Emma Wall: Hello, and welcome to the Morningstar series, Why Should I Invest with You? I'm Emma Wall and here with me today is, Jeremy Thomas, manager of the Brunner Trust (BUT).
Hello Jeremy.
Jeremy Thomas: Hello Emma.
Wall: So I thought we'd start by talking about the U.K., had some pretty positive data around the U.K. recently, low unemployment, low inflation, and U.K. stocks make up the top five holdings in your fund. Does this mean you have high conviction in the region?
Thomas: U.K. is half the benchmark and around about half of the portfolio. One of the crucial things about the U.K. for us is it's got a high-yielding market. Brunner has a decent yield, offers a yield well above the 10-year gilt, 10-year bond and we want to try and make sure that the yield remains above that but also grows in advance for inflation. As a one-stop shop portfolio, that dividend is crucial. Brunner has a terrific record on the dividend. It's grown its dividend every year for 42 consecutive years, and the U.K. very much helps us with that. That said, things are quite attractive in the U.K right now. So, we're broadly happy to remain invested in the U.K., yes.
Wall: And those five stocks, I mean, although it maybe not indicative of the entire portfolio, are all FTSE 100 stocks. Are you seeing those opportunities for income – I know you look for growth as well – with the mega-caps or are you sort of diversifying across the range?
Thomas: A bit more just income from those, although we think there is more growth in some of those companies than perhaps there has been in the past relative to the market, but the valuations are very attractive and hence the yields are attractive. Looking more at growth tends to be in the mid and small cap in the U.K. where we are invested, but also in the overseas parts of the portfolio which is still around half of the fund.
Wall: And the second largest holding region-wise is the U.S. for you guys. Are you at all concerned by the sort of – they're not so much rumours anymore – it's everywhere, saying that there is due a correction, if not for the market to go down but at least just go sideways?
Thomas: Yes, the U.S. as an aggregate does look a little bit more expensive than the rest of the world on that basis. So we are quite cautious about that. That said, this is very much a stock-picking trust. So we don't buy markets, we buy stocks, we buy sectors. So we feel we can pick our way through that. That also said, if equities were to have a correction, it's very unlikely that the U.S. would correct in isolation of Europe and the U.K. and other parts of the world. So, we don't worry about that too much. It's very much a bottom-up stock-picking trust.
Wall: Looking at the trust as a whole, traditionally it has been slightly more volatile than its peer group, but in recent past, gearings actually helped to smooth those returns. I know gearing is quite a difficult tool to utilise successfully. For some people it only just exacerbates losses. So just wondering if you could talk about how you've managed to use that to smooth volatility?
Thomas: Yes. We don't try and be heroic with the gearing. Usually, the gearing comes down because we find more stocks to sell than we do to buy. So we're raising cash from the portfolio, paying down the debt that creates the gearing. Then when we have lots of new opportunities and ideas, then we can raise the gearing through buying stocks that we like. It's not sort of a managed number if you like. Where equities are valued now and the number of new ideas that are coming up gearing is tending to drift down and that allows us to smooth out some of that volatility in the market as you say.
Wall: And where are those opportunities coming?
Thomas: Things that we like right now or sectors that we like right now, we still like healthcare, where we've been quite involved for some time now. We're starting to some of the bids coming through, which is quite exciting. We've owned Allergan (AGN) in the portfolio, Shire (SHP), those have been terrific drivers of performance of late. One area where we have moved a lot of money is in the oil sector. Oil, universally hated by investors, particularly the large-caps, Royal Dutch Shell (RDSB) is quite a big part of the portfolio, and we've moved quite a lot of money into the oil sector through purchases, things like BG as well after its recent disappointments, and that's beginning to come through. The oil sector is performing better I think in part because the operating performance of the companies is better, but also geopolitical concerns that we're seeing today is just a little bit of icing on top. We didn't anticipate it, but it's certainly helping.
Wall: So you’re actually not so worried by what's going on in the Middle East, it's a positive?
Thomas: On a relative basis, positive to the fund. I don't think I want to sit here and pretend I thought the turmoil and strife in the Middle East was something I'm happy about.
Wall: Especially as an ex-military man.
Thomas: Yes, that's not something I'm particularly happy about, but it's not harming our performance right now.
Wall: Jeremy, thank you very much.
Thomas: Pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
