Brunner (BUT ) has slashed its ‘inappropriately’ wide discount with a rerating that saw its shares deliver a 26% first-half return after the global equity portfolio benefited from a shift away from ‘mono-dimensional markets’.

The £587m investment trust run by Allianz Global Investors’ Julian Bishop and Christian Schneider delivered a 12.8% underlying return in the six months to 31 May against a 13.9% increase in its composite benchmark, which comprises 70% FTSE World ex-UK and 30% FTSE All-Share indices.

Although growth in net asset value (NAV) fell just short of the benchmark, the performance was still good given it has no exposure to chip maker Nvidia, which soared 130% over the period to temporarily make it the world’s most valuable company.

Chair Carolan Dobson said at the end of 2023 that the discount was ‘disappointingly wide at 15.4%, which seemed inappropriate considering the excellent investment performance’. However, the gap between the share price and NAV narrowed to 5.5%, as the shares caught up with the value of its holdings.

Since the half-year end, the discount has come in further, below 4%, leaving the shares the second-best performer in the AIC Global sector with a 79% total return over five years. It ranks only behind tech-heavy Manchester & London (MNL ) which has returned nearly 82%.

Financials reborn

The Brunner managers said technology, banks and industrials – which make up two-thirds of the portfolio – continued to lead the pack. Although technology was, unsurprisingly the best performer given the relentless rise of the Magnificent Seven and Nvidia, the ‘comparatively staid’ financials sector was the second-best performing sector.

‘Traditional banks and insurers provided most of the return as interest rates remained high, credit losses remained low, and as they rerated from low levels,’ said Bishop and Schneider.

They said that banks had been a poor investment ‘for many years’ as many had their equity wiped out during the financial crisis and spent the subsequent years strengthening their balance sheets to meet regulatory demands.

‘This has been enormously costly, heavily limiting, until recently, material dividend payments,’ Bishop and Schneider said. ‘In recent times those factors have reversed.’

Bishop (pictured above at our virtual event last month) and Schneider said bank loan losses have remained under control as interest rates have risen, allowing banks to charge more for loans, while failing to pass through the equivalent increases on savings deposits.

Industrials also enjoyed a strong first half thanks to the US Inflation Reduction Act, which is delivering substantial fiscal stimulus, and the ongoing nearshoring and reshoring by companies to offset supply chain risks in an increasingly fraught geopolitical context.

The performance of industrials also ties in with the AI boom, with the managers pointing to the construction of semiconductor foundries in Arizona. Before now, all foundries were in the Far East.

‘AI data centres are huge and very energy hungry,’ they said. ‘A single data centre can easily consume 50 megawatts of electricity, the same as a small town. Electrification was already a longstanding industrial theme associated with decarbonisation. Technology has added another element.’

Bishop and Schneider said there is a shift out of the ‘mono-dimensional markets of the past few years’ that means a greater breadth of returns will be available.

‘On the one hand, markets are being led by companies which are creating scarcely believable technologies,’ they said. ‘On the other, traditional banks – a business model which dates back to the Medicis – are having a field day.’

The contributors to the fund over the period reflected this breadth, with Taiwan Semiconductor Manufacturing (TSMC) being the best performer – it makes microchips for the like of Nvidia and Apple and has ‘recently noted a reacceleration in growth, driven by orders from Nvidia et al, and a cyclical recovery elsewhere’. This sent the shares up 50% over the period.

Bank of Ireland, which was added to the portfolio this year, was also a contributor having finished its recapitalisation process and resumed dividend payments and share repurchases ‘in earnest’.

‘At the time of purchase, we estimated that the bank could return over 40% of our initial investment to shareholders over just a three-year period, assuming interest rate and credit conditions remain benign,’ the co-managers said.

However, the duo ditched Close Brothers (CBG) as it came under the scrutiny of the regulator’s review of historic motor finance commission arrangements. The managers feared a capital raise would be needed that would significantly reduce the equity value and sold out just before the private bank and wealth manager cut its dividend.

A small position in ANZ, one of Australia and New Zealand’s largest banks, was also sold to purchase Bank of Ireland which they said ‘represents superior quality and value’.

If you’d like to know more about Brunner, you can watch a recording of our June one-hour virtual event with Julian Bishop.