‘Three-string’ approach gives this oddball fund a towering record
BRITISH Empire is something of an investment oddball. But shareholders are none the worse for its unusual investment approach as evidenced by the bumper returns they have enjoyed over the past year.
The trust is managed by London-based Asset Value Investors and, in particular, Joe Bauernfreund who has had a handle on the fund’s investments for the past 15 years.
In broad terms, he scours the corporate world in search of businesses where he believes seriously undervalued assets exist. He then takes a stake in the hope of these assets being properly recognised at some stage. This ‘value’ may crystallise through a company selling a previously undervalued subsidiary at a profit. Or it could result from a holding in an investment fund acquired when its share price was trading at a discount but where that discount has been eliminated.
It is a particular investment strategy that involves meticulous research. It also requires a mix of patience, opportunism and occasionally working with company boards to force through necessary change. Apart from British Empire, only two other investment trusts – Lazard World and Miton Global Opportunities – have such a modus operandi.
All have delivered investors more than satisfactory returns over the past year – 33 per cent, 27 per cent and 43 per cent respectively. Over the same period the FTSE All-Share Index has increased in value by 18 per cent.
Bauernfreund currently has three main strings to his investment bow. First, some 40 per cent of the portfolio is invested in big sprawling familycontrolled businesses where he and his four strong team has identified locked-in value. These stakes will take a while to bear fruit, with the trigger point being a corporate event: a disposal, restructuring or listing of a previously unlisted business.
French-listed Wendel is a case in point. The Wendel family has a 37 per cent stake in the company which in turn holds positions in a portfolio of businesses including South African insurer Saham and French multinational SaintGobain. Wendel is British Empire’s biggest holding and Bauernfreund is confident that over the next 12 months, it will add to the trust’s performance as a number of unlisted companies it holds – including mobile phone mast owner IHS – are sold. Another 40 per cent of the trust’s portfolio is in a mix of closed ended funds where Bauernfreund is looking to benefit from a narrowing of their share price discounts. A recent success story was a stake in investment fund DWS Vietnam which British Empire took three years ago when the fund’s share price was sitting at a 40 per cent discount to the underlying assets.
Bauernfreund was instrumental in getting the fund to stick to a promise made at launch to allow investors to get out at net asset value after 10 years, enabling British Empire to bank a tidy profit. The final string is a portfolio of ‘special situations’, primarily comprising positions in a dozen Japanese companies which Bauernfreund believes will reward shareholders as they improve corporate governance.
Combined, the three strings make for what Bauernfreund describes as an ‘eclectic’ portfolio with 90 per cent of the trust held in just 25 core holdings. A recent profile of the trust by London-based Kepler described British Empire as a ‘highly active, benchmark agnostic’ portfolio. An investment oddball through and through, albeit highly effective.