Annual General Meeting (BRIG)

00:00:06:01 - 00:00:23:24

Unknown

Good afternoon. Lovely to see so many of you back here. I've got a number of things we're going to talk about. The chairs already alighted on a couple. But I'm going to try and talk a little bit more about the present and the future than the past. But I think the past is important.

00:00:23:26 - 00:00:41:24

Unknown

And I think, as the chair has explained, it was a very difficult year for the company, and that has really colored some of the long term performance. So I want to talk about what impacted us last year and what are we going to do about it. And then I'll go on to, a little bit of, predictions about what is happening at present.

00:00:42:00 - 00:01:05:11

Unknown

Okay. I don't intend on spending a lot of time on this beginning part. I'm hopeful at this stage of the 14 years or so, that you're familiar with either myself or David. We have both been here for a very long time, and been running money in that period for about 22 years, of which the last 14 have been with the company, as well as an open ended income trust.

00:01:05:13 - 00:01:36:03

Unknown

You will remember that our real primary driver is in stock specific risk. It's really around the free cash flow and the cash generation of companies. And that's really how we focus and spend the vast majority of our time in our investment process. That's shown here through the breakdown of the trust. You can see that we have three primary objectives or strategies within the trust where we allocate free cash flow, in the center, which is our foundation stone of the portfolio.

00:01:36:08 - 00:02:12:02

Unknown

Just to remind you, this is where free cash flow is used to support the yield and the dividend and a growing dividend, which we believe very strongly in. And then we ally that with two very specific strategies. One is about growth and one is about turnaround. Here we take the same cash flow focus. But those companies that were investing in are primary using their cash flow, either to invest in, extra or we would call advantaged growth, and or using cash flow to help them through a dislocation of capital or a dislocation of share price, which is where we come in in turnaround.

00:02:12:03 - 00:02:33:03

Unknown

So I'm very happy to take questions on that at the end. But in the interest of time, I want to talk to last year. You can see 25 was a very difficult year overall. We'll talk through some of the details of that in a second, and that has definitely colored unfortunately, some of the medium term and long term performance.

00:02:33:06 - 00:03:00:13

Unknown

We're absolutely very conscious of that underperformance. It is not the first period of my career where we've had tough times, but we believe we understand what to do. We believe we have all the skills and resources available to do something about it, and I promise you that we leave no stone unturned in focusing and reengaging on our philosophy and our idea generation.

00:03:00:13 - 00:03:25:00

Unknown

But we are and remain very positive about both the present and the future. Let me talk through some of the specifics of last year to give you an idea of what impacted us so negatively. The first thing I think we should talk to is really the underweight to, really to the largest companies in the FTSE All-Share.

00:03:25:00 - 00:03:47:29

Unknown

I've got a slide on this later, so I'm not going to spend too long on this, but the top ten outperformers accounted for 65% of the total performance. The top three accounted for 41% of the total performance. The simple truth is that we were very significantly underweight the largest outperformers and they happened to be the largest companies in the FTSE All-Share.

00:03:48:01 - 00:04:21:24

Unknown

The biggest issue for us there was being very underweight aerospace and defence, notably Rolls-Royce, which you can see there on the left hand side, and detractors which was 150 basis point headwind to the portfolio over the 12 months. The second real issue that we had was a dislocation that occurred with artificial intelligence, and a number of our positions were impacted by concerns over the duration of their cash flows, with the threat of artificial intelligence impacting those businesses.

00:04:21:26 - 00:04:49:04

Unknown

We have made some changes to the portfolio to take account of that issue, but we have also retained a number of positions where we believe that this threat has been somewhat exaggerated and where we believe that there are very, very strong reasons for these companies not just to fend off the threat of artificial intelligence and the challenges that that provides, but also provide those companies with the opportunity to accelerate their growth.

00:04:49:06 - 00:05:13:09

Unknown

Clearly, the most obvious one for us, and our largest position in the space is RELX, which you can see on the left, cost us 100 basis points during the year, but we believe sits in a very strong place for the future. And then the third reason for the underperformance, which is something that unfortunately occurs most years, is that you do get things wrong.

00:05:13:11 - 00:05:38:05

Unknown

And although we had some very notable winners with things like Phoenix, Admiral, Standard Chartered, 3i, BAT, it was clearly not enough to offset most of the underperformance. And we had two notable detractors during the year. One was WH Smith, which was an accounting issue that occurred in their US business around the profit recognition of contracts, which occurred in August.

00:05:38:07 - 00:06:04:16

Unknown

We exited that position very, very shortly thereafter. And the last one was Tate & Lyle, which cost us 180 basis points. And that is an ingredients business, which has had some, issues both in terms of cost inflation, but also some of the challenges around GLP1 and weight loss impacts on volume in the food market, which has impacted them disproportionately.

00:06:04:18 - 00:06:33:24

Unknown

I'm very happy to take questions on this as we go through towards the end, but let me tell you where the portfolio is now and what we have done over the course of the last 12 months. I will go through some of the challenges, over the geopolitical environment. But we have made a fairly significant change over the course, really, over the last 18 months by exiting some of our domestic UK economy sensitive exposures.

00:06:33:27 - 00:06:55:15

Unknown

This is primarily in property or property related shares. We have sold five different shares here. One is Big Yellow which is UK storage. One is Hammerson. Another one is Derwent London which is UK office. One is a housebuilder called Taylor Wimpey. And the other one is Travis Perkins which is a UK building merchant.

00:06:55:17 - 00:07:18:14

Unknown

Some of this is due to stock specific reasons, but the overwhelming issue facing the UK domestic economy is a) its lack of growth and b) ever increasing cost of doing business in the country, which has impacted the long term cash flows of these organisations and I'm afraid, the pricing of these organisations, and as a result, we have materially reduced our exposure

00:07:18:17 - 00:07:44:00

Unknown

 to that part of the market. Elsewhere, we have reinvested this into parts of the market which we see stronger long term opportunities. We have made a very significant improvement. An increase in our oil, in our aerospace and defence, parts of the portfolio by adding two positions. One is Rolls-Royce and one is Babcock.

00:07:44:03 - 00:08:13:16

Unknown

Clearly, we can talk about what is happening in the world today, but these are very, very strong tailwinds in defence spending. And we believe the civil aerospace cycle has a lot longer to go. We have also added a fairly sizable position in SSE through the fundraising in December of last year and that is, something that we'll come to in a second over the spend in both utility CapEx, AI and indeed clearly benefits from higher energy prices.

00:08:13:18 - 00:08:24:08

Unknown

We've also materially added two positions in AstraZeneca, Hiscox, Howden and Reckitt through the course of the year.

00:08:24:10 - 00:08:44:24

Unknown

I thought it would be useful to perhaps look at the portfolio in a slightly different way, and perhaps encompass some of the thematic tailwinds that we see available in the market today and how we're taking advantage of that, and I have four themes here today. These are by no means exclusive and the only ones, but these are, in the interest of time, probably four of the most significant.

00:08:44:27 - 00:09:15:24

Unknown

I'll start with probably the most interesting and perhaps the most topical given over the last two weeks, which is what's happening in resources. There is a supercycle developing in resources. This is mainly due to an increase in electrification, which is a result of artificial intelligence, and that is most prominent in the copper price and indeed, clearly the amount of CapEx that has to be spent in copper is significant and ever increasing.

00:09:16:00 - 00:09:37:04

Unknown

Copper is a pretty horrendous ore to mine, primarily because it tends to have a lot of byproducts like gold, which is good, but it is incredibly tough to find high grades and is very, very disruptive on the equipment, which means you need a lot more of it. So the top chart here shows you the quantity of investment

00:09:37:04 - 00:10:04:29

Unknown

we believe that is going to grow over the next decade. The bottom shows you what a typical copper mine does over time. Because of the grades it declines, so you're forever having to spend more to get the same amount out. That is very good for some of our investments. Most notable for us here is Weir Group, which is one of the largest mining equipment companies in the world and has very, very significant exposure to both copper and gold.

00:10:05:02 - 00:10:28:02

Unknown

And the second large investment in the fund is Anglo American, which is one of the largest copper producers in the world. We think both companies are extremely well set for the future. I talk to aerospace and defence. I think most people here are clearly aware of the change in defence rhetoric over the course of the last two years.

00:10:28:05 - 00:10:51:27

Unknown

I think the, unfortunately, the war today, means that the need for defence spending is ever increasing. Clearly in the UK, we are short of pretty much everything - well, maybe short of everything that works, and therefore we believe that this is a cycle that will last longer than the political cycle and will extend across parties.

00:10:51:29 - 00:11:11:03

Unknown

As a result of that, we have made a number of investments here. The two most notable ones being Rolls-Royce and Babcock, which we believe have long periods of growth ahead of them, which will translate into cash flow, and indeed translate into share price performance.

00:11:11:05 - 00:11:45:25

Unknown

I'd say probably the strongest thematic of the last 12, indeed probably the last 18 months of global stock markets has been the quantity of money that has been spent or has been promised to be spent on artificial intelligence. I've tried to give you a scale of this spend on the left hand side. What you see here is the US CapEx numbers for different industries from 2025 which is represented by the yellow bar, to 2026 which is represented by the red bar.

00:11:45:27 - 00:12:16:25

Unknown

What you can see is over $700 billion of CapEx has been promised to be spent this year by a number of the hyperscalers and data center providers, which if you combine almost the CapEx for almost every other US sector, it still exceeds that. So it is a sizable quantity of money and is likely to sustain and persist for a number of years given how capital intensive this growth is.

00:12:16:27 - 00:12:39:10

Unknown

You can see on the right that there are, in total US CapEx spend, you have approximately five companies that represent 50% of CapEx spend - so highly concentrated in this area. We have made a number of investments to take advantage of this. One is Oxford Instruments, which has been owned by the trust for a number of years, and is benefiting from some spend on semiconductor.

00:12:39:12 - 00:13:04:07

Unknown

We've also made two new investments. One is SSE, which is benefiting from the electricity demand, and Eaton in the US, which is a provider of liquid cooling into the data centres. So this is the equipment that is used to make sure that the equipment doesn't overheat and is energy efficient. The last comment I'll make on the portfolio ahead of just making some comments on the current environment is just about the consumer.

00:13:04:15 - 00:13:41:24

Unknown

We are exiting a very, very tumultuous time for the consumer, post-Covid, post inflation and clearly some of the political impacts and geopolitical impacts that have happened. The consumer is a very different animal than it once was. We see rate expectations and inflation expectations impacting them and we are being very careful about the exposure that we have in the portfolio, choosing to concentrate on some very, very strong franchises which are both well invested, under leveraged and indeed have very, very strong consumer insights and consumer behaviors that are imprinted on hopefully, their cultures.

00:13:41:26 - 00:14:06:05

Unknown

We have four in the fund that I talk to. One is Reckitt Benckiser, one is BAT, which is British American Tobacco. Next is a very, very strong UK retailer, and Tesco which is a recent addition which has a very strong clearly footprint in the UK food grocery market. The three things that combine all of these organisations is that they are well invested platforms,

00:14:06:09 - 00:14:17:03

Unknown

they all have very significant free cash flow generation and indeed, they have very strong yields which are all growing well above inflation.

00:14:17:05 - 00:14:46:24

Unknown

So, on that we'll go through to the market backdrop and what I will show you on the first slide is, as promised, just a breakdown of the FTSE All-Share last year, both by industry and on the left hand side by companies. You can see if you look at all share returns, the FTSE All-Share returned last year a total return of 24.2%, of which 15.6% was represented by the top ten.

00:14:46:26 - 00:15:16:01

Unknown

The next ten companies was 4.8%, which means that 85% of the return came from the top 20, and the remaining 600 or so companies produce 3.8%. So, this was a highly concentrated year of performance. You can see that slightly by the industry return on the right, very concentrated in aerospace and defence, banks, and pharma.

00:15:16:04 - 00:15:41:05

Unknown

Moving on to one of the issues that has impacted the portfolio and continues to be a challenge. I think for most long duration business services, software and technology companies, is whether or not artificial intelligence is something that can be an opportunity to accelerate growth, or it is a threat that will disintermediate growth. You can see here on the left

00:15:41:07 - 00:16:03:17

Unknown

the yellow bar is the semis and semis equipment, the green bar is tech hardware and equipment, and the red bar is software and services. These are all US sectors by the way. You can see that software and services has had a very material pullback over the last six months as the threat of disintermediation has overwhelmed any previous positivity people had towards artificial intelligence.

00:16:03:19 - 00:16:26:29

Unknown

This has impacted us pretty significantly in the portfolio. Most notably in one of our larger positions, which is RELX on the right hand side, and you can see the earnings of the organisation, which is represented by the green and yellow, continuing to show very, very strong growth. Unfortunately, the price is dislocated from this as people worry about the future

00:16:27:01 - 00:16:51:10

Unknown

and there has been a very significant pullback in the equity, from a high of 42 pounds in August of 2025 to the current price of 26 pounds today, having hit 20 pounds, or 19 pounds along the way. So some very significant price volatility here and we have adjusted some of the risk in that part of the portfolio, but we've retained a very large weighting

00:16:51:10 - 00:17:13:23

Unknown

in RELX, which we think has a very, very strong moat, some very significant barriers to entry and a very, very impressive and very exciting future. And then maybe, I didn't start with this because I'd like to start a little bit, not not quite on the UK economy because there isn't very much good news here I'm afraid.

00:17:13:25 - 00:17:45:03

Unknown

I've taken these two slides from the latest OBR presentation. This was page three of the OBR presentation following the spring review, and what I show you on the left is taxation as a percentage of GDP and right spending as a percentage of GDP. You can see that for every unit of tax that we are taking, we are unfortunately having to raise taxes exponentially in order to keep spending flat and pay down the deficit and that has an issue in shrinking, I'm afraid,

00:17:45:06 - 00:18:16:04

Unknown

the opportunities for growth and the incentive for investment. Clearly the biggest challenge of all of this is that the quantity of spending that is being put into the economy is not quite getting its return, because the vast majority of that spending is happening in the public sector and not the private sector. I will show you two very specific issues that are, I think, cyclical rather than structural that have impacted the UK business P&L.

00:18:16:06 - 00:18:54:29

Unknown

Now the top chart shows you the energy costs of the UK, and I show you the chart - this is from the International Energy Agency, taking you back to 2004. I have given you the UK energy cost per kilowatt hour against the median of the international combination. So that is effectively the G7 and most of the developed world and on the right hand side, the energy cost of 2024, 20 years later, you will see that the energy cost in the UK is significantly higher than the average

00:18:54:29 - 00:19:36:24

Unknown

and indeed, almost four times that of the US today. That has a significant issue in terms of the quantity of efficiency businesses, particularly manufacturing businesses, have in the UK, particularly if you are energy intensive. And at the bottom, I have shown you the labour cost, and again, I've taken this only back about ten years, and I show you this against the green dot being the UK, the purple line being the OECD median, you'll see that our labour costs have exponentially risen, particularly relative to history, where we were slightly below the median is now very, very substantially above.

00:19:36:27 - 00:20:19:19

Unknown

These are two extremely tough measures in which to offset any type of margin or profit growth and has very significant impacts for investment in the UK and we hear that consistently through our company engagements over the course of the last 12 to 18 months. When you add in the recent changes to business rates, it is unfortunately just too expensive for many UK businesses to invest, and particularly for those businesses that have the opportunity to invest elsewhere, they are choosing to do so.

00:20:19:22 - 00:20:45:00

Unknown

One of the best performing markets last year in fact, indeed, in the developed world, the best performing market last year was the UK equity market, up 24.2%, vastly outperforming our European and the US peer group. Unfortunately for the last 48 months, UK has seen very, very consistent outflows despite that valuation differential. One of the challenges we find is facts versus fiction. Here

00:20:45:00 - 00:21:12:14

Unknown

what I've tried to do, is show you how valuation has changed on the UK. So on the left hand side I show you the FTSE All-Share, which is the hopefully the colors aren't too merged into one, but the orange bar is the UK in earnings growth, the yellow bar is the S&P and the reddish bar on the right hand side is the Euro Stoxx 50.

00:21:12:17 - 00:21:49:07

Unknown

You can see I've defined this by earnings growth dividends and reinvestment, and then the multiple change, you can see against our US colleagues, UK companies have produced certainly inferior earnings but decent dividends and reinvestment. Against our European peers we have had stronger earnings growth. We have better dividends and reinvestment. But if you look at the third bar on the right, which is the valuation change, unfortunately, developed market investors have chosen to derate the UK despite very strong earnings and good dividends

00:21:49:07 - 00:22:19:13

Unknown

and reinvestment whilst rerating the US and keeping Europe flat. And that is unfortunately why the total return in the UK has been behind both Europe and the US, despite last year's very strong performance. That said, if we go forward, this still is a very, very high yielding market, and indeed it's a very inexpensive market as I showed you on the previous slide. We think the opportunity set in the UK is still extremely exciting.

00:22:19:20 - 00:22:35:23

Unknown

We think it is still extremely inexpensive and despite some recent headwinds, we are very, very excited about the future and where the portfolio is settled today. So on that, I'll stop and open up to Q&A before making maybe some comments on Iran.