It’s not unusual for an investment trust to trade at a slight discount to its net asset value.
For trusts with very small portfolios and for those that invest in illiquid assets, the value of their shares can sometimes slip some way below their NAV.
But neither case is applicable to the Brunner Investment Trust PLC (LON:BUT), which has very liquid £400mln-plus portfolio of large companies and an incomparable dividend record.
Yet shares in the trust, which is managed by Allianz Global Investors, are trading roughly 13% below Brunner’s net asset value per share of 927.6p.
The obvious explanation is that the trust’s lead manager since 2016, Lucy Macdonald, parted company with Allianz in the summer after 20 years.
But it is by no means the first rodeo for any of the team that replaced her. Matthew Tillett, who is now the lead manager, has been deputy manager on the trust since 2016 and has been running Allianz’s UK Opportunities strategy since 2011, not to mention having cut his teeth as an analyst for the company for several years before that.
“The investment philosophy is not changing,” Tillett says. “I’m very much the face of continuity for the trust because I am very familiar with the investment process and the specifics of the portfolio as well.”
He is backed up on the Brunner team by portfolio managers Jeremy Kent and Marcus Morris-Eyton, who both have been jointly running other Allianz funds for most of the past decade. Adding to Tillett’s expertise in income and on UK companies, Kent brings a focus on global funds and ESG investing to the team, while Morris-Eyton’s speciality is growth investing.
This reflects the mandate of the Brunner trust, which has not changed with the shift in personnel: melding income with growth.
As under Macdonald, income is not something the trust goes searching for, rather it is derived as a consequence of owning quality companies that pay out cash to shareholders as part of their capital allocation decisions.
“We’re not setting out to buy companies with high dividend yields,” says Tillett. “We look at income when we come to portfolio construction.”
The primary investment decision is picking companies ticking the boxes of quality, growth and valuation.
“Our bias to quality means we’re looking for companies with differentiated business models that we think can sustain high returns over the long term and ideally with a decent amount of growth. And we’re looking to buy them on attractive valuations where that long-term dynamics are not priced in.”
While all income funds have been hit by the effects of the coronavirus pandemic, with dividends suspended and cut.
“But the core of the portfolio is focused on what we call defensive growth, so has been resilient. If you look across the portfolio, the balance sheet risk is much lower than the average across the market, which helps a lot, so we didn’t see it as badly as the market overall.”
Indeed, an examination of the portfolio reveals no reason for the size of Brunner’s NAV discount, as it is packed with stocks that most investors would choose to own individually.
The largest holding is Microsoft, which was bought several years ago but in 2020 with its cloud software capabilities has shown its attractiveness as a long-term holding and added another 30%-plus.
There are a few other technology holdings in the portfolio, such as Taiwan Semiconductor and consulting giant Accenture, which fit into a broader theme of the digitisation of the global economy that is seen driving continued long-term growth.
Demographic changes in emerging and developed economies, such as ageing populations around the world and growing middle classes, are another broad growth theme seen as having legs, which is behind a handful of healthcare stocks in the portfolio such as Roche and United Health, and financial sector names such as St James’s Place (LON:STJ) and Hong Kong-listed AIA Group.
“Our big question this year is working out how much of the behavioural changes seen this year are temporary and how much are permanent structural changes, because the answer is quite important and has wide ramifications for the investment case for many companies. We’re investing on a five-year-plus horizon and we’re taking the view the pandemic will pass and so are looking beyond the immediate horizon.
So while Tillett has ditched Brunner’s stake in London-listed exhibitions group Informa (LON:INF) – “we don’t think the sector’s going to come back in the same way and may never get back to how it was”; it has bought shares in housebuilder Redrow (LON:RDW) – “they suspended their dividend this year and the shares were hammered but on a long-term view the UK still needs to build a lot of houses.”
That focus on long-term growth and quality is why Tillett says Brunner is able to offer an attractive yield even this year, with the trust raising its interim dividend and pledging to use its reserves to maintain payments while payouts from its portfolio recover after the coronavirus disruption.
“One of the great things about Brunner is that it can offer this yield but it’s not a burden – it’s not something that we having to stretch the portfolio’s balance sheet to try and achieve.
“The trust has been able to deliver this long-term track record of such impressive dividend growth over the very long term as we’re owning good quality companies that fundamentally have the capacity and ability to keep growing free cash flows and keep growing their dividend.
“And that they why we think we can continue with that track record, even taking into account some of the stresses that the markets and the economy have been under this year due to COVID.”