Overhang lifted – potential for a narrower discount

The Brunner Investment Trust 10 May 2021 Review
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The Brunner Investment Trust

Overhang lifted – potential for a narrower discount

Investment trusts
Global equities

10 May 2021

Price

968.0p

Market cap

£413m

AUM

£493m

NAV*

1,097.3p

Discount to NAV

11.8%

*Including income. At 7 May 2021.

Yield

2.1%

Shares in issue

42.7m

Code

BUT

Primary exchange

LSE

AIC sector

Global

52-week high/low*

968.0p

732.0p

1,097.3p

805.3p

*A-shares. **Including income.

Gearing

Net gearing at 31 March 2020

6.6%

Fund objective

The Brunner Investment Trust aims to provide growth in capital value and dividends over the long term through investing in a portfolio of UK and international securities. From 25 March 2008 to 21 March 2017, the benchmark was a composite of 50% All-Share and 50% All-World ex-UK Index (£). It is now a composite of 70% All-World ex-UK (£) and 30% All-Share Index.

Bull points

Balanced portfolio of global equities, aiming to generate both capital and income growth.

Long-term record of outperformance versus its benchmark and 49 consecutive years of higher dividends.

Scope for a higher valuation.

Bear points

Performance lags the averages of its peers in the AIC Global sector.

Structural gearing of £25m will amplify capital losses in a market sell-off.

Around 29% of the share base is owned by the Brunner family.

Analysts

Mel Jenner

+44 (0)20 3077 5720

Sarah Godfrey

+44 (0)20 3681 2519

The Brunner Investment Trust is a research client of Edison Investment Research Limited

The Brunner Investment Trust (BUT) is managed by Matthew Tillett at Allianz Global Investors (AllianzGI), along with deputy managers Christian Schneider and Marcus Morris-Eyton. Tillett is confident that the trust’s shares can trade at a narrower discount to NAV following the exit of a major shareholder, which had acted as an overhang since 2016. He suggests that ‘now is a great opportunity to buy a solid reliable trust that has delivered good performance over the long term’. The manager says that BUT has a ‘philosophy and process that is tried and tested’ with the fund offering investors ‘high quality, large, liquid companies at attractive valuations’. He believes that the trust is well positioned to benefit in an environment where investors place a greater emphasis on the quality and strength of company fundamentals.

Exit of major shareholder provides scope for a narrower discount

Source: Refinitiv, Edison Investment Research

Why consider BUT now?

Aviva’s 2016 announcement of its intention to sell its c 20% holding in BUT has been an overhang to the trust’s share price performance in recent years. The last part of Aviva’s position was sold in April 2021, suggesting that BUT has the potential to trade at a narrower discount going forward. Another historical concern for potential investors was the trust’s high-cost debentures, but its balance sheet has been restructured; the expensive debentures were repaid in 2018.

The analyst’s view

BUT offers a balanced portfolio of high-quality, global equities with the prospects of both capital appreciation and income growth. The trust has a long-term record of outperformance – its NAV total returns are ahead of those of the composite benchmark over the last one, three, five and 10 years – and has generated absolute annualised double-digit NAV and share price total returns over the last decade. BUT could appeal to income-focused investors. It is one of the UK investment trusts with a very long-term record of dividend growth and has paid a higher annual distribution in each of the last 49 consecutive years. AllianzGI has a well-defined investment approach, with stocks selected on a bottom-up basis based on three pillars of quality, growth and valuation, and an assessment of a company’s environmental, social and governance (ESG) credentials is an integral part of the process.

Scope for a narrower discount

Ever since Aviva’s acquisition of Friends Provident in 2015, investors have known that the company intended to dispose of its investment trust holdings. For BUT, where Aviva had a 20% stake, this meant a widening of the discount to c 20% at the time (Exhibit 1). BUT’s discount subsequently narrowed, before widening during the COVID-led market weakness in March 2020. Aviva started selling its holding in the trust in earnest in early 2020 and by the end of the year it had declined to 14.3%; the final disposal occurred in April 2021. The removal of this overhang suggests that there is considerable scope for BUT to be afforded a higher valuation.

Over the last few years, retail investors have migrated towards investment platforms such as Hargreaves Lansdown, and they have less of a focus on discounts than private client wealth managers. The last five years have seen the percentage of BUT’s stablemate The Merchants Trust’s shares held on platforms increase from c 20% to more than 50% and the trust now regularly trades around NAV. BUT’s board aspires for a similar platform ownership (currently just above 20%) and a narrower discount. For potential investors concerned about liquidity, while the Brunner family owns c 29% of BUT’s shares, there are multiple owners, some of whom trade their shares.

Exhibit 1: Share price premium/discount to NAV (including income) over 10 years (%)

Source: Refinitiv, Edison Investment Research

The manager’s view: BUT well positioned for the future

Discussing the investment backdrop, Tillett says there has been a rotation within the stock market with a strong recovery in the cyclical areas and in the shares of those companies that had been negatively affected by COVID-19. News about positive trial data in early-November 2020 followed by the vaccine roll-out has been supportive for the market. The manager notes that ‘data from early adopting countries such as Israel and the UK have been encouraging in terms of keeping people out of hospital’. The stock market is forward looking and is anticipating an economic recovery. Tillett comments that there is likely to be a release of huge pent-up demand as economies reopen as many middle-class, white-collar workers have built up their savings during the lockdowns; he suggests that ‘the consumer is in a good position coming out of the recession, which is unusual, while many businesses that were not negatively affected by the pandemic are also in good shape’.

Exhibit 1: Interview with Matthew Tillett, lead portfolio manager

Source: Edison Investment Research

In terms of the economic environment, both monetary and fiscal policies are supportive, unlike following the global financial crisis when the focus was on monetary stimulus. As examples, there is a very large infrastructure spending agenda in the US and there is little appetite for austerity in the UK. Stock markets are optimistic about the potential for economic recovery; Tillett does not disagree with this view – barring catastrophic coronavirus variants or evidence that the vaccines are ineffective, he expects the recovery to play out over the next six to 12 months.

With the market pricing in economic recovery, particularly in those sectors that are poised to benefit, the manager stresses the importance of having a longer-term perspective. He suggests that an important question to consider for 2022–25 is ‘will the recovery be sustained, or will the backdrop be similar to pre-COVID in terms of a low growth, stop-start economy?’ Tillett believes that companies delivering disappointing results will be heavily punished by the market; we are annualising the ‘free pass’ that businesses were given due to the pandemic’s extenuating circumstances. He considers that quality will be a more important factor; ‘those companies that can deliver and sustain their profitability should be rewarded – growth at a reasonable price is likely to become a more important strategy’, he adds. Tillett continues to seek companies that are ‘long-term structural winners’. He believes that the excitement of the last three months about the prospect of getting back to normal will pass and that long-term fundamentals will become more important. He suggests that ‘this plays to our advantage, with our focus on quality companies with long-term growth drivers’.

The manager says that the issue of inflation needs to be considered in both the short and long term. In 2021, he expects higher inflation data points due to easy year-on-year comparisons. There are signs of significant input cost inflation in commodities and other raw materials, which individual companies view as a risk factor. Quality companies with a strong market position and pricing power are best placed to deal with this environment as they can pass on higher costs to their customers, while other firms are likely to see their margins come under pressure. Tillett notes that ‘there are some companies in the portfolio that are experiencing cost pressures, but they should be able to pass them on’. The manager explains that there has been a secular change over the last 30 years, a period characterised by deflation and declining interest rates. He suggests there is a case now for more upward pressure on inflation compared with the last decade as the policy environment favours fiscal as well as monetary stimulus. As noted above, consumers are in a strong position, as are banks, so their balance sheets do not need to be repaired (unlike following the global financial crisis) and there is room for credit creation. Tillett comments that there is now less of a deflationary pull due to globalisation; the number of companies moving their operations to China and other lower-cost areas (labour arbitrage) is now less pronounced and there has been reshoring back to the US and Europe for both geopolitical issues and economic factors. While there are other deflationary trends in place such as less demand from an ageing population in the west and ongoing digitalisation, which is increasing transparency and lowering prices, on a net-for-net basis the manager believes that we are now in a less deflationary environment.

Tillett is encouraged to report that in recent months the trajectory of dividend payments in BUT’s portfolio has been positive; cyclical companies which cut their distributions due to COVID-19 are generally restoring payments faster than anticipated. He notes that with economic recovery firms are more confident about reinstating their dividends. Many businesses have found ways to cope with restrictions during the pandemic such as in the housing and construction sectors and have been able to deal with social distancing measures. ‘Companies have returned to pre-COVID levels of trading faster than expected’, the manager concludes.

Recent portfolio activity

While BUT’s holdings are always selected on a stock-by-stock basis, Tillett notes that in recent months ‘boring’ parts of the stock market not viewed as beneficiaries of a cyclical tailwind have lagged. He says this includes the healthcare sector ‘where there are many high-quality business models, companies have pricing power and there is long-term demand growth due to ageing populations’. These stocks fared well during the first phase of the COVID-19 outbreak but have since de-rated. Although there are no new healthcare positions in BUT’s portfolio, the manager has increased the trust’s exposure to the sector including adding to the holding in Denmark-listed Novo Nordisk, which is a leader in diabetes care. Tillett also suggests that the consumer staples sector is another unloved area and is now looking more attractively valued.

The manager has added to BUT’s position in the regulated utility company National Grid, which he describes as ‘very defensive and out of favour’. It is a beneficiary of the energy transition from fossil fuels to renewable energy in both the UK and the US, but Tillett believes this is not fully appreciated by investors. National Grid’s stock price had been held back by a regulatory review, but this has now passed. The manager believes there is good five-year visibility in National Grid’s business and that its asset base can grow faster than consensus expectations. He also added to BUT’s position in IG Group; the company posted positive results but announced the acquisition of tastytrade which was viewed negatively by investors. This firm is a high-growth US online brokerage and trading education platform with a leading position in US-listed derivatives, primarily options and futures. A Grassroots (Allianz Global Investors’ proprietary market research platform) investigation was undertaken to determine how tastytrade stacked up against its competitors; this gave the manager confidence to add to the IG Group holding.

BUT has a new position in US payments company FleetCor Technologies, which operates a closed-loop network serving businesses rather than consumers. Its products include fuel and lodging cards used by truckers and travelling salesmen. Tillett says FleetCor has significant growth potential as B2B payments systems have not experienced the same level of innovation as those servicing consumers. There is plenty of scope to add value for the customer; employee payments can be monitored and there is less chance of fraud, while it provides the potential for firms to manage their working capital more efficiently. The manager says that since FleetCor’s initial public offering in 2010, it has grown its annual earnings at a high-teens rate, and he was able to initiate a position as the company’s share price weakened on concerns about its business being negatively affected by the COVID-19 outbreak. BUT’s position in FleetCor was funded by the sale of its holding in Citigroup. Tillett explains that the bank is very dependent on the yield curve in terms of generating spread income, which is not under its control, while in the US, unlike its domestic peers, Citigroup does not have the local scale to generate higher returns. Its share price rallied during the recent stock market rotation providing an attractive exit point.

Performance: Long-term NAV outperformance

Exhibit 3: Five-year discrete performance data

12 months ending

Share price
(%)

NAV*
(%)

Benchmark**
(%)

CBOE UK All Companies (%)

MSCI All World exUK (%)

30/04/17

29.1

29.3

26.1

20.3

31.8

30/04/18

16.4

10.9

8.0

8.1

7.8

30/04/19

4.1

6.5

9.3

2.5

12.1

30/04/20

4.2

(5.8)

(5.4)

(17.2)

(0.3)

30/04/21

21.4

36.9

31.7

25.3

33.9

Source: Refinitiv. Note: All % on a total return basis in pounds sterling. *NAV with debt at market value. **Until 21 March 2017, benchmark was 50% All-Share and 50% All-World ex-UK index. From 22 March 2017, benchmark is 70% All-World ex-UK and 30% All-Share index.

Exhibit 4: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

10 years

Price relative to benchmark

1.5

2.0

2.2

(7.8)

(3.2)

6.9

15.3

NAV relative to benchmark

(0.2)

2.3

3.8

4.0

1.0

6.3

9.4

Price relative to CBOE UK All Companies

1.6

0.8

(3.0)

(3.1)

23.9

43.2

66.4

NAV relative to CBOE UK All Companies

(0.1)

1.1

(1.4)

9.3

29.2

42.5

57.9

Price relative to MSCI All World ex-UK

1.4

2.7

4.7

(9.3)

(11.9)

(6.9)

(5.1)

NAV relative to MSCI All World ex-UK

(0.2)

3.0

6.4

2.3

(8.2)

(7.4)

(9.9)

Source: Refinitiv, Edison Investment Research. Note: Data to end-April 2021. Geometric calculation.

BUT’s relative returns are shown in Exhibit 4. Its NAV is ahead of the benchmark over all periods shown (except for the last month), while its share price is lagging over the last one and three years. Tillett explains that the trust’s relative performance in 2021 has benefited from its holdings in mid-cap UK cyclical names such as Tyman (engineered door and window components) and Redrow (house building), along with higher-growth companies such as Estée Lauder Companies (prestige cosmetics). Holdings that have detracted from BUT’s relative performance this year include those in more defensive sectors including healthcare.

Exhibit 5: Investment trust performance to 30 April 2021

Price, NAV and benchmark total return performance, one-year rebased

Price, NAV and benchmark total return performance (%)

Source: Refinitiv, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised.

Exhibit 6: NAV total return performance relative to benchmark over three years

Source: Refinitiv, Edison Investment Research

Peer group comparison

Exhibit 7 shows the 15 companies in the AIC Global sector. Tillett suggests that a direct comparison between the funds is not easy given the wide range of market caps and the different strategies employed. BUT has a balanced approach aiming to generate both capital and income growth, while its quality bias means there is more of a focus on ‘defensive growth rather than super growth’. The trust may benefit if investors become more cautious about unlisted investments or have concerns that the stock market is looking frothy and vulnerable to a pullback.

Tillet opines that an investor in BUT ‘should be able to sleep well at night’, making it ‘an attractive option for wealth managers and investors using retail platforms’. Its NAV total returns are below average over the periods shown (modestly so over the past 12 months), ranking seventh over one year, 12th over three years, and 11th over five and 10 years. At 7 May 2021, BUT had the widest discount in the sector (but as discussed earlier in this report there is potential for this to narrow), its ongoing charge was below the mean, and its gearing was higher than average. The trust offers an above-average dividend yield, ranking sixth (40bp higher than the mean).

Exhibit 7: AIC Global sector at 7 May 2021*

% unless stated

Market
cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Discount
(cum-fair)

Ongoing charge

Perf.
fee

Net gearing

Dividend yield

Brunner

413.3

35.8

33.6

94.0

171.9

(11.8)

0.6

No

107

2.1

Alliance Trust

3,113.0

39.8

41.0

104.8

187.6

(5.8)

0.7

No

107

1.5

AVI Global Trust

1,043.5

56.9

37.0

118.9

137.9

(5.6)

0.9

No

107

1.7

Bankers

1,497.8

28.3

37.6

106.1

199.4

0.7

0.5

No

101

1.9

EP Global Opportunities

106.3

16.3

0.7

49.1

101.4

(8.1)

1.0

No

100

2.1

F&C Investment Trust

4,538.7

35.5

40.3

106.5

208.6

(5.6)

0.5

No

108

1.4

JPMorgan Elect Managed Growth

287.5

42.6

35.7

92.8

183.7

(4.6)

0.5

No

100

1.6

Lindsell Train

278.0

25.8

73.3

210.7

564.6

12.8

0.8

Yes

100

3.0

Manchester & London

237.9

12.1

47.9

146.2

96.7

(9.4)

0.8

Yes

100

2.4

Martin Currie Global Portfolio

321.7

27.8

58.2

123.4

233.4

2.7

0.6

Yes

108

1.1

Mid Wynd International Inv Trust

439.3

32.1

55.6

126.4

227.3

0.1

0.7

No

100

0.8

Monks

3,230.0

49.3

69.8

185.8

249.5

2.4

0.5

No

100

0.2

Scottish Investment Trust

535.2

11.0

5.6

52.5

106.2

(9.6)

0.5

No

107

2.9

Scottish Mortgage

17,272.7

83.1

156.5

389.1

710.0

1.0

0.4

No

106

0.3

Witan

1,863.7

46.0

26.3

83.8

173.8

(7.0)

0.8

Yes

110

2.3

Average (15 funds)

2,345.2

36.2

47.9

132.7

236.8

(3.2)

0.7

104

1.7

BUT rank in sector

10

7

12

11

11

15

8

7

6

Source: Morningstar, Edison Investment Research. Note: *Performance to 6 May 2021 based on ex-par NAV. TR = total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

General disclaimer and copyright

This report has been commissioned by The Brunner Investment Trust and prepared and issued by Edison, in consideration of a fee payable by The Brunner Investment Trust. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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General disclaimer and copyright

This report has been commissioned by The Brunner Investment Trust and prepared and issued by Edison, in consideration of a fee payable by The Brunner Investment Trust. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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