A review of the Brunner trust this month may result in an increased overseas weighting after its 50% British exposure contributed to an underperformance against its unconstrained peers.
Despite rising appetite for overseas equity exposure among British investors, several funds in the Association of Investment Companies Global Growth sector remain tied to FTSE All-Share benchmarks. Others, such as the £270m Brunner investment trust, have made tentative steps towards less geographically constrained mandates but hold significant overweights to Britain on a total market cap basis.
Brunner changed from a 60% British and 40% overseas benchmark to an even split in March 2008, and Lucy MacDonald, the chief investment officer of global equities at RCM, part of Allianz Global Investors, says a review of the trust this month may see its overseas allocation increase further. In particular, underperformance from the fund against its unconstrained peers could prompt its board to take action.
”Europe pays decent dividends. And at the same time you’ve had quite big dividend cuts in the UK financial sector”
According to Financial Express, the trust generated a total return of 52% over the two years ending October 26, compared with 60% for the sector. MacDonald says relative performance over the period was hurt by the fund’s bias to growth, quality and large caps, as well as by its domestic focus. But while shareholders have previously supported the trust’s British bias for reasons of equity income generation, the dividend landscape is changing.
“I don’t want to pre-judge [the review] but it is something we will talk about,” says MacDonald. “Dividends are being paid elsewhere. Yields are relatively high in Asia. Even in the US, large tech companies like Cisco and Microsoft are paying a dividend. Europe pays decent dividends. And at the same time you’ve had quite big dividend cuts in the UK financial sector. So it makes the case for shifting that bit easier.” (article continues below)
Other topics likely to be discussed during the trust’s “strategy day” include a reduction in the number of stocks. “We won’t do anything too drastic because we never do – it’s always quite ’steady as she goes’,” MacDonald adds. “But if you were to look at the trust in five years’ time you would probably see a bit more overseas, fewer stocks and maybe [that it will be] a little bit further down the market cap.”
The fund is run as separate British and overseas port-folios, with a similar number of stocks in each. Jeremy Thomas took over the British portfolio in July after the departure of Mark Lovett to Ignis, while MacDonald has run the overseas mandate for about five years. MacDonald says Thomas, a deputy manager on Brunner since 2005, has made only “marginal” changes to the British portfolio.
MacDonald is also searching for companies that have “their own structural growth potential” and are thus less sensitive to the macroeconomic environment. Stocks in the theme include Allergan, which makes Botox, and Crown Castle, an owner of American mobile communications towers. The allocation also focuses on companies that can reduce their unprofitable businesses.
“Something like Sony, which we own in Japan, is a good example of that,” MacDonald says. “It’s a company that is loathed [by investors] and on a low valuation as a result. But it is doing some work to restructure from being a very low-return overall business, by outsourcing some of its loss-making activities, like manufacturing televisions. Those sorts of companies with internal self-help are of interest to us.”
Another theme is oil services, where MacDonald expects spending to return following the conclusion of BP’s Gulf of Mexico oil spill, and the $70 billion (£44 billion) capital raising by Petrobras. Elsewhere, she forecasts that liberalisation of the renminbi will become an important trend – she holds Bank of China (Hong Kong). “It’s not going to happen overnight but there is an inevitability about it,” she says.
Stephen Peters, an investment analyst at Charles Stanley, says Brunner’s performance has been disappointing and he welcomes the idea that it could move to a less-constrained, more concentrated approach. However, he says the Brunner family’s influence – it owns 28% of the trust, according to RCM – could block any significant changes and has a negative impact on liquidity, making it a less attractive investment.