The Brunner Investment Trust plc

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  • 09 mins 05 secs
Lucy Macdonald, Portfolio Manager, discusses the aims and objectives of the fund, the highlights of the annual results, restructuring of the debt, performance over the last year and challenges that could face the portfolio in the next few months.


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PRESENTER: Lucy Macdonald is manager of the Brunner Investment Trust and she joins me now. Lucy, what are the aims and objectives of the trust?

LUCY MACDONALD: The trust is set up to deliver income and growth. It is expected to outperform the index so it will be better than an index fund as far as capital returns but also to give an income and real income growth. And it’s been doing this for 46 years, a long track record of delivering on dividend growth, and that’s very significant and important to the underlying shareholders and to us.

PRESENTER: And where exactly does it invest?

LUCY MACDONALD: It invests globally. It’s a focused, a concentrated global equity portfolio, and it has both the income generation capability but also some interesting growth names.

PRESENTER: And when you’re putting that portfolio together, are you a stock picker or do you look at, decided which market you like the most and put most of your money there?

LUCY MACDONALD: It’s very bottom-up stock-driven. We have a lot of resource behind us, analysts around the world, and also non-financial research called Grassroots that we use, and all of that is putting together to find the best companies that are going to deliver the objectives for the trust.

PRESENTER: Now the trust has just published its annual results, what were the highlights?

LUCY MACDONALD: Well it was a very good year. We’re very pleased with it. The NAB was up 19½%. The dividend was grown in real terms so it’s in line with the objective. And the stock price was up over 30% because the discount on the shares closed, so it was a very strong year for us.

PRESENTER: And what’s the financial year for the trust?

LUCY MACDONALD: Financially it ends at the end of November.

PRESENTER: And I understand the debt structure has changed somewhat on the trust of late. Can you talk us through that and what are the implications?

LUCY MACDONALD: Yes, this is a very exciting time for the trust because there were two expensive debentures taken out at the beginning of the ‘90s which have really been a drag on the performance and the dividend paying ability of the trust. One has been redeemed in January this year and another one is under discussion to see about redeeming that early. Now, the interest rates on these two were over 9% on one and over 11 on the other, and where we are at the moment with interest rates, very low, it’s a good time to be refinancing that debt.

PRESENTER: And if you’re not having to pay between 9 and 11% interest on borrowed money what happens to the money you save?

LUCY MACDONALD: It can be used to accelerate the dividend growth on the trust and that will be the primary use of that cash which is coming back into the trust.

PRESENTER: And how do you see this restructuring of the debt benefitting the trust?

LUCY MACDONALD: It’s very significant in that it increases the opportunity to grow the dividends. And as I said the objective of the trust is both income and capital growth. So the ability to accelerate that dividend growth because of the better financing of the trust is a very significant benefit.

PRESENTER: Now, you mentioned the portfolio was up 19½% over the last 12 months, can you talk us through that in a bit more detail?

LUCY MACDONALD: Yes, it was driven mostly by stock selection – which is what we set out to do, we are a bottom-up driven-fund manager. And particularly some of the technology enabled companies within industrials and financials did very well, so companies like Agilent, Amadeus, and Equiniti. But also our stock picking within health care was good, so ADVI and United Health were significant contributors. Plus in consumer, which has been quite a mixed area overall within the market, Estée Lauder did particularly well, again helped to some extent by their ability to be selling online.

PRESENTER: You mentioned Amadeus, what does it do?

LUCY MACDONALD: It is a travel software company and it enables reservations for the airlines. And it is now moving into hotel IT software.

PRESENTER: And you mentioned the healthcare sector as well. Talk us through one of those stocks. What attracted you to it, or how’s it been delivering?

LUCY MACDONALD: The healthcare sector is one where there is a significant issue about pricing going forward, and so United Health is in a position as a pharmacy benefit manager to help reduce the cost of medical care going forward. So they are actually one of the forces for driving down the cost of healthcare going forward and they do that by their scale, by being able to buy in drugs and services at a cheaper price, and that has been really driving their growth, plus consolidation within the sector.

PRESENTER: Where are you finding value at the moment? And I ask that because I think a lot of investors don’t get a sense there’s much that’s good value for money out there.

LUCY MACDONALD: No, the market is quite bifurcated in that there are some very good growth companies that are quite expensive, and then there are some lowly valued companies that are not growing very fast. And I think in that area we are looking to see whether there are some companies which have been derated slightly unfairly, either because of their geographic area, so the UK for instance overall is looking quite cheap, are there companies within the UK which have been sold down just because of their geography? And the other area where they could have been sold down is because of technology, so any companies where there is a concern priced into the shares about their future in digital economy. So those are two areas, I think, we’re finding it’s more value.

PRESENTER: Isn’t that quite dangerous, I mean people can remember things like HMV that thought technology’s never quite going to catch up with us and it caught up with them very quickly?

LUCY MACDONALD: It is dangerous, which is why you need to have very good analytical ability, and also Grassroots which we look at, which is sort of non-financial research, to really understand what’s kind of happening on these companies. Say nine out of ten they may be correctly priced and looking cheap, but one could be just thrown out with the baby with the bath water.

PRESENTER: And how do you position the trust to combat political risk, whether it’s Donald Trump and tariffs or what’s happening with Putin in Russia at the moment?

LUCY MACDONALD: A lot of our political risk is more noise than actually having an impact on markets or economies going forward, but there are some issues which could have more significant impact. And I think tax reform is clearly one of those. So being able to benefit from the US tax reform as it came through was something that we were positioning to be able to do by having some more domestic exposure in the US and also more exposure to some financials. As far as the other things which could be significant going forward, I think the most important is one, is the potential for trade wars. And we’ve had a little skirmish with trade on steel. I think we need to see if that develops into something more significant, and in that case then we clearly have to be aware of the companies that, what their exposures are and what the risks could be. So it’s something we’re watching carefully but you can’t do much about it in advance.

PRESENTER: OK what are the other major challenges that you think could face the portfolio in the next few months?

LUCY MACDONALD: I think as far as the portfolio as a whole it’s very well spread. It’s well diversified by geography and by industry. So there is nothing specific that should be able to hit it which is going to have the most significant impact on its relative performance. For the market as a whole, I do feel that we are at a position where you’ve got quite high valuation. You’ve got quite a peak liquidity and probably peak growth because we’ve come off a very significant help from tax reform in the US. So that suggests going forward that returns in markets are probably going to be lower than they’ve been in the recent past; however, it is an environment which is quite good for stock picking. And the two particular reasons why I think that’s the case is, one, as interest rates go up there is going to be more differentiation on balance sheets and the financial strength of companies. We tend to have a positive bias towards well run and good quality companies with better balance sheets than average so that should be a help. And secondly the other differentiator is likely to be technology and its impact. And as many industries shift online, there’s going to be a big differentiation between those companies. So there’s a lot of disruption, a lot of change and the ability to really differentiate between those companies which are the winners and the losers, it will mean that will differentiate your performance going forward.

PRESENTER: Lisa McDonald, thank you.