Allianz Global Investors’ Jeremy Thomas has been using the recent market volatility as a buying opportunity, which has included building up the financials weighting in the Brunner Investment trust he runs.
Financials are the largest sector weighting in the portfolio at 23 per cent, including US bank Wells Fargo and UK banks Barclays and Lloyds.
Thomas says: “We have been gradually raising our financials exposure as it was underweight. It is now neutral and rising. Wells Fargo has been performing extremely well. We are invested in Barclays and Lloyds because UK banks are behind the banks in the US. But the misconduct charges are beg-inning to wane and most businesses have got stuck into a restructure. From 2017 we should see dividend growth from the banks.”
Thomas bought Barclays and Lloyds in the second half of last year, with the banks representing a combined weighting of 2.5 per cent.
Thomas co-manages the £324m trust with Lucy Macdonald. Historically, Thomas managed the UK component while Macdonald ran the international holdings in the portfolio, but they have gradually transitioned to a more holistic approach in tandem with the number of holdings being drastically reduced. A decade or so ago, before Thomas was appointed co-manager, the trust had 160 positions; it now has 80 after an initial reduction by Macdonald and further cuts over the past three years.
The trust is actively managed with a bottom-up approach and is benchmarked against the FTSE All Share and the FTSE World ex-UK indices, with 40 per cent allocated to UK companies and 60 per cent to international stocks. The managers’ aim is to grow the capital value over the long term and for dividend growth to beat inflation. Currently the dividend yield is 3 per cent, having increased consistently over 43 consecutive years.
“The portfolio has been built stock by stock and is now a more concentrated portfolio,” Thomas says. “You need to have conviction to generate performance.
Thomas describes the trust’s performance as “solid”, with returns of 35.8 per cent against the 26.9 per cent of the IT Global sector over the five years to 17 February, according to FE data. However, over one year returns have been harder to come by, with the trust losing 7.3 per cent against the 5.3 per cent fall in the sector.
Thomas credits UK data processing firm MarketCore, German medical supply company Fresenius, UK broker Tullett Prebon, US tech giant Microsoft and global infrastructure group Balfour Beatty as being positive contributors, describing them as “safe growth companies that are outperforming”.
However, exposure to the oil and gas sector, a 7 per cent weighting, has dragged on performance. Thomas says: “The whole sector has been so bad although we are now looking to increase our exposure.”
Holdings in the sector include BG Group at 1.5 per cent, Royal Dutch Shell at 2.1 per cent, BP at 1.9 per cent and EOG Resources.
Thomas says: “Royal Dutch Shell and BP have strong balance sheets and will pay dividends for a year or two. The oil majors will perform a bit better operationally, but the service stocks will be under more pressure.”
Thomas says he is also looking to play the oil theme through companies in different sectors, such as US industrial firm Flowserve, which manufactures pumps, seals and valves and is a 0.5 per cent position in the portfolio.
He says: “We are taking small market positions. What you see in the cycle is capital expenditure being cut aggressively, but ultimately the oil price will go up and demand will stabilise, and then capital will have to go back in.”
Jeremy Thomas is manager at Brunner Investment Trust