Performance, Commentary & Portfolio

Fund Manager’s Review

January 2025 was an eventful month. President Trump’s second term started with a deluge of executive orders ranging from declaring immigration a ‘national emergency’ and challenging the constitutional birthright to US citizenship, to renaming the Gulf of Mexico the Gulf of America and pulling out of the Paris climate agreement just after huge fires swept through Los Angeles. He also threatened to ‘take back’ the Panama Canal and eyed acquiring Greenland. Whilst The Republican Party is traditionally the party of conservatism, these are not conservative acts. These are the acts of a leader with a revolutionary approach to conventional norms and the status quo. We should expect the next four years to be dramatic, if nothing else.

After a US stock market frenzy in the second half of 2024, January was a more sober month. The release of a Chinese Artificial Intelligence (AI) model by DeepSeek, which was seemingly developed using a fraction of the computing resource and at a fraction of the cost of comparable US-developed AI models, unnerved those who expect untrammelled investments in AI infrastructure to continue. Bulls point out that technology deflation is the norm and lower prices drive massive increases in usage. This is certainly a reasonable possibility. However, we believe that there are legitimate concerns around the profitability of AI developers which may result in a large cyclical downturn at some point. Shares in Nvidia fell heavily in the month, which was a significant positive contributor to Brunner’s relative performance given we don’t currently own shares.

Whilst US markets were more sober, Europe staged a strong recovery. As previously noted, the valuation gap between US and European markets had reached historical extremes and this partially closed during the month. In pound sterling, the MSCI Europe index was up 9% in the month vs just 3.6% for the US S&P 500 index. The global IT sector was actually down for the month, whilst sectors such as healthcare, financials and industrials all fared strongly. 

This more balanced market suited Brunner, which outperformed by 1.2% in the month. The Net Asset Value (NAV) total return for January was 6.16% versus 4.92% from the benchmark index. Positive contributions came from GE Aerospace (which manufactures and services the jet engines that power three quarters of all commercial flights worldwide), Thermo Fisher Scientific (where a recovery in biopharmaceutical spending appears to be underway after a post COVID hiatus) and Partners Group, the Swiss private equity manager. We also saw strong fourth quarter results from payments processor Visa, which continues to grow at a very high level, and US discount broker Charles Schwab which continues to gather assets at an impressive rate whilst seeing an improvement to its net interest margin (the company makes a substantial amount of profit from the interest it receives on the residual cash balances in its clients’ investment accounts). Bank of Ireland also bounced after weakness, whilst Intercontinental Hotels continued its strong run. Third party data points to a very favourable environment for hotels in the US and Europe, which, we believe may feed into strong results when the company reports results next month.

Negatives included softness in Itochu, our Japanese trading company, which owns stakes in businesses ranging from Japanese convenience stores to Kwik Fit, the UK tyre retailer. Microsoft was also a detractor. Their fourth quarter results were solid but missed some optimistic estimates. Elevated AI-related investments are also depressing free cash flows, at least in the short term, although we note historically Microsoft’s returns on data centre investments for their cloud business have been very strong. Like many investors, we query whether the returns on these huge new AI datacenter projects will be similarly attractive. Time will provide the answer, but at the moment the ‘hyperscale’ tech companies are in an arms race to build out infrastructure at great expense. The potential trajectory of this huge capital cycle will have ramifications for the entire US market in the coming quarters and years.

Some of our cheaper UK stocks also detracted from performance this quarter. Staffing company SThree saw further weakness after its profit warning last month, whilst automotive distributor Inchcape was hit by news of some very small but unusual contract losses. Both of these names are at the lower end of our quality and growth spectrum but do generate lots of cash. In both instances, we believed there were no structural concerns of the type that would make us reconsider our positions, but we continue to keep an open mind, and are monitoring ongoing developments.

There were no trades during the month.

Julian Bishop & Christian Schneider
14 February 2025

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.

Awards & Ratings