Investment trust bargain hunter: Top investor slips to 6% discount

This investment trust is a favourite with income investors and is trading on a wider-than-normal discount of 6%, catching the eye of our bargain hunter.

Boasting assets of £1.4 billion, the Edinburgh Investment Trust is one of the largest in the closed-ended fund universe and is popular with income investors, given that its aim is to grow dividends in excess of the rate of UK inflation over the long term.

Manager Mark Barnett took over from Neil Woodford in January 2014 and has delivered a strong showing. According to FE Trustnet, on a three-year view the trust's net asset value (NAV) is up 39.9%, while the share price has gained 34.2%. This is comfortably ahead of the pack - the average UK equity income investment trust is up 18.5% in share price terms.

The last 12 months, however, have been less plain sailing. Barnett has slipped down the league table due to the trust's zero weighting to the mining sector, which has benefited from the pound's decline and an oil price recovery from a low of $30 a barrel a year ago, trading around $50 today. Over the past year Edinburgh's NAV return stands at 12.3%, placing the trust in 19th place out of 24 in the Association of Investment Companies UK equity income sector.

As a result the trust's discount has widened and currently stands at 6%. This compares favourably to Edinburgh's one-year average discount figure of 3.1% and also looks attractive versus rival income funds.

When taking a quick look at the sector as a whole, there's only a small handful of trusts that are trading on a wider than usual discount. Standard Life Equity Income, a previous bargain hunter tip, stands out. It is trading on a discount of 10.4%, more than double its one-year average discount figure of 3.6%.

Stockbroker Killik thinks Edinburgh's current discount has entered bargain territory. In its daily note on Monday (20 March) the firm said: "The portfolio underperformed the benchmark index, due largely to the underweight exposure to the mining sector. The share price has lagged that of the NAV over the last three months, causing the discount to widen to 6%; this is towards the bottom-end of the medium-term discount range and a small discount to the rest of the UK equity income sector."

For some time Barnett has been concerned that too many risks are not being priced into equity markets, which continue to ride high, with the FTSE 100 (UKX) up 20% in price terms over the past year. Last November, when Edinburgh released its half-year report, he said one of his main concerns is the lack of overall profit growth from UK companies.

His exposure to the FTSE 100 is therefore below the UK equity income sector average at 51%, while an above-average 16% is in overseas companies. The latter are mostly big US tobacco companies, which make a valuable contribution to the trust's income.

Banks remain off the menu, with Barnett instead preferring to hold various other financials such as Provident Financial.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.