Debt refinancing to boost income of Brunner trust

Debt refinancing to boost income of Brunner trust

The maturing of historic, expensive debt in 2018 will boost the returns of the Brunner Investment Trust, according to its manager Lucy MacDonald.

Ms MacDonald said the trust borrowed capital decades ago at an interest rate of more than 10 per cent and this has acted as a drag on performance in two ways.

Firstly, some of the cash generated by the trust had to be diverted to make the interest payments and secondly, the imperative to achieve income to pay the interest as well as a rising dividend forced the manager to own stocks she didn’t consider attractive but which pay substantial dividends.

Ms MacDonald said the maturing of the existing debt next year will save the trust £2m, £600,000 of which will go to the trust's income account and the rest to its capital account.

This means the total cash available for dividends starts at £600,000 more than last year before any income has been received from underlying companies.  

The Brunner Investment Trust has increased its dividend for each of the past 45 years and has more than a year’s worth of dividend income in reserve.

Ms MacDonald is taking advantage of the freedom to move out of some UK stocks and to focus on technology companies.

She said the digitalisation of the world economy will be the dominant challenge faced by equity investors, with many existing companies finding their business models obsolete.  

Ms MacDonald has been investing in technology companies for the growth they offer even if they don’t pay a dividend, with the dividends coming from investments in UK income shares in sectors such as tobacco.

The fund manager said many technology companies, such as Amazon, are more profitable than they appear but existing accounting methods do not reflect this.

This is because technology companies expand by hiring people and the costs of extra staff go onto the profit and loss account immediately, reducing profit.

More traditional companies expand by buying plant or machinery, the cost of which enters the profit and loss account incrementally over several years, making those companies look more profitable than they are.

One stock she is particularly keen on investing in is Accenture which provides technology services to clients who pay to use software that becomes embedded in the business and so becomes recurring revenue.

Nick Train, who runs the £1.3bn Finsbury Growth and Income trust, has long taken the view technology will displace many of the biggest players on the stock market.

His approach is to invest in the companies that he feels will be immune, including food and drinks brands rather than trying to find the winners in the technology arena.

Tony Yousefian, investment trust analyst at FundCalibre, said: "The Brunner Investment Trust is having a good run year to date returning 22.77 per cent versus the sector average of 17.77 per cent in share price terms, but over longer periods it isn't as good: returns are below the sector average in eight out of the past 10 calendar years so value added is low and inconsistent.