Page 19 - DIY Investor Magazine - Issue 28

JL: Austerity was imposed to deal with debt run-up by the financial crisis, but debts this time will be far higher; why has the bond market not said, ‘woah, we’re not going to continue to lend’? Will this money ever be repaid – is it just invented money or something to be passed on to future generations. How can debt which was a problem a decade ago, suddenly not be an issue? MT: It’s a good question; if you’d told me 10 years ago that we would be in this position and taking it to even further extremes, I would have said I didn’t believe you. But markets, and particularly bond markets are very hard to predict; I think what ultimately turns them is inflation which, paradoxically, is what a lot of people seem to want at the moment, but sustained, high inflation is not necessarily good because that’s when bonds really lose their appeal, making it hard for central bankers to control the environment. If high rates of inflation come through, then- JL: You can’t cut interest rates, can you? If inflation stays high and interest rates are already almost zero. MT: Yes, and if the real interest rates are so low that people don’t want to hold government bonds anymore, you’re either going to have to let them go up, or introduce even more severe financial repression; when people talk about inflation as a positive they should be careful what they wish for. But, it’s difficult to see any other way to de-lever. After the Second World War we had very high debts; interest rates were kept well below the rate of inflation, bonds performed terribly, but we got the debt down. JL: Do you think it’s exaggerated to say that we could have a repeat of the Roaring Twenties because of this stimulus and the fact there’s a lot of pent-up savings and demand out there that could just explode into the market? MT: From a cyclical perspective there definitely is the potential for that, the question I have is how sustained that would be? JL: The vaccine is a scientific success story; will it play a big role in how financial markets and economies behave as they emerge from the cocoon? MT: Absolutely. We have gone from wondering if herd immunity was the way out of the pandemic to developing and starting to roll out a vaccine in double quick time with levels of efficacy that have surprised even the healthcare experts. My reading is that the results so far have generally been better than expected and that it’s a great triumph for the healthcare industry. JL: I got my jab and feel pretty good about the whole thing; will healthcare stocks continue to be in favour, or is that now priced in? MT: Really interesting question; it’s a sector that we like a lot in the Trust, and Covid aside it’s a great sector for finding high- quality businesses. It’s also got long-term structural growth drivers – aging populations, increases in wealth around the world; we have a lot of holdings, and they were good for us in the first part of last year because they held up better than most, but recently the sector’s been the wrong side of the rotation because it’s quite a defensive industry. Healthcare doesn’t really benefit from reopening or cyclical recovery, so some valuations have fallen back, presenting an opportunity for long-term investors. I think that there will be more spending on healthcare structurally as a result of Covid. Infrastructure failings in the UK and US meant we hadn’t initially done as well as other places as we don’t have enough equipment, beds and testing and diagnostic equipment; that’ll be rectified, I think, which will lead to more spending and more opportunities for some of the businesses that we’re invested in. JL: The AIC, the Association of Investment Companies, appointed the Brunner Investment Trust as: a Dividend Hero. You posted pretty decent dividends; tell us how you got on. MT: We had a good year: portfolio outperformed the benchmark, as did NAV and we increased the dividend as well for the 49th year in a row; a Dividend Hero is an investment trust within the AIC sector that has increased its dividend for more than 20 years in a row. A great advantage of investment trusts is, unlike open-ended funds, they can put some profit aside in good years to build a reserve that can be called upon in times of recession - or pandemic - in order to continue paying a rising dividend. Brunner has done this several times over that 49-year period, including during the global financial crisis and last year. Most encouraging is that when we look forward, dividend payments are coming back and most importantly in the companies we’re invested in. We run a balanced portfolio, so we do have some cyclical businesses that were impacted last year, but we’re seeing almost all of those are now starting to reinstate dividends as they see their trading and their prospects recover. 19 DIY Investor Magazine | Apr 2021