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How Brunner aims to tackle its discount issue with a revamped strategy

13 April 2017

Allianz head of global equities Lucy McDonald explains how the Brunner investment trust is tackling its discount and what has changed since she took over the trust.

By Rob Langston,

News editor, FE Trustnet

As one of the most consistent dividend growers in the investment trust sector the Brunner investment trust may already be familiar to many investors.

However, over the past year the trust has at times swung to large discounts and underperformed the sector.

Lucy Macdonald, head of global equities at Allianz Global Investors, took over full responsibility for managing the trust in June and has set about making a number of changes.

Macdonald took on full management responsibilities following the departure of Jeremy Thomas, who joined Sarasin & Partners towards the end of last year.

She had managed the trust alongside Thomas since 2010, but as sole manager is supported by the Allianz global research team.

Over five years to 12 April, the fund has returned 87.38 per cent compared with an 88.72 per cent return for the average IT Global trust.

Performance of trust vs sector over 5yrs

 
Source: FE Analytics

Brunner aims to increase its total return above a composite benchmark composed of 50 per cent weighted to the FTSE All Share index and 50 per cent to the FTSE All World ex UK over the long term.

However, the board recently announced changes to the investment policy and moved the benchmark to a 70/30 benchmark split in favour of the FTSE World ex UK index.

Indeed, the manager says part of the reason for underperformance of the trust compared with the FTSE World index was its weighting towards UK stocks.

Macdonald has reweighted the portfolio, with UK stocks making up around 30 per cent of the portfolio. The move was designed to reduce the trust’s dependence on yields from the UK and allow it to take advantage of income opportunities in global markets.

According to its most recent factsheet, the closed-end fund is currently yielding 2.4 per cent and was recently recognised by the Association of Investment Companies (AIC) as a ‘dividend hero’ having grown its dividend for the past 44 years.

“Dividend growth is very important and it’s important to keep that going,” Macdonald said.

The rebalancing represents the latest stage in the ongoing geographic diversification of the trust, having been 60/40 in favour of UK stocks in 2005.


Under Macdonald is a team of seven, which is backed up by an 80-strong team of global research analysts. It is also supported by its Grassroots Research division, which is able to provide on-the-ground market research.

The investment process sees an investable universe of around 2,000 stocks, whittled down to a portfolio of around 60-80 holdings. The trust currently has 76 holdings in the portfolio.

Macdonald says each member of the team focuses on a particular sector, however, investment decisions are driven by bottom-up stock research.

She said: “Every company in the portfolio has the name of one of the team on it. There are no ‘orphan’ stocks… without support.

“We’re continuing to narrow down the number of names, if there is anything below 1 per cent it’s either coming in or going out.”

Since taking over the trust it has recorded a 30.68 per cent gain compared with a return for the average IT Global trust of 31.04 per cent.

Performance of trust vs sector under Macdonald

 

Source: FE Analytics

Greater flexibility to hunt for income outside the UK has added some more international names to the portfolio.

After the UK, the next largest geography in the portfolio is a 30.1 per cent allocation to North American stocks. It has 19.5 per cent of the portfolio invested in non-UK European stocks.

North American names such as Microsoft, United Health and Apple feature among the top 20 holdings, while top European holdings include Munich Re and Roche Holdings.

On a stock level, Macdonald says the trust has recently taken some profit on companies in the portfolio that have performed well to invest in other areas.

“We reduced positions in the oil & gas sector and reinvested some of that growth names,” she said.

The firm recently added Chinese online firm Tencent, with Macdonald noting: “It’s an example of a company [that others don’t own] because it doesn’t have a yield, but because of greater flexibility can own companies that don’t have to pay a dividend.”

Another recent addition to the portfolio is London-listed marketing giant WPP. Macdonald explains that it had underperformed because of concerns that consumer staples giants like Unilever could cut their marketing spend.

However, Macdonald says concerns are overdone, particularly as firms such as Unilever – which is a WPP client – currently uses 3,000 agencies and is only proposing to halve them.


At the time of her appointment last year, Macdonald noted that the investment trust was the largest holding in her personal pension fund and intended to invest further at the fund’s wide discount.

Indeed, the trust had swung out to a discount of more than 20 per cent at times in 2016, although has made some progress on this front, and currently now stands at around 14 per cent, according to the trust’s factsheet.

Absolute discount/premium over 5yrs

 

Source: FE Analytics

Addressing discount concerns has been a priority for the board and Macdonald.

“The current discount is around 14 per cent. It’s a bit lower than it was but still too high and that’s something where focusing on,” she said.

One area of focus is costly debentures held by the company. However, both are up for renewal within the next five years and can be refinanced at more attractive rates.

“This trust has some very expensive debentures taken out in the 1980s, they’re coming up to maturity in the next year. There is one coming up in five years’ time and one coming up in January,” said the manager.

Indeed, the trust currently has built up a cash holding of 7.9 per cent. Renegotiated debentures at lower rates could provide further flexibility for the fund to invest.

Brunner was formed in 1927 as an investment vehicle for the Brunner family, descendants of Victorian British chemical industrialist John Tomlinson Brunner. The family involvement in the trust has been a concern for investors, although Macdonald says the family’s interest has reduced over years and has a greater representation of retail investors.

James Carthew, head of research at Marten & Co, says while the trust has a higher than average yield for the IT Global sector cent and long track record of increasing dividends, it may not be sufficient to attract investors.

He said: “Currently, it trades on a discount to its cum fair net asset value of 13.2 per cent. This is the widest discount of its peers barring Caledonia, which has significant exposure to private equity, and Hansa which has struggled mainly thanks to its heavy Brazilian exposure.

“Over 10 years, its net asset value performance is decidedly third quartile and over the past year it ranks middle of the pack with a 28.6 per cent return on net asset value – having benefitted from sterling weakness.

“One reason why it didn’t shoot the lights out last year is that its benchmark encourages it to be overweight UK equities relative to global equity indices.”

Carthew added: “The ideal audience for this fund is probably retail investors given it has few stand-out features and a ‘steady Eddie’ investment approach.

“Brunner needs to work harder at attracting these if it is to bring its discount under control and stem buy-backs. Alternatively, it could look to merge with a more successful rival but the poison-pill of the expensive debentures might make that difficult to achieve.”

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