Welcome to the latest update for The Brunner Investment Trust PLC from the Trust’s portfolio manager, Lucy Macdonald.
Global equities have rallied over the first quarter of 2017, buoyed by signs of strengthening growth and optimism over company earnings, although this rally has faded towards the quarter end.
US equities posted their strongest quarterly gain in four years, and shares were bolstered by signs of improving economic momentum, optimism over company earnings, and by hopes that the new administration would introduce tax and regulatory reform. However, this stalled towards the quarter-end amid concerns about President Trump’s ability to implement his election promises, after legislation to replace Obamacare failed to gather sufficient support in Congress. As widely expected, in March the Federal Reserve raised interest rates by 25 basis points to 1.0%.
European equities outperformed, reaching 15-month highs amid economic news indicating that growth in the euro zone was picking up, driven by strong activity in both Germany and France. However, the European Central Bank kept both interest rates and the size of its monthly bond purchases unchanged.
UK equities also advanced, but underperformed those in Continental Europe. The Consumer Price Index rose to 2.3% in February, its highest level since 2013, and there were signs rising inflation was starting to impact consumer spending. The Bank of England kept interest rates on hold and the Prime Minister triggered Article 50, the start of the two-year process to leave the EU.
In Asia, Chinese equities surged after underperforming in 2016, helped by evidence that the recovery in economic growth was on a solid footing. New exports orders expanded the most since September 2014, buying activity increased the most since July 2014 and business confidence hit a 21-month high. On the other hand, Japanese equities ended the quarter with marginal losses, lagging other regions as exporters were hurt by a stronger Japanese yen.
Emerging market equities delivered robust returns over the quarter, outperforming their more developed counterparts amid signs of stronger global growth and a weaker US dollar, which weakened as the Federal Reserve’s forecasts for the future path of interest rates were more dovish than expected.
The Trust’s NAV returned 1.7%, outperforming the benchmark return of 1.1%. Stock selection in Industrials and Health Care had the most positive impact to performance with Tyman and Roche Holdings among the top contributors. Tyman’s results for the year were strong, with margins in both the US and Europe ahead of expectations. This margin momentum looks set to continue as the US footprint project should deliver more savings and synergies. Management continues to benefit from self-help initiatives and plans to manage higher cost inflation through pricing, effective purchasing and cost reductions. The company has made significant progress and we expect continued progress over the next few years.
Roche Holdings also contributed positively after announcing that the US Food and Drug Administration approved Ocrevus as the first and only medicine for both relapsing and primary progressive forms of multiple sclerosis. We view Roche as a lower risk growth story compared to its large-cap pharmaceutical peers.
Walgreens Boots detracted on concerns around the closure of the Rite Aid acquisition, which remains pending on the government’s authorisation. This deal would represent good synergy opportunities for the company, which would be another driver to help drive above-market growth among others, including cost savings and efficiency gains, margin enhancement opportunities around beauty, and procurement efficiencies.
During the period, we sold Total as part of a small reduction in the exposure to the oil and gas sector, retaining other higher conviction names such as BP and Shell. We also sold our position in ING after a strong performance of the stock.
The global economic indicators have continued to improve over the last few months. This represents a favourable sign for equity investments. However, political risks in the US and Europe persist and attractive equity valuations become more difficult to find in several regions.
Low interest rates and the expansionary monetary policy of the Federal Reserve have helped to push US equity valuations to a comparatively high level. This will reduce the return potential and might result in higher volatility. For now, equity prices are supported by healthy macro data, particularly for the labour market. Still, the economic cycle has reached a mature stage, which suggests that a slowdown is more likely
In Europe, favourable economic data have helped to keep equities largely insulated against political uncertainties and bond market volatility, but further upside surprises are becoming increasingly unlikely. While equity valuations in Europe are roughly in line with the long-term average, there is still attraction in individual countries.
The environment in China is now showing more stability and highend spending should continue to grow at a healthy pace in 2017 as the country moves quickly toward consumption-driven economy. We believe that luxury brands with the right product positioning will be able to benefit from this trend.
In Healthcare, concerns about US regulation on drugs are now dissipated and our exposure in the managed care and specific therapeutic areas should also be rewarded, benefiting companies such as Celgene, which was added to the portfolio this month.
Our approach of investing in high return, reasonably valued, growth companies that can consistently grow earnings has added value to our clients’ portfolios over the long-term, and we believe it will continue to do so in the current low-return market environment.
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