Performance, Commentary & Portfolio

Fund Manager’s Review

Dear Fellow Shareholder,

The Net Asset Value (NAV) total return for October was -1.17%, versus 1.11% from the benchmark index.

US electioneering dominated the news in October. At the time of writing, President Trump had just won and the Republicans look to have control of both the House and the Senate.

In his first term Trump slashed US corporation tax and he intends to do so again. His rhetoric has also emphasised tariffs and other protectionist measures, something most mainstream economists caution against. Broadly, his policies appear domestically stimulative but inflationary. With the US already running a large budget deficit, we can’t help but wonder what the implications of these policies are for treasuries and the dollar. As Liz Truss found out to her cost, the bond market can be a ruthless judge of uncosted policies.

Despite the Republicans’ reputation as the ‘party of business’ the recent history of the stock market reveals no obvious correlation between the performance of the S&P 500 and the political persuasion of the President. Over the full Presidential cycle, from election day to election day, the S&P 500 gained 57% under President Trump’s first term and 70% under President Biden.

Obama came to power shortly after the financial crisis and oversaw a 42% rally in his first term and a 50% rally in his second. Republican George W Bush’s tenure from 2001-2009 saw the dotcom crash, 9/11 and the zenith of the financial crisis. The S&P fell 21% during his first term and 11% during his second. In financial terms, Presidents are often a hostage of circumstance.

During October there was a pronounced underperformance of European markets versus the US. In Sterling terms, the MSCI Europe fell 1.8% and the UK FTSE All Share fell a similar amount whereas the American S&P 500 rose 3.4%. This divergence continues the broad year to date pattern. For any trust with a dividend requirement, such as Brunner, this is unhelpful for relative performance. The dividend yield in the UK is now almost 4% versus just over 1% in the US on an after-tax basis. This is the widest spread in living memory. Partially the explanation has to do with the composition of the markets and the method of cash return. The US market is skewed to massive low or zero yielding technology companies. Additionally, American companies which do chose to return cash to shareholders often prefer to do so via buybacks (effectively the same as reinvested dividends) which theoretically show up as capital gains, not income. But even considering these factors the difference is unusually stark. We frequently comment that the US and UK markets are very, very different beasts. We like the diversification that comes from owning both as per our composite benchmark of 70% FTSE World ex-UK Index and 30 % FTSE All Share Index.

During the month, TSMC (Taiwan Semiconductor) was the largest positive contributor to performance. TSMC is a ‘foundry’ who manufacture chips on behalf of customers such as Apple and Nvidia. The chip in the latest iPhone has 19bn transistors, each just a few atoms across, in an area approximately 1cm square. TSMC have emerged as the only company capable of making such extraordinarily complex chips at scale. Their recent financial results suggest that enviable competitive position is being more fully exploited. Their Q3 sales were up 36% in dollars and operating margins expanded 5.8% to 47.5%, both well ahead of expectations.

Payments company Visa also fared well. In the quarter to the end of September, their revenues grew 12% and earnings per share grew 17%. These results are typical of Visa, who grind out consistent, profitable growth with almost metronomic precision. As a reminder, Visa take a very small fee every time they process a transaction on their network. Growth is driven by consumer expenditures, inflation and the shift from cash to card payments. It remains one of the trust’s largest holdings.

On the negative side of the ledger, Dutch company ASML warned that profits in the coming year would be below expectations. ASML makes the lithography machines used by TSMC in the semiconductor manufacturing process, so it is unusual to see such divergent performance between the two stocks. ASML’s tools cost as much as $300m. Sales therefore tend to be lumpy and are dependent upon cyclical conditions. Whilst TSMC are flourishing, many of ASML’s other customers, such as Intel, are not. Given the critical importance of ASML’s machines to the production of cuttingedge semi-conductors we continue to believe ASML will grow a great deal between now and the end of the decade. However, the precise timing of sales is and always has been unpredictable, meaning the shares can be a bumpy ride at times.

Other detractors include the relative impact of not holding tech giant Nvidia, which bounced back after a few soft months to finish near fresh highs. Our holding in Bank of Ireland also retreated from the highs seen towards the end of September.

There were no trades during the month.

Yours sincerely

Julian Bishop & Christian Schneider
8 November 2024

This is no recommendation or solicitation to buy or sell any particular security. Any security mentioned above will not necessarily be comprised in the portfolio by the time this document is disclosed or at any other subsequent date.

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