Brunner Investment - Half-year Report
15/07/2024 07:00
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RNS Number : 3089W Brunner Investment Trust PLC 15 July 2024
LEI: 529900S0Y9ZINCHB3O93
THE BRUNNER INVESTMENT TRUST PLC
HALF-YEARLY FINANCIAL REPORT
For the six months ended 31 May 2024
Financial Headlines
For the six months ended 31 May 2024
· Net asset value total return (debt at fair value) per share
increased by 12.8% (2023: +1.6%)
· Net asset value total return (debt at par) per share increased by
13.0% (2023: +1.1%)
· Benchmark index total return increased by 13.9% (2023: +0.3%)
· Net asset value (debt at fair value) per share increased by 11.8%
(2023: +0.7%)
· Net asset value (debt at par) per share increased by 12.0% (2023:
+0.2%)
· Share price total return increased by 26.0% (2023: +2.3%)
· Earnings per ordinary share increased by 8.9% to 17.1p (2023:
15.7p)
· Dividends for the half year increased by 6.3% to 11.8p (2023:
11.1p)
· Discount of net asset value (debt at fair value) to share price
5.5% and an average of 7.6% over the period (2023: 13.0%, average over the
period 10.6%)
Six months ended Six months ended % change
31 May 2024 31 May 2023
Revenue
Available for ordinary dividend £7,305,000 £6,689,000 +9.2
Earnings per ordinary share 17.1p 15.7p +8.9
Dividends per ordinary share 11.8p(1) 11.1p +6.3
Consumer price index 133.9 131.3 +2.0
( )
Assets At 31 May At 30 Nov 2023 Capital return % Total return(1)
2024 change % change
Net asset value per ordinary share 1407.5p 1258.6p +11.8 +12.8
(debt at fair value)
Net asset value per ordinary share (debt at par) 1386.2p 1237.2p +12.0 +13.0
Ordinary share price 1330.0p 1065.0p +24.9 +26.0
Total net assets with debt at fair value £600,912,000 £537,308,000 +11.8
Total net assets with debt at par £591,799,000 £528,210,000 +12.0
Performance relative to the benchmark for the six months to 31 May 2024
Net Asset Value with debt at fair value relative to Benchmark(2) Capital Return Total Return(3)
Change in net asset value 11.8% 12.8%
Change in benchmark 12.4% 13.9%
Percentage point performance against benchmark(2) -0.6 -1.1
(1)First interim 5.90p, second interim 5.90p
(2) The benchmark applied is 70% FTSE World Ex UK Index and 30% FTSE All-Share
Index.
(3)Total returns are calculated with net dividends reinvested
Interim Management Report
Half-yearly report
As I mentioned in my Chair's Statement in the Annual Report, 2024 was going to
be the year that 64 countries plus the European Union were going to hold
elections and that associated news was likely to be rampant. So far news has
proved to be even more volatile than expected. The most surprising and
significant outcome was the initial success of the far right in the first
round of the unexpected French parliamentary election, who were then quickly
surpassed by the Nouveau Front Populaire, an alliance of left-wing parties
ranging from communists to centre left, in the second round. It is difficult
to see how France can continue to play a leading and unifying force in driving
Europe with such a fractured parliament and since Germany has its own
political divergences in its parliament, who will? On the other side of the
Atlantic there is a potential President with a criminal conviction and an
incumbent where there are doubts about his physical competencies. At a time of
wars with horrific civilian casualties, it is unclear which power block will
be able to lead the world out of these.
Whilst politics can be extremely polarising and emotive, the extent to which
any election result will influence the fortunes of an individual business does
vary. Generally, election results do not have immediate and significant impact
on a country's domestic economy. When they do, the lesson of the brief
Truss/Kwarteng era was that markets have shown they can, and will, constrain
movements towards unsound economic policies.
Geopolitical tensions dominate headlines and ongoing conflicts show little
sign of reaching conclusions. Defence spending is generally high and rising in
the west, and national service and conscription has started to re-appear on
some national political agendas as nations brace for the potential of any
spread to a wider stage.
Performance
For the six months under review, global markets provided strong returns. Our
composite benchmark (70% FTSE World Index Ex UK and 30% FTSE All-Share Index
with net dividends reinvested), generated a return of 13.9%. Our fund returned
12.8% on a similar basis with debt at fair value.
At our year end, our discount was disappointingly wide at 15.4%, which seemed
inappropriate considering the excellent investment performance and I am
pleased to note that at the end of the period under review it had narrowed to
5.5% therefore producing a share price total return of 26.0%.
Top-down vs. bottom-up - a question of approach
Shareholders may well recognise these terms and may even feel they are
overused. However, in the Portfolio Managers' Report, there is a detailed look
at this and how it influences the manager's approach - in short it is much
easier to predict the future behaviour and potential performance of an
individual company that it is an entire economy or geographic region. For this
reason, our managers concentrate staunchly on building the company's portfolio
from the ground up, finding companies that meet Brunner's strict investment
policy and crafting these into a carefully risk-controlled portfolio for the
benefit of all our shareholders.
As we have noted before, aversion to too much risk (some risk is of course
both necessary and helpful in investment terms) as well as a strong element of
our investment philosophy and process being not overpaying, means that we may
sometimes fail to participate fully in some of the astronomical rises that can
occur, particularly in the technology sector, but we remain comfortable with
the lower volatility that this approach generally yields over the longer term,
viewing it as a more prudent approach we feel is well aligned with the values
of the majority of our shareholders.
Of course, both the board and the investment manager closely monitor
macroeconomic factors and geopolitics and consider and debate the potential
impact on portfolio companies, but we would not necessarily expect any
wholesale rework of the portfolio based on such factors. The company specific
factors that influenced our performance over the period are examined in detail
in the Investment Manager's Review.
Earnings
We are pleased to report continuing recovery in dividend payments amongst
portfolio companies through the period. Earnings increased by 8.9% to 17.1p
per ordinary share in the six months to 31 May 2024 (2023: 15.7p). Brunner
continues to have strong revenue reserves, equivalent to 1.3 x last year's
pay-out, which exist to support dividend payments in years (such as during the
pandemic) when earnings were constrained. This is a primary advantage of
investment trusts in general. The board intends to continue both prudently
accumulating such reserves and utilising them as necessary to maintain a
growing dividend. The board has no current plans to pay dividends out of
capital and foresees no need to do so in the foreseeable future.
Dividends
In June, the board declared a first interim dividend of 5.90p per ordinary
share which is payable on 25 July 2024. The board also stated in that
declaration that it anticipates second and third interim dividends at a
similar level and an unchanged final dividend for 2024 of 6.05p for the year
ending 30 November 2024. Brunner's revenue reserves of 29.6p per share (as at
30 November 2023), comfortably cover a full year's dividend payment, allowing
the board to forecast this year's dividend with confidence. This would
represent a full year's dividend of 23.75p per ordinary share, an increase of
4.6% over the dividend for the year ended 30 November 2023. The board
therefore declares a second interim dividend of 5.90p per ordinary share
payable on 12 September 2024 to shareholders on the register at the close of
business on 2 August 2024. The ex-dividend date is 1 August 2024. A Dividend
Reinvestment Plan (DRIP) is available for this dividend and the last date for
the DRIP election is 16 August 2024.
The board remains aware of current pressures in the cost of living and the
concern this may be causing shareholders - this remains a key consideration
when discussing and deciding on the appropriate dividend level.
At the end of the 2023 financial year, the trust proudly reached 52 years of
consecutive dividend increases, keeping us in the leading pack of the
Association of Investment Companies (AICs) "Dividend Heroes" list. We see 2024
as firmly continuing this tradition in the interests of our shareholders.
Discount and shareholder demand
Over the period we saw good demand for the trust's shares, on the back of our
strong and steady long-term performance.
Sales (direct interaction with professional investors), marketing and PR
(indirectly raising the profile of Brunner to both private and professional
investors) efforts continue and we believe that the overall makeup of the
company's share register is one of appropriate stability and diversity of
investor type.
Your board remains very confident that the Brunner investment philosophy is
well suited to the increasing numbers of investors we see joining the share
register, either as private self-directed investors through the investment
platforms or underlying clients of the wealth management firms.
Material events and transactions
In the six months ended 31 May 2024 there were no share buy backs, or share
issuances, and no related party transactions, nor have there been any since
the period end.
Principal Risks
Market conditions and emerging risks continue to stress test the business
models of all companies. As a result, the board stays in close contact with
the manager regarding any developments.
The principal risks facing the company are set out on in a table on pages 17
to 19 of the Annual Report for the year ended 30 November 2023, together with
commentary on the board's approach to mitigating the risks, under the
following headings: Investment and Portfolio Risks; Business and Strategic
Risks; Operational Risks; and Emerging Risks. These continue to be the
principal risks facing the company.
The board oversees a detailed review of the principal risks by the audit
committee at least twice a year to ensure the risk assessment is current and
relevant, adjusting mitigating factors and procedures as appropriate.
Going concern
The directors have considered the company's investment objective and capital
structure both in general terms and in the context of the current
macro-economic background. Having noted that the portfolio, which is
constructed by the portfolio manager on a bottom-up basis, consists mainly of
securities which are readily realisable, the directors have also continued to
consider the risks and consequences of such external factors on the
operational aspects of the company and have concluded that the company has the
ability to continue in operation and meet its objectives in the foreseeable
future. For this reason the directors continue to adopt the going concern
basis in preparing the financial statements.
Responsibility Statement
The directors confirm to the best of their knowledge that:
· The condensed set of financial statements contained within the
half-yearly financial report has been prepared in accordance with FRS 102 as
set out in Notes 3 and 4, and the Accounting Standards Board's Statement
'Half-Yearly Financial Reports'; and
· This report includes a fair review of the information required by
Disclosure and Transparency Rule 4.2.7 R of important events that have
occurred during the first six months of the financial year and their impact on
the condensed set of financial statements, and a description of the principal
risks for the remaining six months of the financial year; and
· This report includes a fair review of the information concerning
related parties' transactions as required by the Disclosure and Transparency
Rule 4.2.8 R. Note 17 of the company's 2023 Annual Financial Report gives
details of related party transactions and transactions with the AIFM. The
basis for these has not changed during the six months under review.
The half-yearly financial report was approved by the board on 12 July 2024 and
the above responsibility statement was signed on its behalf by the Chair.
Cost disclosure
Our own industry, investment trusts, has not been having the easiest start to
2024. Shareholders may be aware of the ongoing debate around cost disclosure
for investment trusts. Whilst it is too nuanced a subject to debate properly
in a paragraph in this report, we continue to monitor the situation and are
supportive of various efforts to remove confusing disclosures, whilst ensuring
investors have access to the pertinent data to be able to make informed
investment decisions. What is of little doubt is that poorly executed
disclosure regimes seem to have put a considerable dampener on the investment
trust sector in general. As an important part of the UK investment landscape,
we feel this needs to be addressed with urgency by the relevant regulatory
authorities. We support the lobbying of the new Government by the Association
of Investment Companies.
AGM
It was a pleasure to once again see so many shareholders at this year's Annual
General Meeting. In terms of the business of the meeting, as announced after
the meeting, all resolutions were passed on a poll.
Co-lead Portfolio Managers Julian Bishop and Christian Schneider presented an
investment update to shareholders. If you did not have chance to see the
managers present at the AGM, they appear in multiple webinars and interviews
on behalf of Brunner and you can see and/or listen to some of those updates on
Brunner's website. Julian and Christian have also written the Portfolio
Managers' Review for this interim report and we would encourage shareholders
to read this update.
Outlook
There have been positive indicators such as inflation starting to ease and the
world economy continues to grow modestly but global political uncertainty is
high and has the potential to cause economic upset. As noted by our investment
managers in their report, the best service we can perform for shareholders is
to concentrate less on the noise of the news and predictions and instead focus
on the more contained stories of the companies they uncover as potential
investments for the Brunner portfolio. After the mono-dimensional markets of
the past few years it is interesting to see such different types of equity
investments leading this year. On the one hand, markets are being led by
companies which are creating scarcely believable technologies. On the other,
traditional banks - a business model which dates back centuries- are having a
very strong performance. This wider market breadth is reassuring and suits
Brunner's balanced approach.
There continue to be some great growth stories amongst companies in all
geographies. There are many more than the most cited Magnificent 7 technology
companies and the managers highlight them in the market review section of
their report.
Brunner continues to aim to provide investors with a well-diversified
portfolio of global equities with the aim of steady long-term growth in
capital, as well as a rising income.
Carolan Dobson
Chair
Investment Manager's Review
Market Review
Global equity markets were very strong in the six months to the end of May
2024. The FTSE World Index was up over 14% in Sterling, which strengthened
slightly over the period. The UK FTSE All Share Index was up a similar amount.
Together, Brunner's benchmark was up just under 14% over the period.
Returns varied considerably by sector. Leading the pack were Technology,
Financials and Industrials - three areas which account for about two thirds of
Brunner's portfolio. Lower quality, more indebted sectors like Telecoms and
Real Estate lagged considerably. Brunner has negligible exposure here.
The Technology sector continues to garner the headlines. The US listed
'Magnificent 7' - Microsoft, Amazon, Nvidia, Tesla, Alphabet, Meta and Apple -
now collectively account for about 1/3 of the entire S&P benchmark of the
top 500 US companies, a level of concentration unprecedented in modern times.
The Magnificent 7, of course, is an eye-catching journalistic term; in
reality, all seven are very different and saw varying returns over the period.
Nvidia, which produces graphics processing units (GPUs) used in artificial
intelligence (AI) applications, was up an extraordinary 130%, propelling it
close to a $3 trillion market capitalisation - an amount only ever equalled by
Apple and Microsoft. Tesla, meanwhile, was down over 20% as the competitive
realities of the brutal automotive industry were felt. In 2022 Tesla's margins
were 17%. In their last quarter, they were just 5.5%.
The comparatively staid Financials sector was the second-best performing area
of the market over the period. Traditional banks and insurers provided most of
the return as interest rates remained high, credit losses remained low, and as
they re-rated from low levels.
The strong performance of banks, particularly, is worth commenting upon. By
and large, banks have been a poor investment for many years. Many had their
equity wiped out during the financial crisis and have spent the subsequent
years strengthening their balance sheets to levels commensurate with modern
regulatory requirements, which demand they are sufficiently capitalised to
withstand most conceivable future adverse events. This has been enormously
costly, heavily limiting, until recently, material dividend payments.
In recent times those factors have reversed. Although most Western economies
are not exactly flourishing, most avoided outright recession and bank loan
losses have remained well controlled - testament to the far more sensible
lending standards imposed since the 2007-8 financial crisis. Interest rates
have risen considerably, allowing banks to charge more for loans and gain more
income for money on deposit with central banks. Observant depositors will have
noticed that equivalent increases have not been applied to their current
accounts. In industry parlance, the 'net interest margin' has increased, with
positive ramifications for profitability.
Industrial companies also enjoyed a strong first half. The fiscal stimulus
associated with the US Inflation Reduction Act is substantial. After many
years offshoring industrial capacity, countries and companies are also
reshoring or nearshoring production to offset geopolitical supply-chain risks.
The construction of semiconductor foundries in Arizona is a case in point;
hitherto they have virtually all been in the Far East. AI is also very capital
intensive. AI data centres are huge and very energy hungry. A single AI data
centre can easily consume 50 megawatts of electricity, the same as a small
town. Electrification was already a longstanding industrial theme associated
with decarbonisation. Technology has added another element to this
longstanding trend.
After the mono-dimensional markets of the past few years it is interesting to
see such different types of equity investments leading this year. On the one
hand, markets are being led by companies which are creating scarcely
believable technologies. On the other, traditional banks - a business model
which dates to the Medicis - are having a field day. This wider market breadth
is reassuring and suits Brunner's balanced approach.
Portfolio Review
Over the six months to the end of May 2024, the net asset value (NAV) of the
Brunner Investment Trust with debt at fair value was up 12.8% vs the benchmark
which was up 13.9%. The Trust's share price was much stronger, up over 25%.
This reflects a sharp narrowing of the discount to NAV at which the shares
trade, from an unusually high level of 16% at the end of November to under 6%
at the end of May. The share price of an investment trust is an outcome of
supply and demand for the shares and the price relative to NAV (the 'discount'
or, more rarely, 'premium') can therefore vary. NAV refers to the value of the
trust's equity holdings less the fair value of the trust's modest debt load,
with adjustments for income and expenses.
An analysis of our contribution to performance by sector show that we
benefitted from our overweight positions in Industrials and Financials. As
discussed above, both these sectors enjoyed a strong first half. We also
benefitted from our underweight in Consumer Staples. After a couple of years
of unusually strong growth driven by inflation related price increases, growth
has decelerated sharply.
We discussed Nvidia earlier. At a $3 trillion market value it has become a
large part of the global benchmark. Not owning it cost us 1.6% of relative
performance over the 1H. However, not owning NVDA was largely offset by
several investments in the related semiconductor and industrial area. Top of
the list was Taiwan Semiconductor Manufacturing Company (TSMC) which has
emerged from a multi decade competitive battle as the only 'foundry' able to
make the most complex logic chips sold and used by companies such as Nvidia
and Apple, who don't manufacture the chips they design themselves. TSMC have
recently noted a reacceleration in growth, driven by orders from Nvidia et al
and a cyclical recovery elsewhere, sending shares up over 50%.
TSMC itself relies on machines produced by ASML, the Dutch semiconductor
capital equipment company specialising in the most advanced lithography tools
where shares were up 39%, Both these companies have, effectively, 100% market
share at the upper end of their markets and benefit from structural growth
enjoyed by the semiconductor industry.
Two other positive contributors benefitted from the same theme. Amphenol make
electrical connectors which are used across a wide variety of end markets,
including data centres. Similarly, Schneider Electric make a wide range of
components used in all manner of electrical systems. Like Amphenol, their
current growth rates are being boosted by the construction of AI
infrastructure.
Other positive contributors include two new holdings to the trust during the
period - Bank of Ireland and GE Aerospace. The investment cases for each are
discussed in more detail in the 'Purchases' section. Intercontinental Hotels
also performed well. This is another relatively recent purchase, acquired in
the first half of 2023. This asset light business owns few hotels, but
generates reliable fee streams lending its brands, management capability,
systems and loyalty program to hotel owners under long term contracts. We
believe it is amongst the best businesses listed in the UK.
Negative detractors aside from Nvidia include UnitedHealth Group, the US
health insurer, which has faced some margin pressure as patients have returned
to hospital after COVID for elective surgeries, increasing claims rates and
'medical loss ratios'. Given this is an industry-wide issue, and as
UnitedHealth's insurance policies are repriced annually, this is nothing more
than a short-term concern.
IT consultant Accenture also fared poorly as revenue growth slowed after a
strong period, and investor focus switched to perceived AI winners. Adobe saw
its P/E multiple contract as some questioned the resilience of its software
used by designers to new entrants powered by AI. We worked with Grassroots
Research, a division of Allianz Global Investors which uses market research
and investigative journalism, to uncover trends in the competitive
environment. Tellingly, not even one of the graphic designers who use Adobe's
'Creative Suite' interviewed intended to cancel their subscription to what has
become the de facto industry standard.
Within the financials sector, insurance broker AJ Gallagher, payment network
Visa and private equity firm Partners Group all saw modest gains in absolute
terms, but they were insufficient to keep up with the market. In each case,
there is nothing of importance to mention, but these examples do serve to
highlight how difficult it has been for anything untouched by AI fever to keep
up with the bull market. More damaging was our small investment in UK lender
Close Brothers, which we discuss later in the 'Significant Transactions'
section.
Significant Transactions
In recent years, annual turnover on the Brunner portfolio has ranged between
15% and 20%. This implies an average holding period of 5 to 7 years for our
investments.
We often say that our ideal holding period is forever. However, there are
three primary reasons why we may make changes:
1. We were wrong;
2. The investment becomes overvalued;
3. We find something new we would rather own.
Purchases
Founded by Thomas Edison in 1892, General Electric is notorious in corporate
history. As recently as 2005 it was the largest company in the world by market
capitalisation. CEO Jack Welch and his successor Jeff Immelt were feted
darlings of the business community before the conglomerate's undercapitalised
finance business crumbled in the aftermath of the global financial crisis.
Since then, the business has been almost entirely dismantled, leaving GE as a
standalone aircraft engine business trading as GE Aerospace.
A modern jet engine is amongst the most sophisticated devices ever made. The
latest variants contain over a million parts and operate at the limits of
physics and material science. Additionally, there is the obvious importance
of absolute safety and near total reliability.
Reflective of their exceptional competitive position and what we believe are
near total barriers to entry, about 75% of all flights that take off worldwide
are powered with a GE engine 'under wing'. GE make their money by servicing
the engines under long term agreements with the owners. This provides a highly
visible, very profitable recurring income stream for the 20 year plus life of
the engine. Growth should come with regular price increases plus ongoing
expansion in the global aircraft fleet.
As one of the largest banks in a country particularly hard hit by the global
financial crisis and subsequent sovereign debt crisis, it is perhaps
unsurprising that shares in Bank of Ireland fell 99% during this period. The
bank was saved from full insolvency by a distressed equity raise that
increased the number of shares outstanding by a factor of twenty, diluting
existing shareholders an equivalent amount.
Crises often induce lasting change. In a banking context, Scandinavia provides
a helpful historical precedent. In the early '90s, Sweden, Norway and Finland
saw a similar boom and bust. The insolvency of the entire banking sector and
the socialisation of those costs resulted in a wholesale change in regulatory
attitudes to risk. The result has been that Scandinavian banks are now widely
seen as setting the benchmark for financial strength and prudency.
We believe a similar process has taken place in Ireland. Debt levels across
the entire economy are much reduced. Lending standards have greatly improved.
The Bank of Ireland et al have recapitalised their balance sheets at great
expense. This cost has forced the industry to consolidate, resulting in a more
concentrated market where the survivors stand a greater chance of generating a
decent return.
With the recapitalisation process now complete, dividend payments and share
repurchases have now restarted in earnest. At the time of purchase, we
estimated that the bank could return over 40% of our initial investment to
shareholders over just a three-year period, assuming interest rate and credit
conditions remain benign.
UK listed Inchcape is an unusual company. They market and distribute cars and
parts on behalf of companies like Toyota, Subaru and Jaguar Land Rover in
smaller markets such as Chile, Singapore and Australia. They are, by some
distance, the leader in what is a highly fragmented market where we believe
scale is becoming more important. It is a business with attractive financial
characteristics, including good levels of profitability and free cash flow
generation. They are well positioned to add new automotive brands and
geographies to their stable via contract wins and small, bolt-on acquisitions.
Inchcape is a smaller company with a generous dividend which typifies the
exceptional value currently on offer in parts of the UK market. As an aside,
we note that two of our other smaller UK holdings - homebuilder Redrow and
industrial Tyman - have recently been subject to takeover bids, suggesting
corporate buyers also detect attractive opportunities.
Roper is a US listed industrial technology company focused on mission
critical, industry specific software for a wide range of verticals including
education, utilities and insurance.
Most of its revenues are recurring in nature and customer retention is
extremely high. We are impressed by management's relentless focus on creating
a predictable, growing, high quality cash flow stream, with growth in the
existing business augmented by sensibly judged acquisitions that add new end
markets to its range.
Alphabet is the parent company of Google, a company we have long admired. It
consistently enjoys over 90% share in sponsored search, their core business.
They also make money arranging and placing adverts across their network of
third-party websites. Additionally, Alphabet owns and operates YouTube and
Google Cloud, where it has emerged as a credible competitor alongside
Microsoft and Amazon in the provision of cloud computing services.
Alphabet has become a prodigious generator of free cash and recently paid its
maiden dividend. We believe the company will continue to grow, albeit not at
the pace seen in the past. The multiple is very reasonable, particularly in
the context of its net cash balance sheet. Looking forward, a combination of
cash returns, growth and a stable valuation should lead to a solid outcome for
investors.
Towards the end of the first half, we took a position in American Financial
Group (AFG). AFG is a family-run speciality property and casualty insurer
based in Cincinnati, Ohio. 'Combined' loss ratios - which measure both
incurred payouts on policies written and the expense of running the business -
have been superior to most peers over long timeframes. They have also been
within a sufficiently narrow corridor for us to be persuaded that their
underwriting prowess and risk management abilities are first rate. Growth has
been modest but consistent.
Over time, AFG has divested various businesses to focus solely on specialty
property and casualty insurance. This is the part of the industry we like
best. They generate dependable returns which are largely uncorrelated to
macro-economic factors. Cash returns are high, helped by AFG having
significant excess capital; the dividend yield in 2023 was 6.4% based on the
share price at time of purchase.
Sales
We sold our shares in wealth manager St James's Place in December. This has
been a disappointing holding. Although the company's model has clear financial
appeal (recurring fees, sticky assets, low capital requirements and a solid
record of growth) the company's opaque charging structure has come under
increased scrutiny. Growth has also slowed dramatically. We are therefore
happier with our holdings in Charles Schwab and Partners Group, both of whom
are also 'asset gatherers'.
We sold our small position in the specialist UK lender, Close Brothers, which
has also been a costly holding. The company was impacted by a Financial
Conduct Authority (FCA) review into historic motor finance commission
arrangements. Whilst there is wide range of potential outcomes from this
review, the worst-case scenario for Close could require a capital raise and
significantly reduce the equity value. The investment case had therefore
become an uncomfortably binary situation, so we decided to sell. Soon
afterwards, the company took a large provision and cut its dividend in
recognition of the meaningful risk to its capital position.
ANZ is one of the largest banks in Australia and New Zealand. We sold our
small, residual position to purchase Bank of Ireland, which we believe
represents superior quality and value on several key metrics. As global
investors we are well placed to take advantage of regional differences such as
this as we see fit.
Rentokil's acquisition of Terminix in the US appeared strategically sound,
bringing together the no 2 and 3 players in the pest control market. However,
there is growing evidence that the acquired target has structural growth
challenges which may prove difficult to correct. Share losses to their largest
competitor have continued and were sufficiently concerning for us to sell our
small position.
We sold Intuit, a high-quality US software company, where the valuation means
we can no longer see a route to a good return in the next several years. The
company has also become an increasingly profligate user of stock-based
compensation for employees, which we believe represents an under-appreciated
and persistent drag on the true free cash flow attributable to shareholders.
Roper, by comparison, generates a far higher and cleaner free cash flow
stream. Our valuation work always focuses on the cash that will ultimately
come due to investors.
Market Outlook
In meetings with clients, we often say we are micro-economists, not
macro-economists. Micro-economics refers to the economics of the firm and
industry structure whilst macro-economics refers to factors like GDP,
inflation and interest rates. Why are we more interested in the former than
the latter?
Generally, it relates to predictability. Economies are hugely complex,
adaptive systems which, like the weather, are inherently chaotic and random.
Serious meteorologists don't even bother to forecast the weather more than a
couple of weeks ahead, yet the financial industry is full of commentators who
think nothing of making confident predictions of the economic environment
months or even years ahead. They are often wrong but rarely uncertain. As a
species who appreciate clarity about the future they provide us with something
we desire but cannot have.
In our opinion, business is slightly different. While there is still
randomness and shocks, we are sometimes able to identify and understand the
dynamics that deliver lasting returns for certain companies or sectors. In
some cases, competition is revolutionary (think of the impact of combustion
engines on horse breeders) but often it is evolutionary. Things improve. Good
ideas float. Bad ones sink.
Biologists distinguish between two types of evolution - contingent and
convergent. Contingent evolution is random. The asteroid that hit Yucatan and
wiped out the dinosaurs was a contingent event. If the offending asteroid's
billion-year journey through space was on an infinitesimally different
trajectory it would have missed the earth, the dinosaurs' reign would have
continued uninterrupted, mammals would've remained a minor class and none of
us would exist.
In contrast, convergent evolution refers to what was bound to happen.
Throughout different branches of the evolutionary tree, eyes and wings have
repeatedly and separately developed. Sleep, interestingly, too. Seeing, flying
and restoration are all too useful not to have inevitably emerged through a
long, natural process of trial and error.
Recessions, like asteroids, are random. Most people have wondered how
different the world would've been if Wuhan's patient zero had stayed in bed
that day. As they didn't, that single contingent event diverted the course of
history. By comparison, the way some industries develop is often convergent.
As an example, we cannot foresee a world in which the semiconductor industry
does not continue to grow; processing power and data transmission is simply
too useful for it not to. This brings an element of long-term predictability
that is very different from the random machinations of the short-term economic
cycle.
Julian Bishop / Christian Schneider
Allianz Global Investors
1 All data in GBP as of 31 May 2024 unless stated.
BRUNNER INVESTMENT TRUST PLC
PORTFOLIO BREAKDOWN AS AT 31 MAY 2024
Name Value % of Invested Funds Sector
£'000s
Microsoft 40,479 6.56 Software & Computer Services
Visa 23,123 3.75 Industrial Support Services
United Health 21,826 3.54 Health Care Providers
Taiwan Semiconductor 20,181 3.27 Technology Hardware & Equipment
Microchip Technology 18,529 3.00 Technology Hardware & Equipment
Schneider Electric 17,683 2.87 Electronic & Electrical Equipment
Shell 16,620 2.69 Oil, Gas & Coal
Thermo Fisher Scientific 16,148 2.62 Medical Equipment & Services
Bank of Ireland Group 15,630 2.53 Banks
ASML Holding 15,620 2.53 Technology Hardware & Equipment
Intercontinental Hotels 15,532 2.52 Travel & Leisure
Charles Schwab 14,723 2.39 Investment Banking & Brokerage
Partners Group 14,241 2.31 Investment Banking & Brokerage
TotalEnergies 13,678 2.22 Oil, Gas & Coal
Arthur J. Gallagher & Co. 13,379 2.17 Non-Life Insurance
AMETEK 13,196 2.14 Electronic & Electrical Equipment
General Electric 12,798 2.07 Aerospace & Defence
Alphabet 12,737 2.06 Software & Computer Services
Itochu 12,561 2.04 General Industrials
American Financial Group 12,549 2.03 Non-Life Insurance
AENA 11,594 1.88 Industrial Transportation
Unilever 11,227 1.82 Personal Care, Drug & Grocery
DNB Bank 10,883 1.76 Banks
Atlas Copco 10,650 1.73 Industrial Engineering
Admiral Group 10,042 1.63 Non-Life Insurance
Roper Technologies 9,753 1.58 Software & Computer Services
Accenture 9,427 1.53 Industrial Support Services
The Cooper Companies 9,334 1.51 Medical Equipment & Services
Redrow 9,163 1.49 Household Goods & Home Construction
Roche Holdings 8,530 1.38 Pharmaceuticals & Biotechnology
SSE 8,458 1.37 Electricity
Baltic Classifieds 8,336 1.35 Software & Computer Services
Assa Abloy 7,523 1.22 Construction & Materials
Amphenol 7,497 1.22 Technology Hardware & Equipment
S&P Global 7,312 1.19 Finance & Credit Services
CME Group 7,269 1.18 Investment Banking & Brokerage
Nestle 7,264 1.18 Food Producers
Corpay 7,152 1.16 Industrial Support Services
SThree 7,055 1.14 Industrial Support Services
IG Group 6,881 1.12 Investment Banking & Brokerage
Inchcape 6,766 1.10 Industrial Support Services
Tyman 6,766 1.10 Construction & Materials
Munich Re 6,661 1.08 Non-Life Insurance
RELX 6,576 1.07 Media
Novo Nordisk 6,305 1.01 Pharmaceuticals & Biotechnology
Iberdrola 6,140 1.00 Electricity
Haleon 6,094 0.99 Pharmaceuticals & Biotechnology
DCC 5,975 0.97 Industrial Support Services
Brambles 5,654 0.92 General Industrials
GSK 5,298 0.85 Pharmaceuticals & Biotechnology
Rio Tinto 5,201 0.84 Industrial Metals & Mining
Adobe 5,172 0.84 Software & Computer Services
LVMH Moet Hennessy Louis Vuitton 5,025 0.81 Personal Goods
AIA 4,456 0.72 Life Insurance
Jumbo 4,037 0.65 Leisure Goods
AbbVie 4,020 0.65 Pharmaceuticals & Biotechnology
Align Technology 3,838 0.62 Medical Equipment & Services
Diageo 3,682 0.60 Beverages
Estée Lauder 2,634 0.43 Personal Goods
616,883 100.00 % of Total Invested Funds
ANALYSIS BY REGION AS AT 31 MAY 2024
Region Value (£m) % of Invested Funds
North America 272.9 44.3
Continental Europe 145.9 25.2
UK 155.3 23.6
Pacific Basin 30.2 4.9
Japan 12.6 2.0
Total 616.9 100.0
ANALYSIS BY SECTOR AS AT 31 MAY 2024
Sector % of Invested Funds
Industrials 25.6
Financials 20.1
Technology 22.4
Health Care 13.2
Consumer Discretionary 7.0
Energy 4.9
Consumer Staples 3.6
Utilities 2.4
Basic Materials 0.8
Total 100.0
SUMMARY OF UNAUDITED RESULTS
INCOME STATEMENT
for the six months ended 31 May 2024
Revenue Capital Total Return
£'000s £'000s £'000s
(Note 2)
Gains on investments held at fair value through profit or loss -
62,736 62,736
Losses on foreign currencies - (87) (87)
Income from investments 9,170 - 9,170
Investment management fee (402) (938) (1,340)
Administration expenses (492) (2) (494)
Profit (loss) before finance costs and taxation 8,276 61,709 69,985
Finance costs: interest payable and similar charges (216) (473) (689)
Profit (loss) on ordinary activities before taxation 8,060 61,236 69,296
Taxation (755) - (755)
Profit (loss) after taxation attributable to ordinary shareholders 7,305 61,236 68,541
Earnings per ordinary share (basic and diluted) (Note 1) 17.11p 143.44p 160.55p
BALANCE SHEET
as at 31 May 2024
£'000s
Investments held at fair value through profit or loss 616,883
Net current assets 22
Total assets less current liabilities 616,905
Creditors: amount falling due after more than one year (25,106)
Total net assets 591,799
Called up share capital 10,673
Capital redemption reserve 5,327
Capital reserve 555,867
Revenue reserve 19,932
Equity shareholders' funds 591,799
Net asset value per ordinary share 1,386.2p
The net asset values are based on 42,692,727 ordinary shares in issue at 31
May 2024.
SUMMARY OF UNAUDITED RESULTS
INCOME STATEMENT
for the six months ended 31 May 2023
Revenue Capital Total Return
£'000s £'000s £'000s
(Note 2)
Gains on investments held at fair value through profit or loss -
409 409
Losses on foreign currencies - (191) (191)
Income from investments 8,678 - 8,678
Investment management fee (354) (827) (1,181)
Administration expenses (426) (1) (427)
Profit (loss) before finance costs and taxation 7,898 (610) 7,288
Finance costs: interest payable and similar charges (194) (426) (620)
Profit (loss) on ordinary activities before taxation 7,704 (1,036) 6,668
Taxation (1,015) - (1,015)
Profit (loss) after taxation attributable to ordinary shareholders 6,689 (1,036) 5,653
Earnings (loss) per ordinary share (basic and diluted) (Note 1) 15.67p (2.43p) 13.24p
BALANCE SHEET
as at 31 May 2023
£'000s
Investments held at fair value through profit or loss (Note 3) 523,038
Net current assets 26
Total assets less current liabilities 523,064
Creditors: amount falling due after more than one year (25,096)
Total net assets 497,968
Called up share capital 10,673
Capital redemption reserve 5,327
Capital reserve 464,215
Revenue reserve 17,753
Equity shareholders' funds 497,968
Net asset value per ordinary share 1,166.4p
The net asset values are based on 42,692,727 ordinary shares in issue at 31
May 2023.
STATEMENT OF CHANGES IN EQUITY
Called up Capital Redemption Reserve
Share £'000s Capital Revenue Reserve
Capital Reserve £'000s Total
£'000s £'000s £'000s
Six months ended 31 May 2023
Net assets at 1 December 2022 10,673 5,327 465,251 15,846 497,097
Revenue profit - - - 6,689 6,689
Dividends on ordinary shares (Note 4) - - - (4,782) (4,782)
Capital loss - - (1,036) - (1,036)
Net assets at 31 May 2023 10,673 5,327 464,215 17,753 497,968
Six months ended 31 May 2024
Net assets at 1 December 2023 10,673 5,327 494,631 17,579 528,210
Revenue profit - - - 7,305 7,305
Dividends on ordinary shares (Note 4) - - - (4,952) (4,952)
Capital profit - - 61,236 - 61,236
Net assets at 31 May 2024 10,673 5,327 555,867 19,932 591,799
CASH FLOW STATEMENT
Six months Six months
ended ended
31 May 31 May
2024 2023
£000's £000's
Operating activities
Profit before finance costs and taxation 69,985 7,288
Less: Gains on investments held at fair value through profit or loss (62,736) (409)
Add: Losses on foreign currency 87 191
Less: Overseas tax suffered (755) (1,015)
Increase in other receivables (1,727) (413)
Increase (decrease) in other payables 188 (33)
Purchase of fixed asset investments held at fair value through profit or loss (67,254) (57,797)
Sales of fixed asset investments held at fair value through profit or loss 66,484 58,971
Net cash inflow from operating activities 4,272 6,783
Financing activities
Interest paid (668) (516)
Dividend paid on cumulative preference stock (11) (11)
Dividends paid on ordinary shares (4,952) (4,782)
Net cash outflow from financing activities (5,631) (5,309)
(Decrease) increase in cash and cash equivalents (1,359) 1,474
Cash and cash equivalents at the start of the period 9,865 7,919
Effect of foreign exchange rates (87) (191)
Cash and cash equivalents at the end of the period 8,419 9,202
Comprising:
Cash at bank 8,419 9,202
Notes to the Financial Statements
Note 1
The returns per ordinary share have been calculated using a weighted average
number of shares in issue of 42,692,727 (31 May 2023: 42,692,727
shares).
Note 2
The total column of this statement is the profit and loss account of the
company.
All revenue and capital items derive from continuing operations. No operations
were acquired or discontinued in the period.
Purchases for the half year ended 31 May 2024 were £67,254,000 (31 May 2023:
£57,797,000) and sales for the half year ended 31 May 2024 were £66,484,000
(31 May 2023:
£57,997,000).
Included in the cost of investments are transaction costs on purchases which
amounted to £162,000 (31 May 2023: £159,000) and transaction costs on sales
which amounted to £15,000 (31 May 2023:
£16,000).
Note 3
Investments are designated as held at fair value through profit or loss in
accordance with FRS 102 sections 11 and 12. Investments are initially
recognised at fair value, which is determined to be their cost. Subsequently,
investments are revalued at fair value which is the bid market price for
listed investments.
FRS 102 sets out three fair value levels.
Level 1: The unadjusted quoted price in an active market for identical assets
or liabilities that the entity can access at the measurement date
Level 2: Inputs other than quoted prices included within Level 1 that are
observable (i.e., developed using market data) for the asset or liability,
either directly or indirectly
Level 3: Inputs are unobservable (i.e., for which market data are unavailable)
for the asset or liability
As at 31 May 2024, the financial assets at fair value through profit and loss
of £616,883,000 (30 November 2023: £553,377,000) are categorised as
follows:
Six months ended Year ended
31 May 30 November
2024 2023
£'000s £'000s
Level 1 616,883 553,377
Level 2 - -
Level 3 - -
616,883 553,377
Note 4
In accordance with section 32 FRS102 ' Events After the end of the Reporting
Period', dividends declared after the end of the reporting period shall not be
recognised as a liability.
Dividends paid on ordinary shares in respect of earnings for each period are
as follows:
Six months ended Six months ended Year ended
31 May 2024 31 May 2023 30 November 2023
£'000s £'000s £'000s
Final dividend - 6.05p paid 4 April 2024 (2023 - 6.05p) 2,583 2,583 2,583
First interim dividend - 5.55p paid 25 July 2023 (2022 - 5.15p) - - 2,369
Second interim dividend - 5.55p paid 15 September 2023 (2022 - 5.15p) - - 2,369
Third interim dividend - 5.55p paid 12 December 2023 (2022 - 5.15p) 2,369 2,199 2,199
4,952 4,782 9,520
Dividends declared after the period end are not recognised as a liability
under section 32 FRS 102 'Events after the end of the reporting period'.
Details of these dividends are set out below.
Six months ended Six months ended Year ended
31 May 2024 31 May 2023 30 November 2023
£'000s £'000s £'000s
First interim dividend 5.90p payable 25 July 2024 (2023: 5.55p) 2,519 2,369 -
Second interim dividend 5.90p payable 12 September 2024 (2023: 5.55p) 2,519 2,369 -
Third interim dividend 5.55p - - 2,369
Final dividend 6.05p - - 2,583
5,038 4,738 4,952
The final and interim dividends above are based on the number of shares in
issue at the period end. However, the dividend payable will be based upon the
number of shares in issue on the record date and will reflect any purchase or
cancellation of shares by the company settled subsequent to the period end.
Note 5
The directors believe it is appropriate to continue to adopt the going concern
basis in preparing the financial statements, as the assets of the company
consist mainly of securities which are readily realisable and accordingly,
that the company has adequate financial resources to continue in operational
existence for the foreseeable future.
Note 6
The half-yearly report has neither been audited nor reviewed by the company's
auditors. The financial information for the year ended 30 November 2023 has
been extracted from the statutory accounts for that year which have been
delivered to the Registrar of Companies. The auditor's report on those
accounts was unqualified and did not contain a statement under either section
498(2) or (3) of the Companies Act
2006.
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