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Quality growth, growing income, discounted price

A key advantage of the investment trust structure is the opportunity to buy well-regarded funds at discounted prices. Here, we explore one of them in depth…
Last update 25 May 2021

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.

There are many justifications for buying a particular fund. We would of course always advocate planning your portfolio carefully, to ensure it meets your goals while remaining suitable for your risk appetite. But, on an individual level, the investment trust structure offers one unusual, but attractive way in: the discount.

An investment trust’s discount essentially means that investors access a collection of underlying assets at a price lower than that they could achieve buying these assets separately. A trust can attract a discount for a range of reasons, and there is no guarantee such a discount will come in. However, for a trust investing in major market listed equities, a discount can represent an opportunity for investors.

One such fund is Brunner (BUT). The £400m trust invests in global equities, primarily listed in developed markets. As of, 28 April 2021, it sits on a discount of 13.2%, the second-widest in the AIC Global sector and wider than its own five-year average discount.

Yet the trust is no fledgling performer, outperforming its FTSE composite benchmark by 24.3% over five years on a total return basis. A long-term large-scale shareholder, which had slowly been selling its position, has now fully exited the trust too, which should offer investors greater liquidity in its shares and a potential catalyst for the discount closing.

Growing trajectory

Brunner has a distinct goal: it seeks to offer real capital growth ahead of the benchmark to investors over the long term, through investments in high-quality blue-chip companies, alongside providing a reliable income via its dividend.

The trust invests across a wide range of industries, with a particular focus on companies and industries that are favourably positioned for long-term growth. However the manager, Matthew Tillett, prefers to see a track record of profitable growth before investing in a company.

The global remit of Brunner means that he is able to tap into the highest quality companies in the markets identified. He is also able to leverage the extensive resources of a truly global asset manager to get a deep understanding of these businesses prior to investing in them, investing in the ‘best ideas’ identified across the Allianz Global Investors team worldwide.

Overall, investors get access to a portfolio of steadily growing businesses and, given the trust’s current discount, at a lower price than these typically attract.

A stellar line up

The net result of the trust’s process and resources is a portfolio filled with recognisable, quality names. But while the trust’s long-term outlook means that holdings typically stay in the portfolio over an extended period, unforeseen circumstances, such as a global pandemic, can force something of a rethink.

In the last year, Matthew has had to assess which of the portfolio’s names can survive and even thrive in the aftermath of the pandemic and which will struggle for some time to come.

One of the thrivers identified by Matthew is Redrow, one of the largest housebuilders in the UK. The housing market was hit hard in the first lockdown, as sales all but ground to a halt. However, Matthew added to Brunner’s position in Redrow on the basis that it has been well-run for several years and has proved itself adaptable and resilient in the past. This assessment was proved correct when in the latter half of 2020, the housing market recovered rapidly, boosted by the shifting desires of home-owners and the government’s support for the housing market.

Another company that reflects the trust’s investment approach is luxury goods conglomerate LVMH. Matthew bought LVMH as a direct substitution for another luxury goods group Richemont, reflecting his focus on finding the very best operators in markets experiencing overall positive trends. LVMH and other luxury groups were hit hard as the work from home mantra impacted expectations for luxury fashion and high-end alcohol markets, among others.

Matthew believed that the company had been excessively punished by the market, as it is well-diversified and less dependent on hard luxury than its peers. That intuition has been proved correct, with sales recovering strongly and the company’s stock price rising by over 60% since he made his initial purchase.

One stop shop

Alongside its growth mandate, Brunner explicitly aims to provide investors with a reliable, growing income, a commitment which has contributed to the trust raising its dividend for 49 consecutive years.

This dividend track record combines with the trust’s overall focus on quality growth in the portfolio to provide investors with a compelling, rounded long-term investment package.

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