What will become of the Woodford-run Edinburgh Investment Trust?

Neil Woodford's announcement to leave Invesco Perpetual in April 2014 has surprised many, and the market is speculating on what will become of the giant £1.1 billion Edinburgh Investment Trust mandate.

Edinburgh Investment Trust has been hit by speculation on who will take over its mandate and the share price has dropped rapidly. On 15 October, as the markets closed, the trust saw its price fall 5%, followed by a further 3.5% fall on the morning of 16 October. Having traded at a 10-12% premium to its net asset value (NAV), the shares are now trading at close to NAV.

The independent board for the trust will decide the future management responsibilities for the trust. So far, the group has released a "holding statement" saying that it "will review carefully with its manager their proposed future arrangements for the management" and "will make a further announcement in due course". There is speculation that Mark Barnett may take over running Edinburgh IT, but analysts point out that he will already have a lot on his plate if the board decides he is the right person for the job.

Mark Barnett will succeed Woodford as head of UK equities at Invesco Perpetual and, alongside Ciaran Mallon and the existing fixed income managers Paul Causer and Paul Read, will assume responsibility for the open-ended funds Woodford manages.

Barnett had been dubbed the "next Woodford" even before the latter's resignation. He has 21 years' experience, including 17 years at Invesco Perpetual and has managed the £300 million Invesco Perpetual UK Strategic Income fund since January 2006, and is the lead manager of two investment trusts: the £815 million Perpetual Income and Growth and £220 million Keystone Trust as well as being responsible for the £55 million UK portfolio of Invesco Perpetual Select.

Iain Scouller, contributing analyst at Oriel Securities, says that, following the share price fall yesterday, the shares de-rated from trading on an estimated premium of 8% (fair value, ex-income of 12p) to a premium of 3%.

Scouller says: "This is disappointing news for Edinburgh Investment Trust and we would expect to see the premium erode further, with a possible discount arising in due course.

"Since Neil Woodford took over the management of the trust from Fidelity, Edinburgh Investment Trust has re-rated to trade from a 10% discount to trade on a significant premium to NAV."

He believes if Barnett is named the new manager of the trust this would give investors some comfort, as he has done a good job managing Invesco Perpetual Income and Growth.

Scouller adds: "However, given the size of the other funds he will be managing, it may be difficult to manage all the open-ended portfolios in addition to the investment trusts i.e. Keystone, Edinburgh IT and Invesco Perpetual Income and Growth."

To understand more about Barnett's approach to investing, read:Barnett - why dividend growth beats yield.

Charles Cade, head of investment companies research at Numis Securities, says a substantial outflow of assets from Invesco Perpetual seems inevitable given Woodford's high profile.

He believes it is highly likely the board of the trust will "hold a beauty parade" at some point. However, he is confident Barnett would be as capable as Woodford, pointing out that Barnett has the same "active, valuation-driven investment approach and long-term focus".

He says: "The ability to move the fund to a new manager is a unique feature of the investment trust sector and the board of Edinburgh Investment Trust has been active in demonstrating its independence in the past by moving from Edinburgh FM to Fidelity in August 2002, and then to Invesco Perpetual in September 2008.

"In theory, a merger with Perpetual Income and Growth and/or Keystone might make sense, although we believe that this is unlikely."

Past management moves and their impact

Earlier this year Richard Buxton moved from Schroders to Old Mutual. Cade highlights the move resulted in a significant shrinkage of assets in Schroder UK Alpha, his flagship open-ended fund.

Cade says: "However, the board of the £300 million Schroder UK Growth IT decided to stay with Schroders after putting forward Julie Dean as the new manager following the takeover of Cazenove Capital.

"We suspect that Invesco Perpetual may well look to strengthen its UK team, but it is unclear to us whether a senior hire would fit in well with the team's existing investment approach."

Alternatives to the Edinburgh Investment Trust

For those managers looking outside the Invesco Perpetual stable, there is an alternative for investors seeking UK equity income. Cade says the investment trust that currently stands out is JPMorgan Claverhouse, which has seen performance turn around since William Meadon took over as manager in March 2012, but is trading at a 5% discount, which is the widest in the peer group.

Cade also rates the Troy Income and Growth, Temple Bar, Finsbury Growth and Income, Dunedin Income Growth and City of London.