Performance, Commentary & Portfolio

Fund Manager’s Review

Dear Fellow Shareholder,

The Net Asset Value (NAV) total return for December was -2.63% versus -1.08% from the benchmark index.

The extremes that characterised 2024 reached their zenith in the final month of 2024. Growth hugely outperformed value. Large cap outperformed small cap. The US outperformed Europe. Technology outperformed everything. Eight of the eleven global MSCI industry sectors were in strongly negative territory whilst Information Technology, Telecommunication Services (Alphabet/Google, Meta/Facebook) and Consumer Discretionary (Tesla, Amazon) continued to roar ahead.

This mono-dimensional market did not suit Brunner’s balanced approach. Whilst our technology holdings such as Taiwan Semi, Alphabet, Microsoft and ASML fared well, the weight of other names we don’t hold, more than offset their contribution. We believe the valuation of some of these stocks defies common sense and is indicative of a frothy, suggestible market. It is telling that the price of the ultimate speculative asset - Bitcoin - has become highly correlated with shares in the most hyped names.

Tragedy struck on 4 December when Brian Thompson, CEO of United Healthcare, a major subsidiary of Brunner holding UnitedHealth, was murdered outside the Hilton Hotel in New York where the company was due to host its investor day. The murder unleashed an unsympathetic torrent of criticism of health insurers on social media.

Health insurers like United Health are at the centre of the US healthcare system. They arrange plans for individuals, employers and, increasingly, government schemes such as Medicare (for the elderly) and Medicaid (for low incomes). Healthcare costs in the US, as in many other countries, are vast and growing due to new treatments, inflation and the ageing of the population.

It is the job of insurers to develop plans that keep these spiralling costs in check. At an epidemiological level there is necessarily a cap on whatever a healthcare system can spend, no matter how distasteful or upsetting that may be when reduced to individual cases. The vast majority of UnitedHealth’s revenues (87%) are spent on medical treatments, with the remainder attributable to operating costs and a small profit margin. UnitedHealth are doing what they and their peers (many of whom, like Bupa in the UK, are not for profit) are designed to do, albeit within the confines of a messy, patchwork system ‘no one would design’, as CEO Sir Andrew Witty said in a New York Times guest essay¹.

In the aftermath, we did reduce our position size slightly. This decision reflected some additional considerations, including UnitedHealth’s growing reliance on government business (something we prefer to avoid, given the pressure they are likely to prove able to exert) and the political noise we expect from the newly proposed Department of Government Efficiency which must necessarily address healthcare given how it forms such a large slice of state expenditure.

Elsewhere, staffing company SThree reduced its profit guidance reflecting a weak employment picture in its core technology and healthcare end markets. This is a cyclical company which supplies skilled contract workers to employers and we are currently in a downcycle. The balance sheet and cash flow are both very strong and the company will likely see profits rocket once a recovery takes place. It’s a very sensibly stewarded company and management are commendably planning for the long-term.

Aside from the small reduction in UnitedHealth, we added slightly to our position in Bank of Ireland. At the initial purchase (February 2024), we highlighted that we thought the company could return over forty percent of its market cap in cash over three years. We note that the company has already, in ten months, paid out 12% in dividends in addition to buybacks. Financial assets only have value because of the cash they can ultimately provide to their owners. The rise of Bitcoin etc shows this truism may have been forgotten.

Julian Bishop & Christian Schneider
10 January 2025

¹ New York Times article https://www.nytimes.com/2024/12/13/opinion/united-health-care-brian-thompson-luigi-mangione.html

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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