Bankers Investment Trust (The) — Most regional portfolios outperformed in H123

BNKR’s interim results to end-April 2023 showed a strong six-month NAV TR performance of 8.1%, ahead of the benchmark’s 3.5% TR. It outperformed most of its regional benchmarks, returning to its long-term trend, after a more challenging FY21–22 (see Exhibit 1), highlighting the respective management teams’ stock-picking expertise. During H123, the strongest outperformance was in the UK (+3.1pp) and continental Europe (+1.3pp), and four out of five of the trust’s top performance contributors were from these markets (see Exhibit 2). On the other hand, BNKR’s investments in China and Pacific ex-Japan underperformed their respective benchmarks. Crooke highlights that the China sleeve is positioned for a revival in consumer goods demand, which has lagged the recovery of the Chinese economy following its early-2023 reopening. The manager remains confident that consumer stocks will perform well, although later than previously expected. Following recent changes in senior positions at JHI, Crooke will now dedicate himself fully to the management of BNKR and the Global Equity Income strategy, as his role of head of EMEA and Asia Pacific was assumed by Lucas Klein.

The best performing stock in BNKR’s portfolio in H123 was Microsoft, which is at the forefront of AI implementation in IT services. Crooke highlights that while he acknowledges the potential benefits of AI, the North American manager (Jeremiah Buckley) avoids pure-play AI technology stocks as he views them as overpriced and too risky. Crooke currently favours traditional financial holdings, providing more interest rate and less transaction-based exposure, which proved effective, as highlighted by UniCredit being the second-best performing stock in the portfolio in H123.

In H123, BNKR’s performance was supported by the strong UK stock market, while the North American stock markets were broadly flat during the period. To end-June 2023, however, BNKR underperformed its global benchmark across all analysed periods (see Exhibit 4). The benchmark is heavily skewed towards North America (66.7% of the index weight at end-May 2023), which has been a major contributor to global equities indices’ returns, as highlighted by the US S&P 500 Index’s outperformance across all periods shown. As a balanced, style-neutral global fund, BNKR has a significant underweight exposure to North America (27.6pp below the benchmark weight at end-May 2023, see Exhibit 3).

Crooke highlights that there are plenty of indicators showing that the US market is overpriced and unlikely to continue its outperformance versus other regions. We believe that BNKR may be an appealing stock for investors sharing this view.

The manager highlights that the US economy is slowing, while core inflation remains above the US Federal Reserve’s 2.0% target, which will likely prompt it to further tighten its monetary policy. Also, the savings boom that has helped to support the US market is mostly exhausted. US stock prices have outpaced US earnings growth; on this basis, other regions of the world look more reasonably valued. The US market also appears unattractive when compared to real yields on US 10-year government bonds (see Exhibit 6).

BNKR's focus on cash-generating companies saw dividend income increase by 10% y-o-y in H123. Crooke has raised his dividend growth forecast to 7.0% in FY23 (from 5.0%) and expects it to beat UK inflation, which he forecasts at c 6% (versus 7.9% in May 2023 and the IMF forecasts of 6.8% for 2023 and 3.0% for 2024). This was assisted by BNKR’s recent North American portfolio repositioning (following the change in manager) to more cash-generating businesses with the ability to pay dividends even during periods of economic weakness (see details in our previous note).

Crooke believes that, although inflation continues to be persistent, corporate earnings and balance sheets are strong and many supply chain bottlenecks have been removed, assisting the consumer. That said, he still expects global earnings to decline in 2023 and thinks this expectation is likely to be shared by the broad market given current global valuation levels. He remains sceptical with respect to the broader market’s enthusiasm for US stocks on the back of hopes that the Federal Reserve has reached the peak of its interest rate tightening cycle.

BNKR focuses on companies with high cash generation, and Crooke currently favours more defensive businesses. Compared with its benchmark, the trust has a significantly lower exposure to technology stocks, which made up 15.5% of the portfolio at end-June 2023, versus 25.2% in the benchmark portfolio (at end-May 2023). The North American manager is avoiding the most popular and highly valued names like NVIDIA (1.6% of the benchmark and currently trading on a forward P/E multiple of 48.0x according to Refinitiv consensus estimates), which explains part of the underweighting and underperformance. BNKR is also overweight financial stocks, which represented 17.2% of the portfolio (versus the 13.0% combined sector weighting of banks, financial services and insurance in the benchmark), although BNKR’s exposure has recently moved away from credit cards payments towards more traditional financial institutions.

In terms of the trust’s geographical exposure, the relatively low US weighting is offset by overweight positions in China, Japan and the UK compared with global equity indices. Crooke believes that China (as well as other Asian markets) will continue to benefit from the reopening of the Chinese economy despite the challenging macroeconomic environment and should post strong 4–5% GDP growth in 2023 (the IMF forecast is 5.2%). The manager also sees Asian markets, including Japan, as providing a good counterbalance to Western economies, where interest rates are rising.

We compare BNKR’s performance to other funds in the AIC Global sector, which includes 13 funds with a broad variety of investment mandates. BNKR is style neutral with a balanced exposure to value and growth stocks (although the regional sleeves employ different investment approaches) and a bias towards larger-cap companies (see Exhibits 8 and 9). We therefore consider Alliance Trust and F&C Investment Trust its closest peers, but also view Brunner Investment Trust (despite its smaller size and higher portfolio concentration) and Witan (despite its lower bias to large caps) as relevant peers.

BNKR’s current more balanced regional exposures are yet to be fully reflected in its long-term NAV TR, which over the last 10 years was somewhat below Alliance Trust and F&C Investment Trust (though broadly in line with the average including Witan and Brunner, see Exhibit 11). This underperformance may be at least partially explained by BNKR’s high historical weighting to UK equities (poorly performing relative to US and continental Europe), which the manager has gradually reduced in recent years (see Exhibit 10). More recently, its lower US weighting versus some peers (c 39% currently versus 50–60% for Alliance Trust and F&C Investment Trust) has affected its performance, as discussed above.

BNKR is currently trading at an 11.7% discount to its NAV, which is slightly wider than the peer average. The company seized the opportunity to buy back 24.1m shares at an average discount of 9% in the six months to end-April 2023. At the same time, the trust’s dividend yield currently stands at 2.5%, slightly above sector average. BNKR has maintained moderate gearing, broadly in line with its peers.