Q&A with Brunner’s Bishop: Microsoft's 'extraordinary' market position

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06 July 2023

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Describe your career background; how did you find your way into the investment industry and your current role?

I grew up in Liverpool, where there isn’t much of a financial services sector, so I knew very little about The City growing up. I went to university in Cambridge and started considering careers after graduating. I was analytical and interested in the world around me, and I wanted a job that could utilise those skills and interests. There’s a circularity between being interested in something and being good at it and I think that’s particularly the case in investment. Unless you love it, you’re very unlikely to succeed.

I landed a place on a graduate scheme as a trainee fund manager. Within a few years I was running US portfolios before I switched tracks to cover the global consumer sector as an analyst, allowing me to hone my equity research skills. I then moved back into portfolio management, managing institutional global mandates. I joined Allianz Global Investors to manage Brunner last November. It’s a terrific team and I’m delighted to be here.

What is the broad strategy you have in place for the trust?

We have an ‘all-weather’ strategy that is designed to form the backbone of any investor’s equity exposure. The trust’s benchmark is 30% UK and 70% global, and we’re bottom-up stock pickers first and foremost. We have a strong preference for quality, which we define as value creative businesses with sustainable competitive advantages and strong balance sheets, but we marry that with a determination not to overpay. The income target provides a useful discipline, and Brunner has increased its dividend for 51 consecutive years, a record we intend to continue increasing.

The portfolio has 60 holdings at present within which we aim to embed as many uncorrelated risks as possible. The core tends to be steady growth companies. These are generally well established, proven winners in their respective fields which generate lots of cash, delivering decent growth whilst trading at uncontroversial multiples. This strategy has proven very successful with long-term outperformance of the benchmark. We have outperformed in each of our past four financial years, which is very unusual given the wild swings in markets over that period.

Which industries and countries offer the most compelling opportunities at the moment in your view?

We have a bottom-up approach based on stock specific analysis, so we never make calls based simply on region or geography. Ultimately, equity markets are composed of individual stocks and every company has its own idiosyncrasies, so that is what we focus on. The extent to which the regional exposure is relevant is embedded into the individual investment case for each of our holdings. Equities are very long duration assets, so the local institutional framework – rule of law /shareholder rights etc – is vitally important.

Looking at industries, we have broad exposure but are overweight the healthcare sector at present. Healthcare tends to be the defensive sector where we find the best combination of quality, value and growth.

Could you give three examples of your largest holdings. What are the main reasons you hold each of them?

Microsoft is our largest holding at present. Its market position is extraordinary. Most enterprises are centred on Windows and Office and we see very little chance of this changing. Making additional copies of Office for its customers has virtually zero incremental costs, leading to margins and profitability that defy the normal laws of capitalism. The company is also a leader in the provision of cloud computing services and artificial intelligence, both of which are nascent businesses with huge addressable markets. The company has net cash on its balance sheet, very clean accounts and, unusually for the sector, has tended to pay a reasonable dividend.

Visa is another large holding, taking a very small fee every time they enable a payment. They have almost 4 billion cards in circulation accepted at 80 million merchant locations worldwide, a network effect that creates a powerful barrier to entry and has resulted in very strong profitability. Growth tracks nominal consumer expenditure, augmented by a structural shift from cash to card payments. Again, the company has no material debt and generates lots of cash.

A third example is Microchip. They make relatively simple analogue chips and microcontrollers that are used in the ‘digitalisation of everything’. They have a huge library of designs, sold at relatively low price-points to a very wide range of customers. The company has been paying down debt but will shortly be able to return 100% of its prodigious cash flow to shareholders.

What have been the most significant additions and cuts to the portfolio over the past year?

Although we generally have low turnover, there is still competition for capital within the fund. One of our larger new holdings was Intercontinental Hotels Group. We also took a position in DNB, the leading Norwegian bank. Our banking exposure has been very low in the past, but European banks now have the potential to return enormous amounts of cash to shareholders. DNB, by dint of a very strict regulatory framework in Norway, has a higher capitalisation requirement than other banks in various jurisdictions, thereby making it financially stronger than almost all its global peers.

What is your overall macro outlook over the next 12 – 24 months, and what are the key things for investors to watch closely?

We avoid making short-term macro forecasts for three reasons. Firstly, economic systems are too complex to be predictable – the world is inherently surprising, and we therefore build a portfolio that we believe will be relatively resilient whatever the economic environment. Secondly, good quality companies are not just corks bobbing around on a macroeconomic ocean; we prefer to focus on the economics of the firm.

Finally, the short term is mathematically of very little relevance to the intrinsic value of a business. We spend much more of our time thinking about the long term. We let the rest of the market fret and obsess over the next quarter. We firmly believe they are digging in the wrong place.