Brunner Investment Trust – Half-year Report

THE BRUNNER INVESTMENT TRUST PLC

HALF-YEARLY FINANCIAL REPORT

For the six months ended 31 May 2022

Financial Headlines

For the six months ended 31 May 2022

• Net asset value (debt at fair value) per share fell by 1.4% (2021: +11.4%)
• Net asset value (debt at par) per share fell by 2.9% (2021: +10.6%)
• Earnings per ordinary share increased by 18.4% to 13.5p (2021: 11.4p)
• Dividends for the half year increased by 9.6% to 10.30p¹ (2021: 9.40p)
• Net asset value total return (debt at fair value) per share fell by 0.5% (2021: +12.4%)
• Net asset value total return (debt at par) per share fell by 2.0% (2021: +11.5%)
• Benchmark index total return fell by 1.3% (2021: +11.3%)
• Share price total return fell by 3.3% (2021: +18.2%)
• Discount of net asset value (debt at fair value) to share price 12.5% and an average of 9.2% over the period (2021: 9.3%, average over the period 13.4%) 

¹ First interim 5.15p, second interim 5.15p

² The benchmark applied is 70% FTSE World Ex UK Index and 30% FTSE All-Share Index.

³ Total returns are calculated with net dividends reinvested

Interim Management Report

Half-yearly report

During the past two years the dominant opening theme for the company's annual and interim reporting was, unsurprisingly, the effects of the COVID pandemic. Whilst things have started to move on, the world still seems to be grappling with the tail end of this modern global pandemic.

Nor have we been so fortunate as to have been offered the respite of a return to what we had all become accustomed to calling normality. The human cost aside, the unsettling effects of the pandemic and associated lockdowns on economies, monetary systems and markets have pushed us into a new world order where inflation is rampant, supply chain issues persist and central bank intervention is finally coming to bear, exerting downward pressure on growth. Unfortunately, inflation is not simply a number to be quoted in financial reports and news articles – it is a real-world factor that is felt by most, but ultimately has the biggest effect on those on lower incomes.

As this scenario began to take grip, shortly after our reporting of the company's 2021 financial year, we also stood aghast with much of the rest of the world as we witnessed the horror of war returning to Europe when Russian forces invaded Ukraine in March. To witness such an act in Europe unfolding in front of us in the 21^st century seems unfathomable. As with any event that is a humanitarian crisis, our thoughts are firmly with those either directly affected or with connections to those that are.

Wars tend to cause inflationary impacts and that is what we have witnessed in Europe, particularly with the impact of Russian energy supply to large parts of the continent. This exacerbated an already growing issue.

Closer to home in the UK, we have witnessed ongoing political turmoil – whilst not on the scale of some world events, it has nonetheless had an ongoing unsettling effect on the UK market.

From an investment perspective the period was dominated by a somewhat indiscriminate purge of the highest rated growth stocks from the past several years. Whilst our investment manager believes the de-rating was necessary for some stocks (in particular what the team describe as “spec-tech”, where valuations had become more about chasing the next 'shiny new thing'), many quality businesses who are still operating successfully have also seen their ratings plummet as the market indiscriminately punished all growth stocks.

This brought an end to a strong run for equity markets, where huge gains were made, but often concentrated to a handful of companies and predicated on sectors like technology that were already causing a paradigm shift in the world but that were further highlighted during the unusual circumstances of global lockdowns.

The net winners over the period have been so-called value stocks, for many years unloved by investors. This was spurred on latterly by many of these companies being in 'old-world' industries such as fossil fuels, that have benefited from the turmoil and surging commodity prices as a result of the Russia/Ukraine conflict.

Despite the gravity of these factors, as we have described before – most recently during COVID, there have been pockets of opportunity for investors who were able and/or willing to look through the near-term volatility towards the longer term. Please do take time to read the investment manager's report on pages 8 to 13 where they look at the backdrop to the period in more detail, but also describe what they have done as stockpickers to make the most of the situation.

Performance

The six months since the company's 2021 year end have been tumultuous for markets. Against that backdrop, although Brunner returned a slight fall in the Net Asset Value (NAV) of -1.4%, this was ahead in relative terms of the fall in the composite benchmark index (70% FTSE World Index Ex UK and 30% FTSE All-Share Index) of -2.7%. Amongst other factors, the investment managers' strict focus on valuation has helped to avoid some of the worst falls, as well as identifying new opportunities where companies that have previously been beyond what the managers are prepared to pay for them have come back to more reasonable valuations.

Whilst capital return tells part of the story, the company remains proud of its income paying heritage and in total return terms with income factored in (net dividends reinvested), the NAV total return was -0.5%, ahead of the -1.3% return of the benchmark.

The attribution of the absolute and relative investment performance of the portfolio is examined in the Investment Manager's Review.

Earnings

We are pleased to report further recovery in dividend payments amongst portfolio companies through the period. Aggregate earnings are now back above the pre-COVID level of 12.6p for the six months to 31 May 2019. Earnings increased by 18.4% to 13.5p per ordinary share in the six months to 31 May 2022 (2021: 11.4p). Brunner continues to have strong revenue reserves which exist to support dividend payments in times when earnings are constrained. This is a primary advantage of investment trusts in general. The board intends to continue to use these reserves as necessary to maintain a growing dividend while earnings recover to a level where the dividend is covered.

Dividends

In June the board declared a first interim dividend of 5.15p per ordinary share which is payable on 21 July 2022. The board also stated at the point of that declaration that they anticipate second and third interim dividends at a similar level and an unchanged final dividend for 2022 of 6.05p for the year ending 30 November 2022. Therefore, a second interim dividend is declared payable on 15 September 2022 to shareholders on the register on 5 August. Given the board's intention, this should give a dividend for the year of 21.5p, a 6.7% increase. The last date for DRIP elections is 19 August. The board has taken the decision to propose this increase on the back of current strong revenue forecasts. These in turn are a result of the careful and long-term management of the portfolio by the investment manager. Whilst it is not possible to judge the impact of the potential rises in interest rates, imposed by central banks to bring inflation back to lower levels, and how this will affect economic growth and company profitability, our trust's very strong revenue reserves of 24.7p per share, comfortably covering a full year's dividend payment, should allow the board to forecast this increase with confidence.

The board is aware of the current very sharp rise in the cost of living and the concern this is causing many of our shareholders – this in particular has remained front of mind when discussing and deciding on the appropriate dividend level.

At the end of the 2021 financial year, the trust proudly reached a landmark 50 years of consecutive dividend increases, keeping us in the leading pack of the Association of Investment Companies (AICs) “Dividend Heroes” list. We see 2022 as firmly continuing this tradition in the interests of our shareholders.

Discount and shareholder demand

Once again, we have seen continuing pressure on the company's share price over the period with the discount to NAV narrowing on occasion on the back of good performance and promotional activity, but more often being pushed to a wider discount than we would feel is ideal, although this has been more stable than the peer group average. An element of the sustained discount is likely the market's current aversion to the growth end of the market.

Sales (direct interaction with professional investors), marketing and PR (indirectly raising the profile of Brunner to both private and professional investors) efforts continue.

Your board remains confident that the Brunner investment philosophy is well suited to the increasing numbers of investors we see joining the share register, either as private self-directed investors through the investment platforms or underlying clients of the wealth management firms.

Investment philosophy

In recent years Brunner could have been accused of looking almost pedestrian against some peers that were heavily investing in the speculative part of technology markets in particular. We have remained steadfast through that time that we have an all-weather investment approach appropriate for a multitude of different market conditions by taking a more balanced approach to portfolio construction and having a strong focus on valuation. Whilst for many years this meant missing out on some astronomical gains being made by these speculative companies as the investment team judged their valuations to be too high, it also means missing out on the heavy losses that have been seen as those same companies have seen a reversal of their fortunes and had their valuations reduced to a more reasonable level.

We feel that this consistency of approach is really important for those shareholders who want stability coupled with growth of both capital and income in their portfolio, particularly in a period where market volatility is high and markets often swing from one approach to another.

Brunner has, and continues to, aim to consistently grow your investment over time and pay out a regular and rising dividend, targeting stable long term stock market returns whatever the economic or market background. To do this we:

• Invest in some of the world's best companies with superior business models delivering strong and consistent profitability with long-term growth potential
• Manage a diversified portfolio with exposure to most major geographic regions and industries
• Aim for growth in both capital and income, with a 50 year track record of continual dividend growth for shareholders
• Employ the expertise and scale of global asset manager AllianzGI to provide robust investment processes and oversight
• Provide all of this in a cost effective, actively managed fund.