Edinburgh Investment Trust aims to deliver an attractive long-term total return of both income and capital growth. This enables Edinburgh to meet its objectives, which are to exceed the total return on the FTSE All-Share index and grow its dividend faster than UK inflation.
We seek firms with deep economic moats (enduring competitive advantages) that underpin attractive future returns. The process is flexible, with an open-minded approach to the type of investments held: holdings include growth, value and recovery stocks. The portfolio holds 43 stocks and is well diversified both economically and thematically.
Shareholders also benefit from several of the features of the investment-trust structure. For example, the company has long-term debt equivalent to 9% of gross assets, which should enhance long-term returns. It is also buying back its shares, taking advantage of the modest share-price discount to net asset value (NAV) and providing a boost to the NAV per share for remaining shareholders. The following three holdings illustrate how our investment process generates attractive investment opportunities.
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Three companies with economic moats for capital growth and income
Rightmove (LSE: RMV) is a strong company going through a period of change. It benefits from the network effect of more users (consumers) driving more customers (estate agents) to the site. With an 85% share of the time spent on all property portals in the UK, estate agents have little option but to use the site as otherwise properties risk not being viewed. As a result, Rightmove’s economic moat is firmly established.
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However, moats do need investment to retain their strength. Rightmove is seeing an acceleration of investment – and a short-term impact on margins – to help the business take advantage of developments in the arena of artificial intelligence and to ensure a robust internal infrastructure. The management team is clearly thinking about the future and positioning the firm for the greatest chance of continued success in a changing competitive environment and backdrop for AI.
Oxford Instruments (LSE: OXIG) is a medium-sized UK-listed scientific instruments company. Oxford Instruments was the first commercial spin-out from Oxford University, having started life in the garden shed of its co-founder, Martin Wood. The company sells high-end scientific equipment into the semiconductor, materials-analysis, healthcare and life-sciences markets. The group should be able to grow sales at between 5% and 8% per year in the medium term, combined with strong and improving margins, returns on capital and cash conversion. Strong scientific expertise explains the firm’s deep moat.
Finally, Howdens (LSE: HWDN), the British market leader in kitchens, is an illustration of how scale can be used to deliver a powerful economic moat. Howdens sells directly to builders and installers. Most of its products for kitchens and new growth areas, such as fitted wardrobes, are manufactured in-house, giving it control over quality and costs, and resulting in a highly competitive and reliable offering.
Howdens also manages its own logistics operation with a nationwide network of 900 depots, ensuring that its trade customers are in close proximity. The group’s economic moat of scale results in lower costs, higher-quality products, faster delivery times and increased reliability and convenience for its trade customers. Howdens now holds 40% of the UK kitchen market – and with this business model we think there is further to go for in the years ahead.
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