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An Establishment figure that looks to the East

An Establishment figure that looks to the East

I thought this week I would look at Establishment (ET) investment trust. Establishment is the smallest fund within the Global Growth sector, with a market value of £36 million and assets of £45 million.

It's small and a management fee of 1% on the market capitalisation give it an ongoing charge ratio of 1.27%, towards the top end of the range for its peer group.

Nevertheless, competing as it does in a world of big beasts, it is important Establishment differentiates itself. It has done this by having an absolute return target and maintaining a marked bias in its asset allocation towards Asia.

Establishment first listed in March 2002 as a Luxembourg investment company reconstructed into a UK investment trust. It started life with 20 million shares and £19.6 million of assets.

A substantial part of this was contributed by Richard Thornton and entities associated with him. Thornton was known for founding GT Management and later Thornton & Co, both asset managers. He was the first chair of the company and a director until his death in January 2013.

Establishment’s management contract was, until recently, held by BDT Investment Management – a triumvirate comprising Henry Thornton (Richard’s son and the company’s day-to-day investment manager, pictured), Robert Brewis and Simon Dobson.

Thornton’s career has always been involved in Asian and emerging markets, including stints at Thornton Management, Royal Trust (Asia) and Colonial First State. The Thornton family still controls a large percentage of the fund’s share capital. This gives Thornton more freedom to focus on the long term rather than fretting about short-term performance.

The philosophy behind BDT was to achieve absolute returns from focused portfolios, constructed without reference to any particular benchmark. In 2002, the prospectus said BDT thought the best opportunities for making money existed in Asian and emerging markets so this bias was present in the portfolio from the outset.

The trust subscribed for 20% of the share capital of BDT Investment Management. This had around £50 million under management in 2002.

This company struggled to grow meaningfully however, and the rising burden of red tape associated with running an investment management firm became too much for them. In July this year BDT folded itself into Blackfriars Asset Management, a global emerging markets specialist.

Brewis left the company at this point but the deal added additional investment research resource for the management of the company, and Thornton stayed on as manager.

The portfolio at the end of August was 61% invested in equities, almost all of it in Asia (they hold one UK stock, Rotork (ROR), a fluid controls business that derives most of its revenue from exports and one which AXA's Nigel Thomas also likes). The Asian equity portfolio is refreshingly different from the standard mainstays of dedicated Asian funds and more diversified – the largest holding, Malayan Banking, accounts for about 5% of the fund.

Fourteen per cent of the portfolio was invested in the BDT (now Blackfriars) Invest Oriental Focus fund, an open-ended fund managed by Thornton. There is a substantial overlap between the two portfolios so it is not obvious to me why some of the money is allocated to this fund.

However, there is no double charging on the fee so the effect for Establishment shareholders is neutral. The balance of the fund reflects its absolute return stance; 8% of the fund is invested in Gold Bullion Securities (an exchange traded fund linked to the gold price) and the balance of the fund is in cash.

At first glance, compared to its global peer group, the fund’s recent track record doesn’t look all that marvellous. Over one year to 11 September the net asset value return was 3.4%, which ranks it 31st of 37 global funds. When you compare it to other funds trying to deliver absolute returns however it looks better, ahead of funds such as Capital Gearing (CGT), which is in the UK Growth sector despite having just 18% invested in UK shares, and Ruffer Investment Company (RICA).

Over 10 years the net asset value of the portfolio has returned 132%, which places it 23 out of 33 global trusts. The long-standing discount on the shares, however, means shareholder total returns have been just 88%.

The underperformance versus the group is partly a consequence of the fund’s asset allocation but it also looks as though the Asian equity portfolio underperformed the average Asian investment company until recently. August saw a welcome return to form, however, with the asset value outstripping Asian indices.

The portfolio has a bias to companies that should benefit from domestic demand growth. Recently, many have been overlooked by investors who instead have been favouring defensive stocks.

As investors become more confident, sentiment could swing in Establishment’s favour. With a fair wind, this could also be a trigger for a narrowing of Establishment’s 20% discount.

James Carthew is a director at Marten & Co, an adviser on assets including investment trusts 

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