The Bankers Investment Trust PLC (BNKR) Earnings Call Transcript & Summary

Okay. Good evening, everyone, and welcome. Thank you very much for joining us on tonight's webinar. And my name is Roland Spencer, I'm Head of Business Development at AJ Bell and Shares Magazine. The format for tonight is really straightforward. And we have 2 of the most popular funds on the AJ Bell platform presenting for you tonight. And first up, we have The Bankers Investment Trust and with Alex Crooke, Fund Manager on the trust; and then Schroders Japan Trust with Masaki Taketsume, who is the Portfolio Manager. Now each presenter has around 20 minutes or so to present and then time for a Q&A. So it will be done shortly after 7:00 p.m. And the questions are a very important part of these webinars. [Operator Instructions] You type your questions into that and they come through to me and my team, and then I'll read them out on your behalf. Apologies, if I don't get a chance to get through all the questions that come in, but we'll try and get through as many as we can. And this is really important part of these webinars and the events that we run. It's your chance to ask the questions directly to the people looking after your money. So something on your mind, ask it. It's probably on someone else's mind as well. And you can also e-mail us on [email protected] and that's [email protected]. And if you have any technical problems, you can also use the questions box and e-mail address to contact the team here. The slide deck you'll see tonight can have a lot of information in them. So with permission of the presenters, we'll be e-mailing you copies of these slide decks in the next day or so. Videos of the presentations get uploaded on to the website. It takes about a week to get those live. And again, we have to get permission from the presenters first. So look out for those if you want to watch this webinar again in the future. The final thing for me is an investment disclaimer. This is to kind of cover us off for the whole webinar, and there for you to read through. But the highlights are that we don't offer investment advice and nothing tonight should be construed as a recommendation or an endorsement. If you're not sure about the suitability of an investment, we recommend you seek qualified independent financial advice. So I hope you've all got a cool drink. And may I welcome our first presenter this evening, Alex Crooke from The Bankers Investment Trust. So just give us a moment, we'll get Alex up on the screen.

Great. Okay. Thank you very much, Roland.

All right. Let's get your presentation too.

It's made up -- the presentation is wonderful.

All right. Here we are now. So we can see you, we can hear you. We can see your presentation. I'll go now and I'll come back for questions.

Thank you. Okay. Well, as Roland said, it's only half an hour. So a bit of a whistle stop tour around Bankers. I'm really going to focus on a few areas of -- and a bit of an outlook. But I might just take the first 5 minutes to run through an introduction for those that maybe don't know us so well. And so maybe we just jump on to the first slide, some basics about the trust here, really sitting in the global sector and the objective -- twin objectives to grow capital above the FTSE world and grow the dividend above inflation. So sort of real growth in the income streams. And you can see that on the right, really, that's our dividend over the last 20 years. I just picked 20 years, but actually -- we have 58 years of consecutive annual dividend growth. We're one of the dividend heroes, if you heard of that, and just behind City of London. So 58 years, we've consecutively grown the dividend. And over the last 20, you can see sort of up 3.5, 3.6x where inflation has only been up about 1.5, 1.7x. So it's a very strong dividend record. The trust really, I suppose, still -- it's an old trust, 1888. It's still doing sort of what it started out doing, which was launched to provide clients of Williams & Glyn Bank as it was then, sort of democratizing investment and providing sort of easy access to global markets for smaller investors. And we're still doing that. So for just over GBP 1.20 a share, you can get access to global markets. So jump on one slide, please. And our core principles, as I said, have not changed a lot, really about focusing, I suppose, on a core portfolio of about 100 stocks. So that certainly puts us more concentrated than the index, sort of 1,200 stocks and many of our peers. So again, trying to back our best ideas to some extent. Very much you'll see the team in a minute, but local experts based in their regions is something key to us all really. And I think the flexibility, what I like is the flexibility really to shift a little bit between sort of value and growth investment styles. We're predominantly growth at the moment. It seems to been certainly the last few years where most of the better investments have been. But we do have that ability to shift and certainly within, say, the Asia region, we've got a more value orientation to our investment picking. And then finally, sort of low cost, that's important. Keep those as low as we can. So the ongoing charge, which sort of throws in everything management fee, flat charges, fees and all sorts of audit fees, et cetera, is about [ 0.51% ] in the last set of accounts. And then we do have a bit of debt. Again, very low cost these days. We've managed to recycle all our debt into the last 2 or 3 years or 5 years, I suppose, as debt -- cost of debt fell. So the average cost of 2.7% for our debt. Right. Jump on one more. In terms of trying to -- I suppose, our core principles and therefore, our values here, I've mentioned some of these, again, regional expertise. I think that's really important, having managers who really understand their markets and able to pick stocks in those regions, really backing our best ideas with the majority of our capital, hence, that more focused portfolio that we've been following. I put following the cash. I think if there's one process and style that we really like to look at in a good company, its cash flow generation. I've always sort of believed that the best companies in the world ultimately generate surplus cash, which can be returned to us in the concept of a dividend or it can pay down debt or it can grow -- hopefully grow the business through CapEx, and obviously, takeovers and acquiring new opportunities. So I think following that cash hopefully pushes us in the right place for companies. So cash flow yield is again a core metric for value that we look at. And then sort of consider investing here. It's being mindful, I think, of, I suppose, the inherent volatility of equities. So really trying to have a good spread of investments, trying to focus on environmental impact, although we're not an ESG fund in any sense, but we do look at a lot of factors around water use, where in the world people operate and companies are operating. So again, trying to see the impacts that our investments have and really trying to also follow innovation. I've got a slide later on, trying to find the best companies that are going to innovate and disrupt markets. So I jump on one more. Where does that leave us today? And again, online, as I say, there's a lot more information about latest positioning of the portfolio. But here's a sort of summary, snapshot for us. The U.S. is by far the largest market in the world. So unsurprising to see us biggest allocation there. Sadly, the U.K., as many of you will know, has got smaller and smaller, about 4% of global markets, but we are, therefore, slightly overweight U.K. But we see more -- slightly more opportunities in Japan and Europe relative to the U.K. market. So those are the next 2 largest areas. And I think in terms of sector profile, again, information technology -- technology is a huge component these days of markets of the Mag 7 being very dominant. We are overweight in that technology space. We still see definitely some interesting opportunities there, but it has quite nice breadth rather than being too narrow into those largest companies. Industrials might surprise many as being really our largest overweight. There's slight quirk of the index, some stocks like the credit card companies, so Amex in the U.S. and Visa are 2 of our larger holdings and for some arcane reason, they do seem to crop up industrials support services. So they're in there. But I think others like big exposures to some defense names in there, largest holding RTX, which is sort of what used to be called Raytheon, but also a big aerospace component there, Safran in Europe and also some of the companies like Schneider and Eaton providing, I suppose, equipment for national grids, and I'll talk about that a little bit later. So industrial is a key area. We still see big investment spending in that space and benefits there. And then finally, financials, again, probably prioritizing banks over insurance, and I've got a slide on that. And then the underweights, health care has been really very tricky outside a few big stocks. And so we are underweight in that sector, but it's probably we should have had less. And consumer discretionary, where I believe I think a lot of the companies have really taken too much price in the last few years, and struggling with volumes. And so we're certainly seeing that in areas like luxury being very difficult to underweight in that space. So finally, let's move on very quickly and finish up with the team. As I said, there's the investors and Jeremiah is in Denver with our U.S. -- key U.S. office there. I'm here in London, Junichi in Tokyo and Sat is in Singapore. So again, good experience investing in their markets locally. And then finally, if we jump on, just to plug the firm I work for Janus Henderson. Many of you will know us, I suppose, but we manage trust like City of London, our European smaller companies trust. So we manage 8 trusts in total and 159 investment professionals just in the equity space. We also have experts in fixed interest to help support us as well. Right. So that's the quick plug. Let's talk about the trust on the next page and outlook. So what are we seeing in the world? I've got 2 slides really, I suppose, just encapsulate, I think what I go back to at the moment and I'm thinking about, and it's nothing about Trump. I'm sure there might be some questions about that. But I think the big picture here is a change in really the cost of capital, the cost of doing things, borrowing money, the hurdle rate, whatever you want to think about it. And I've shown here the U.S. 10-year Treasury yield over the last, well, sort of nearly 35 years, sort of my career, actually, I started back in 1990. And this is called -- this period, I suppose, until about 2020 was called The Great Moderation by a lot of people is when really investment -- central banks sort of got a handle on inflation and drove inflation down. There was the peace dividend, all sorts of things going on. But really, in this period, inflation fell very rapidly, interest rates fell and central banks sort of kept this running. And we can see here the 10-year Treasury almost got to 0. It got negative 10-year yields in obviously Germany and parts of Europe and towards that latter period. And I think this period also defined risk taking. So as rates fell, more people took on more leverage. So risk taking, I think, elevated obviously, the world of private capital boomed. But you can see at the bottom there, a very clear to my mind return towards the average, that line in the middle is the average rate over this period. And we're sort of chunking around there sort of 4% to 4.5% to 5% really. And I think in my mind, we're not going back. I think interest rates, central banks controlled a lot of the problems by cutting rates, but the problems are all more sort of demand side. But looking forward, I think I see more challenges on the supply side, and this is where Trump and tariffs will come to play. They create a sort of supply side shock. Suddenly, the cost of goods is very expensive or goods just can't be shipped because of the price being charged through tariffs. And I think when I look at other aspects, inefficient supply chains, I think about the hot and cold sort of wars we're seeing now around the world, return of manufacturing to places where really it's inefficient and expensive, but it's done because of governments wanting to see manufacturing return. Then we've got climate change, obviously, energy transition, and finally, sort of some of those macro political decision-making. All these to me will affect the supply side, will affect inflation. And therefore, I think this cost of capital likely to stay -- will stay elevated and could even rise further. This is challenging for markets. I think it's not a bad thing for equities in aggregate, but it is an issue about risk taking. And therefore, I see the breadth of the market improving and some of the narrow base of stocks that have been performing, I think will expand out. I think there are issues in here. Positives are probably towards financials who banks benefit from higher return on deposits that you're going to see in this space. There are offsets to that about jobs, but I think really challenging also in private equity and private capital where, again, we may see this cost of capital having an impact. If we look on the next year, that I think about a lot in the next slide as well, is an issue, which is again showing the very narrow breadth to markets. So here, you can see this is the S&P, so it's U.S. market. So looking at the percentage of stocks that have outperformed in each of the years going back. And really, yes, the median, the average is around about 50%. So half the stocks outperformed, half underperformed. But you can see the 2 periods I've outlined the '98, '99, the dotcom boom when less than 30% of the stocks outperformed. So a very narrow focus of investors' minds and really very similar in the last couple of years, '23, '24, where, again, I suppose, signified by the Mag 7 to some extent, but a very narrow focus to markets. And Bankers struggled a little bit in the last year or 2, particularly '23 into -- '23 really, and we had -- we didn't -- underperform in that period. And we underperformed in that '98, '99 period, you can see on the right, our returns. So what I'm trying to highlight is, I think when the market broadens out, which I do think is going to happen and some of the hype rolls over, you can see how our returns expanded in that period, sort of 2000, 2007, '08, '09. So hopefully, we see a broadening of markets. Let's touch on a few themes that we're seeing and opportunities on the next slide. Electrification, I think, is something we've been continuing selectively to invest into. So really here, the concept is, I think, national grids. So the connectivity of grids, allowing more electricity to flow has really been hugely underinvested in the last 20, 30 years, particularly in key markets like the U.S. And this is the graph on the left is showing U.S. -- it's a forecast for U.S. power demand. And you can see the green line really, last few decades has been very flat. So efficiencies are coming in, more efficient light bulbs, et cetera, more efficient capital equipment, offsetting sort of natural growth. But over the next couple of decades, you can see how suddenly we've got a step up a 38% forecast growth in demand for electricity. And really, that's funding data centers, it's funding electric vehicles. It's funding growth in the economy. And so we're expecting huge investments to have to flow to support this. And this is going on everywhere. We see this in India, where we own one of the key grids, their Power Grid, investing in India. We see it in -- certainly in China and in across Europe. So there's a selection of the stocks we own there on the right, all feeding into slightly different areas, whether they're natural grid providers themselves or providing equipment like Hitachi. Hitachi is a fascinating business. It provides some of the big inverters that convert offshore wind power back onto the grid. And really, as we saw in Spain, very recently in Spain, Portugal, if you don't invest, there's the potential for some serious blackouts. So again, I think that's just going to be focus of mine increasingly on this area. We used to have -- I think at the beginning of the year, it was about 4%. We're at 7% of total assets in this area, I suppose, this theme of electrification. So we see interesting opportunities and hopefully, that will grow for us. If we look on the next slide, our next sort of theme has been -- been big focus on banks as an area to invest in where I continue to think certainly, they've been very depressed for many years since the great financial crisis really when a lot of them were built out. So one of our key holdings there NatWest has finally paid the government back for the investment stake there. But I think as the banking sector in aggregate, what interests me really here, I think, is finally with interest rates slightly higher, that is supporting net interest income profits here. We've also got to come deregulation, which we're seeing certainly probably start in the U.S., but I think there's talk of Europe following as well, should allow banks to increase their lending. And therefore, we should see more loan growth picking up as well. So -- and that's really the heartbeat of a good bank is loan quality and loan growth. So I'm expecting we're already seeing that in Europe pick up from sort of barely 0 to 1% to about 3% or 4% and hopefully, will rise as the economy grows. So the left-hand graph is just showing the private equity ratio for the banking sector. And I've been very positive as it's been -- we'd be able to buy banks on sort of 6 to 7x earnings with dividend yields of that order. So 7x, something like BNP is roughly on 7x earnings and a 7% yield. But I think we should get 15% to 20% earnings growth out of some of these stocks. They're buying their stock back as well. And therefore, to my mind, they should be trading certainly sort of 9, 10x earnings. And we've had a good recovery, as you can see, that line for European banks is now back to the sort of long-term average, over the last 20 years. But again, I feel this could go higher. So we're overweight European banks. I've got 3 names we own there. And we're overweight banks globally with additional holdings in places like U.S. with Morgan Stanley and JPMorgan, OCBC in Singapore and Sumitomo, Mitsubishi in Japan. So again, a big sector for us and one we're positive on. Finally, just let's talk on the next slide, a little bit about innovation. I think one of the great aspects of owning an equity investment trust and owning equities is you do participate in companies that are really trying to innovate, trying to change the world and make it a better place. I think if you start with Lilly there, which we own Eli Lilly in the U.S. and for those that don't know GLP-1s, these are basically the obesity drugs that suppress appetite. So I think the figures are relatively really quite depressing, sort of 15% of the world is defined as obese in markets like the U.K., it's 30% of people and 40% in the U.S. So I think solving this issue of obesity is going to be a hugely profound change, I think. And companies like Lilly are really at the cutting edge of that. And what interests me is they do -- these drugs have some slight negatives. And Lilly are really working very hard on combining them with new compounds where the drugs focus on reducing fat, not muscle and also more tolerant. Another company, DSM -- that we own, Firmenich. This company makes a lot of flavorings and health products for the food industry. But really, what I like about one of the key ones there is Bovaer, which really reduces methane in dairy cows and not dairy -- but dairy cattle. So a fascinating compound and additive to food. So it doesn't go into the milk or the meat, but really 1/2 a teaspoon, 1/4 of teaspoon a day to each cattle massively reduces methane, which is the largest sort of greenhouse gas coming out of the farming industry. And then finally, Safran, which is aerospace. This is, again, a great innovative company. They dominate narrow-body aircraft engines, sort of 75% market share there, 10,000 engine order book here. And really these new engines reducing fuel consumption, noise and gases and really working increasingly on electric engines, liquid hydrogen engines and et cetera. So I think, great innovation. So with that, let's jump on very -- I'm nearly there, I think I might -- and one more. Just summarizing really Bankers as a global trust here, is a -- hopefully buying stocks with our -- with innovation, good value, we're still relatively positive on markets despite the fact they've returned back to their recent highs, and that's through local equities and a global oversight. So really, that's it. I'm happy to go to some questions.

Super. Alex, thank you very much indeed. The sun is bursting in here. So questions, let's go. First up, earlier in the presentation, you used the term recycling debt. Could you explain what that means, please?

Yes. So a lot of trusts issued debt mainly in the sort of '80s and '90s, and they were long-term debentures, 30-year bonds, and we had one that yielded 10.5% and another one that yielded 8%. So trying to beat that at 10.5% interest rate was quite challenging. Now those eventually retired and the 30 years came up and we paid them back, and we managed to reissue new debenture, new loan stock as they're called. So we've got some running out at 10 more years, 2035, all the way to 2045. So between 10- and 20-year debt at rates of between sort of 1.25% or so, 1.5% to 3%. And so the average is 2.7%. So again, that's what I mean by recycling, paying off these old expensive -- it's like having a mortgage at a very high rate and remortgage effectively.

Yes. I think that's the analogy that works, isn't it? And a lot of comments about the U.K. The government has been talking a lot about the U.K. and a lot of different organizations and bodies seem to be talking up the U.K. market. Do you see anything there that would convince you to allocate more or buy more U.K. companies beyond all this chat, is there anything you can see that would get you excited or enthusiastic and to increase your U.K. exposure?

Yes. So I said we're marginally overweight. So we are positive on the U.K. let's be clear about that. But obviously, 6% is a lot smaller than we've historically had. I still think the U.K. -- I think helping the U.K. stock market is tricky. I mean, whether the government decide to do some active give the benefit from investing in U.K. equities of some form, that would be lovely. Also helping institutions to invest more in the U.K. market would be helpful as well. But really good companies have got to perform better than their peers. And I think there are some great sectors. We like the banks. I like National Grid, as I say, on that one, good quality companies that are producing, I think, good quality earnings and are cheap. So -- but I don't think the government is going to be a great help and support it. At the end of the day, we need these companies hopefully stop delisting. The rumors today of AstraZeneca into the U.S. would be a disaster again. So I think we just got to hope that these companies continue to operate in a good way.

The next question we had was about interest rates. And you commented you thought interest rates would maybe stay higher for longer or back around that average. How are you positioning the portfolio as a result?

Yes. So I didn't go into a lot about Trump, but the problem with tariffs is it certainly increases -- we've seen them before, increases pricing. Therefore, inflation stays elevated. Now a year later, that price doesn't go -- shouldn't go up again unless tariffs continue to rise. So it's sort of transitory in that sense. But I think once prices go up, it leads to people having to put wages up and you get a bit of a spiral effect coming through. So I therefore expect inflation to be more elevated over the next 10 years than it has been in the last 10. We can also talk about the reduction in -- or the limited amount of labor, whether that's through birth rates falling or aging populations, all sorts of things. Again, I think labor is scarce and therefore, wages are likely to stay more elevated. And again, that's wages leads to inflation. So I'm in the camp that interest rates, certainly, I hope they get cut in the U.K. I expect them to be cut a little bit, but don't expect them to go all the way down to 2% or something, something in the 3% to 4% would be, I think, helpful to the economy, but I just don't see how they fall dramatically. Now there are lots of sectors that do well with reasonable rates of interest and things like the banks is absolutely bang in the middle when the interest rates are at the sort of 3%, 4% banks begin to make a decent return when it's below 2%, we've seen them really struggle with making a return on net interest margins and loan growth is a bit more problematic. So I think that's a key sector that should do well as rates are, let's say, more elevated in this next decade than they are in the past one. Other areas should be the consumer sector, but it needs to slightly get repriced a little bit, but that's again typically been reasonably good news because of that wage growth.

And I guess the next question is sort of asking the same thing. That you commented yourself that the performance struggled in the last year or 2. And the question is asking about your outlook going forward, the future being more important than the past, perhaps. Why or what do you believe would make you more likely to outperform -- your improvement -- your performance to improve in the future rather than staying on the trend that you've been on?

Yes. So again, we're trying to pick stocks and benefit from good companies doing better and therefore, the price going up. And where it can be a bit more struggle is when the macro, the bigger events dominate. So we had a tricky period around the U.S. election in November when it's very thematic, everything suddenly went on stocks that might benefit from U.S. exceptionalism and things of that. We've got a lot of that back. We've been outperforming all year now since the beginning of this calendar year as we're starting to focus again on earnings and things of that. And the other period where we slightly underperformed was again, as rates started rising at the end of sort of through '22 into '23. I did feel that was more time for sort of more value doing a bit better. So again, rates rising it has beneficial for things like the financials. It did work, but then AI, ChatGPT turned up, and we had a big -- we had to sort of go back and buy some of those sort of AI stocks and technology stocks that we thought looked a little bit overvalued, but clearly didn't quite see that AI boom. So we did buy them back, and we've insulated that a little bit rise. But I think really, looking forward, I think positivity shouldn't get too negative about markets or about Trump. He's positive on wanting economic growth and he wants equities to do well in his market and certainly wants U.S. to do better than everybody else. But I think there's reasons to think that, again, his economic policies will be growth orientated. And I see that also in Europe. We can -- touched on it, but Europe wanting to spend more money, certainly the German economy and get that growing again. It's been almost 0 growth and negative periods of quarterly growth. So if we get Europe picking up and we get China adding into that equation as well, get the other side of the tariffs, which I expect will be quite moderate actually in the grand scheme of things and manageable, then we can see the world getting better and growth returning, and that should do quite well for both the breadth of the market and our stock picking.

Next question, you mentioned the U.S. a few times there. What impact is the fiscal debt in the U.S. going to be? Do you think it's going to hold back U.S. growth or -- or do you think U.S. economy is resilient to this debt…

U.S. economy is a phenomenally resilient economy. It's been extremely difficult to [ punch it ] despite some of the politics. So it is an amazing thing. And so I don't see a U.S. recession, but we're expecting slowing growth this year relative to last, and that's because the prior government was trying to pump prime the economy borrowing very heavily to try and get the economy growing and therefore, get reelected. Now you'll see some of that ease back this year, but not enough for a recession. I think the impact of the U.S. is likely to be the dollar. So we've seen quite an incredibly weak dollar this year. Now that might -- naturally, these things don't go on forever, and you might see it recover a little bit. But one would think if they're borrowing more quickly than the rest of the world, don't forget the rest of the world is trying to borrow as well. So it's not a one-off good bet there. But if they borrow continue at this rate with big deficits, then you should expect to see a weaker dollar and slightly higher rates because they have to sort of pay up to get that marginal investment from an international investor. So I think those are the 2 aspects to be careful of and mindful of.

Final question is about the dividend and where your income comes from for the dividend. Is there any particular sectors or regions that you rely on for the income? And is the income -- is the dividend paid out of natural income?

Sorry, I missed the last bit.

And is the dividend paid from the income that you receive from the companies in the portfolio?

Yes. So let's start there. It historically has all the way through -- so last year, we covered the dividend with the income. This year, we've signaled that it might have to dip a little bit into reserves. And we've got lots of reserves. We've been building these up over the last 20 years. So these are the sort of times when you want to be investing in the best opportunities. And therefore, we've gone -- as I said right at the beginning, we're still reasonably growth orientated in our investment style, particularly some of the U.S. names prefer to buy their stock back if they've got excess rather than keep pushing the dividend up too high. And we want to be in the right name. So this year, we're likely to dip into some reserves that might trickle into next year, but it's not too far away, and it's very small that it might be a degree of sort of 0.5% or something. And we've got reserves of sort of nearly 2x the annual dividend. So plenty of space. But where we're finding opportunities back to the banks again, I'll highlight that. Utilities have been pretty good and again, for investments. Property is one we're looking at that could be -- we're quite light there, so we could buy some more of that as an area that's been a bit depressed and again, based on rates. But if I'm right in saying you get some small rate cuts, we might be an interesting one. And then Asia probably over most regions for us has again provided some very nice income for the portfolio.

Okay. Alex, thank you very much indeed.

Great. Thank you.