Performance, Commentary & Portfolio

Fund Manager’s Review

Dear Fellow Shareholder,

The Net Asset Value (NAV) total return for November was 3.90% versus 4.49% from the benchmark index.

Despite fears of a controversial, contested US election, President Trump won a comfortable victory; there was no insurrection or talk of ‘dimpled chads’ this time. The Republicans also won the rare, coveted trifecta - control of the presidency, House and Senate – which will make it easier for Trump to implement his agenda.

In the weeks following Trump’s election, it has been his proposals for sweeping tariffs that have received the most attention. Most mainstream economists caution that tariffs ultimately benefit no one and evidence from the modest tariffs imposed in his first term suggests they were simply passed on to American consumers in the form of higher prices. Given Trump’s electoral success can at least partially be attributed to the pauperising impact of inflation under the Biden administration, this is a consequence we are confident he will be keen to avoid. We therefore believe much of his rhetoric represents a negotiating tactic, and expect some of the more extreme proposals mooted to be watered down with time.

The divergence between American markets and the rest of the world following Trump’s election has been stark and further exaggerates a longstanding trend. The S&P500 in November alone rose almost 6% whilst the Euro Stoxx 50 fell 3% in dollar terms. Year to date the S&P500 has risen over 26% while the Euro Stoxx 50 is up just 6%. It is interesting to note that the aggregate profitability for the S&P500 this year has risen just 8% so most of the US market’s performance can be attributed to an increase in the price investors are willing to pay for each dollar of profit. The P/E ratio for the S&P500 now stands at around 22x forward consensus profit estimates, almost twice the multiple for the FTSE100. This is unusually stretched and we expect it to handicap the US market going forwards. As disclaimers proclaim, past performance is not a guide to the future.

Brunner lagged its index by around 0.5% in November. The increasingly speculative nature of the US market, in particular, does not suit our focus on cash flows and sustainable competitive advantages. The biggest single detractor from our relative performance this month was not holding Tesla, which increased 40%. Tesla is now valued at 150x 2024 profit estimates. For comparison, BMW trades at 6x. Whilst Elon Musk has penetrated the upper echelons of the U.S government, autos are a demonstrably tough business and we are sceptical of the value we should attribute to the carrots – autonomous driving, robotaxis, humanoid robots etc - he regularly dangles in front of credulous fans. Sometimes our job is to protect shareholders from ‘extraordinary popular delusions and the madness of crowds’, to cite Charles Mackay’s classic study of financial mania, no matter the impact on our short-term relative performance.

Other detractors include the cyclical Microchip, which continues to suffer from the weakness in non-AI semiconductor demand, and Taiwan Semi which retreated slightly after having almost doubled this year.

The biggest positive contributor to November’s performance was American Financial Group. AFG is a Cincinatti, Ohio based insurer which has a terrific record of profitable growth and generous dividend payments. We believe this is precisely the sort of down to earth stock that can protect against the dangers of investing in a hyped market.

Other positive contributors include Charles Schwab, the US discount broker, and Visa, one of our largest positions. UK listed Intercontinental Hotels also continued its fantastic run since we bought it.

We sold a couple of our small positions during the month. We said goodbye to luxury goods company LVMH. Brands Louis Vuitton and Dior had exceptional performance in the immediate post COVID period as consumers spent with abandon following their captivity. We don’t believe investors have fully recognised how unusual and unsustainable LVMH’s performance was in this period. Ongoing macroeconomic challenges in China add to the luxury industry’s challenges. We also sold our position in metals and mining giant Rio Tinto. We are concerned about the housing downturn in China and believe it would be naive to assume demand for iron ore continues at current levels. China consumes around 60% of the worlds iron ore (a feedstock for steel) much of which is used in construction.

We also reduced positions in a few industrial stocks where valuations had expanded. We used the proceeds to further build our new holdings in stocks like Auto Trader, Roper and Alphabet.

November is the last month in our financial year. Whilst we were unable to make it six years in a row of outperformance vs benchmark, we are pleased that shareholders have nonetheless seen strong capital growth and have also enjoyed the material benefit of the discount narrowing. We ended the year trading at a modest premium to net asset value. We were also delighted to be named ‘Investment Company of the Year’ in the Global category at the recent Investment Week awards, an accolade that reflects both long term performance and the great work stewarding the trust.

Julian Bishop & Christian Schneider
12 December 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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