A world running to stand still: Brunner Investment Trust

 

 

Extract from the latest ‘Connected Investor’ podcast from The Brunner Investment Trust. 

Inflation is rampant and central banks are reacting strongly with associated rate rises. At the same time some governments are looking at policies reflecting a very present need to try to buffer current hardships for people. Given Brunner’s focus on growth stocks that have been hit particularly hard by this high inflation and rising interest rate backdrop, will this affect the investment philosophy at all?  

 

BBC’s Joe Lynam talks to Brunner’s acting Portfolio Manager, Christian Schneider. 

 

 

Joe Lynam: What is the situation regarding risk of recession in Europe? 

 

Christian Schneider: In Germany we have pretty skyrocketing energy prices. The government’s trying to do their best to support the consumer out there, make sure there are no casualties. Clearly lower income brackets, demographic-wise, are hurt by the significant change in energy prices across the board and there needs to be support. Yet we have to see these kind of measures on a broader scale.  

 

And if we do so, it simply means government debt down the road, and government debt today means more taxes at some point down the road. We’re pushing the problem into the future, simply, and future generations, or we in the future, have to pay the bill on increased debt loads. That’s how it is, unfortunately, but it’s about currently buffering most of the hardships, which probably makes sense. 

 

‘Future generations, or we in the future, have to pay the bill on increased debt loads’

 

 

JL: Are central banks scrambling to catch up with rising prices and tame inflation? 

 

CS: Absolutely. It was catching central banks on the left foot, if I can put it that way. Last year on the back of reopening after COVID, there had been some significant bottlenecks in terms of supply chains opening up. China with still restrictive COVID policies, and less production and distribution in the country, led to further bottlenecks, and so we had this first wave of inflation. 

 

Now, this was made worse when the war started in Ukraine, not just the energy prices that have been affected, but also supply chains around the globe and food prices. Ukraine is a large food producer for the world. Many by-products are produced in Ukraine, surprisingly, so we all learned – I certainly had to learn that this is the case. So a massive inflation push.  

 

While central banks were hoping that this was evening off after COVID, it got a push and they had to accelerate the interest rate hikes. Even the European Central Bank just very recently increased interest rates by an unheard of 75 basis point step. Clearly this is going to continue until other measures are coming on the radar screen of the central banks. Taking the Federal Reserve of the US as an example, it has a dual goal of inflation and employment. 

 

‘Currently, employment is super strong, inflation is super high, and so they have to tackle inflation’

 

 

Currently, employment is super strong, inflation is super high, and so they have to tackle inflation. And I would suspect this is going to go on until unemployment starts to rise, and the Fed needs to balance the dual goal structure it has and then considers maybe slowing interest rates. And the same is probably true for most central banks around the world.  

 

JL: How is this affecting the portfolio or investment thesis, particularly given the focus on growth? 

 

CS: Yes, excellent question. It has had kind of a dual effect. One is a very technical one, and it impacted the broader market simply with rising interest rates and a rising risk premium on the back of the war in Ukraine. The discount rate for future cash flows – if you value any assets, you discount future cash flows – was going up simply in Q1 and Q2, one on inflation, secondly, on the risk premium going up. Now, that simply means that future cash flows are worth less today, and asset prices are falling.  

 

And that’s what we’ve seen. Equity markets came off significantly. The second effect is on the inner workings of single companies and how it affects their balance sheet and P&L and cash flow statement.  

 

‘We have a dual goal of paying an ever-rising income stream to our shareholders, but also to generate over time, capital growth as well’

 

And it had clearly given different effects. Energy companies, some utilities, had super strong gains in this period as they are dependent on the energy price, and rising prices led to some significant extra profits. For most other companies, though, it was an increase in input costs. And it was dependent then, on how much a company was able to raise prices and roll prices through to its customers in order to protect the P&L and balance sheet.  

 

Now we at Brunner have a very firm view on quality growth investments. We have a dual goal of paying an ever-rising income stream to our shareholders, but also to generate over time, capital growth as well. And, as such, highly profitable companies with a bit of growth: this is what we were looking for.  

 

The quality angle gave us some support, given that our companies are typically able to roll through prices given that they have pricing power – they operate in good industries with not too much competition. 

 

 And so, The Brunner Investment Trust wasn’t as terribly affected as many super growth strategies have been in this period of time, or very cyclical companies have been that are strapped for cash. Even in normal times those get into trouble if interest rates rise and they can’t roll through prices. 

 

JL: On that note let’s bring this edition of Connected Investor to a close; thank you for listening and thank you to Christian Schneider, and make sure you subscribe, so you don’t miss an episode. To find out more about Brunner, please go to www.brunner.co.uk 

 

 

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