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The Brunner Investment Trust PLC
Welcome to the latest update from the Trust's portfolio managers
September 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 30.09.2022
Market Review
Global equities fell over September. Hawkish statements (where a central bank uses hawkish language to describe the threat of inflation, one could reasonably expect stronger actions) from major central banks and stronger-than-expected US inflation data prompted an initial sell-off. Sentiment worsened further as Vladimir Putin conducted sham referenda to annex four regions of Ukraine, raising the possibility of nuclear escalation. The UK’s then new government also announced a mini budget ostensibly designed to invigorate economic growth. However, its fiscal imbalance prompted a crisis in financial markets.
Interest rates were hiked across the developed and developing world. Among G7 economies, the US Federal Reserve (Fed), European Central Bank and Bank of Canada each raised rates by 0.75%, while the Bank of England hiked by 0.5%. In contrast, the Bank of Japan maintained its accommodative stance. Russia and Turkey both cut rates, while China’s state-run banks reduced their deposit rates for the first time since 2015.
Continuing last month’s trend, all sectors delivered negative returns. Telecommunication Services, Real Estate and IT pulled back the most. The more defensive Healthcare and Consumer Staples held up best.
Portfolio Review
In September, the Trust’s equity portfolio outperformed its benchmark. NAV total return was -5.3% compared to the benchmark’s -5.7%.
At a single stock level, the biggest positive contributor to return was UnitedHealth Group. The company announced a 10-year partnership with the retail giant Walmart, in which the two will look to coordinate care for the elderly and receivers of Medicare. While the deal is not expected to drive an immediate boost in earnings, the long-term potential is significant. Having trimmed our holding earlier in the year given strong performance, the shares continue to be a high conviction position.
Munich Re also boosted returns. Having reiterated full year guidance the previous month, management expects the war in Ukraine and mounting inflation to drive reinsurance prices higher longer-term. While one-off challenges may continue to drive some short-term volatility in the shares, these longer-term tailwinds continue to underpin our investment case.
Adidas made the largest negative contribution to returns. Shares in the maker of sports apparel continue to weaken following a series of execution errors which have culminated in CEO Kasper Rorsted’s departure. Adidas is struggling with weakening consumer sentiment and – most recently – a dispute with the musician Kanye West. Yet at 14x earnings, the shares could be viewed as oversold in the context of their longer-term growth.
Paragon Banking Group also weakened returns. Shares in the buy to let specialist lender weakened in the wake of UK Chancellor (at the time) Kwasi Kwarteng’s mini-budget and the ensuing reaction in bond markets. Markets fear that a sharp jump in interest rates will impair the ability of mortgage owners to service loans, at the same time as economic weakness erodes the broader housing market. However, the quality of Paragon’s loan book should provide relative insulation from the former, and its balance sheet remains strong.
Significant Transactions
We exited our positions in National Grid, Booking Holdings and Atalaya Mining and used the proceeds to initiate a position in SSE. The utility company is split c.60% generation and 40% distribution and transmission. Generation is focused largely on renewables and both parts of the business have the potential to see good growth over the long-term. Despite strong performance, the shares were trading at a discount relative to peers and offered a good entry point within the framework of the portfolio.
Market Outlook
The inflation narrative continues to wrongfoot global equity markets. The first full week of October saw softer than expected US manufacturing data swiftly followed by a stronger than expected jobs report. Stocks whipsawed as a result, surging with hopes of a Fed pivot in policy direction and falling as these were soon dashed.
Energy, the biggest driver of inflation this year, has softened with a barrel of Brent crude now 25% cheaper than its March peak. Yet with unemployment at historic lows, service costs continue to grow and the effect of hedging means many other price increases have yet to be felt by consumers. Similarly, longer-term inflationary forces such as demographic change and long-standing underinvestment in infrastructure, not only precede Russia’s invasion of Ukraine but may also outlast it.
Equity investors are thus grappling with a world in which central banks remain fully committed to monetary tightening even as economic indicators sour. At a fundamental level, many companies are now facing a decline in revenues and earnings expectations. The question is to what extent analysts and management have correctly priced this in?
As active equity investors, it behoves us to take a longer-term view. In a lower growth environment, many stocks with strong balance sheets and sticky revenues have seen an excessive collapse in their valuations, relative to peers. Similarly, companies with exposure to structural drivers which are uncorrelated from the broader economy – such as digitalisation, electrification and ageing populations – offer greater growth visibility for investors. We believe that opportunistically adding to such high conviction names will lay the necessary foundation for performance when fundamentals are once again in focus.
For the latest portfolio breakdown, performance, dividend information, please visit www.brunner.co.uk.
*Past performance does not predict future returns.
Fact Sheet
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