Brunner Investment Trust – Final Results

Chairman's Statement

Progress made in challenging markets

In a volatile year for global stock markets, the company's Net Asset Value (NAV) per ordinary share rose by 2.7% on a net dividends reinvested basis with debt at fair value, our key performance measure. This was a little behind the composite benchmark index (70% FTSE World Ex-UK and 30% FTSE All-Share Index) which rose by 4.1% on a total return basis over the period, due to the 0.7% NAV cost of the debt restructuring and 0.7% of portfolio returns lower than the index. Encouragingly, the average discount over the year has narrowed, however, the company's share price fell by 2.8% over the year as the year end to year end discount widened.

Earnings per share

Strong underlying dividend growth from the investment portfolio contributed to an increased level of income and earnings. Earnings per share for the year rose by 7.1%, from 18.4p to 19.7p.

Debenture restructuring

The company's balance sheet was transformed and simplified during the year following the repayment and refinancing of the two very expensive long-term debentures. In January 2018 the First Debenture Finance debenture was paid off at maturity using the company's cash reserves. Subsequently, the second debenture (Fintrust) was redeemed for a total cost of £39 million (including accrued interest) which was funded by the issue of a £25 million fixed rate 30-year unsecured private placement note at a coupon of 2.84%, with the balance funded from a combination of existing assets and bank debt. Although the debt had not been due to mature until 2023, the board took the decision to repay it early in order to lock into a long term rate at more attractive pricing levels and to achieve a balance of financing sources and maturities. Following this refinancing exercise, the company's weighted average interest rate on all of its structural borrowings and preference stock is 3.0%, compared with 9.0% previously. (More details on the restructuring can be found on page 53 of the annual financial report).

Continued focus on dividends

The board recognises the importance of delivering a reliable income to investors and is proud of its status as a 'dividend hero', as defined by the Association of Investment Companies (AIC). It is proposed that a fourth and final dividend of 6.00p per share will be paid on 5 April 2019 to shareholders on the Register of Members at close of business on 1 March 2019, bringing the total payment for 2018 to 18.15p, a substantial increase of 10.0% on last year. Dividend payments for the year are fully covered by earnings per share of 19.7p, allowing a further increase in the company's revenue reserves to 26.9p per share, after the payment of the third quarterly and proposed final dividends.

If the dividend is approved, it will mark the 47th year of successive dividend increases, a clear illustration of how the investment trust structure can deliver steady above-inflation income returns even during volatile market environments.

Discount management

Further progress has been achieved in the average discount to NAV at which the company's shares trade over the year as it has narrowed from 13.1% last year to 9.2% this year.

As always, it is difficult to analyse exactly what causes discounts to change but the board and managers are pursuing a clear long-term strategy and this has generated new and sustained demand for the company's shares, particularly via execution-only investment platforms.

In summary, we have:

–     A focused global equity proposition, with a single manager and a single portfolio

–     An active PR programme to raise awareness of Brunner's investment strategy

–     A balanced stock picking approach which has demonstrated that it can deliver strong returns in a range of market environments

–     A consistent growth in dividends supported by strong revenue reserves

–     A simplified balance sheet following the debt refinancing.

Outlook

2018 was a year of heightened volatility across global markets, against a backdrop of ongoing trade tensions.  Equity returns were weaker and our manager anticipates that these market conditions, as well as weak economic momentum and a more elevated level of market volatility, will continue to prevail. On a positive note, however, increased volatility and lower company valuations should offer more attractive buying opportunities than they did a year ago. With these factors in mind, the manager's focus will continue to be on identifying those companies which can grow independently of economic cycles. 

At the time of writing, the UK Government is yet to agree a trading arrangement with the European Union following the country's scheduled departure from the EU on 29 March. This has created a heightened level of political and economic uncertainty in the UK. Although the company has 26% of its assets invested in the UK, the majority of these UK listed investments are international businesses, meaning that overall exposure to the domestic UK economy remains modest.

INCOME STATEMENT

for the year ended 30 November 2018

BALANCE SHEET

as at 30 November 2018

The proposed final dividend accrued is based on the number of shares in issue at the year end. However, the dividend payable will be based on the numbers of shares in issue on the record date and will reflect any changes in the share capital between the year end and the record date.

 All dividends disclosed in the tables above have been paid or are payable from the revenue reserves.