British Empire Trust has addressed issues that weighed on performance
Thursday 24 May 2018 Author: James Crux

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Investors seeking a fund flush with bargain stocks and upside catalysts should buy British Empire Trust (BTEM). It aims to achieve long-term absolute returns by investing in undervalued assets.

It offers shareholders value within the portfolio’s underlying assets and the share price also trades at a discount to the trust’s own net asset value (currently 9.4%).

Investment bank Jefferies argues: ‘Having addressed many of the issues that previously dogged the fund, namely too little focus within the portfolio and holding too much cash, we see British Empire as a resurgent proposition.

‘Although the fund has been swimming against the tide of growth favoured markets, underlying portfolio returns are attractive, with potentially even more value now embedded within the portfolio than has been the case historically.’

BAUERNFREUND’S BEST IDEAS

Since his 2015 appointment, fund manager Joe Bauernfreund has modified the investment process. The manager is more focused on a core universe of around 350 stocks made up of investment or holding companies including conglomerates, real estate companies and private equity portfolios.

There is also increased conviction within the portfolio with larger holdings increased in size to reflect Bauernfreund’s ‘best ideas’. As British Empire often takes an activist stance in order to create valuation catalysts, larger position sizes and greater voting power are advantageous.

Throughout much of the trust’s recent history, ‘value’ as a style has underperformed, creating a performance headwind and partially explaining the discount to net asset value.

Compelling catalysts would include a market shift to favour ‘value’ over ‘growth’, as well as the possible upside as catalysts on individual portfolio holdings come to fruition through valuation uplifts, returns of capital or wind-ups.

Key risks to consider include the presence of two layers of discount risk, a style bias to ‘value’ and currency risk arising from a predominantly non-sterling portfolio.

WHAT’S UNDER THE HOOD?

As at 30 April 2018, top holdings included Japan Special Situations, a basket of 17 Japanese stocks with a significant proportion of their market cap in net cash.

It also invests in Swiss-listed holding company Pargesa, jointly controlled by the Frère and Desmarais families and whose only asset is its 50% stake in Groupe Bruxelles Lambert, a Belgian-listed holding company with stakes in Adidas and Pernod Ricard among others.

Other leading British Empire positions include the US hedge funds Pershing Square (PSH) and Third Point Offshore (TPOU) and within the listed private equity space, a holding in Riverstone Energy (RSE), an exemplar of a portfolio holding, trading at a wide discount to asset value and with hidden value under the hood.

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