The Brunner Investment Trust PLC

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

February 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 28.02.2023

Market Review

Global equities reversed some of the previous month’s strong gains in February. Hopes that central banks may be nearing the end of their rate-hiking cycles were dashed by stronger-than-expected economic data and hawkish statements from central bank policymakers (where a central bank uses hawkish language to describe the threat of inflation, one could reasonably expect stronger actions). US and emerging market stocks closed the month lower, while shares rose modestly in Europe and Japan.

At the start of the month, the US Federal Reserve (Fed) and European Central Bank (ECB) raised rates by 0.25% and 0.5%, respectively. While the hikes were widely expected, subsequently released minutes showed policymakers believe further hikes are likely to be needed and rates may stay elevated for longer. Recent inflation declines are slowing and the probability of an extended European recession is fading.

All sectors fell in USD terms, with Materials and Real Estate posting some of biggest losses. Despite the changing interest rate expectations, Information Technology stocks held up best, sharply contrasting with the weaker Telecom Services sector. Industrials stocks also fared relatively well, thanks to stronger economic data and softer commodity prices.

Portfolio Review

In February, the Trust’s equity portfolio outperformed its benchmark. NAV total return was 0.7% compared to the benchmark’s -0.2%.

Jumbo made the strongest contribution to returns. The Greek discount retailer has delivered year on year sales growth of 14%, while protecting a gross margin of 57% in the first half of their financial year. Net profit for 2023 is now expected to grow 10%. With further rollout potential in Romania and shares trading at a price-to earnings ratio of 12 times, we retain our conviction on the stock in terms of our portfolio investment case.

Microchip also boosted performance. The maker of microcontrollers reported Q3 results which saw record net sales, up over 23% year on year. Microchip’s ninth consecutive quarter of growth was particularly well received given broader negative sentiment in semiconductors. This is testament to the company’s trailing-edge technology which it supplies across diversified end markets, giving it a less cyclical growth profile than peers.

Estée Lauder made the weakest contribution to returns. Having rallied substantially since the abandonment of China’s zero-Covid approach, shares in the cosmetics and skin care company pulled back after the Q2 results. Sales for the year are expected to decline between 5-7%, with travel in Asia and retail traffic still disrupted by the pandemic. These are likely to be further compounded against last year by a strong dollar, inflationary pressures and recession concerns.

After Estée Lauder, the largest detraction from performance was through stocks not held. These consisted of BP and a handful of high growth, technology-related names: Nvidia, Tesla and Apple. The latter have all seen their share prices rally substantially in recent months as US equity investors grew more bullish about weakening inflation and a possible Federal Reserve (Fed) pivot. Optimism around consumer spending and, in Nvidia’s case, the artificial intelligence program ChatGPT, have also helped. Shares in BP bounced after the company announced it would be increasing its oil output in the US, although management has since claimed the comments do not reflect a change in its broader strategy.

Significant Transactions

We initiated a new position in DNB Bank. The company is Norway’s largest bank, with high market share across corporate and consumer loans, as well as other services such as investments and insurance. As a leading player operating in a stable and wealthy market, DNB has built up a strong balance sheet and sector-leading returns on equity. At the time of purchase, the shares looked attractively priced given the potential for further upward earnings revisions from net interest margins, and the company’s historic policy of returning cash to shareholders in the form of a healthy dividend.

Market Outlook

The outlook for inflation remains ambiguous. On the one hand, US Consumer Price Index (CPI) has fallen to its lowest level since October 2021, reaching an annualised rate of 6.5%. On the other, much of this decline can be attributed to the lapping effect of last year’s high energy prices and covid-fuelled supply chain issues. Services inflation meanwhile continues to follow a stubbornly upward trajectory, touching over 4%. With the bulk of this consisting of wages, and unemployment stubbornly low, the US Federal Reserve (Fed) is likely to view its mission as not yet complete.

The global economy is giving similarly mixed signals. Global purchasing manager indices (PMIs) have now returned to above 50 - the threshold between recession and expansion - for the first time in six months. Europe in particular, is benefiting from better than feared energy supply, warmer weather and China’s reopening. Annual growth is now expected to reach 3.5%. However, initial optimism around China’s reopening has cooled as market participants await the conclusion of March’s National People’s Congress. This will include Gross Domestic Product (GDP) targets and any potential stimulus measures.

Ultimately, for companies the task continues to be that of balancing higher input costs (including wages) with the prospect of softer demand and interest rates at a level not seen for over a decade. Q4 earnings for the S&P 500 index already suggest that we have seen peak profitability at an aggregate level. Within the portfolio, we are reassured by holdings which show they are capable of bucking this trend, with Align Technologies, MarketAxess and Intuit all recently reporting results which strongly beat expectations.

Whether it takes the form of a hard or soft landing, central banks are committed to orchestrating some level of economic pullback in order to tame inflation. For as long as sentiment is dictated by estimates about when and how this will have been achieved, equities will remain volatile in the short-term. Yet further tightening and economic weakness should favour our positions in quality companies with sticky revenues, pricing power and exposure to structural growth. These should be well rewarded once fundamentals come back into focus.

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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