Mark Barnett, manager of the £1.3billion Edinburgh Investment Trust, has said the stock market is fully valued and defended his major position in tobacco companies.

The trust, once managed in the capital but now run from Henley-on-Thames by Invesco Perpetual, still holds its annual meeting in Edinburgh and three of its five directors are Scots – chairman Jim Pettigrew and non-executives Gordon McQueen and MaxWard.

Mr Barnett, understudy at Invesco to star manager Neil Woodford until the latter left to start his own fund last year, steered the UK-focused trust to a 16.5per cent return last year against 6.6per cent for the all-share index. He told shareholders, in a presentation after the formal meeting, that the performance was “pleasing”. After making changes when he took over in May last year, he had left the portfolio largely alone, with turnover down to a low 10per cent.

“It is still pretty concentrated overall with 50 stocks but it was very heavily weighted towards the 10 or 15 largest holdings,” Mr Barnett said.

Shareholder Jack Wishart said he was concerned that four of the trust’s top 10 stocks and 17per cent of the fund by value was in tobacco companies. “I think this is dangerously exposed,” he said.

Mr Barnett said it was “not an ethical issue” and tobacco companies were “amongst the very best in terms of their financial performance”. Sales volumes in developed countries had been declining at a steady long-term rate of 1.5per cent a year in the mature developed world market. “They are successfully exploring new markets in the developing world where people are switching from local brands to international brands...they have also been consolidating manufacturing, driving efficiency....we don’t manufacture any cigarettes in the UK any more, the last plant closed last year. Returns have been growing over the last 10 to 20 years, all this time the businesses have been delivering higher levels of return and cash, that cash is finding its way back to shareholders.”

Mr Barnett was questioned by another shareholder on last month’s Canadian court ruling that BAT should pay £5.5bn in damages to a million smokers who were not warned about health risks. He said BAT was very experienced in defending such cases. “They may end up paying some damages but it till be much reduced from the headline levels, it is not something I am overly concerned about. Legal issues around tobacco are significantly reduced from there they were 10 years ago.”

Mr Barnett said he believed the stock market was now “more fully valued than we have seen in the recent past”, because a lack of earnings growth would see prices become vulnerable. He added: “I think it is highly likely that the US will move on interest rates in September.”