at the portfolio holdings on this page, I must say we've been hugely impressed with the way these businesses have handled the recent volatility, whether that's around the supply chain, the inflationary environment or the uncertain macro economics that we've seen in the last couple of years. And the vast majority of companies on this page have become stronger businesses over the last 2 years. And that's where the confidence comes from going forward. It's these businesses producing good profit growth, good cash flows that allows the trust to achieve its total return objectives. So that concludes the thematic lens. Now in my 2.5 decades of managing portfolios, economic diversification has always played an important role in allowing to deliver performance across market cycles. So we have a second lens with which we look at the portfolio, how well is the portfolio economically diversified, not just versus the benchmark. So let's have a look at the portfolio again. You can see it's very well diversified across a range of sectors, some which are exposed to the economic cycle, so that the industrial businesses like Ashtech Group and Spirax Sarco and the commodities industries. So that's the like of Anglo America. Others that are defensive. So that's the likes of Unilever, the consumer goods companies and the health care assets are companies like Helium that we own on your behalf. And some with structural growth characteristics like in technology and data. So that's the Verisks and the AutoTraders and the LSEGs of this world. Right at the beginning, I talked about building a high conviction portfolio and one that aims to perform across market cycles. And by looking at these -- the portfolio with these 2 lenses gives us the best chance to continue to deliver attractive total returns for you, our shareholders. So now let's have a look at what we've been doing in the portfolio. I'll talk about what we've been buying, and Emily will cover how we've been funding the purchases. So firstly, just to give you a flavor, [indiscernible], the homewares and furniture retailer. It's a very good retail business. We've been adding to that position. It's a very cash-generative business and produces very attractive stream of dividends. LSEG and Rentokil, I mentioned earlier, 2 businesses that we think will provide very attractive profit growth over the next 2, 3, 4 years. Our new industrial positions in the likes of Spirax, Diploma and Rotork, all well set to continue to deliver structural growth at high margins and high returns. And then finally, Verisk. Verisk is an example of use of the 20% of the Trust NAV that we're allowed to invest in non-U.K. listed shares. And Verisk is a U.S.-listed data analytics business in the insurance vertical very powerful business, great growth, a formidable market position and a real economic moat.

Thank you, Imran. For the sales year-to-date, there are broadly 3 categories. The first are valuation aware sales. So these are companies which we still hold in the portfolio, but where we've trimmed the position because we felt that valuation sort of ran ahead of itself a little bit. They would be BAE, the defense contractor, M&S and Centrica. The second category of sales year-to-date are industrial companies where we have lowered conviction. So you heard Imran talk about some of the industrial buys. So Spirax Sarco, Rotork. And they have been funded in part by sales of companies where we've lowered conviction. So they are complete sales of Mondi, Ware and RS Group. And the third category of sales are turnarounds where we think the path to profit recovery and returns recovery is perhaps longer and bumpier than we had expected, and they are Hays and standard chartered. So over the last 10 minutes, you've heard Imran talk about the importance of the flexible and total return approach to managing the trust. I'm going to set that in a broader context and then we'll go on to the outlook. So first, we'll talk about why a flexible approach is important in a world of increased uncertainty and volatility. And then secondly, why the total return approach to managing the trust, thinking about both dividends and capital growth is well suited to the changing U.K. market structure. So geopolitics. On the left-hand side of the slide, you'll see a visual representation of what the last years have looked like and felt like. And I'm sure most of the faces and the virus are familiar to you all. geopolitical risk has been rising for a number of years. Now if we were to wind the clocks back 12, 18 months, maybe more than 1 U.K. politician may have made the left-hand side of the slide, but there aren't any present today. And we feel that U.K. political risk is receding both absolutely and relatively against Europe and the U.S., and that has become a bit more starkly apparent in the last few weeks. So to set that geopolitical risk in a longer context, we go to the right-hand side of the slide. This is a chart which goes back 20 years to 2004 and shows 2 measures of global risk. In orange, we have a measure of the uncertainty of economic policy globally. And in blue, we have a measure of geopolitical risk. Now this is using data from the Federal Reserve. So I feel relatively confident that the data is pretty sound. You can see for the first 13 years of the chart until around 2017, the lines were relatively range-bound, relatively unexceptional. And since 2017, we've been in a pretty unusual period for investing where both economic policy uncertainty and geopolitical risk have both been elevated. And why I'm showing you this chart is, to me, it demonstrates really strongly the importance of a flexible pragmatic approach to managing the trust because we do not know how those lines are going to move to the right-hand side of the slide going forward. Secondly, why is our total return approach, thinking about both dividends and capital growth. Why is that well suited to the U.K. market structure. So this is the last chart for me, and this goes back 10 years. And it looks at the totality of the U.K. market, the FTSE100 and the FTSE250 and it looks at how those companies are returning cash to shareholders, principally dividends and share buybacks. So in orange, you can see the dividend yield of companies in the U.K. market. And in blue at the bottom, you can see the share buyback yield of companies in the U.K. market. Now it's not a smooth line, but gently over time, U.K. companies are making increasing use of share buybacks as a way to return cash to shareholders. And we think our flexible investment approach, which looks at both dividend yield and capital growth is well suited to the U.K. market, which is seeing an evolving structure. And finally, why the U.K.? Now before I pass back to Imran, there are 10 stocks in the U.K. market, which account for 50% of the total market dividend -- they are the likes of HSBC, BP, Shell, Rio Tinto, Big Pharma. Now they are important from a dividend perspective and we hold a number of them in the trust. But that misses something really special about the U.K. market, which is there are so many fantastic gems that we can find that Imran mentioned earlier. The likes of Rotork, the London Stock Exchange Group, and we are invested in those as part of this flexible total return approach to managing your trust.