Diverse, global portfolio that seeks out undervalued assets is perfect for bargain hunters

British Empire Trust trades at an attractive discount and makes a solid, long-term holding, says Laura Suter

QUESTOR tipped British Empire Trust (BTEM) last October at 606p, arguing that the price – then representing an 11pc discount to the stated value of the company’s underlying holdings – represented bargain exposure to a diverse, global portfolio. But our real argument lay in the fact that we believed the stated discount to be a wild underestimate. BTEM owns, among a range of assets, other investment funds, overseas holding companies and family businesses – where in many cases the ultimate assets are not quoted on any stock market. Their valuations are, thus, infrequently updated, adding a further “layer” of discounts. This led us to suspect the real discount was far greater than the stated 11pc. We were also interested that Us-based activist investor Elliott, which took a long-term position in Alliance Trust and achieved – after much disruption – a substantial narrowing of the discount there, started to buy into BTEM in mid-2016. The trust’s “headline” discount – the one you will see quoted on stockbrokers’ websites – remains today at about 11pc. But the “hidden” discount (the difference between the quoted value of some of BTEM’S holdings and their own respective holdings) has indeed narrowed.

The latter is difficult to calculate, however, as the information derives from a number of sources. Currency adds further complication.

Anthony Leatham, head of investment company research at broker Peel Hunt, estimates the company’s “overall discount” has narrowed from 30pc to 25pc.

The share price has risen handsomely since our tip partly because of the weakening pound, but in part, also, because of this narrowing discount, Mr Leatham says. This effect is set to continue as local markets re-rate a number of BTEM’S holdings.

Elliott is reducing its own position, which is now below 5pc, according to a stock exchange announcement earlier this month.

One differentiator of the company is that it actively seeks undervalued assets, often finding them in quoted funds and holding companies whose own shares are out of favour. This gives rise to the double-discount.

The company is independently managed, making it relatively unusual among investment trusts – most of which employ a fund management house to oversee their assets. Called Asset Value Investors, the management team was established in the Eighties purely for the purpose of managing BTEM’S assets – then with a value in the single millions.

Portfolio manager Joe Bauernfreund has enjoyed some notable successes, including Swedish investment company Kinnevik. Recent additions include activist fund Pershing Square, bought at a discount of around 15pc.

The trust remains an attractive, long-term holding for those wanting exposure to a very different asset class. Even at today’s price there is plenty of potential.