The Brunner Investment Trust PLC
Welcome to the latest update from the Trust's portfolio managers
June 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 30.06.2023
Fund Manager's Review
Global markets were strong in June, with most sectors posting positive returns. For UK investors, some of this was lost in translation due to the pounds ongoing recovery to 1.27 vs the US dollar. The pound troughed last Autumn during the Truss/Kwarteng mini budget and has continued to recover since, acting as a headwind for overseas assets denominated in Sterling.
Recently, Sterlings strength has been boosted by the higher interest rates available in the UK. Mays core inflation reading (i.e. excluding food and energy, which tend to be volatile) was 7.1%, higher than in most other developed economies. As a result, the Bank of England raised interest rates 0.5% to 5%, the highest since the 2008 . The intention is to lower demand in the economy, hence ongoing concerns regarding the outlook for consumer spending in the UK.
For comparison, Mays core inflation figure in the US was a more benign 5.3%, leading to optimism that inflation there is under control and that interest rates may be near their peak. The S&P 500 US stock market index therefore continued to rally in dollar terms. Within this, mega market capitalisation (cap) technology stocks continued their ascent. The market cap of Apple is now over $3 trillion, considerably more than the entire UK stock market. The top five US stocks now account for about 25% of the value of the S&P500; an unprecedented level of concentration.
Brunner was approximately flat vs its benchmark during June. The NAV total return was 3.1% vs 2.6% for the benchmark. Our largest positive contributor to performance was Microchip, a stock we added to during the month. Microchip makes small, relatively simple semiconductors and microcontrollers that are used in a wide variety of applications, from electric vehicles to factory automation. Their large library of chip designs are sold to electrical engineers looking to solve a specific problem or automate a specific task. The relatively low price points and small quantities sold steer the sales away from aggressive and sophisticated procurement departments, limiting pressure on prices. Once the components are designed in to a device, repeat purchases tend to be assured. The result is a very profitable business that has grown in lockstep with the digitalisation of everything. We also like the companys outlook for cash returns. Microchip has made some big acquisitions in the past and has subsequently paid down most of the associated debt. Looking forward, the company plans to steadily increase its dividends and buybacks. On balance, we believe Microchip offers a good balance of quality, value and growth, hence our decision to make it one of the larger active weights in the portfolio.
Other positive contributors to performance in June include the Greek retailer Jumbo, Japanese trading company Itochu, Align Technology, the maker of Invisalign dental devices, and Baltic Classifieds Group. The latter runs the leading recruitment, property and autos portals in the Baltic states, similar to sites like Autotrader and Rightmove in the UK. History tells us these tend to be winner takes all markets with outstanding economics for the leaders. Recent results, followed by a meeting with management, demonstrated that the companys market position and profitability continues to strengthen.
On the other side of the ledger, our large position in the US insurer United Health detracted from performance. At an investor conference, the CEO guided that medical utilisation rates had increased faster than anticipated, temporarily and modestly pressuring margins. In plain language, older patients are now more comfortable returning to hospital to undergo procedures such as hip replacements which had been deferred during and after COVID. This adds to UNHs costs. Given that pricing can and will be adjusted to reflect these higher levels of utilisation we see nothing of long-term concern, although we acknowledge that we were wrong to extrapolate recent levels of higher than normal profitability. COVID created distortions across many businesses. In this instance, we think that this should now be behind us.
In order to fund the addition to our position in Microchip, we reduced our holdings in Roche and Novo Nordisk, two European pharmaceutical names. Novo has been particularly strong this year due to success of its Wegovy anti-obesity drug and we are mindful of its valuation. Roche is a more mature business and valued accordingly. In both instances we acknowledge the that valuing pharmaceutical companies is challenging, given their dependency on a small number of drugs that have finite patent protection. As such we believe modest position sizes are appropriate for the portfolio.
For the latest portfolio breakdown, performance, dividend information, please visit www.brunner.co.uk.
*Past performance does not predict future returns.
Fact Sheet
as at 30 June 2023
Half Year Report
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