THE BRUNNER INVESTMENT TRUST PLC
HALF-YEARLY FINANCIAL REPORT
For the six months ended 31 May 2024
Financial Headlines
For the six months ended 31 May 2024
· Net asset value total return (debt at fair value) per share increased by 12.8% (2023: +1.6%)
· Net asset value total return (debt at par) per share increased by 13.0% (2023: +1.1%)
· Benchmark index total return increased by 13.9% (2023: +0.3%)
· Net asset value (debt at fair value) per share increased by 11.8% (2023: +0.7%)
· Net asset value (debt at par) per share increased by 12.0% (2023: +0.2%)
· Share price total return increased by 26.0% (2023: +2.3%)
· Earnings per ordinary share increased by 8.9% to 17.1p (2023: 15.7p)
· Dividends for the half year increased by 6.3% to 11.8p (2023: 11.1p)
· Discount of net asset value (debt at fair value) to share price 5.5% and an average of 7.6% over the period (2023: 13.0%, average over the period 10.6%)
| Revenue | Six months ended31 May 2024 | Six months ended31 May 2023 | % change | |
| Available for ordinary dividend | £7,305,000 | £6,689,000 | +9.2 | |
| Earnings per ordinary share | 17.1p | 15.7p | +8.9 | |
| Dividends per ordinary share | 11.8p1 | 11.1p | +6.3 | |
| Consumer price index | 133.9 | 131.3 | +2.0 | |
| Assets | At 31 May2024 | At 30 Nov 2023 | Capital return %change | Total return1% change |
| Net asset value per ordinary share(debt at fair value) | 1407.5p | 1258.6p | +11.8 | +12.8 |
| Net asset value per ordinary share (debt at par) | 1386.2p | 1237.2p | +12.0 | +13.0 |
| Ordinary share price | 1330.0p | 1065.0p | +24.9 | +26.0 |
| Total net assets with debt at fair value | £600,912,000 | £537,308,000 | +11.8 | |
| Total net assets with debt at par | £591,799,000 | £528,210,000 | +12.0 | |
| Performance relative to the benchmark for the six months to 31 May 2024 | ||||
| Net Asset Value with debt at fair value relative to Benchmark2 | Capital Return | Total Return3 | ||
| Change in net asset value | 11.8% | 12.8% | ||
| Change in benchmark | 12.4% | 13.9% | ||
| Percentage point performance against benchmark2 | -0.6 | -1.1 | ||
1First interim 5.90p, second interim 5.90p
2 The benchmark applied is 70% FTSE World Ex UK Index and 30% FTSE All-Share Index.
3Total returns are calculated with net dividends reinvested
Interim Management Report
Half-yearly report
As I mentioned in my Chair’s Statement in the Annual Report, 2024 was going to be the year that 64 countries plus the European Union were going to hold elections and that associated news was likely to be rampant. So far news has proved to be even more volatile than expected. The most surprising and significant outcome was the initial success of the far right in the first round of the unexpected French parliamentary election, who were then quickly surpassed by the Nouveau Front Populaire, an alliance of left-wing parties ranging from communists to centre left, in the second round. It is difficult to see how France can continue to play a leading and unifying force in driving Europe with such a fractured parliament and since Germany has its own political divergences in its parliament, who will? On the other side of the Atlantic there is a potential President with a criminal conviction and an incumbent where there are doubts about his physical competencies. At a time of wars with horrific civilian casualties, it is unclear which power block will be able to lead the world out of these.
Whilst politics can be extremely polarising and emotive, the extent to which any election result will influence the fortunes of an individual business does vary. Generally, election results do not have immediate and significant impact on a country’s domestic economy. When they do, the lesson of the brief Truss/Kwarteng era was that markets have shown they can, and will, constrain movements towards unsound economic policies.
Geopolitical tensions dominate headlines and ongoing conflicts show little sign of reaching conclusions. Defence spending is generally high and rising in the west, and national service and conscription has started to re-appear on some national political agendas as nations brace for the potential of any spread to a wider stage.
Performance
For the six months under review, global markets provided strong returns. Our composite benchmark (70% FTSE World Index Ex UK and 30% FTSE All-Share Index with net dividends reinvested), generated a return of 13.9%. Our fund returned 12.8% on a similar basis with debt at fair value.
At our year end, our discount was disappointingly wide at 15.4%, which seemed inappropriate considering the excellent investment performance and I am pleased to note that at the end of the period under review it had narrowed to 5.5% therefore producing a share price total return of 26.0%.
Top-down vs. bottom-up – a question of approach
Shareholders may well recognise these terms and may even feel they are overused. However, in the Portfolio Managers’ Report, there is a detailed look at this and how it influences the manager’s approach – in short it is much easier to predict the future behaviour and potential performance of an individual company that it is an entire economy or geographic region. For this reason, our managers concentrate staunchly on building the company’s portfolio from the ground up, finding companies that meet Brunner’s strict investment policy and crafting these into a carefully risk-controlled portfolio for the benefit of all our shareholders.
As we have noted before, aversion to too much risk (some risk is of course both necessary and helpful in investment terms) as well as a strong element of our investment philosophy and process being not overpaying, means that we may sometimes fail to participate fully in some of the astronomical rises that can occur, particularly in the technology sector, but we remain comfortable with the lower volatility that this approach generally yields over the longer term, viewing it as a more prudent approach we feel is well aligned with the values of the majority of our shareholders.
Of course, both the board and the investment manager closely monitor macroeconomic factors and geopolitics and consider and debate the potential impact on portfolio companies, but we would not necessarily expect any wholesale rework of the portfolio based on such factors. The company specific factors that influenced our performance over the period are examined in detail in the Investment Manager’s Review.
Earnings
We are pleased to report continuing recovery in dividend payments amongst portfolio companies through the period. Earnings increased by 8.9% to 17.1p per ordinary share in the six months to 31 May 2024 (2023: 15.7p). Brunner continues to have strong revenue reserves, equivalent to 1.3 x last year’s pay-out, which exist to support dividend payments in years (such as during the pandemic) when earnings were constrained. This is a primary advantage of investment trusts in general. The board intends to continue both prudently accumulating such reserves and utilising them as necessary to maintain a growing dividend. The board has no current plans to pay dividends out of capital and foresees no need to do so in the foreseeable future.
Dividends
In June, the board declared a first interim dividend of 5.90p per ordinary share which is payable on 25 July 2024. The board also stated in that declaration that it anticipates second and third interim dividends at a similar level and an unchanged final dividend for 2024 of 6.05p for the year ending 30 November 2024. Brunner’s revenue reserves of 29.6p per share (as at 30 November 2023), comfortably cover a full year’s dividend payment, allowing the board to forecast this year’s dividend with confidence. This would represent a full year’s dividend of 23.75p per ordinary share, an increase of 4.6% over the dividend for the year ended 30 November 2023. The board therefore declares a second interim dividend of 5.90p per ordinary share payable on 12 September 2024 to shareholders on the register at the close of business on 2 August 2024. The ex-dividend date is 1 August 2024. A Dividend Reinvestment Plan (DRIP) is available for this dividend and the last date for the DRIP election is 16 August 2024.
The board remains aware of current pressures in the cost of living and the concern this may be causing shareholders – this remains a key consideration when discussing and deciding on the appropriate dividend level.
At the end of the 2023 financial year, the trust proudly reached 52 years of consecutive dividend increases, keeping us in the leading pack of the Association of Investment Companies (AICs) “Dividend Heroes” list. We see 2024 as firmly continuing this tradition in the interests of our shareholders.
Discount and shareholder demand
Over the period we saw good demand for the trust’s shares, on the back of our strong and steady long-term performance.
Sales (direct interaction with professional investors), marketing and PR (indirectly raising the profile of Brunner to both private and professional investors) efforts continue and we believe that the overall makeup of the company’s share register is one of appropriate stability and diversity of investor type.
Your board remains very confident that the Brunner investment philosophy is well suited to the increasing numbers of investors we see joining the share register, either as private self-directed investors through the investment platforms or underlying clients of the wealth management firms.
Material events and transactions
In the six months ended 31 May 2024 there were no share buy backs, or share issuances, and no related party transactions, nor have there been any since the period end.
Principal Risks
Market conditions and emerging risks continue to stress test the business models of all companies. As a result, the board stays in close contact with the manager regarding any developments.
The principal risks facing the company are set out on in a table on pages 17 to 19 of the Annual Report for the year ended 30 November 2023, together with commentary on the board’s approach to mitigating the risks, under the following headings: Investment and Portfolio Risks; Business and Strategic Risks; Operational Risks; and Emerging Risks. These continue to be the principal risks facing the company.
The board oversees a detailed review of the principal risks by the audit committee at least twice a year to ensure the risk assessment is current and relevant, adjusting mitigating factors and procedures as appropriate.
Going concern
The directors have considered the company’s investment objective and capital structure both in general terms and in the context of the current macro-economic background. Having noted that the portfolio, which is constructed by the portfolio manager on a bottom-up basis, consists mainly of securities which are readily realisable, the directors have also continued to consider the risks and consequences of such external factors on the operational aspects of the company and have concluded that the company has the ability to continue in operation and meet its objectives in the foreseeable future. For this reason the directors continue to adopt the going concern basis in preparing the financial statements.
Responsibility Statement
The directors confirm to the best of their knowledge that:
· The condensed set of financial statements contained within the half-yearly financial report has been prepared in accordance with FRS 102 as set out in Notes 3 and 4, and the Accounting Standards Board’s Statement ‘Half-Yearly Financial Reports’; and
· This report includes a fair review of the information required by Disclosure and Transparency Rule 4.2.7 R of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks for the remaining six months of the financial year; and
· This report includes a fair review of the information concerning related parties’ transactions as required by the Disclosure and Transparency Rule 4.2.8 R. Note 17 of the company’s 2023 Annual Financial Report gives details of related party transactions and transactions with the AIFM. The basis for these has not changed during the six months under review.
The half-yearly financial report was approved by the board on 12 July 2024 and the above responsibility statement was signed on its behalf by the Chair.
Cost disclosure
Our own industry, investment trusts, has not been having the easiest start to 2024. Shareholders may be aware of the ongoing debate around cost disclosure for investment trusts. Whilst it is too nuanced a subject to debate properly in a paragraph in this report, we continue to monitor the situation and are supportive of various efforts to remove confusing disclosures, whilst ensuring investors have access to the pertinent data to be able to make informed investment decisions. What is of little doubt is that poorly executed disclosure regimes seem to have put a considerable dampener on the investment trust sector in general. As an important part of the UK investment landscape, we feel this needs to be addressed with urgency by the relevant regulatory authorities. We support the lobbying of the new Government by the Association of Investment Companies.
AGM
It was a pleasure to once again see so many shareholders at this year’s Annual General Meeting. In terms of the business of the meeting, as announced after the meeting, all resolutions were passed on a poll.
Co-lead Portfolio Managers Julian Bishop and Christian Schneider presented an investment update to shareholders. If you did not have chance to see the managers present at the AGM, they appear in multiple webinars and interviews on behalf of Brunner and you can see and/or listen to some of those updates on Brunner’s website. Julian and Christian have also written the Portfolio Managers’ Review for this interim report and we would encourage shareholders to read this update.
Outlook
There have been positive indicators such as inflation starting to ease and the world economy continues to grow modestly but global political uncertainty is high and has the potential to cause economic upset. As noted by our investment managers in their report, the best service we can perform for shareholders is to concentrate less on the noise of the news and predictions and instead focus on the more contained stories of the companies they uncover as potential investments for the Brunner portfolio. After the mono-dimensional markets of the past few years it is interesting to see such different types of equity investments leading this year. On the one hand, markets are being led by companies which are creating scarcely believable technologies. On the other, traditional banks – a business model which dates back centuries- are having a very strong performance. This wider market breadth is reassuring and suits Brunner’s balanced approach.
There continue to be some great growth stories amongst companies in all geographies. There are many more than the most cited Magnificent 7 technology companies and the managers highlight them in the market review section of their report.
Brunner continues to aim to provide investors with a well-diversified portfolio of global equities with the aim of steady long-term growth in capital, as well as a rising income.
Carolan Dobson
Chair