The Brunner Investment Trust PLC
Welcome to the latest update from the Trust's portfolio managers
April 2023
Why invest in Brunner?
- AIC Dividend Hero: 51 years of dividend growth*
- One of the highest yields in its sector*
- A global, actively managed equity portfolio
Monthly Fact Sheet
Welcome to our latest monthly factsheet, featuring data and commentary as at 30.04.2023
Fund Manager's Review
The Brunner Investment Trusts NAV Total Return was 1.01% in April, slightly ahead of benchmarks 0.94%.
This benign outcome masks unsettled conditions in global markets, where the health of the US banking system is still a source of concern. There, dramatically higher interest rates have caused a flight of bank deposits in search of higher short-term returns elsewhere. Coupled with unwise decisions taken by a handful of bank management teams, this has led to old fashioned bank runs, no different to that seen in the film Its a Wonderful Life. In that movie, the kindly protagonist George Bailey of Bailey Savings and Loans has to face queues of panicking depositors outside his branch at Christmas. This time the withdrawals are enabled digitally at a speed that has deeply unnerved the market. The key regulatory bodies need to quickly find a solution to restore confidence in the system; options such as unlimited federal deposit insurance are being mooted. Please note, Brunner owns no conventional US banks in the portfolio at this time.
Partially, this crisis is an outcome of a sharp increase in interest rates from unusually low levels. It was inevitable that the return of money having a cost, after years of ultra-low interest rates, would reveal cracks somewhere in the system. So far, the US regional banking crisis and the UKs liability driven investment crisis (also known as LDI, this is describes a strategy focused on gaining enough assets to cover all current and future liabilities) last autumn are the most obvious examples to emerge. Moving ahead, we believe that lower year over year commodity prices should help reported inflation levels fall from their peak, but core inflation, which excludes food and energy, remains stubbornly high; hence central banks determination to persist with elevated rates despite the unnerving consequences.
Despite the challenges in the US banking system, there is no sign of any material impact on economic activity (in the UK?) so far. Many of the holdings in Brunner have reported very resilient first quarter results
The trusts largest holding, Microsoft, continues to grow strongly; its Q1 profitability was up 14% year on year, adjusted for exchange rates. Atlas Copco, a Swedish industrial conglomerate, saw shares rally 15% on the day it reported 18% like for like sales growth. Both stocks are examples of the high quality, reasonably valued companies we prefer to invest in. Its gratifying to see these businesses develop so favourably.
We purchased one new holding during the month; Intercontinental Hotels Group (IHG). London-listed IHG is one of the worlds largest hotel companies with 6,000 hotels open around the world and another 1,800 in the pipeline. It has, in our opinion, a strong business model; it takes a franchise or management fee from hotel owners who licence its brands, which include Holiday Inn, Intercontinental, Six Senses etc. This leads to a reliable fee stream which is hugely profitable and has the potential to grow over time as new hotels open and inflation drives hotel rates higher. The asset-light nature of the business means it generates tremendous amounts of cash, all of which can be returned to shareholders via dividends and buybacks.
The purchase of IHG means we say goodbye to our small holdings in SSP and Astellas Pharma. We also reduced our position in Novo Nordisk, the Danish pharmaceutical company. Novo is enjoying very strong growth thanks to the well-publicised success of its drugs Wegovy and Ozempic for obesity and diabetes. We share the markets enthusiasm for the companys mastery of these important therapeutic areas, but are mindful that their products enjoy finite patent protection, which blurs the very long term outlook.
This underlines our belief in the importance of considering the long term in all of our investments. Share ownership confers the right to a portion of a companys profits in perpetuity. Shares are therefore, by definition, very long term assets. The short termism of many market participants still confounds us. There is a reluctance, perhaps, to consider the long term because prediction necessarily becomes more uncertain the further out you look. More the reason to consider, with no pretence to precision, an investments longevity, resilience and barriers to entry; characteristics that are highly valued by the Brunner investment process. In the instance of IHG, we are reassured by the 20 year+ nature of their contractual agreements with hotel owners. Each hotel therefore provides IHG with an individual income stream that should grow in line with inflation across the economic cycle. In our eyes, that is under-appreciated by a market that obsesses over small variances in each quarters financial results.
Looking forward, we hope to see interest rates peak soon but this will be, in central bankers parlance, data dependent. In other words, we first need to see evidence that core inflation is under control. Lower interest rates and lower inflation will relieve pressure on the consumer and, it is hoped, spell an end to the cost of living crisis. At a human and financial level, this will be a much welcome development.
For the latest portfolio breakdown, performance, dividend information, please visit www.brunner.co.uk.
*Past performance does not predict future returns.
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