THE BRUNNER INVESTMENT TRUST PLC
Final Results for the year ended 30 November 2021.
The following comprises extracts from the Company's Annual Financial Report for the year ended 30 November 2021. 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
Dear Shareholder
Performance
Welcome to the Annual Report of the 2021 financial year. Stock markets in 2021 witnessed strong returns, led by the US and Europe, interspersed with bouts of volatility. Against this backdrop, we are pleased to report that the company's Net Asset Value (NAV) per ordinary share rose by 21.5% on a net dividends reinvested basis with debt at fair value, our key performance measure. This was marginally ahead of the composite benchmark index (70% FTSE World Ex-UK and 30% FTSE All-Share Index) which rose by 21.1% on a total return basis over the period.
This marks a third year of outperformance against the benchmark. It is particularly pleasing to see this outperformance in the radically different market conditions of these years.
Review of the 2021 Financial Year
This is the fourth time of writing to shareholders under the shadow of the COVID-19 pandemic, either in an Annual or Half-Year Report. It remains unclear how close we may be to the end of these conditions.
The individual human and broader social costs have been immense and the future path of the pandemic will influence global economic developments. The ability of economies to open and grow will continue to be balanced against the need to protect the vulnerable and we have seen the impact of frequent and abrupt changes to governments' responses. Certainly, the middle of 2021 had a very different outlook to either end of the year, though that was also dependent on where in the world you might be living. In 2021, economies reopened strongly earlier in the year, supported by emergency fiscal and monetary policies; supply and labour shortages started to drive a rise in inflation to levels not seen for a decade; and geopolitical instability around the world has steadily increased over the year. Despite these negative factors, recovering economic growth encouraged investors to commit record amounts of capital to flow to financial markets, supporting share price growth, if skewed somewhat towards in-favour sectors.
Brunner is about investing responsibly and sustainably in businesses across the globe with the aim of generating superior returns for the trust's shareholders. In normal times, company valuations reflect their ability to grow and be profitable. In the current market valuations have often been unduly influenced by sentiment. Sentiment can become distorted and amplified when there is a high degree of uncertainty in the future. Yet most companies have carried on doing what they have always done, adapting to the prevailing situation. Short-term sentiment driven stock markets are not wholly negative for the long-term active investor – such market volatility can prove beneficial where valuations of good quality companies become depressed on the back of wider sentiment, providing opportunity where valuation rigour is an integral part of the investment management process. There is more detail about this in the Investment Manager's Review on page 22 of the annual report.
Our manager remains alert to the ever-changing variety of extraneous factors which could have an effect in some way on the portfolio's companies and the investment process remains focused on finding sound businesses with clear business models which have the potential to provide sustainable returns for shareholders over the long term.
Whilst such an approach will inevitably mean missing out on some of the highest returns available – particularly in an environment where global stock markets have been dominated by a few titans of the technology space – it also means less exposure to the volatility that can sometimes accompany these very in-favour companies.
Environmental, Social and Governance (ESG)
The board considers that it is in shareholders' interests to be aware of and consider environmental, social and governance factors when selecting and retaining investments and believes that active stewardship is a key task of a responsible asset owner
Understanding the manager's approach to ESG and how it has been integrated within the investment process has been a specific focus for the board over the past year. We continue to take account of our performance in this area against our objectives using the manager's internal analysis and external measures and benchmarks.
We give a full and clear account of ESG considerations within this report (see page 19) and we also have a page on our website that describes the manager's Integrated ESG process in more detail. Since the beginning of 2020 we have included quarterly updated ESG measurements on our monthly factsheet, showing the rating of the Brunner portfolio on ESG risks and combined ESG risk measurements compared to the rating of the benchmark, however imperfect that comparison may still be.
One of the complications surrounding ESG is terminology. Shareholders will be aware of the considerable variety in terms used to describe the same activities and the variety of ways to measure them. The development of the EU taxonomy regulation will be a key step forward to more universal descriptions and until ESG can be more reliably measured it remains difficult to reliably compare one portfolio to another.
Earnings per Share
Over the past year we have witnessed a good income recovery with many companies returning to paying dividends after a hiatus in the prior year. This rebound meant the portfolio's generation of income and earnings recovered through 2021, with earnings per share for the year rising by 27.5%, from 16.0p to 20.4p. This has put Brunner in the strong position this year to once again be able to cover our dividend payment to shareholders.
Dividend
The proposed final dividend of 6.05p, if approved by shareholders, will be paid on 1 April 2022 to shareholders on the register on 25 February 2022. In line with board's dividend policy, which is outlined on page 14 of the annual report, the total dividend for 2021, including the proposed final dividend will be 20.15p. This represents an increase over the 2020 dividend which was 20.06p and means Brunner has now reached a landmark 50 years of consecutive dividend increases, maintaining its place as one of the AIC's “Dividend Heroes”.
Revenue reserves will remain strong at 24.7p after the payment of the proposed final dividend.
Board Succession
The board is continuing with its cycle of recruitment as existing directors reach the point of retirement from the board. The next planned change will be the recruitment of a new director to succeed Peter Maynard during 2022. Peter, the Senior Independent Director, has given long service, invaluable challenge and input and guidance to the board, staying slightly beyond his planned retirement date to provide additional continuity on the board through the ongoing pandemic. We thank Peter for his service and counsel and wish him well for the future after his retirement later in the year.
Marketing
Promoting Brunner to as wide an audience as possible remains a priority and the board supports the manager in sales and marketing efforts to further that aim. The trust's balanced nature means it is a long-term holding that can, in our view, form the cornerstone of an investor's diversified portfolio. Attracting more investors, particularly individual investors, generally has the effect of improving liquidity of the trust's shares and stabilising the share register. We were pleased that during the recent exit of a large institutional shareholder which was completed in the middle of the financial year, most shares were absorbed by demand from the investment platforms and many smaller wealth managers. This demand, helped by our marketing efforts, meant we were able to manage that exit without the need for share buybacks which would have decreased the size of the trust and increased the total expenses ratio. Maintaining the size of the trust and the liquidity of the shares is an important investment consideration.
Outlook
There is considerable concern that we may be at a turning point in global stock markets. There has been over a decade of falling interest rates which at their low reached a level where many central banks charged an investor for holding money with them. This is unsustainable unless economies never grow again and as we are now seeing positive global economic growth, and some sharp and possibly sustained rises in inflation, central banks are starting to indicate increasing interest rates and a wind down or reversal of their quantitative easing programmes. This is a big change in the background for markets and it remains to be seen how peacefully such a change can be implemented. The way modern stock markets are structured, with short term activity dominating trading, and geared strategies – often focused on quite narrow areas – offering the prospect of sharp volatile stock market price movements often unrelated to underlying company profit fundamentals. This will provide opportunities for the patient, thoughtful investor but it is likely to be bumpy.
In addition, geopolitical tensions with China and Russia may continue to have a significant impact on market sentiment and particularly on supply chains and energy prices.
For Brunner, we expect to continue to follow the same balanced strategy and approach, investing in well-run companies with high-quality business models but only at a fair price. Brunner remains a long-term balanced equity investment, aiming to provide investors with steady growth in capital as well as a rising income stream.
It is difficult to know whether stock markets will be higher or lower this time next year, but the board have confidence that many of the companies in our portfolio will continue to make good business progress.
Annual General Meeting
We are hoping that the Annual General Meeting this year, which is to be held at 10.30 a.m. on Wednesday 30 March 2022, can be an open meeting at which shareholders can receive a presentation from the managers before the formal business takes place. We would be delighted to meet with all those shareholders who are able to attend, however, the continuing impact of the COVID-19 pandemic remains uncertain and there is still a risk of further variants bringing about the need for restrictions to be re-introduced. To keep this event as inclusive as possible we would encourage shareholders who wish to attend to take precautions such as wearing face coverings for the protection of others from the spread of viruses. We intend to have only light refreshments before the meeting and will provide a status update on the AGM arrangements on the website www.brunner.co.uk in the week before the meeting is due to take place.
Shareholders can send any questions to be answered at the AGM by the board and manager care of the company secretary at investment-trusts@allianzgi.com or in writing to the registered office (further details are available on page 60 of the annual report) and we will publish questions and answers on the website after the meeting. We encourage all shareholders to exercise their votes in advance of the meeting by completing and returning the form of proxy.
Carolan Dobson
Chairman
15 February 2022