The Brunner Investment Trust — An ‘all-weather’ fund for global investors

4 October 2022 – an announcement that Julian Bishop would join the AllianzGI team managing BUT, effective from 1 November 2022, as a senior portfolio manager with a view to becoming co-lead manager with Christian Schneider in due course. Bishop has 25 years’ investment experience as a global equity analyst and portfolio manager, most recently as a senior global equity portfolio manager with Tesco Pension Investment and before that with Sarasin & Partners.

26 July 2022 – BUT’s board announced that lead manager Matthew Tillett had stepped down and would be replaced by Christian Schneider, one of the trust’s deputy managers, for a minimum of six months. He works closely with BUT’s other deputy managers, Marcus Morris-Eyton and Simon Gergel, AllianzGI’s CIO of UK equities. The board and AllianzGI would continue to review the structure of the team, including the appointment of a permanent lead portfolio manager.

While there is a team-based approach in managing BUT’s portfolio, lead manager Schneider has ultimate responsibility, although it is envisaged that in due course, he and Bishop will be co-lead managers. Schneider highlights how BUT’s quality-oriented, balanced portfolio helps to insulate the trust’s performance from style biases in the stock market. The manager is keen to continue generating both long-term capital and income growth supporting BUT’s progressive dividend policy; the annual distribution has increased for the last 50 consecutive years.

Morris-Eyton explains that BUT has a clear investment philosophy where portfolio stocks must fulfil the team’s three broad criteria of quality, growth and value. In terms of quality, investee companies have long-term records of sustainable competitive advantages such as a brand (LVMH Moët Hennessy Louis Vuitton, LVMH) or product (Microsoft). They have strong balance sheets and proven management teams that do not overpromise and underdeliver. These businesses generate high and sustainable returns and have creditable approaches towards ESG issues. BUT’s portfolio companies have secular growth opportunities with potential to grow throughout an economic cycle, while valuation is an important consideration; the managers seek firms that are trading below their estimated intrinsic values. Morris-Eyton notes that on a forward P/E multiple basis, BUT’s portfolio has a modestly higher valuation compared with the global market but it has around twice the estimated year-one earnings growth.

Gergel highlights the very broad resources at AllianzGI that the BUT team is able to draw on, including Grassroots, which he describes as a unique market research platform. The trust has an investment universe of more than 6k stocks and its portfolio is made up of 60–80 holdings selected following diligent stock selection. Gergel says that BUT is a well-diversified actively managed fund; positions are sold if they are reaching or have met full value, a better idea has been identified or if there is a change in the investment case or operating environment – the managers are willing to sell a holding at a loss if that is deemed appropriate.

There are a series of themes represented within BUT’s portfolio. Schneider focuses on digitisation where the fund is invested across the value chain. The trust has infrastructure assets including Microsoft, Visa, Microchip Technology, Amphenol Corporation and Atlas Copco. BUT has a holding in business-to-business company Intuit, which has recurring revenue and growth opportunities from its number-one global position providing online tax-filing services and accounting software for small businesses. The trust also has a holding in business-to-consumer company Charles Schwab Corporation, a dominant online provider of banking, investing and wealth-management services.

Morris-Eyton highlights structural demand growth in the healthcare sector. The projected old-age dependency ratio, which is the number of old-age dependents (persons aged 65 years or over) per 100 persons of working age (aged 20 to 64 years), is increasing significantly, led by Europe, Australia and New Zealand and North America. Over the long term, rising incomes mean there is more wealth available to spend on healthcare systems. According to the manager, BUT has numerous touchpoints with the healthcare sector such as: insurance (UnitedHealth); diagnostics (Agilent and Roche); treatment (Intuitive Surgical, the global leader in robotic surgery, and Cooper Companies, which has an IVF franchise and a contact lens recurring revenue business); outpatient (Ecolab provides infection protection across a range of industries); and aftercare (Novo Nordisk, which has the leading global diabetes franchise and a growing business tackling obesity, and GSK (formerly GlaxoSmithKline)).

Gergel focuses on cheaper, decentralized electricity generation that is fuelling energy demand. He says that climate change is leading to increased efficiency and a shift away from fossil fuels towards renewable energy, with electricity demand expected to double by 2050. The manager says there are powerful growth themes within the energy and related sectors that are represented in BUT’s portfolio, such as Rio Tinto, which he says is fundamental for energy transmission and industrial automation and instrumentation. Gergel comments that there are renewable energy generation projects at well-established energy companies including Shell, TotalEnergies and Iberdrola, while the trust has exposure to grid and infrastructure assets such as National Grid and Schneider Electric.

Turning his attention to one of BUT’s holdings, the manager says that Unilever fits in well with the trust’s quality, growth and valuation criteria. The company has a portfolio of global brands and has a long history of good growth, high returns and pricing power, and is seen as a pioneer in sustainability issues. Unilever has a strong position in emerging markets, which offers the potential for above-average long-term growth. The firm’s valuation was depressed, which provided the managers with an attractive entry point as investors were disappointed with Unilever’s bid for GSK’s consumer assets, some poor operational performance, and less exposure than its peers to the United States, which has performed relatively well this year.

Morris-Eyton highlights BUT’s position in LVMH, which has 85 brands with the most important, Louis Vuitton, generating c 80% of the company’s EBIT. The manager considers LVMH to be an amazingly successful company that grew through the pandemic and continues to take market share. The firm is diversifying its brand portfolio and the company is 60% larger now than before COVID-19, and its leather goods business is 80% larger. While investors have to pay a premium for this superior-quality company, the manager considers its valuation is compelling as LVMH has derated in 2022 along with other growth stocks.

At end-October 2022, BUT’s top 10 holdings made up 32.2% of the fund, which was a modestly higher concentration compared with 31.1% a year before; five positions were common to both periods. There is a notably higher exposure to UnitedHealth, which has now claimed the top spot in the trust’s portfolio.

Exhibit 2 shows that BUT’s portfolio is diversified by both geography and sector. The geographic data is somewhat confusing as the chart is based on where companies are listed. Data from BUT show that looking where investee businesses generate their revenue, the fund’s broad geographic exposure is c 40% North America, around one-third Europe, c 20% Asia-Pacific (including Japan) and c 5% rest of the world.

Looking at BUT’s relative returns in Exhibit 5, its NAV has outpaced the performance of its benchmark over the last three, five and 10 years, while lagging over the shorter periods shown. It is worth noting the trust’s significant outperformance of the broad UK market over the last three, five and 10 years, illustrating the potential benefits of investing overseas.

Over the last year, BUT’s healthcare stocks, including UnitedHealth, AbbVie and Novo Nordisk, have been important positive contributors to the trust’s relative performance. On the negative side, the largest detractors have been more diverse including Adidas (sportswear manufacturer), Tyman (building products) and Partners Group (private equity).

The AIC Global sector is made up of 15 funds following a variety of investment mandates. Having outperformed over a multi-year period, companies with a growth bias such as Scottish Mortgage Investment Trust and Monks Investment Trust are having a tougher time this year as investor preferences have changed in an environment of sustained higher inflation and rising interest rates. With its balanced approach of seeking both long-term capital and income growth from a portfolio of listed high-quality companies BUT can be considered as more of a ‘core’ or ‘all-weather’ fund.

Its NAV total returns are comfortably ahead of the peer group averages over the last one, three and five years, ranking first, third and fifth respectively. BUT ranks ninth out of 15 funds over the last decade. Given its above-average returns and balanced investment approach, it is somewhat surprising that the trust’s discount is one of the widest in the peer group. BUT has a competitive ongoing charge and a below-average level of gearing, while its dividend yield is modestly below the peer-group mean.