Brunner (BUT) fund managers have apologised after UnitedHealth, the US insurer that was their second biggest holding eight months ago, crashed on fears of a Trump clampdown on the business.
Shares in UnitedHealth (UNH.O) have plunged 43% this year, prompting Julian Bishop and Christian Schneider of Allianz Global Investors to dump what had been a longstanding and profitable holding for the global investment trust.
The Minnesota-based company has had a difficult time since December when its then chief executive Brian Thompson was shot and killed by a gunman in New York. While prompting worldwide shock and sympathy, the murder highlighted growing controversy over the company’s high level of rejected insurance claims.
Meanwhile, the Trump administration’s aggressive actions to curb government spending, including healthcare, left the company exposed, leading to two profit warnings and the departure of Thompson’s successor.
While the managers reduced what had been the trust’s 4.2%, £26.9m, weighting to UnitedHealth in November, they didn’t sell out until later in the half-year to 31 May. Although other healthcare holdings also struggled, the company was the biggest drag on Brunner’s performance, offsetting some of the relative gain the “all-weather” trust made from an underweight to an expensive US stock market.
As a result, net asset value of the £611m trust fell 1.5% in the six-month period, slightly underperforming the 0.1% dip in its 70/30 world/UK equity benchmark. The shares shed 3.9%, with dividends included in the total return, as their price slipped below NAV as investor demand waned during the market turbulence caused by Trump’s tariff policies.
“Whilst we try to be long-termist and look through what appear to be short-term challenges, sometimes reacting is the right thing to do,” the managers admitted.
Expanding their analysis of UnitedHealth, Bishop and Schneider said: “The company has changed a great deal since it was first bought by Brunner. Not only has it become more complex it has also become more reliant upon government business. It is increasingly apparent that the business has become reliant on a single large customer, the US government. This is not a good thing.
“Not only does it mean that prior growth rates have been exaggerated by the acquisition of what is now clearly poor business, it also means that the company may have been over-earning at the government’s expense. Given the huge budgetary pressures faced by the US healthcare system, we fail to see how the company recovers to its prior levels of profitability. We therefore chose to move on, regretfully late. We hope to learn from our mistake.”
There was better news on investment income with Brunner’s earnings per share up 1.2% to 17.3p, amply covering 12.5p per share of dividends that were 5.9% higher than the 11.8p paid a year ago. Brunner yields 1.7% and while the shares, on a 3.5% discount, have been subdued in the past year, over three years the trust has generated a 49.8% total return that is well above the 33.3% avearge of its peer group.
The managers, who run a diversified portfolio they hope will do well in all market conditions, saw their best returns from European banks, notably Norway’s DNB and Bank of Ireland, which have been returning “huge amounts of cash” to shareholders.
They added three new positions in Tesco, South Korean car maker Kia and Amazon, the US online giant whose share price falls in the first quarter offered a “good balance between quality, value and growth”.
Two other stocks were sold: Abbvie, the US drugs company whose high valuation appeared to ignore the loss of valuable patents in the next few years, and Nestle, the UK consumer goods multinational, whose growth prospects the managers say are limited. This left Brunner with 55 holdings at the end of May.
