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Since the onset of the pandemic, growth and value have rotated in and out of favour. Debate continues to rage about whether interest rates should rise, and whether nascent inflation is here to stay, and this changeability is unlikely to settle soon. Here, we discuss how Brunner’s stock-focused approach has led to strong performance over the tumultuous last twelve months…
Since the onset of the Covid-19 pandemic in March 2019, the assumptions that have driven markets for the last decade have been repeatedly turned on their heads.
For almost all of the post-recession period, growth stocks like the FAANGs fuelled global markets to reach giddying new heights, while ‘value’ stocks languished on the other side of an ever-widening valuation gap.
However, the last two years have been far from ‘normal’ societally, economically or from a market perspective, as populations around the world have experienced successive wide-ranging lockdowns. One of the impacts these lockdowns have had is to upset the apple cart for growth investors; with value stocks surging ahead in the latter half of 2020 and into 2021 as lockdowns were lifted and economies reopened. That trend itself has since reversed too and global markets are now painting a much more nuanced picture, with neither ‘style’ dominating. With the outlook for inflation and interest rates far from clear, this shifting landscape is unlikely to settle for some time to come.
This complicated context could lead to frustration for investors. Increasingly over the last ten years, fund managers have defined themselves by their style, especially as markets have been so driven by this factor. But if these styles are going to fall in and out of favour, it is hard to know where to look for returns without having to anticipate these rotations.
A precise instrument
This is where a stock-focused approach, which doesn’t favour either style at any one time, can come into its own. This has certainly been true for the team behind Brunner (BUT) over the last year. It is the fifth-strongest performing trust in the AIC Global sector over the 12 months to 26 November 2021, returning 20.5% - ahead of the FTSE All World Index return of 20.3% over the same period.
This success has been achieved in part due to the team’s even handed approach to the question of ‘growth versus value’. The team look for high quality, established, profitable companies across a range of sectors both cyclical and defensive. They like growth businesses and will invest in them provided the valuation stacks up. Similarly, they reject the notion that value stocks are inherently low quality. Whilst this may be true in some cases, the team find many examples where it is not.
The team look for high-quality, established, profitable companies across a range of sectors both cyclical and defensive. They like growth businesses and will invest in them provided the valuation stacks up. Similarly, they reject the notion that value stocks are inherently low quality. Whilst this may be true in some cases, the team find many examples where it is not.
In practice, this means that the team looks for a diverse range of businesses across a breadth of sectors, seeking to identify those that they believe exhibit sustainable growth and profitability on attractive valuations.
The healthcare sector exemplifies this approach – it is the trust’s largest absolute and relative sector allocation. They like the long-term, secular drivers of growth which support the sector – ageing populations, the rising middle class in many parts of the world and a consequent demand for better healthcare provision, and the nature of businesses within it, which often have high barriers to entry and sticky customer relationships.
Some parts of the sector have benefitted from the COVID-19 pandemic, such as vaccine producers and diagnostics providers, and the team has found opportunities here where they believe valuations are not too stretched.
On the other hand, other areas of healthcare have been punished by markets due to the impact of the pandemic on their operations, such as providers offering elective surgeries. The team believes that there are strong long-term growth drivers for these businesses and that they should experience a recovery as economies and societies normalise.
The allocation to healthcare demonstrates the relatively style-agnostic approach that has driven much of the trust’s performance in the past year.
The team’s flexibility means that Brunner had exposure to some of the cyclical stocks that benefitted from the rotation away from growth earlier in the year. However, the managers emphasise that these companies are expected to deliver strong, secular growth through the cycle, beyond this rotational trend.
An example is Assa Abloy, a Swedish conglomerate that is a world leader in entranceway security such as locks and gates. It has spent several years acquiring established household names such as Yale and Chubb. It has high profitability and supplies the residential and commercial building trades – both of which were initially hit when the uncertainty of early lockdowns caused the markets to draw a pessimistic outlook for the sector but have since recovered on strong demand. The team expects the sector to maintain strong growth through the cycle.
Similarly, travel and leisure has experienced mixed fortunes over the last eighteen months. The initial lockdowns suggested that travel was off the cards for some time to come and businesses in the sector such as Booking.com suffered deep price cuts as a result. However, domestic travel has since recovered and flourished in many economies, with the company’s share price surging as the vaccine outlook became more positive in the latter half of 2020. As global travel continues to open up, the team expects the company to continue to experience strong growth.
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