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Kepler Trust Intelligence
Updated 15 Mar 2022
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Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Brunner. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

In his magnum opus, ‘The Intelligent Investor’, Benjamin Graham wrote that defensive investors should look to hold shares in companies that have, amongst other things, paid a consistent dividend for 20 consecutive years.

That book was published in 1949 and many of its other precepts, such as its critique of firms obfuscating poor performance with dodgy accounting, remain as pertinent today as they were back then.

It’s trickier to reconcile today’s markets with that dividend claim though. Some of the best performing companies of the past decade either pay relatively low dividends or, in the case of Facebook and Amazon, haven’t paid them at all. In contrast, many dividend stalwarts, whether that be tobacco companies or the oil majors, have produced tepid returns over the same period.

Growth with dividends

For lots of investors this is all rather frustrating. It means feeling as though capital growth has to come at the expense of receiving income. Moreover, many of the firms providing that capital growth are often trading at very high valuations, something investors may not feel completely comfortable with.

That’s not to mention that dividends are often a necessity for lots of us. Supplementing a pension or your regular income, for instance, can easily be a necessity and that can be hard to achieve if the shares you hold don’t pay any dividends.
Fortunately there are investment trusts that can help support investors navigate these problems. Brunner (BUT), managed by Allianz Global Investors, aims to provide investors with a rising dividend and capital growth.

The investment trust occupies a happy middle-ground, with holdings in both higher quality and growth stocks, and a keen focus on valuation. This approach has provided strong returns historically and it has been able to pay out a rising dividend for 50 consecutive years.

Mixing styles

The portfolio is managed by Matthew Tillett, who is supported by deputy portfolio managers Christian Schneider and Marcus Morris-Eyton. The trio place a great deal of emphasis on valuations and will only buy higher valued shares if they believe the growth prospects justify doing so.

The investment trust also has a broad remit. It invests in global equities, albeit with a greater weighting to the UK than some peers, having a composite benchmark including global and UK indices. It can invest across the market cap spectrum, although the core focus is on large cap stocks.

The result of this is a high conviction portfolio, but also one that is broadly diversified, holding a mix of firms that investors are unlikely to find in a single fund elsewhere.

That’s true in terms of both the geographic location and size of the companies held, but also in terms of style. Even though the portfolio has a lower price-to-earnings valuation than the wider market for global equities, it contains a number of exciting growth stocks.

From Silicon Valley to Lithuanian job ads

Some of the trust’s largest investments exemplify this. Microsoft is currently the largest holding in the portfolio. Although by many metrics an ‘expensive’ stock, the BUT team believe the tech conglomerate continues to justify its share price based on future growth prospects.

On the other hand, German reinsurance group Munich Re is also a part of the portfolio’s top 20 holdings. Unlike Microsoft it’s priced more in the value range of the market but it also has a strong track record of steady growth, paying out consistent dividends to shareholders.

Both of these firms are large - Microsoft has a market cap of over $2trn at the time of writing and Munich Re’s is close to €40bn. This is not entirely reflective of the wider portfolio, which, as noted, does contain several smaller companies.

One example of this is Baltic Classifieds, a London-listed company which operates several websites that allow users to sell cars and property, or advertise jobs, across the three Baltic states. The company held its IPO last year and is trading at a market capitalization of under £1bn at the time of writing.

Plenty of cover

Some of the companies in the BUT portfolio do have a strong track record of paying dividends. US pharmaceuticals business AbbVie sits in the top 20 holdings alongside Munich Re. Like the German company, it has a relatively high yield at the time of writing compared to the wider market and would also sit on the value side of the portfolio.

Income is not always guaranteed though, particularly from some of the more growth-oriented businesses in the portfolio. Still, BUT takes advantage of its closed-ended structure to support payments, even in periods where there may be dips in dividend payouts from its portfolio.

The investment trust has built up robust revenue reserves over time, which has enabled it to pay out increasing dividends over consecutive years, even during rough periods in the market and the wider economy. This was on display during 2020 when many of the trust’s holdings slashed dividends or scrapped them entirely because of the pandemic.

Despite that, BUT still increased its dividend relative to the prior year by dipping into those revenue reserves. This was not the first time the investment trust has done that and it’s something which has helped it become one of a small number of trusts to have paid a rising dividend for over 20 consecutive years. 2021 also saw a powerful recovery in dividend payments, allowing the trust to increase the dividend again and have it fully covered by underlying earnings.

Such consistency over an extended period of time, combined with a strong track record of capital growth, should go to show investors that growth and dividends needn’t be a binary choice. Investors can get both with a trust like BUT.

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