Brunner Investment Trust Final Results- Year Ended 30th November 2020
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The company's Net Asset Value (NAV) per ordinary share rose by 6.2% on a net dividends reinvested basis with debt at fair value, our key performance measure. This was ahead of the composite benchmark index (70% FTSE World Ex-UK and 30% FTSE All-Share Index) which rose by 5.3% on the total return basis over the period.
2020 has of course been a year of extremes, not least for humanity's collective experience of the global effects of a pandemic, the like of which has not been seen in living memory. This inevitably cast the shadow of economic upheaval and market volatility across the majority of the year.
Whilst many businesses across the globe have struggled to survive, let alone thrive, it is encouraging to see that many have fought hard to adapt their business models to a new modality. This means as we leave 2020 behind there are a surprising number of companies that continue to perform well, with clear prospects for continuing growth. There are also many companies in cyclical sectors that should also be set to perform well should there be sufficient levels of economic recovery on the back of a widespread vaccine rollout programme.
A more detailed analysis of the investment landscape through the past year is given by the manager on page 22 of the Annual Financial Report. The manager has also provided an in-depth view of the Brunner investment philosophy (see page 34) and both pieces describe how the trust maintains a balanced approach, even in the face of the kind of volatility experienced in 2020 this year.
As noted in our Half-yearly Report, May 2020 saw a change to our portfolio management arrangements. Lucy Macdonald stepped down as portfolio manager, with Matthew Tillett, who worked closely with Lucy on Brunner for a number of years, now leading the management of the portfolio supported by global equity managers Christian Schneider, a long standing member of Lucy's team, and Marcus Morris-Eyton, a long standing member of Allianz Global Investors' European Growth team. These experienced portfolio managers continue to implement Brunner's existing strategy and investment approach without change, however the renewed team also benefits from the application of new viewpoints to the approach. The team have a collegiate approach to managing the portfolio, ensuring a rounded investment rationale for all stocks held. We are happy to see a continuation of Brunner's solid portfolio performance being maintained under the new team.
Earnings per share
The earnings potential from our portfolio was always going to suffer in such an extraordinary year, when many companies have been forced to cut, suspend or cancel dividend payments.
Against this difficult background the portfolio's generation of income and earnings was constrained through 2020, with earnings per share for the year falling by 26.3%, from 21.7p to 16.0p.
Increased dividend in a difficult year
Rolling lockdowns throughout 2020 have disturbed trading at several of the companies owned in our portfolio to the extent they have had to cut or cease paying their dividends. Our portfolio's focus on quality companies with strong balance sheets has protected our company from the worst of these problems and whilst our earnings per share fell from 21.7p in 2019 to 16.0p in 2020, our dividend forecasts are currently showing some recovery for 2021. Over many years the board has bolstered our company's ability to maintain dividend payments to shareholders during difficult market times by steadily building up our revenue reserves in the good times. Accordingly, the total dividend for 2020 at 20.06p shows a small increase over 2019 in line with the board's dividend policy as described on page 12. In addition, the board intends to at least maintain this current level of dividend for 2021 unless there is a significant deterioration in global economic conditions from current expectations.
After paying the 2020 dividends (including the proposed final dividend) revenue reserves will remain very strong at 24.5p.
It is proposed that a fourth and final dividend of 6.05p per share will be paid on 2 April 2021 to shareholders on the Register of Members at close of business on 26 February 2021, bringing the total payment for 2020 to 20.06p, an increase of 0.4% on last year. As dividend payments for the year of 16.0p are not fully covered by earnings per share, we will be utilising a portion of the company's accumulated revenue reserves to allow us to make the proposed dividend payment. Such exceptional circumstances are exactly what revenue reserves are for and remain an important differentiator of the closed-end investment trust structure. It is too soon to make any kind of prediction on the outlook for dividends in the market for 2021, but we are heartened to see many dividends being reinstated, as companies get a clearer picture of their capital allocation requirements under the current stressed scenario.
The board continues to view the delivery of a reliable income stream to investors as an important factor which drives our thinking on this topic, though we carefully consider all aspects of the company's returns before recommending the proposed final dividend.
Should shareholders approve the proposed dividend, it would mean the company has provided 49 years of successive dividend increases. The company will therefore retain its status as a 'dividend hero', as defined by the Association of Investment companies (AIC), with one of the longest track records in that group.
At the time of reporting our 2019 results we noted strong demand for the company's shares, resulting in a significant narrowing of the share price discount to NAV. That trend continued into the first part of 2020 and the company was regularly trading at a low-single digit discount and even a very slight premium for a short time during the volatility experienced around the first national lockdown. Unfortunately, post the change of lead portfolio manager in May, we observed a marked drift in the discount out to unacceptably high levels. We believe this had little or no basis in the performance of the underlying portfolio and was rather a result of a 'wait and see' attitude by the market on the renewed management team.
As a result, the marketing effort to both professional investors and to direct private investors was stepped up in the final two quarters of the year. Overcoming the natural inertia of the market has proved challenging, but we are pleased to report that a significant number of investor meetings, virtual events and PR activity combined with a renewed advertising campaign has resulted in a narrowing of the discount over the final months of 2020.
The discount remains beyond where we would ideally expect it to be, however our clear long-term strategy, as detailed previously and outlined below, continues to hold true and we see no reason why we would not return to even stronger demand for the company's shares in time:
- Focused global equity proposition
- Consistent growth in dividends supported by strong revenue reserves
- Balanced stock picking approach with demonstrable returns in a range of market environments
- Efficient capital structure
- Active PR and marketing programme
Buy back of shares into treasury
There were no buybacks during the year under review, but the board is seeking renewal of shareholder approval to buy back shares for the next year. This is being sought so the company may retain a mechanism to manage the discount of share price to NAV at the margins should it be needed.
Buying back shares may help to reduce the volatility of the discount and could enhance the underlying NAV but also reduces the size of the company, which may make it less attractive to some investors. In addition to seeking renewed authority to buy back shares at the annual general meeting, we will also be asking for approval to be able to hold these shares in treasury rather than immediately cancelling them. More information is given in the Directors' Report on page 65 of the Annual Financial Report, but any shares issued or sold from treasury will be at a premium to NAV to ensure that existing shareholders benefit from the transaction.
Marketing - important but proportionate
As a closed-ended investment trust, the creation of sustained demand for the company's shares is a benefit to all shareholders and, as noted above, is of particular focus at the moment given the share price discount to NAV. As with any expense for the supply of services to the company, the board monitors the costs for marketing and PR, and the associated results, to ensure they remain appropriate.
Environmental, Social and Governance matters
Our manager has an active approach to investment. AllianzGI has a dedicated ESG research team working with the portfolio managers to integrate ESG factors into investment decisions. We firmly support our manager's view that there is value in working with companies in the portfolio on environmental, social, governance and business conduct issues. This helps unlock potential, identifies risk, creates broader societal gains and as a result delivers value to shareholders. There is more detail on the engagement with the portfolio companies on page 18 and in the investment manager's review on pages 22 to 54 of the Annual Financial Report.
As noted previously Amanda Aldridge joined the board as a non-executive director of the company with effect from 1 December 2019 and Andrew Hutton joined as a non-executive director of the company with effect from 20 April 2020. Amanda also became Chair of the Audit Committee on 1 April 2020. Ian Barlow retired as our audit committee chairman after the AGM on 1 April and, after staying on for a period of transition, retired from the Board in December 2020. The board will greatly miss Ian's input into the running of the company, and he provided excellent guidance and the benefit of his experience. We wish him well for the future.
Our managers believe we should see a strong economic recovery this year as the vaccine roll out allows lockdowns to reduce and more normal working conditions to emerge. However, there is a danger that new virus strains may delay that. Governments have played an effective roll in cushioning many of the effects of lockdowns by making large payroll and business subsidies and the provision of copious quantities of cheap credit. However, the longer many sections of the economy remain closed the more difficult it is for governments to be able to provide that cushion. So, whilst our central thesis is that economies recover this year there is an outside chance that may not be the case.
In such a scenario we feel it is more important than ever to keep a sharp focus on maintaining the balanced approach that characterises the Trust. There are some key themes that we see driving the portfolio, such as digitalisation (stretching beyond just the tech companies), global demographics and the energy transition. The manager describes these trends in more detail in the investment management report. That said, despite these strong themes proving to be drivers of growth, the manager's overriding strategy remains to find individual companies from a bottom up perspective that provide the requisite quality and growth characteristics, at sensible valuations.
We believe that the manager's strategy of carefully buying quality companies, backed by the detailed analysis carried out to ensure every investment held in the portfolio is justified, will continue to serve the company well in the future.
Annual General Meeting
In view of the current restrictions in place on travel and meetings in connection with COVID-19 the Annual General Meeting of the company to be held on Tuesday 30 March 2021 will be held as a closed meeting and shareholders will not be able to attend in person. To give you the opportunity to communicate with the board and management team you are invited to view a video presentation which will be posted on the website www.brunner.co.uk two weeks before the AGM and send any questions for the board and manager care of the company secretary at email@example.com or in writing to the registered office (further details are available on page 64 of the Annual Financial Report) and we will publish questions and answers on the website. We encourage all shareholders to exercise their votes in advance of the meeting by completing and returning the form of proxy.
17 February 2021