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Bankers looks to increased US exposure to address underperformance

Bankers has announced results for the year ended 31 October 2024. Over that period, the trust delivered an NAV return of 21.1%, trailing its benchmark (the FTSE World Index) by five percentage points and extending the period of underperformance out beyond 10 years (+168.7% versus +174.0%). The discount narrowed from 15.8% to 13.4%, which meant that the return to shareholders for the period was 21.4% (+148.3% over 10 years). 88,341,407 shares were bought back over the year.

The dividend was increased by 5.0% to 2.688p, the 58th successive year of annual dividend growth, the second longest record in the investment trust sector.

As the chair notes in his statement, markets were dominated by returns in the US, led once more by the Magnificent Seven technology companies. The US market rose by 30.3% in sterling terms during the year, roughly double the return from European and Japanese stocks over the same period. Both stock selection in the US and the company’s relative underweight to the US market contributed to the underperformance.

The portfolio is now managed through four regional sleeves: Pan Europe, North America, Japan and Pan Asia. The restructuring has concentrated the number of holdings to approximately 100. The allocation towards the US equity market has increased from 40% a year ago to 50% at the year end and is currently 60% at the time of writing. [This should reduce the gap between the company’s returns and its benchmark, but means the portfolio is now more exposed to a market with much higher valuations than the rest of the world].

The chair says that, as discussed in the half-year update, the dominance of the low-yielding US stocks over global markets has meant Bankers’ income mandate has put the company at some disadvantage when it comes to capturing future capital returns. Revenue reserves will be used to top up future dividends in the short to medium-term in order to give the manager the flexibility to invest in some of the lower-yielding sectors of the market. The build-up in revenue reserves over the past decade will support these efforts. The company remains committed to progressive dividend growth and for the current financial year, the board expects to recommend dividend growth of at least 2.0%, in line with the forecast for UK Consumer Price Index (CPI) inflation.

Extracts from the manager’s report

The portfolio performed in line with the market until mid-year when Asia and Japan both diverged in performance from the rest of the world. Then Europe also faded against the US following the collapse of the French government. Finally, the US market left all others behind in the run up to the presidential election. Our broadly diversified portfolio has impacted returns, in a year when the US market outperformed the rest of the world by over 10%. Stock selection was also affected by stock picking in the consumer discretionary sector and health care. Consumers were clearly struggling with higher inflation and spending patterns have changed, impacting some past winners like Nike, Burberry and Samsonite. Health care stocks suffered from a sharp derating as investors switched from defensive health care franchises to chase the AI story. The technology underweight in the portfolio was eliminated but not holding Nvidia proved painful for relative performance. The company has strong new order growth but the valuation is now assuming that doubling sales growth and elevated margins carry on for a decade ahead. This would be an unusual outcome in a historically cyclical sector. Competition is also increasing from in-house AI chips developed by the large Technology companies, such as Alphabet and Meta.

The portfolio turnover was exceptional this year and will settle back next year. We have taken advantage of market conditions and large block trades to reposition the portfolio cost effectively, as well as raising the US allocation. The reduction in stocks towards 100 holdings was completed in October and the portfolio is more concentrated into the investment team’s best ideas. The Chinese A share portfolio was significantly reduced as we failed to see meaningful government policy to revive the economy, retaining just two holdings making electrical equipment and appliances.

[We interviewed Alex Crooke, the manager, on 22 November 2024. You can watch this back here]

BNKR : Bankers looks to increased US exposure to address underperformance

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