The Brunner Investment Trust PLC

Welcome to the latest update from the Trust's portfolio managers

March 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 31.03.2023

Market Review

It was a volatile month for global equities. Shares fell sharply mid-month as the collapse of Silicon Valley Bank (SVB) in the United States triggered broader concern about the health of the global banking system. As the uncertainty spread to Europe, Swiss investment bank Credit Suisse was forced into an emergency merger with rival UBS. Despite this, global stocks staged a late-month recovery as falls in headline inflation rates boosted hopes that central banks would adopt a more accommodative monetary policy.

At a sector level, it was a strong month for IT and Telecommunication Services. Utilities and Consumer Staples also performed well, with the prospect of lower interest rates boosting higher growth names and so-called bond proxies. The weakest sector was Financials, as fears of contagion in the banking sector sparked memories of a Lehman moment. Real Estate and Energy also lagged. Overall, value stocks underperformed growth.

Portfolio Review

In March, the Trusts equity portfolio performed in line with its benchmark, but the NAV total return at -0.6% was marginally behind the benchmark return of -0.1%.

Microsoft made the largest positive contribution to performance. Shares in the computing giant have performed strongly this year thanks to optimism for lower interest rates, better than expected Q1 results from its cloud computing division and growing interest in the companys investment in the artificial intelligence platform ChatGPT. The stock benefited further in March as investors sought refuge in companies with rock solid balance sheets, high quality earnings and reasonable valuations.

Novo Nordisk also boosted returns. Like Microsoft, the maker of diabetes and obesity-related pharmaceuticals benefited from the markets flight to quality. As of Novos Q4 earnings report in February, the company expects revenue growth up to 19% driven largely by its Ozempic diabetes drug and Wegovy weight loss treatment. At present, demand is outweighing supply and the main barrier to growth is the ability of the company to ramp up manufacturing capacity.

Perhaps unsurprisingly, our three largest detractors from performance were all in the financial sector. Charles Schwab (one of the largest retail brokers in the US), DNB (a Norwegian bank) and IG Group (a UK-listed trading platform) all fell in March due to the turmoil from SVB and Credit Suisse.

Of the three, Schwab was worst hit. The run on SVB led to fears of deposit flight and, in the longer run, increased regulation. For multiple reasons we believe the situation at SVB is incomparable to Schwab. Most importantly, unlike at SVB, the vast majority of Schwabs deposits are under $250k and therefore insured by the US federal insurance scheme, eliminating the incentive for clients to move their funds. Schwab management expect continued growth in discount brokerage which, together with their enviable market position, means our portfolio investment thesis remains intact.

Significant Transactions

We exited our position in UBS. The Swiss regulator effectively forced UBS to rescue Credit Suisse, fundamentally changing the investment case. Our original thesis was based on UBSs ability to drive growth through its well positioned wealth management division. We believe that the addition of Credit Suisse may bring numerous unknown risks. Moreover, the mere size of the combined entity means the Swiss government are likely to boost regulatory oversight and, potentially, capital requirements, reducing the outlook for cash returns.

We initiated a position in Rentokil. The company has recently acquired Terminix, a termite eradication business in the US. This combination boosts their market share in US pest control considerably, which could bode well for margins. We believe managements targets for network optimisation and back-end efficiencies are clear and achievable. Longer term, industry fundamentals are attractive with consistent, steady growth that is uncorrelated to broader economic activity.

Market Outlook

In a period of monetary policy adjustment, the financial sector becomes the primary mechanism of transmission. Yet the consequences are typically felt with a lag of between four to six quarters. With banks only recently feeling the stress, there is reason to believe other industries and consumers have yet to feel the full effect of money once again having a cost.

Economic indicators are thus deteriorating, albeit slowly. The latest manufacturing Purchasing Managers Indexes (PMIs) in the US, Eurozone, UK and China all declined by 1 point in their latest readings. US jobs numbers similarly show that while unemployment remains at a multidecade low, the pace of hiring is decelerating.

Softer economic data has combined with easing inflation numbers. In the US, the consumer price index (CPI) for March rose 5% year on year, easing to its lowest level in nearly two years. Recent financial stress has further reduced banks willingness to lend. As a result, market participants now expect the US Federal Reserve to start cutting interest rates as early as September, with a peak of 5% in June.

Yet with core CPI (which strips out volatile energy and food costs) rising 5.6%, there is reason to believe that price pressures for some goods and services will remain elevated. Central banks thus continue face the difficult task of determining a policy stance that is sufficiently restrictive to lower inflation, yet not so high as to risk financial stability.

As shareholders know, we do not seek to take a position or even a strong view on near-term economic matters. Rather, we seek to own the companies that we believe are most likely to outperform through a range of macroeconomic environments. So far this year, quarterly sales and earnings have been robust, with a high proportion of portfolio companies beating and raising expectations for the year ahead. As the effects of monetary policy continue to work their way through the system, we remain focused on opportunities that will best compound shareholder wealth over the long term.

For the latest portfolio breakdown, performance, dividend information, please visit www.brunner.co.uk.

*Past performance does not predict future returns.

Active is:

With regards,

Allianz Global Investors GmbH

199 Bishopsgate, London, EC2M 3TY
Freephone (UK calls only): 0800 389 4696
Email: [email protected]

www.brunner.co.uk

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