The Brunner Investment Trust PLC
Welcome to the latest update from the Trust's portfolio managers
January 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 31.01.2023
Market Review
Global equities rallied strongly over January, boosted by rising hopes of a soft landing for the global economy. Despite continued hawkish statements from major central banks (where a central bank uses hawkish language to describe the threat of inflation, one could reasonably expect stronger actions), a further easing in inflationary pressures contributed to the positive tone, as did optimism over China’s reopening.
At a sector level, performance reflected the market’s rotation away from lower growth defensive names, in an effective mirror of 2022. Health Care, Utilities and Consumer Staples were among the weakest performers. Meanwhile, Consumer Discretionary, Telecommunication Services and IT performed strongly.
Commodities were mixed. Natural gas prices tumbled, reaching levels last seen prior to the invasion of Ukraine, helped by relatively mild winter weather in Europe and above-normal storage levels for this time of year. In contrast, oil prices closed the month roughly unchanged. Industrial metal prices, such as copper and iron ore, rallied on hopes of a rebound in China’s economy once the current COVID-19 exit wave has passed.
Portfolio Review
In January, the Trust’s equity portfolio underperformed its benchmark. NAV total return was 3.7% compared to the benchmark’s 4.7%.
The biggest positive contributor to returns was TSMC. The world’s largest outsourced semiconductor manufacturer reported Q4 net profits that were up 78% year-on-year, strongly beating expectations. While forward guidance was only for slight growth in 2023, reflecting the cyclical slowdown in semiconductors, management expects TSMC’s technological edge and scale advantage to help it weather the downturn. The stock also benefited from the passing of Taiwanese legislation which allows local chip firms to convert 25% of their research and development expenses into tax credits, in a bid to retain the nation’s technology leadership.
MarketAxess also boosted returns. The leading fixed income electronic trading platform reported another strong quarter, with revenues and Earnings per Share (EPS) growing by 7.8% and 15.3% respectively, both beating estimates. The momentum reflected a rise in trading volumes, particularly longer duration bonds. January also saw the company promote its Chief Operating Officer Chris Concannon to CEO, while boosting its dividend forecast by 4.2%.
Unitedhealth Group made the largest negative contribution to returns. The healthcare insurance provider reported a typical earnings beat, delivering 12% year-on-year revenue growth with double-digit growth in both its lines of business, Optum and UnitedHealthcare. November’s guidance for 11% EPS growth in 2023 was also confirmed. Despite this, the shares weakened, largely reflecting the market’s rotation towards higher growth stocks and away from the more defensive winners of 2022. We remain high conviction holders in terms of the portfolio investment case.
Charles Schwab also weakened returns. Shares in the brokerage company fell after Q4 results saw EPS miss expectations. Schwab has seen a decline in interest earning assets even as net interest margins rise. However, client ‘cash sorting’ (moving money from lower to higher yielding money market funds) is following expectations and expense growth should soon decline following the full integration of the Ameritrade acquisition. While 2023 may prove to be a transition year, we remain comfortable with our 2% holding in the portfolio.
Significant Transactions
There were no significant transactions over the month.
Market Outlook
January’s positive equity performance reflects a market looking well into the future. Investors appear to have moved ahead of the inflation and interest rate story, through pending economic weakness and straight to later in the cycle. The extent to which investors are right in so doing is likely to dictate the path for equities in the coming months.
Headline inflation is certainly moderating. This is partly due to the cyclical effect of easing supply chains and lower energy prices – oil and gas are down around a third and a half from where they were one year ago. However, with the latest US jobs data showing that unemployment is at 3.4%, its lowest in 53 years, core inflation may yet remain resilient.
Alternatively, the job market’s ability to withstand higher interest rates may reflect a so-called “soft landing”. Central banks have long claimed their desire to cool inflation, without necessarily inflicting a prolonged or damaging recession. With Europe’s energy crisis seemingly averted in the near term, and China reopening at a greater than expected speed, there are hopes that this may come to pass.
After the sharp multiple compression of 2022, earnings results will be a key driver of equity performance in the medium-term. In Q4 numbers for portfolio holdings so far, we have seen good top-line demand and beats, with relatively few companies missing margins expectations. Typically, the latter have been due to higher labour and costs, increased marketing spend, as well as unwinding inventories.
Substantial earnings disappointments, as well as consistently softer outlooks, could paint a gloomier economic picture. In this event, a swifter return to accommodative monetary policy might be likely. We believe our companies would have an advantage at such a time, due to their higher quality earnings and structural growth exposure.
As our shareholders know, we do not seek to take a position or even a strong view on the matter. Rather, we seek to own the companies most likely to outperform through a range of macroeconomic environments. With most market participants so intently focused on the near-term, we believe we are well positioned to find the profitable growth opportunities able to 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.
Fact Sheet
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With regards,
Allianz Global Investors GmbH
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Freephone (UK calls only): 0800 389 4696
Email: [email protected]
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