Brunner has announced interims covering the six months ended 31 May 2015. The Net Asset Value per ordinary share of the company increased by 2.6% on a total return basis, outperforming the benchmark (50% FTSE All-Share, 50% FTSE World Index (ex UK Sterling), by 0.4%. Earnings increased by 11.3% to 8.9p per ordinary share in the six months to 31 May 2016 (2015 – 8.0p). The board declared a first quarterly dividend of 3.30p per ordinary share which was paid on 30 June 2016. The board has now declared a second quarterly dividend of 3.30p per ordinary share. A third quarterly payment will be made in December and the final dividend will be proposed for payment in March 2017. This is the third year of quarterly dividend payments. It continues to be our intention that any dividend increases that are declared will be applied to quarterly payments rather than the final dividend with the aim of achieving a more even distribution of dividend payments across the year.
The benchmark for investing is currently 50 per cent UK equities, represented by the FTSE All-Share Index, and 50 per cent global equities, as represented by the FTSE World Index (ex UK Sterling). The portfolio manager has considerable discretion either side of these proportions and has been investing an increasing proportion in global equities, partly to diversify the income stream further, and partly because she has found more attractive growth opportunities overseas. The board is now considering reflecting this development by proposing a revision to the benchmark which would incorporate a higher proportion in global equities. It is anticipated that a formal resolution will be put to shareholders at next year’s annual general meeting if the board reaches this conclusion.
Lucy Macdonald’s report says, on a total return basis, over the period the portfolio’s NAV with debt at fair value rose 2.6%, compared to a 2.2% gain for the benchmark (50% FTSE All-Share, 50% FTSE World ex-UK). In aggregate the highest conviction holdings outperformed significantly while the impact from the largest underweights was neutral. Overall stock selection contributed positively, particularly in Industrials, Health Care and Consumer Goods, which more than offset a negative contribution from Oil & Gas, Technology and Utilities. Industry weights, which are a result of bottom-up stock picking, detracted moderately, primarily due to underweights in Consumer Goods, where many companies have become expensive both in absolute and relative terms, and Utilities, where there are limited opportunities to invest in companies that meet our growth and quality investment criteria.
The top contributor to performance was Adidas, which is benefiting from strong demand for athletic footwear and apparel, driven by more active lifestyles and the rise of “Athleisure,” casual attire designed to be worn for both exercise and everyday use. Recent results confirmed that the company is successfully executing on its strategy, helped by price increases and favourable shifts in product and channel mix. 1Q 2016 revenues rose 22% and the operating margin expanded 1.4%, leading to a 38% year-on-year increase in earnings. Adidas also raised guidance for the rest of the year. They anticipate that the strong recent momentum in sales and margins will continue.
Nielsen Holdings was another strong contributor. Nielsen’s audience analytics services encompass all media platforms and its ratings are used as the basis for setting advertising rates. The company also announced better-than-expected results, driven by digital clients and accelerating emerging markets growth. Nielsen is an attractive way to gain exposure to the strong secular growth trend in digital media consumption and benefits from high revenue growth visibility and steady margin expansion due to its long-term customer contracts and new cross-platform media services.
Leading U.S. managed care provider UnitedHealth Group, also outperformed. 1Q 2016 results continued to show well-balanced growth in both membership enrolment and the company’s health care services business Optum. UnitedHealth is a high return business with good earnings visibility and we continue to like the stock.
Mothercare was the top detractor. This is a turnaround story and continues to be a volatile stock. The UK business continues to show improvement with FY2016 like-for-like store sales +3.6% and a strong contribution from the online business which grew 15% and now accounts for 37% of UK sales. However, the international business is facing challenges due to a challenging macro environment compounded by continued currency pressures. Nonetheless, the turnaround appears to be on track and they believe over time greater visibility will result in higher valuations.
Petroceltic International also detracted. The company’s main asset was a gas field in Algeria with very meaningful development prospects. They initially purchased the shares because they were trading at a large discount to the value of the field and believed the company would either develop the field or be acquired. Unfortunately, the collapse in oil and gas prices both derailed a premium takeover offer and led to cash flow issues that ultimately resorted in the shares being delisted.
UBS also underperformed. The company has been reducing its exposure to volatile and low-return investment banking activities in order to concentrate on its wealth management business, which is experiencing some medium-term pressures due to capital markets volatility and a slowdown in client activity. However, the company is one of the best capitalised banks in Europe with a best-in-class private banking franchise and its focus on higher returns should result in a more consistent earnings profile and a higher market rating. Regulatory risk, however, remains for the entire sector.
They are extending their search for dividend income beyond the UK in order to provide greater diversification for investors
BUT : Brunner considering increasing overseas exposure