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Ian Cowie: British Empire – bad name but great global value

Ian Cowie: British Empire – bad name but great global value

Nine years after share prices began rising in recovery from the global credit crisis, it’s becoming increasingly difficult to find value among investment trusts where assets include businesses whose brands we recognise.

So a £1 billion fund whose shares trade at an 11% discount to underlying assets which include well-known names such as Adidas, Burger King, Ferrari and Oriental Mandarin Hotels might sound too good to be true.

Bear in mind that the typical investment trust now trades at a 3.9% discount to net asset value (NAV), according to the Association of Investment Companies (AIC), and the average discount to NAV in the global sector is just 1.5%.

Better still, this long-established trust which lingers in the bargain basement, can be seen to deliver a ‘double discount’ because its underlying holdings are in the books at an average discount of 28% to their market value. How so?

The explanation is that British Empire (BTEM), which is due to celebrate its 130th anniversary next January, invests in the shares of holding companies which themselves invest in trading companies’ shares. While the latter are often well-known, the holding companies themselves are far from being household names.

This somewhat convoluted structure may have contributed to rotten recent performance as well as adding to costs. For example, according to the AIC, British Empire imposes ongoing charges of nearly 0.9% per annum, or almost half as much again as the global sector average of just over 0.6%. Both numbers are small but the difference could add up to a substantial drag on returns over long periods.

Worse still, British Empire has delivered below average total returns of 11%, 60% and 86% over the last one, five and 10-year periods. For comparison, the global sector averages are 19%, 130% and 216% respectively.

So, on the face of it, British Empire has done little to stir the patriotic ardour of profit-seeking investors. But Joe Bauernfreund, who has managed the fund for less than three years, says he is focusing strictly on holding companies where hidden value is likely to be unlocked and that this billion-pound tanker of a trust is beginning to turn around and deliver decent performance.

Encouragingly, Bauernfreund is an activist investor willing to speak up to improve shareholder returns. For example, as my colleague Michelle McGach reported earlier this week, he is trying to persuade the private equity company Oakley Capital Investments (OCI) – whose most valuable asset is the listings magazine Time Out – to move its base from Bermuda to London or the Channel Islands.

While OCI and British Empire’s other holding companies – such as Exor, Jardine Strategic and Pargesa – may remain profoundly obscure, their controlling family interests have good reason to preserve capital tax-efficiently and avoid frothy valuations.

For example, the Agnelli family uses the Exor investment company to hold its interests in Fiat Chrysler and Ferrari at a 29% discount to their market value. By investing in Exor and other holding companies’ shares, British Empire can offer its shareholders a globally-diversified and professionally-managed way to invest alongside some of the wealthiest families in the world.

The question remains whether this investment trust is good value or merely cheap for a good reason? It’s certainly badly-named as the fund has next to no assets in the UK and is by no means focused on our former colonies or the countries that form the Commonwealth. As an historical aside, what began as the Transvaal Mortgage Loan & Finance Company in 1889, no longer has any assets in South Africa.

This DIY investor hasn’t bought any shares in global investment trusts since the days when they traded at double-digit discounts. But I confess I am tempted to so do so again, now that Bauernfreund is banging the drum for British Empire.

Here is a complete list of Ian Cowie’s stock market investments. It is not financial advice nor is any recommendation implied.



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