THE BRUNNER INVESTMENT TRUST PLC
Final Results for the year ended 30 November 2019.
The following comprises extracts from the Company's Annual Financial Report for the year ended 30 November 2019. The full annual financial report is being made available to be viewed on or downloaded from the company's website at www.brunner.co.uk. Copies will be posted to shareholders shortly.
MANAGEMENT REPORT
Chairman's Statement
Performance
The company's Net Asset Value (NAV) per ordinary share rose by 13.2% 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 12.6% on a total return basis over the period.
Global equity markets were volatile through 2019 and this produced opportunities for long term stock pickers as individual share prices often got temporarily mispriced during these bouts of market instability.
A full investment review which goes into more detail can be found on page 29 of the annual financial report.
We were delighted that, in response to Brunner's strong long-term performance and strategic focus, the trust was a shortlisted finalist in the highly competitive 'Overseas' category of the Investment Week – Investment Company of the Year Awards. It is encouraging to see Brunner recognised in this way.
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 10.1%, from 19.7p to 21.7p.
Benefits from improved costs of debt
When I wrote to you last year I described how the company's balance sheet had been transformed and simplified during the year following the repayment and refinancing of expensive long-term debentures. The weighted average interest rate on all structural borrowings and preference stock is now 3% compared to 9% previously and the current level of structural debt and preference stock is 7.2% of net assets.
Continued focus on dividends
The continuing dividend growth in the investment portfolio, combined with lower annual cost of debt and strong revenue reserves means the company is again in a strong position to pay an above inflation increase in dividends over the previous year.
It is proposed that a fourth and final dividend of 6.0p per share will be paid on 3 April 2020 to shareholders on the Register of Members at close of business on 28 February 2020, bringing the total payment for 2019 to 19.98p, an increase of 10.1% on last year. Dividend payments for the year are fully covered by earnings per share of 21.7p, allowing a further increase in the company's revenue reserves to 28.6p per share, after the payment of the third quarterly and proposed final dividends.
This is the second successive year of the company increasing dividends by 10% and dividend levels have now reflected the benefits of the lower debt costs. Dividend growth in future years will broadly reflect underlying growth in earnings. However underlying portfolio earnings growth has been strong and revenue reserves at 28.6p per share cover the annual dividend 1.4 times, which is a considerable position of strength for future years. The board continues to view the delivery of a reliable income stream to investors as an important factor.
Should shareholders approve the proposed dividend, it would push the company to 48 years of successive dividend increases. The company retains its status as a 'dividend hero', as defined by the Association of Investment companies (AIC).
Discount management
I am pleased to report that demand for your company's shares has been strong, particularly in the latter portion of 2019. This has led to a significant narrowing of the share price discount to NAV, ending 2019 at just under 6%. As a result, the average discount to NAV at which the company's shares trade over the year has narrowed once more from 9.2% last year to 8.6% this year. We believe that we are seeing the fruits of our pursuit of a clear long-term strategy as detailed at the 2018 year end:
- 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 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 64 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.
Spreading the message
The board recognises the importance of a coherent programme of activity aimed at stimulating demand in the market for the company's shares. Through the year, Brunner has continued its marketing and communications programme that includes targeted advertising and proactive contact with national and trade journalists. As a closed-ended investment trust, the creation of sustained demand for the company's shares is a benefit to all shareholders. 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 – responsible investment
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 19 of the annual financial report and in the investment manager's review on pages 36 to 38 of the annual financial report.
Board succession
As I noted in the last annual report, whilst maintaining the tenure of experienced long-standing directors has facilitated a smooth transition during a period of strategy development and implementation for the company over the past few years, we are undertaking a process of recruitment aimed at refreshing the composition of the board as director retirements start to take place. That process began this year and we were happy to announce the appointment of Amanda Aldridge as a non-executive director of the company with effect from 1 December 2019 and of Andrew Hutton as a non-executive director of the company with effect from 20 April 2020. Amanda will become Chair of the Audit Committee on 1 April 2020. I am looking forward to working with both Amanda and Andrew on the Brunner board.
Vivian Bazalgette retired from the board on 22 November 2019 – the board will greatly miss Vivian who made an invaluable contribution to the company, providing excellent counsel and guidance as a colleague and as Senior Independent Director. We wish him well for the future.
Ian Barlow will retire as our audit committee chairman after the AGM on 1 April and will be retiring from the Board in late 2020. We remain committed to keeping shareholders fully informed as we progress the process of refreshing the board whilst ensuring a balance of skills and relevant experience is maintained for the benefit of the company and its shareholders.
Outlook
We had thought as some of the uncertainty that plagued global markets through 2019 falls away that economic and corporate growth would pick up or at least there would be a clearer outlook. This would allow companies to plan better for the future and this increased confidence could spur improved corporate spending and growth. However, at the time of writing it is impossible to know whether the current outbreak of the Coronavirus will remain a human tragedy or also develop into a significant economic problem as global trade becomes disrupted. Also, the eventual outcome of the Brexit negotiations remains far from clear.
Equity markets are still attractively valued when compared to bond markets. 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. At a time of rapid technological change, it remains particularly important for the portfolio to maintain a sharp focus on stocks with the potential for structural growth, providing good cash returns for shareholders and which have strong management teams guiding them. We also remain committed to our view that working with portfolio companies on environmental, social, governance and business conduct issues should remain a key factor of the investment process.
Annual General Meeting
The Annual General Meeting will be held at Trinity House, Trinity Square, Tower Hill, London, EC3N 4DH on Wednesday 1 April 2020 at 12 noon, and on behalf of the board, I look forward to meeting those shareholders who are able to attend.
Carolan Dobson – Chairman