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The Brunner Investment Trust PLC

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

October 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 31.10.2022

Market Review

Global equities rallied over October, once again lifted by hopes that central banks may soon start to scale back the size of their interest rate hikes given the deteriorating economic outlook. Political headlines also continued to drive markets. The appointment of Rishi Sunak as UK Prime Minister was seen to restore some fiscal credibility, lowering UK government bond yields and boosting equities. Chinese equities fell however, as President Xi Jinping consolidated his grip on power at the Party Congress. This was seen as less positive for foreign investors in the region, particularly when viewed in conjunction with no visibility on ending the zero Covid approach.

Economic data continued to indicate that the economic backdrop was deteriorating with the International Monetary Fund (IMF) warning a growing risk of recession in 2023. The European Central Bank (ECB) raised rates by a further 0.75% but hopes of a more dovish tilt (where a central bank is dovish its actions will be less forceful) to overall monetary policy were boosted when the Bank of Canada and Reserve Bank of Australia enacted smaller-than-expected rate hikes.

Returns at a sector level were mixed. Energy once again led the pack, consolidating its lead for the year. Industrials and Health Care also rallied. However, Telecommunication Services, Consumer Discretionary and the Real Estate sector all delivered negative returns.

Portfolio Review

In October, the Trust’s equity portfolio underperformed its benchmark. NAV total return was 2.4% compared to the benchmark’s 3.5%.

The biggest positive contributor to returns was Visa. The digital payments company reported robust quarterly results, with revenues and earnings per share both beating expectations. The company continues to benefit from a resurgence in international travel, with cross-border volumes rising 36%. A weaker growth environment may weigh on consumer spending more broadly, but Visa’s management remain constructive given the company’s broad revenue exposure and ability to capture inflation directly.

UnitedHealth Group also boosted returns. The diversified healthcare company also released strong results, with earnings beating estimates by over 6% and management raising full year guidance. Growth continues to be driven by strong enrolment numbers across its UnitedHealthcare unit, as well as continued value-based care initiatives in Optum Health. With the company building on its Walmart collaboration by plans to jointly develop 15 health clinics, the growth pillar of our investment thesis remains very robust.

Adidas made the largest negative contribution to returns. Shares in the sportswear apparel company fell after management announced another profit warning, with inventory issues and lower sales in China denting both revenues and earnings. A public feud with the musician Kanye West also resulted in the end of the Yeezy collaboration, whose outsized impact on profitability had been underestimated by investors. The holding is currently under review.

Yum China also weakened returns. Shares in the convenience restaurant chain traded in line with the broader Chinese market, which softened as investors grew more cautious about President Xi’s tighter grip on power and limited prospect of economic reopening post Covid. However, with the latter showing some signs of reversing and management announcing continued investment in store expansion, Yum China is well positioned to gain market share and navigate these uncertainties.

Market Outlook

Global equity markets continue to be volatile, sentimental and focused on the short-term. Leading the dance is the US Federal Reserve (Fed), which is marching markets along to a tune of elevated inflation data and ever tighter monetary policy. Investors are poised for a key change, with markets often rallying sharply on encouraging datapoints. Yet so far, these have proved to be short-lived refrains and any moves in this direction missteps.

Absent such a turnaround, the path for corporate earnings is being scrutinised more closely. Unlike last quarter, companies reporting Q3 numbers are likely to be incorporating the full impact of higher energy, labour and material costs at the same time as economic growth trends downwards. The extent to which companies can sustain margins in these conditions will be a clear indication of their cyclicality, pricing power and capital discipline.

At the same time, valuations remain volatile. Multiples have largely pulled in from their “low interest rate world” highs and this has created some select opportunities. However, many names perceived as defensive continue to command a premium and with so much macroeconomic uncertainty, investors are pricing securities on increasingly short-term data points. Consequently, earnings events (and forward guidance perhaps even more so) are likely to trigger sharp reactions in either direction.

Our task in the coming months remains the same. We continue to seek high cash-flow generating companies which, through their value proposition, should be able to grow and compound their earnings over the long-term. At its heart, this task centres around distinguishing between market noise and fundamentals. We believe that this – rather than any change in our philosophy or process – will best serve our shareholders.

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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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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