With more than half a century of unbroken dividend hikes under its belt, Brunner (BUT) aims to provide long-term growth in capital and dividends by investing in global and UK equities with an ‘all-weather’ approach designed to adapt to different market conditions.

To achieve this resilience, co-managers Julian Bishop and Christian Schneider of Allianz Global Investors focus on structurally-growing, cash-generative companies operating in high barrier-to-entry industries and diversify the £660 million of assets portfolio across market factors including quality, growth and value.

Over time, Brunner’s strategy has proved highly rewarding for shareholders. AIC data shows Brunner is the Global sector’s fifth best 10-year share price total return performer, bested only by the likes of Baillie Gifford-steered growth trusts Scottish Mortgage (SMT) and Monks (MNKS), the tech-focused Manchester & London (MNL) and Alliance Witan (ALW), although Brunner is the second best performer on a five-year view, sitting above Alliance Witan, AVI Global (AGT) and ultra-diversified duo F&C (FCIT) and Bankers (BNKR) in the rankings.

Reassuringly balanced, Brunner is differentiated by having a higher allocation to UK equities compared to its Global sector peers; almost 25% of the book at last count versus 9.3% for F&C and a mere 5.9% for Alliance Witan due to Brunner’s composite benchmark consisting of 70% FTSE World ex-UK and 30% FTSE All-Share.

Schneider and Bishop believe owing UK equities brings diversification to the table, since the domestic stock market leans more toward the ‘old economy’ and UK valuations remain undemanding, particularly in comparison to those in the exuberantly-valued US market.

PURSUIT OF CONSISTENT PERFORMANCE

Frustratingly, against a volatile backdrop and in a cyclical rally, Brunner was unable to extend its previous five-year record of outperformance in the year to 30 November 2024, with the trust’s NAV total return of 17.9% trailing the 23.6% for the composite benchmark. However, by virtue of a strongly narrowing NAV discount, the year’s share price return was some measure ahead at 39.3%.

As chair Carolan Dobson outlined in her statement accompanying the final results (13 February), Brunner’s ‘all-weather’ approach ‘does not mean chasing some kind of absolute return or constant outperformance of the benchmark - rather it means the pursuit of consistent performance, delivered with a strong focus on risk management, finding companies with dominant market positions that the portfolio managers believe should provide steady long-term returns for shareholders.’

BALANCED APPROACH

‘It was the first year in six we didn’t outperform and I think it was because the only factor that mattered last year was growth,’ Bishop informs Shares. ‘We have plenty of growth, but we balance that with income and quality. Our balanced approach didn’t quite keep up, but January for us was a lot better. Some of what we perceive as being froth in US markets moderated slightly and European stocks fared a bit better for the first time in a long time. At a high level that helpful to us.’

But Bishop is sticking to his knitting: ‘We know what our shareholders want, which is a balanced 50 stock portfolio of good quality companies which generate cash, are sensibly valued and should compound over time, where you get a reasonable portion of the total return from the dividends. And that’s what we do.’

QUALITY STREET

Described as ‘literally a rainy day fund’ by Bishop in the promo video on the website, Brunner’s portfolio is a reassuringly diversified selection of handpicked gems from around the world. Top 20 names span tech titans such as chip manufacturer TSMC (TSM:NYSE), Google-parent Alphabet (GOOG:NASDAQ) and Microsoft (MSFT:NASDAQ) to the likes of InterContinental Hotels (IHG), Accenture (CAN:NYSE), energy giant Shell (SHEL) and UnitedHealth (UNH:NYSE).

Bishop and Schneider put a lot of emphasis on quality, which they define as businesses with sustainable competitive advantages of some sort. ‘That quite often translates into good returns on invested capital, which is how companies can create value over the long term,’ explains Bishop. ‘If you look at all the world’s great equities, they’ve combined growth and good returns on invested capital and high returns on invested capital are normally an outcome of a business being able to do something that other businesses can’t.’

Quality names called out by Bishop include major holding Microsoft. ‘Think about Office 365, which to all intents and purposes has got no competition. Office 365 is probably the world’s stickiest business, as in it is recurring revenues for Microsoft, people pay every month and I’m pretty sure when my kids have office jobs they’ll probably be using it too.’

Another high-quality holding is payment card services colossus Visa (V:NYSE), which takes a small percentage fee every time someone uses their card and crucially, leaves the credit risk with the banks. ‘Often, we find there’s some sort of network effect that acts as a barrier to entry,’ continues Bishop. ‘In Visa’s case there’s around four billion Visa cards in circulation issued by 10,000 banks and other financial institutions and accepted at millions of retailers and websites worldwide. So it is just impossible to replicate that network, essentially it’s a duopoly with Mastercard (MA:NYSE). Incredibly profitable and new entrants are virtually unthinkable.’

Also benefiting from a network effect is Brambles (BXB:ASX), the Aussie-listed pallets, crates and containers play whose main business is actually in the US. The A$28 billion cap operates the networks of wooden pallets that goods are delivered on. ‘Brambles veers towards a monopoly because it is all to do with operational efficiency and scale. It has this nicely profitable, slightly dull but decent business on the back of that.

ONE OF THE WORLD’S GREATEST BUSINESSES

A recent addition to the portfolio is Auto Trader (AUTO), the FTSE 100 automotive online marketplace Bishop believes is ‘one of the world’s greatest businesses’. Asset-light Auto Trader’s margins are an ‘extraordinary 70%. Well over 75% of all the time that people spend online looking at car websites in the UK is taken up on Auto Trader, it is the go-to destination for anyone who wants to buy a second hand car,’ explains Bishop. ‘That means that with virtually no exception, every second hand car dealer in the UK lists their inventory on Auto Trader and they pay to do so, they absolutely have to do that just to reach consumers. Really, Auto Trader is a network of buyers and sellers and businesses like this just become incredibly resistant to competition, and competition is what undermines profitability for most businesses.’

STRETCHING THE ELASTIC

When pressed on the broader market outlook for 2025, Bishop observes that the emergence of open-source Chinese AI chatbot DeepSeek has brought some focus to the eye-popping amounts of money companies are spending on artificial intelligence (AI) infrastructure.

‘Microsoft is spending $75 billion on capex in 2025,’ notes Bishop. ‘At some point as shareholders, we need to see a good return on that. One of the key things to look at in 2025 is evidence of people who develop AI models or use AI models turning a good profit. The evidence isn’t there yet.’

He also cautions that US valuations are ‘high and that implications for future returns. At the same time he notes valuations are more modest in the US and Europe.’ For us the key question, because we are always trying to balance these different factors of quality, value and growth, is how much of a premium does the US deserve? American businesses are superior to most European and UK-listed businesses at the aggregate level, the US is a better market, more profitable, and has displayed better growth in the past, but how far do you stretch that piece of elastic? If I were to bet, the next 10 years would be a lot closer between Europe and the US in terms of stock market performance and we like to have a more balanced approach.’

One attractively-valued UK-listed stock which Brunner recently purchased is automotive distributor Inchcape (INCH). ‘It is an unfashionable UK-listed name, nice double-digit free cash flow yield, pretty good returns on invested capital and an opportunity to roll-up a fragmented market’, enthuses Bishop.

OVER FIVE DECADES OF RISING DIVIDENDS

With a track record spanning more than five decades of increasing dividends, Brunner’s total dividend for 2024 will be 23.75p, an increase of 4.6% over the 2023 dividend which means the trust has now reached 53 years of consecutive dividend increases and remains in place near the top of the AIC Dividend Heroes list.

Even after paying out the proposed final dividend, Brunner’s revenue reserves will remain strong at 32.6p. ‘We’ve got well over a year in reserve and we can absolutely afford to consider increasing that again next year,’ beams Bishop. ‘That’s a record the trust is very proud of and not one we would expect to break. Not on my watch.’ 

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