One of the attractions of investment trusts is that in many cases the managers seem to stay in place longer than they do with open-ended funds, which can result in a more consistent approach. The downside with this is that things can get a bit stale and it sometimes requires a change at the top to bring in fresh ideas and improve the performance, with a case in point being the British Empire Trust (BTEM).
BTEM was managed by John Pennink of Asset Value Investors (AVI) for 13 years until he stepped down last September so that he could focus on his role as CEO. Over this period he delivered annualised returns of just under 11%, although the performance in recent years had been somewhat disappointing.
At the start of October 2015 the responsibility passed to Joe Bauernfreund, who also works for AVI and had been the co-manager for a couple of years. In the first 12 months since he took over there has been a step change in the performance with the fund’s net asset value (NAV) up 33%.
The British Empire Trust was launched in 1889 and aims to generate capital growth by investing in a focused portfolio with a particular emphasis on companies whose shares trade at a discount to their underlying NAV. It has a market value of around £750m.
Bauernfreund has retained the same value orientated strategy as his predecessor, but analysis by the investment trusts team at Winterflood suggests that he has moved to a higher conviction approach. He also puts a greater emphasis on the events that could lead to a narrowing of the discount and is willing to get actively involved to unlock the intrinsic value.
At the end of August the fund’s ten largest holdings made up 52% of the portfolio and in total there were 32 positions representing the manager’s highest conviction ideas. These have the biggest upside potential and on average estimated to be trading at a 32% discount to their intrinsic value.
The thing that differentiates BTEM from all the other funds is that it provides exposure to four unusual sectors: closed-ended funds, European holding companies, Asian holding companies, and property. This makes it a unique proposition and a useful diversifier.
Bauernfreund invests in closed-ended funds that provide an attractive underlying exposure and that are trading at a discount. Ideally AVI would be one of the largest shareholders and able to influence the manager’s approach to realising shareholder value. These tend to be shorter term holdings with the main aim being to benefit from a tightening discount.
A prime example is Symphony International, which is an Asian consumer-focused fund where AVI is the largest shareholder with 13% of the shares. Despite recent strong performance it is trading at an estimated 40% discount to its underlying value.
Another significant holding is the DWS Vietnam fund where AVI has succeeded in getting two nominated candidates appointed to the board. They plan to propose to shareholders the winding-up or open-ending of the fund and think that this would generate a 27% return.
An even more unusual aspect of the portfolio is the exposure to Asian and European holding companies like the offshore fishing, construction and engineering business Aker ASA. These sorts of securities typically own other companies with independent realisable values. The reason for investing in them is that they will typically reflect the broader market movements while adding value via their unlisted assets.
The remaining element of the portfolio is made up of listed property companies. These are mainly special situations where a particular expected event is likely to generate significant upside.
On a look-through basis the main geographic weighting is the Europe ex-UK region that makes up 38% of the fund. This is followed by Asia Pacific ex Japan at 19%, the US at 15% and Japan 10%, with the UK only accounting for 6% of the assets.
An interesting diversifier
Value orientated investments have tended to struggle in recent years, but BTEM has bucked the trend and is the fourth best performing investment trust out of the twenty-five in the global sector with a 12-month increase in NAV of 32.7%.
The fund has modest gearing of 8% and is mainly aimed at investors looking for capital growth as it is yielding just under 2%. It has reasonable ongoing charges of 0.89% and is unlikely to incur large transaction costs as the annualised portfolio turnover has averaged 23% between March and August.
In his latest monthly newsletter, Bauernfreund said that, “the portfolio is heavily pregnant with potential events and, as our investment theses play out….we are able to recycle the proceeds by adding to other event-driven holdings where we still see potential for material upside.”
British Empire Trust has had a new lease of life since Bauernfreund took over 12 months ago and his focus on unlocking the underlying value bodes well for the future. The holdings in the portfolio are estimated to be trading on a 32% discount to their intrinsic value, while BTEM itself is on a 9% discount to NAV. This suggests that there is plenty of scope for further profit.