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The Brunner Investment Trust PLC

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

December 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 31.12.2022

Market Review

Global equities retreated over December. Despite a decline in headline inflation rates, sentiment was knocked by a series of hawkish statements from central banks implying long-term rates may be higher than markets had priced in (where a central bank uses hawkish language to describe the threat of inflation, one could reasonably expect stronger actions).

At a sector level, information technology, consumer discretionary and communication services stocks were among the weakest performers as hopes of a more dovish stance were dashed (where a central bank is dovish its actions will be less forceful). Meanwhile, utilities and health care stocks held up best, helped by their defensive characteristics.

Commodity prices closed December with little change overall. Oil prices initially fell back to levels last seen prior to Russia’s invasion of Ukraine, with Brent crude trading as low as 75 USD a barrel, before rallying to close the month around 85 USD a barrel. European natural gas prices also declined sharply on news that the EU’s gas storage facilities were more than 80% full, thanks to record imports of Liquified natural gas (LNG), a pick-up in German wind power and greater nuclear generation in France.

Portfolio Review

In December, the Trust’s equity portfolio outperformed its benchmark. NAV total return was -1.8% compared to the benchmark’s -4.0%.

The biggest positive contributor to returns was Munich Re. The reinsurance company announced that it now expects to see net profits of around 4bn EUR in 2023, thanks to higher pricing in its natural catastrophe and property and casualty segments. It remains a high conviction position in terms of the portfolio.

Novo Nordisk also boosted returns. After strong results the previous month, the producer of obesity-related pharmaceuticals continued to perform well. Alongside plans to remedy a lack of Wegovy supply in Europe, the company announced it was expanding its agreement with Amalgam Rx to support Dose Check, an app for patients who take basal insulin. Given the strong run in the shares, we have taken some profits.

Microchip made the largest negative contribution to returns. Shares in the maker of microcontrollers have been under pressure as signs of semiconductor demand start to weaken. However, Microchip’s broadbased end markets mean the company continues to expect revenue growth of c. 20% of which over 50% comes through the firm’s noncancellable Preferred Supplier Program.

Accenture also weakened returns. Shares in the global professional services weakened as Q2 revenue forecasts were slightly below estimates. Accenture cautioned that client spending may reduce, overshadowing its higher-than-expected revenue and earnings for Q1. While the stock may experience some macro-related headwinds, the underlying fundamentals of the business, in our view, remain robust.

Significant Transactions

We made several transactions over the month, exiting positions where conviction on longer-term growth potential had weakened even as valuations remained relatively elevated. These were Adidas, Ashmore, Ecolab, International Flavors and Fragrances and Intuitive Surgical. Market movements over the past twelve months have made many previously expensive stocks more attractive. We thus used the proceeds to initiate three new positions.

Admiral is the UK’s largest motor insurer, with a market share of c.14%. The company benefits from an industry-leading combined ratio (claims + operating costs/premiums) thanks to its lower cost structure and . Admiral is also benefiting from rising pricing power after years of minimal growth.

Diageo is a multinational alcoholic beverage company, with more than 200 brands including Smirnoff, Baileys and Guinness. The company is gaining market share thanks to fast-growing categories such as tequila and whisky, whilst also benefiting from premiumisation. At the time of purchase, the shares were overly discounting macro concerns and were trading at an attractive valuation relative to history.

Arthur J Gallagher is one of the world’s largest insurance brokers. The company consists of three divisions: brokerage, risk management and corporate, with well diversified operating segments. The company has a long history of margin expansion whilst also generating strong free cash flow, that provides opportunities for strategic Mergers and Acquisitions (M&A).

Market Outlook

At its latest meeting the US Federal Reserve (Fed) sought to stamp out once and for all any notion that a return to easy monetary policy is imminent. While US consumer price inflation appears for now to have peaked at 9.1% in August, core inflation ex-housing remains stubbornly elevated. Chair Powell is particularly focused on rising wages, observing that “it feels like we have a structural labour shortage out there”.

To counter this, central banks around the world are committed to engineering weaker aggregate demand. A recession of some form has now become the broad consensus. However, Q4 2022 was many developed economies’ first unrestricted festive period in three years. Bullish investors have also helped drive bond yields down and share prices up, effectively loosening financial conditions.

China’s protracted return to economic normality may complicate matters further. The zero-Covid approach is being abandoned, and government officials are making increasingly pro-business comments. This year may also see a return to more proactively stimulative fiscal policy. However, investors also need to ask what impact China’s reopening will have on commodity prices? Political and trade tensions only increase the potential for the global economy to take increasingly divergent paths.

Companies, for their part, are managing down expectations. Across the MSCI All Country World Index (ACWI), 2023 Earnings per Share (EPS) growth forecasts have roughly halved since the start of the year according to IBES (Institutional Brokers’ Estimate System) data¹. Weaker demand, higher costs and in some cases a backlog of inventory that had been purchased at higher prices, all threaten to erode corporate profitability. Money once again has a cost, and growth can no longer be funded with limitless debt. However, expectations may need to fall further before central banks consider their monetary policy objective complete.

¹Source: Refinitiv Datastream as of January 13, 2023.

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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Allianz Global Investors GmbH

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Freephone (UK calls only): 0800 389 4696
Email: [email protected]

www.brunner.co.uk

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