Brunner Investment Trust (The) — Highest total return versus peers over three years
Edison Group | Sep 25, 2023 10:33
The Brunner Investment Trust’s (BUT’s) two co-managers, Christian Schneider (deputy CIO global growth) and Julian Bishop (global equity specialist) are supported by deputy managers Marcus Morris-Eyton (European equity specialist) and Simon Gergel (CIO UK equities). BUT can be considered as a global equity fund for all seasons given its steady trend of outperformance in recent years despite volatile share prices and changes in stock market leadership. The trust stacks up well in both absolute and relative terms with double-digit annual NAV total returns over the last decade and above-average returns within the AIC Global sector over the last one, three and five years. BUT’s dual mandate of income and capital growth means it should appeal to a broad range of investors.
Why consider BUT?
BUT’s highly experienced managers have a shared investment philosophy, seeking quality companies with stable, above-average returns, operating in secular growth businesses, and which are trading at reasonable valuations. A company’s long-term free cash flow is a particular area of focus within the team. Investing for the long term is borne out by the trust’s relatively low portfolio turnover, which averages below 20% per year, implying a holding period of more than five years.
Stocks are selected on a bottom-up basis and in aggregate Brunner Investment Trust (LON:BUT) has meaningful above-index positions in two cyclical sectors, industrials and financials, while its largest underweight is to consumer staple stocks, suggesting the fund should perform relatively well ahead of an economic recovery.
The trust has a commendable record in terms of its income growth. It has increased its annual dividend in each of the last 51 years, earning it seventh place in the AIC’s list of 20 dividend heroes, which are funds that have grown their distributions for at least 20 consecutive years.
One could argue that BUT’s 13.0% share price discount to cum-income NAV, which is equivalent to around 20 years of its latest ongoing charges, looks overly wide given the trust’s straightforward high-quality equity portfolio, notable dividend record and strong record of outperformance. BUT has outpaced the returns of its composite (70% global, 30% UK) benchmark over the last one, three, five and 10 years in both NAV and share price terms.
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BUT: A one-stop shop for a global investor seeking both capital and income growth
A straightforward global equity fund
We highlight BUT’s upside/downside capture over the last decade in Exhibit 1. Unusually, the trust has a very similar rate of 111% in a rising and 110% in a falling market. The portfolio does not display any particular bias to rising or falling markets, partly due a 100% listed equity exposure, with no unquoted assets or derivatives.
Current portfolio positioning
Exhibit 2 shows how BUT’s geographic exposure has evolved over the last decade. Compared with global indices the trust retains a relatively high UK weighting due to its composite benchmark, which is a combination of 70% of a broad global ex-UK index and 30% of a UK index (50:50 split until March 2017). Stocks are selected on a bottom-up basis but a comparison with the benchmark shows a notable overweight exposure to European stocks, while the UK allocation is below its benchmark weighting.
Exhibits 3 and 4 show that there were modest changes in BUT’s sector exposure in the 12 months to the end of July 2023 with the most notable being a 4.0pp higher weighting to technology stocks and a 3.9pp lower weighting to the consumer discretionary sector. Compared with the benchmark, the trust’s active weights are not dissimilar to when we published our last review in May 2023. The largest overweight sectors are industrials (+9.1pp) and financials (+5.2pp), with underweight exposures to consumer staples (-4.1pp) and basic materials stocks (-3.9pp).
At end-July 2023, BUT’s top 10 holdings, over a broad range of businesses, made up 32.6% of the portfolio, which was a higher concentration versus 29.7% 12 months previously; eight positions were common to both periods.
Recent portfolio activity
Portfolio activity in recent months has been modest. In July, the managers initiated a position in Netherlands-based ASML Holding (AS:ASML), the market leader in photolithography equipment, which uses a light source to expose circuit patterns from a photomask onto a semiconductor wafer. ASML’s extreme ultraviolet lithology enables semiconductor manufacturers to increase the number of transistors on the same area of silicon. The considerable development cost of this technology affords the company a very high barrier to entry, while ASML has a high-quality earnings stream and a strong balance sheet. To fund this new holding, profits were taken in a range of positions including Microsoft (NASDAQ:MSFT), as it is deemed to be a lesser beneficiary of the growth in artificial intelligence compared with some other major technology companies.
In June 2023, the managers added to BUT’s holding in Microchip Technology, a US manufacturer of small, relatively simple semiconductors and microcontrollers that are used in a wide variety of applications, from electric vehicles to factory automation. Relatively low price points and small quantities limit pricing pressure, while as Microchip’s components tend to be designed for a specific device there is a high level of repeat business, supporting the company’s margins. Having made acquisitions and subsequently paid down the debt incurred, Microchip is now able to return cash to shareholders via higher dividends and share repurchases. The managers consider the company has a good balance of quality, value and growth. Funding for the increased allocation to Microchip came from taking profits in two European pharma companies, Novo Nordisk (CSE:NOVOb) and Roche Holding (SIX:ROG).
London-listed Intercontinental Hotels Group (LON:IHG) was added to BUT’s portfolio in April 2023. It is one of the largest chains in the world with c 6,000 current and a further c 1,800 hotels in the pipeline. The managers favour IHG’s franchise or fee-based business model with licenced brands including Holiday Inn, Intercontinental and Six Senses, which generate a reliable, profitable fee stream with opportunities for future growth. IHG has long-term contracts with hotel owners and its asset-light model means the company generates high levels of cash flow that can be returned to shareholders. This new position was partially funded by the sales of two small holdings in UK contract foodservice company SSP Group and Japan-listed Astellas Pharma.
Performance: Looking strong versus its peers
There are 13 funds in the AIC’s Global sector following a range of different mandates. BUT’s relative performance has definitely improved in recent months and its NAV total returns are above average over the last one, three and five years with very commendable rankings of third, first and second respectively. The trust’s performance is below average over the last decade. Despite its strong performance record, BUT’s discount is wider than average in a group where no fund is trading at a premium. Its ongoing charge is below average as are its level of gearing and dividend yield, although few of its peers can match BUT’s annual dividend growth record. There are only 20 AIC dividend heroes, which are funds that have a 20-year or greater record of annual dividend increases. There are six in the AIC Global sector; BUT has the fourth longest record.
With the trust aiming to generate both capital and income growth, BUT could be considered as a core or ‘all-weather’ fund. Its high-quality portfolio is straightforward, with no exposure to unlisted businesses or derivatives. Looking at the Morningstar style analysis of the companies in the AIC Global sector, there are three categorised as large-cap blended funds: BUT, Bankers Investment Trust (LON:BNKR) and F&C Investment Trust; most are categorised as large-cap growth funds. Comparing the performance of these three companies, BUT’s NAV total returns rank comfortably first over one, three and five years, while it is narrowly in third place over the last decade.
In H123 (ending 31 May), BUT’s NAV and share price total returns of +1.6% and +2.3%, respectively, outpaced the benchmark’s +0.3% total return. As shown in Exhibit 7, the trust is ahead of its benchmark over the last one, three, five and 10 years in both NAV and share price terms.
Over the last year, stocks that have made the largest contribution to BUT’s relative performance include the trust’s holding in Greek retailer Jumbo (year-to-date share price +71%), and top 10 holdings Munich Re (+24%) and Microchip Technology (+13%). The largest detractors to the trust’s relative performance include top 10 holding UnitedHealth (NYSE:UNH) Group (-6%) along with a lack of exposure to some of the US large-cap technology stocks that have performed particularly well such as NVIDIA Corp (NASDAQ:NVDA) (+203%) and Apple (NASDAQ:AAPL) (+42%).
Dividends: Progressive policy over last 50+ years
BUT has delivered higher annual dividends for the last 51 consecutive years, and is seventh in the AIC’s list of 20 dividend heroes. Also, the trust’s average annual dividend growth is higher than the average level of UK inflation over the long term.
At the end of FY22, BUT had 25.9p per share in revenue reserves, which is equivalent to c 1.2x the annual dividend. In H123, BUT’s earnings per share was 15.7p versus 13.5p in H122, a 16.3% increase. So far, two interim dividends of 5.55p per share have been declared in respect of FY23, which are 7.8% higher year-on-year. If the third interim dividend is also 5.55p per share and the fourth interim dividend of 6.05p per share is maintained, the total distribution would be 22.7p per share, which would equate to a 5.6% annual uplift.
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