British Empire Securities & General Trust - update

Many Investment Trusts (“closed ended” funds with a stock market listing) have a long history, with some plying their trade since before the First World War.

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  1. Rob Morgan

Originally founded in 1889, British Empire Securities & General Trust is one such stalwart. It is currently managed John Pennink and Joe Bauernfreund at Asset Value Investors Limited using a “value” oriented approach – finding unfashionable investments priced below their true value.

Taking a ”contrarian” view in search of cheap assets is not unusual in itself, but this Trust goes about this in a distinct way targeting four specific types of investments: Asian and European family-controlled holding companies or conglomerates, other Investment Trusts, property companies, and the mining and resources sector.

The proportion invested in each of these areas varies according to where the managers see the greatest opportunity, and by far the largest areas at present are holding companies at 43% and Investment Trusts at 36%. Holding companies are essentially parent companies of a range of businesses whose valuation doesn’t adequately reflect the “sum of the parts” according to the managers’ research. Examples in the portfolio include Hong Kong’ s Jardine Matheson and Investor AB, a Swedish company that owns stakes in a variety of large international businesses such as Atlas Copco, AstraZeneca and Ericsson.

Similarly, as you would expect given the fund’s value-orientated philosophy, the Investment Trust holdings in the portfolio tend to have significant discounts to their stated net asset values. However, there has to be more than just value on offer. The managers are opportunistic, looking for catalysts for the discount to narrow and for the value to be realised – for instance, the Trust winding up or otherwise distributing assets, a takeover or the introduction of more shareholder friendly policies such as share buy backs.

Presently the largest area in the Investment Trust portion of the portfolio is Private Equity. A number of Trusts were launched in this sector in 2006 and 2007, just before the global financial crisis hit, and with subsequent performance weak it has fallen out of favour with investors. Yet Mr Bauernfreund explains the portfolios of these trusts are relatively clear to see and the values straightforward to estimate; they have been happy to invest for the long term as discounts to net asset values across the sector narrow. In some cases this has already played out and they have begun to reduce their holdings.

The property holdings in the fund are also characteristically opportunistic. Having generated strong returns from German property company Westgrund, the managers are now turning their attention to commercial property in major Spanish cities where they believe income is poised to recover after several years of falling rents. Meanwhile, following a couple of years of (wisely) steering clear of the mining sector, they have started to build a position, largely through BlackRock World Mining Trust, whose share price stands at a discount of around 12% to net asset value at present.

Given the bias of the fund towards Europe and Asia and away from the US, recent performance relative to other global funds has been poor. However, over the longer term returns have been stronger, and the managers are not about to change their patient, disciplined approach. Indeed it could be that the Trust enjoys a better period in the shorter term derived from any rebalancing towards Asia and Europe by investors.

Presently the Trust itself can be bought at a discount of around 11% to net asset value (on top of the average discount that the portfolio holdings trade at of around 24%), so it could be of particular interest to investors searching for value in a market that has grown more expensive in recent months and years. We believe it offers something a bit different for investors looking to diversify a global equity portfolio or complement more US-centric global funds; it remains part of our Foundation Fundlist of preferred investments across the major sectors.

Read more about the British Empire Securities & General Trust here.

 

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