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The Brunner Investment Trust PLC
Welcome to the latest update from the Trust's portfolio managers
August 2022
Why invest in Brunner?
- AIC Dividend Hero: 50 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 31.08.2022
Market Review
Global equities rallied over the first half of August amid growing hopes that central banks would soon start to reduce the pace of monetary tightening. However, the rally came to an abrupt end following hawkish comments (where a central bank uses hawkish language to describe the threat of inflation, one could reasonably expect stronger actions) from the US Federal Reserve (Fed) and European Central Bank (ECB). In general, developed markets fell over August while emerging markets, many of which are ahead of the curve in raising rates, rallied modestly.
The US Federal Reserve (Fed) increased rates by 75 basis points (bps) or 0.75% and Chair Jerome Powell reinforced his hawkish stance at the annual Jackson Hole gathering. The European Central Bank raised rates by 50 bps to zero, ending eight years of negative borrowing costs. ECB officials also indicated that another sizeable increase in rates was likely in early-September. Japan and China remain the sole bastions of easy monetary policy.
Portfolio Review
In August, the Trust’s equity portfolio underperformed its benchmark. NAV total return was -1.6% compared to the benchmark’s -0.1%.
Munich Re made the largest positive contribution to performance. The multinational reinsurance company reported H2 results which saw growth fall 5%. However, Munich Re reiterated its full year profit guidance on account of rising pricing and smaller than expected losses in H1. Combined with its strong balance sheet and defensive business model, we remain high conviction holders.
Yum China also boosted returns. In July the fast food restaurant company reported Q2 earnings which beat estimates despite continued Covid-19 disruption. In August, news that the company is looking to make Hong Kong its primary listing place provided a further boost to the shares, with mainland China serving to provide additional liquidity. Given the financial multiple compression, Yum’s valuation is low in the context of its long-term growth potential.
Adidas made the weakest contribution to performance. The sportwear apparel company announced a profit warning ahead of its Q2 results. While weakness in China continues to be the main driver, the since announced departure of CEO Kasper Rorsted has underscored broaderbased mis-execution, particularly around product. Ongoing supply chain issues and softer consumer sentiment are serving as additional overhangs. As a result, we are reviewing the investment case.
Schneider Electric also weakened returns. Towards the end of July, the electrical distribution company released H1 results that were above expectations. However, in August, Schneider announced its intention to make a potential offer for AVEVA – a software company in which it already holds a 59% stake. While the shares initially weakened, the deal represents an opportunity to acquire a high margin business at compressed multiples, and the downward share price move has since reversed.
Significant Transactions
Over the course of the month, we sold our position in Bright Horizons. The childcare provider has faced persistent headwinds since the onset of the pandemic. The company faces a structural shortage of workers with uncertainty looming on the demand side. As a result, our conviction has weakened.
We also sold our position in HomeServe, taking profit in the wake of the home emergency and repair service company’s takeover by Brookfield Asset Management.
Using the proceeds of these exits, we initiated a position in S&P Global. Shares in the provider of financial data have weakened both as a result of softer issuance and a rotation towards beneficiaries of rising interest rates. However, the long-term fundamentals of the business remain intact, with strong double-digit growth and net income margins of over 30%.
Market Outlook
In the US, August’s S&P Global composite purchasing managers’ index (PMI) tumbled to 45.0, its lowest reading since May 2020, the height of the pandemic. Data in Europe and China is turning similarly negative. What has changed however, is the market’s perception of how willing central banks are to keep raising interest rates in the face of such negativity.
Such doggedness from central banks reflects the persistent nature of inflation. In the UK for example, a combination of supranormal energy prices and rising labour costs has pushed inflation to a 40-year high of 10.1%, with the expectation that it will top 13% later this year. Combined with weaker growth, the resulting stagflationary environment (persistent high inflation combined with high unemployment and stagnant demand/ slowing economic growth) will have the likely effect of reducing consumer spending power and eroding corporate margins.
Nonetheless, there are glimmers of hope, M2 money supply (a measure of the money supply that includes cash, checking deposits, and easilyconvertible near money) began reducing in February 2021, and is often a leading indicator for deflation. Similarly, as post Covid supply chains begin to normalise, so too have prices for commodities like lumber, copper and steel. The latter may also reflect the impact of high prices, which typically weaken demand, in turn softening prices. Signs of companies reducing inventories, many of which were built during periods of elevated costs, also bode well in this respect.
Historically, our preference for quality stocks means that, even in the event of a full-blown recession, underlying earnings remain robust. Companies with high value-add products, pricing power and strong management teams tend to out-earn the broader market in these conditions. At the same time, in a world in which global growth slows, companies which can expand earnings independently of the broader cycle will become more valuable. With valuations having become progressively more attractive, we remain confident that these characteristics will come to be appreciated by the market longer-term.
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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