Looking beyond the obvious…

The ‘Magnificent 7’ have been much heralded as the drivers of stockmarket performance over the past year or so, but are they all performing strongly, and what might be some other ways of accessing technology sub-sector growth? Joe and Julian also discuss a couple of more traditional companies added to the portfolio earlier this year.

This is a marketing communication. Please refer to the key information document or KID before making any final investment decisions. Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Past performance does not predict future returns. The mention of any particular security or strategy should not be considered as a recommendation. For further information on the Brunner Trust please go to www.brunner.co.uk.

JL: Hello and welcome to the 19th and latest instalment of Connected Investor, the podcast from the Brunner Investment Trust. I'm Joe Lynam, the BBC World Service presenter and News Talk Business Editor. And in this podcast, we're going to touch on some of the latest investments by the fund, and what that might mean for investors in the Brunner Fund. And I'm joined by the Co-Lead of the Brunner Investment Trust, Julian Bishop. Hello, Julian.  

JB: Hello, Joe.

JL: Now, Julian, the magnificent seven is the name given to a bunch of seven, mostly technology companies, nearly all of them are American, and they have absolutely boomed over the past 3 to 6 months, well above standard equities. You hold one of the magnificent seven. And yet the fund has done quite well.

JB: Yes, So I mean, I think the first thing to mention perhaps is not all of the magnificent seven, as they’re called, are doing incredibly well at the moment. There's a couple in particular that have struggled to put any ground in the last few months. So, Tesla's having a bit of a tougher time now, with competition, particularly in China. And Apple, actually is struggling a little bit as well, again in China, which is a big market for them. So, it's not as though all the magnificent seven are doing exceptionally well. And the magnificent seven, as you said, that's the sort of term given for these very, very large, very profitable, very high-quality technology stocks in the States, and particularly in video, which has done very, very well over the last year, which we do not hold, unfortunately. But another stock, which we hold, which is our largest holding is Microsoft, which is also participating in this AI boom. And then we have a couple of other investments in the semiconductor space, which actually are associated with NVIDIA. So, there's one company called Taiwan Semi, which as to all intents and purposes makes all of NVIDIA’s chips so they'll be the manufacturer of the chips that NVIDIA designs and there's a Dutch company called ASML, which makes the equipment that Taiwan Semi use to make the NVIDIA chips. And so, names like that which are a bit smaller, I mean, actually pretty big companies these days as well, but they're a bit smaller and slightly less high profile than the magnificent seven, have also done very well and allowed us to keep up and actually beat the market over the last year.

JL: Yes, we, of course, we invent these names - magnificent seven, and it just it gives us an opportunity to lump stocks together, and it makes for a fun discussion. But it's never going to be the case that all seven companies are moving in the same direction. It is interesting is it not that a company as large as Apple has struggled over the last few months, but it's also interesting, as you say, that the chip making and chip design, whether it's ASML or NVIDIA, have done very, very well. ASML is a hugely important company for Europe because the dependency on Taiwan had grown to the extent that people said, ‘well, what if China invades Taiwan?’ Then you lose a hugely valuable asset.

JB: Yeah. I mean, there was certainly a fear around that. I mean, I think if China does invade Taiwan, most of the world's chips are made in that country. If that happens, the world has a pretty big problem. I think to the extent that that is probably the greatest reason that China does not invade Taiwan. I think it would be an act of mutually assured economic destruction. So, I see it as unlikely, personally. If China was to invade Taiwan and Taiwan cannot make chips that would be as big a problem for China as anywhere else. But, yeah, that would be a real issue for the world economy. Certainly not a zero chance of it happening, but when we look at names like Taiwan Semi we see in the price of that investment, you know, a lot of that concern, that risk being discounted, we think.

JL: Now on a more mundane level of technology you've invested in two companies. Two - what could be regarded as old school or old-world companies. Tell us about them and why you chose them.

JB: Yeah. So, a couple of new holdings for Brunner recently. So, one of which is Bank of Ireland, and the other one is General Electric. I think partially, because certain technology stocks and very high-quality stocks in inverted commas have done so well over not just the last year, but over the last decade. One thing we've noticed is that not only have the earnings of those stocks grown quite a lot, but also the valuations have grown. So, the multiples you pay for those stocks have expanded a great deal over the last decade. And at the same time, sort of more mundane businesses, as you said, have fallen in valuation. So, it's our job, you know, we have a sort of framework, which is flexible and it allows us to consider different areas of the market. We're not beholden to quality, for example, but not beholden to growth. We very much like both attributes. The value is part of it. And I think the bank sector is a good example of a sector where we would expect the next 10 years to be very different from the last 20.

So, taking Bank of Ireland as an example, clearly, Ireland had a very severe crisis. Big housing bubble. Housing bubbles often drag down the banks sector with them when they go wrong. And in response to that regulators get very tough. So, regulators get accused of being asleep at the wheel etcetera, and they essentially force banks to behave in a more prudent manner.

So, since the crisis, the Irish economy has spent a decade delevering - recapitalising its banks, so that's a very expensive process. Essentially, that just means the banks have to put aside more cash for when things don't go so well. Because it's been so expensive, a couple of participants in the sector have exited. So, Ulster Bank and KBC have effectively exited the Irish market, leaving behind really two players, So Bank of Ireland and AIB.

And if you look at the economics of the banks these days, compared to a decade ago or 20 years ago, it's night and day, so the banks are much better capitalised - the lending standards are much, much improved. In short, we think going forward, the safety of the banking sector in Ireland is a lot better than it has been at any point in the past, and quite often, this happens in response to a crisis, the crisis is a catalyst for improvement.

So, we've just taken a stake in GE, so, General Electric - famed for its rise and then fall. So, used today in business schools as an example of corporate hubris of a conglomerate’s overreach. So, started off with an industrial core and then expanded into a financial business that all went pretty badly wrong, And, since then the company has been dismantled, essentially. Very soon, the only business left will be aerospace propulsion, AKA jet engines. So, some pretty remarkable statistics, but every three out of every four flights that take off worldwide are powered with a GE engine ‘under wing’ as the expression goes in the industry. It's a very, very high market share and I think that reflects the extraordinary engineering that it goes into building a modern jet engine, which obviously has to operate with complete reliability and complete safety. So, the business has a strong market position, and it's a growth industry. So, back in 1980 there were only 8000 commercial airliners in the global fleet. Today, that's about 40,000. And that number continues to grow every year. And the business model’s really appealing to us. So, most of their profit comes from recurring revenues. The aftermarket sale of spare parts and servicing of that engine. Once the engine is built, and sold to an Airbus or Boeing, it remains in the sky for a very long time. You know, the typical life of a jet engine is well over 20 years. So, for every engine that is built, it provides a great revenue stream for GE for a very long period, and we love that visibility.

JL: You're still very keen on equities?

JB: Yeah, yeah, absolutely. I mean, I think we look backwards and we can see we described some of the expansion of valuations in certain parts of the market. But it's clear to us that that doesn't apply to the whole market. There are some equities that have become very fashionable, some segments that have become fashionable and probably for good reason. But there are other parts of the market, you know within banks, for example, where to our mind, valuations are incredibly attractive certainly versus history. I mean, look at the amount of cash that these businesses can return going forward and we think, you know, it's sufficient to make them very, very attractive for us.

JL: And is the dividend one of the key factors for you, or is it the growth that you can see in that stock?

JB: It's a combination of both. I mean, I think in the Bank of Ireland example, most of the return we would expect to get is from dividends and from other forms of cash return. So, buy-backs as well. I think maybe a small amount of growth. So, the Irish economy has spent a lot of time delevering you know, getting rid of that. And now we're probably at a stage where people take on a few more loans to grow businesses, to invest in their homes, etcetera. So, we expect a little bit of growth. I think in that instance, most of the returns would come from cash returns.

JL: Yeah, they are buying back at quite a bit of their own stock portfolio out there, as is the rival AIB bank. But it is a very interesting play in that respect. It's not just Irish focus, of course, Bank of Ireland have a decent presence in the UK.

JB: Yes, they do. So, they have a presence in Northern Ireland as well. And so it is a sort of a bank that does have some exposure to the United Kingdom. I think about three quarters is to the Republic of Ireland and then the remainder of the business is lending, for example to homeowners, north of the border.

JL: All right. Well, thank you very much for that quick update, Julian. That's Julian Bishop, the portfolio co-manager of the Brunner Investment Trust. That's all the time we have for this episode of Connected Investor. Make sure you’re subscribed to the Connected Investor podcast 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 and give us a rating, so that we can learn for the next time, that would also be very useful. Thank you for listening. We value your views, so if you want to get in touch with us, you can do through the website, that is www.brunner.co.uk. That's B R U N N E R.co.uk. From Julian Bishop and from me, Joe Lynam, ta ta for now.