In a challenging environment for dividends, diversifying away from a high level of income concentration four years ago turned out to be the right move for the £428m Brunner Investment Trust when the coronavirus pandemic struck.
Matthew Tillett, portfolio manager at Brunner Investment Trust, recalled one of the major changes that he and former manager Lucy MacDonald made back in 2016 when he came on as deputy manager.
Tillett (pictured), who took over this year after MacDonald left in May, said: “When we looked at the income back then, the trust had a slightly larger UK weighting than a lot of the other global trusts. 
“It was very dependent on a relatively small number of UK large-cap companies in sectors like banks, oil & gas, mining and insurers.
“There were two problems with that,” he explained. “Firstly, income concentration is not particularly great, you want a bit of diversity in order to protect you if a pandemic comes along or something else unexpected.
“Secondly, a lot of those stocks were not particularly interesting then and they’re not particularly interesting now. They are kind of old economy businesses that are a bit large for their industries, not really much growth.”
So, in 2016, the managers moved the portfolio out of the UK and diversified the income away from domestic stocks, which Tillett believes has proven to be very successful.
“If you look at the top-20 income generators by stock today, it looks completely different to what it looked like four to five years ago,” he said.
Given the large swath of dividend cuts seen across some of the more cyclical industries such as energy and banking this year as a result of the pandemic, Tillett said if not for the changes the trust’s revenue for the year would be under a lot more pressure than it currently is.
However, he noted that the global investment trust is not necessarily income-focused, despite boasting a feat of maintaining dividend growth for 48 consecutive years.
“We are very much quality- and growth-orientated and we have this track record that we want to continue going forward,” he said.
The yield it does target is broadly in line with its benchmark, which is 70 per cent FTSE World ex-UK index and 30 per cent FTSE All-Share index.
When Tillett first joined, he recalled how Brunner was benchmarked against 60 per cent of the FTSE All-Share index and 40 per cent of the FTSE World ex-UK index. It has since shifted to 30 per cent FTSE All-Share and 70 per cent FTSE World ex-UK.
When asked if the benchmark could change again, Tillett said: “If you look at the trend and extrapolated that you could come to your own conclusion, but one thing I can say is that this is a very long-term focused trust.
“The Brunner family are the biggest shareholders and they are very happy with what we are doing, and we don’t sort of rush into things just because we feel that’s the popular trend.”
He continued: “Where do we go from here? I could see a scenario where the UK reduces, but equally UK equities, at the moment, are actually quite attractively valued, not just because of Brexit.
“A lot of the UK stocks we own in the portfolio have businesses all over the world. The UK market is at a 50-year low in some measures, and pretty much every investor in the world is underweight the UK.
“The contrarian in me says that’s usually a good starting point.”
Tillett admitted that whilst the trust will be uncovered on earnings this year, as most income orientated trusts are, he said he will draw down on the reserves and probably do so again next year.
“But we’ve got well over a year’s worth of revenue reserves,” he said, “so I’m not particularly concerned about it because we’re in a strong position.”
Nevertheless, Tillett said the Brunner Investment Trust is not buying stocks for dividends, and that he picks stocks on a fundamental basis looking at quality, growth and valuation into consideration.
“We only invest when we think there’s a mispricing when we consider those three together,” he explained. “We’re not trying to be a super-high-yielding trust, we’re looking to deliver a yield more or less in line with the market.”
The manager revealed some of the largest income generators for the trust are AbbVie, the US pharmaceutical company and Munich Re, a large reinsurer, both of which he described as “quite defensive” businesses.
The manager said in March the question was whether companies were going to cut dividends, but now, looking forward, the question investors are facing is how quickly dividends are going to recover in the sectors that have been impacted.
“We are assuming on a three to five-year view that the virus will eventually pass, and things will return to ‘normal’ and we make sure we understand what that ‘normal’ looks like,” said Tillett.
“We will try to have a balance across some of the sectors that are exposed, including some of those that are actually impacted at the moment, because if we just chase what is doing well at the moment, the danger is that in a year or two’s time, you end up buying things that are very expensive as a result of short term momentum.”
He said there are some holdings in the portfolio who have stopped or cut dividends this year, but they have the potential to grow and recover quite markedly as their markets recover.
“I’d say that’s the big variable really next year and the year after for dividends. How the recovery plays out will have a big impact on this huge divergence we’ve seen,” he finished.
Since 2016 when Brunner came on as deputy manager and the changes to the portfolio were made, the trust has delivered a 69.92 per cent total return compared to 80.64 per cent for the average peer in the IT Global sector.
Performance of the trust since 2016
Source: FE Analytics
Brunner has ongoing charges of 0.67 per cent and is 7 per cent geared, according to the Association of Investment Companies. As of 14 October 2020, the trust is trading at a 17.4 per cent discount to net asset value (NAV) and has a yield of 2.6 per cent.