Delving into the details

In this latest episode we look deeper into some of the things that portfolio companies actually do. In particular, host Joe Lynam and co-lead portfolio manager Julian Bishop examine some of the extreme technology needed to create the world’s most powerful semiconductor chips. The term ‘cutting-edge’ may often be overused, but in this case the sheer physics of what is being achieved by some of the leading companies is, quite simply, astounding.

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JL: Hello and welcome to the 18th and latest instalment of Connected Investor, the podcast from the Brunner Investment Trust. I'm Joe Lynam, the BBC presenter and News Talk Business Editor, and in this podcast, we're going to touch on some of the specifics of companies held by the trust and especially those in the technology sector. We're not allowed to give views on individual stocks as that could constitute advice, but we think it's interesting to examine just what it is that some of the portfolio companies actually do and their relevance for investors and of course the Brunner Fund. I'm joined by the co-lead of the Brunner Investment Trust, Julian Bishop. Hello, Julian.  

JB: Hello, Joe. 

JL: You're flying solo today; Christian can't join us. Can we start, if I may, Julian, with the performance of the portfolio so far this year as we approach the final furlong? 

CS: Yeah, so our financial year ends at the end of November, if we do end ahead of the benchmark, that'll be the fifth year in a row, which is very satisfactory. So, we're getting a bit of a... 

JL: What is the benchmark, Julian, just so our audience understands?

JB: Sure. So, we have a hybrid benchmark. So, it's 30% UK and 70% global. So, the idea is it's a one-stop shop for the UK investor who wants some exposure to the domestic market but also wants exposure to all the stocks in America, Europe and the Far East. 

JL: Okay, and you were telling us how the fund has performed thus far.

JB: Yeah, so far, this financial year we're having a good year relative to that benchmark. If we finish ahead that'll be the fifth year on the trot of our performance. And what's really satisfying about that is that's across a very wide range of market conditions when growth has worked, when value has worked. So, we're really getting a reputation for consistency. 

JL: So, Brunner has 22% of the fund invested in financials and the same amount in industrials. Why is that? 

JB: Well, the fact that they're the same amounts is purely a coincidence, of course. But you're right to point out that they're both relatively large weights. I mean, a couple of things to mention here is the first thing is that we don't allocate by sector. So, we're bottom-up investors. We do our research into business quality, growth, and valuation. When an investment case passes muster, we take a stake. And it so happens that on that basis, we find a lot of opportunities in those two sectors. Second thing I think it's important to emphasise is that those sectors are incredibly diverse. So, if you take financials, for example, I think when you talk about the financial sector, most people envisage traditional banks and insurers. And we actually have quite low exposure to both of those types of businesses. They don't tend to meet our quality hurdles. But we do have, for example, in financials, we have an insurance broker called AJ Gallagher. We have a derivatives exchange operator, CME, which is the old Chicago Mercantile Exchange. S&P Global, which is a credit rating business and lends its name to indices like the S&P 500. And those are all businesses operating in industries with really attractive market structures, decent growth, business models that don't require much capital to grow, so therefore can generate a lot of free cash. And then industrials equally, we have a very wide range of investments in an equally diverse range of sectors. So, we have pest control businesses, we have a business that arranges networks of wooden pallets for the delivery of goods, we have Visa in there, the payments network, and Accenture, the global IT implementation firm, that's classified in financial terms as an industrial holding. So again, a very, very wide range of different businesses, all of which share the characteristics of quality, a bit of growth, and as much valuation as we can find. So as much value as we can find. 

JL: So, from pest control to some fairly leading-edge technology, the fund has about 18% invested in information technology. Which innovations would you say are making the most waves?

JB: Yes, so we have 18% in the tech sector. Most of that is attributable to two sub-sectors. We like software businesses, so we have holdings in Microsoft, Adobe and Intuit. Things we like about the software businesses is that they tend to be very, very sticky businesses. So once an entire cohort of users is trained on a particular piece of software, they tend to become users for life. So, the most obvious example there is with Microsoft Office. The files are standards, so you can share them with other people in the industry and so on. And the same applies for Adobe. Adobe is best known for Photoshop, so pretty much every graphic designer in the world will use Adobe software. Intuit equally for tax and for small businesses who are dealing with payroll, that sort of thing. And then, of course, in software, you're talking about a pretty incredible business model where the incremental cost of publishing one more copy is approximately zero. So, it's not like, you know, you're Cadbury and you have to go out and make another chocolate bar to sell. You press a button and then there's another digital copy of Excel. So, the economics for the winners are absolutely superb. The other area we have a great deal of exposure to is semiconductors. And there I would highlight two investments; TSMC, Taiwan Semiconductor Manufacturing Corporation. And this is what's called a foundry. So, it's basically the factory which makes pretty much all the world's leading-edge chips. So, if you've heard of NVIDIA chips for artificial intelligence, down to the chip in your iPhone, they will pretty much all be made by TSMC in their factories. One of their suppliers for their factories is a Dutch company called ASML. And what they do is they specialise in an area called lithography, and precisely something called EUV lithography, which is some of the most mind-blowing technology that exists on the planet today. 

JL: And that's extreme ultraviolet. In fact, I was at the Intel new fabrication unit launch only last month, and I saw the ASML kit being used to make chips for Intel. So that's very, very geopolitically important, as well as important for your mobile phone, all that, in the sense that no continent wants to lose that tech, does it? 

JB: No, that's correct. And at the moment, there's a great book on this topic actually called The Chip War by Chris Miller, which is a great read for people who are interested. But today, most of the world's most advanced chips are made in Taiwan, which is obviously at the centre of a geopolitical fracas between China and the Communist Party and Taiwan. So, what a lot of companies are trying to do is now establish the capability to make these chips in places like Ireland, in the United States, and so on and so forth. But what's common here is that they all require kit from ASML. And just to take you through the sort of very basics of what they do, so they make lithography machines, and if you're a classicist, you'll know that lithography means stone writing. Essentially, it's the projection onto a... 

JL: I didn't know that. 

JB: Onto a very fine, an incredibly flat - like to atomic level - silicon wafer of the image of a semiconductor. And the most advanced semiconductors, a good example, the iPhone 15 - sorry, I was just looking at my iPhone - the A17 chip there has approaching 20 billion transistors in about three centimetres squared. And the way they're made is it's much like a dark room. You know, you shine a light and then onto this silicon wafer and it creates a bunch of chemical reactions that are then exposed and leaves behind a pattern of the semiconductor. And the line widths, as they're called, which is essentially the little lines, there's the little wires, if you like, that connect all these transistors, are now so small, they're 3 nanometres wide. Nanometres is about a millionth of a millimetre. So... 

JL: Wow. So much smaller than, much finer than an individual hair on your head. 

JB: Yeah, so for example, a human hair, I believe, is about 100,000 nanometres wide. We're talking here 3 nanometres, which apparently is how far your thumbnail grows in three seconds. And the thing about this is it's far, far lower than the wavelength of light. So, if you think about projecting this image, it creates all sorts of problems. So, what these companies have had to do is basically invent new forms of lights. And where ASML have got to is this thing called EUV, which is extreme ultraviolet. And even the making of that light is extraordinarily complex. That's just one stage in many hundreds that these machines have to undertake. And these machines, by the way, they're probably the most complex machines on Earth. You know, they cost several hundred million dollars, they weigh 200 tonnes, and the physics and the chemistry inside them is absolutely extraordinary. 

JL: Let's move it a little bit back closer to home. There's been some notable UK stocks have fallen out of favour recently due to the economic malaise. But Brunner thinks there might be some movement upwards now.

JB: Yes, in the fund, I mentioned earlier that we have a benchmark that is 30% the UK, so 30% the FTSE All-Share. We’ve tended to be a little bit underweight in preferring opportunities outside the UK. But recently and quite famously, some of the names that are in the UK market, particularly the domestic names - so those names that aren't geared to export or multinational businesses - simply the domestic names and the smaller names, have really had a tough time. And what that's meant is that we've had an opportunity, I think, to add to some positions and take some new positions in companies that we think absolutely pass muster on a sort of quality value growth basis. I wouldn't say that they're world leaders, but they're good businesses that are good at what they do, and very importantly, they have strong balance sheets and they're generating at present absolutely lots of cash. So, some very high dividends there. I mean, I think they're good businesses. They're not the world's most exciting businesses. They're not the world's fastest-growing businesses, but they're good at what they do. They generate tonnes of cash, and they return it to shareholders. So just recently, we've taken the opportunity to add to some of those names and increase our weightings in the domestic market. 

JL: Well, I think on that optimistic note we will wind things up. Thank you very much, Julian. Julian Bishop there, the portfolio co-manager of the Brunner Investment Trust. That's all we have time for in this episode of Connected Investor. Make sure you're subscribed to Connected Investor wherever you get your podcasts so that you don't have to go hunting for it next time. And if you could leave a review on Apple Podcasts and give a rating so that we can learn for the next time, that would also be appreciated. Now thank you all for listening, we value your views and we're keen to know what you think so do get in touch. You can contact us via the website www.brunner.co.uk. From Julian Bishop and me, Joe Lynam, ta ta for now.