British Empire Trust has an eclectic portfolio of assets, but its focus on value looks attractive, says Merryn Somerset Webb.
If you were launching a global investment trust today, I’m not sure you’d put the word “empire” in the name. But when the British Empire Trust launched in July 1889, the idea of empire didn’t have quite as many detractors – just a sense of global reach and riches. And 127 years on, that is pretty much what the trust has delivered. It hasn’t done particularly well relative to its peers in the last few years, but longer term things look better: according to its own data, the trust has returned around 12% a year on average since launch – not bad at all.
So what differentiates it from the other one-stop-shop global equity trusts? British Empire looks for “companies trading at discounts to net asset value (NAV) or to net realisable value”, notes manager Joe Bauernfreund (his firm Asset Value Investors has been running the trust for 30 years). This leads him to three specific types of company.
The first is family-controlled investment holding companies which own diversified portfolios of assets – these often trade at a discount, partly because the market baulks at family rather than external-shareholder control, and partly because they often own unlisted and hence illiquid assets (which are hard to value). They also aren’t well covered by analysts, which leads to “mispricings”. Think, for example, of the Wallenberg family company Investor AB in Sweden, and the Jardine group in Singapore.
This is true, I say. But it’s always been true. Why buy at a high discount when you will have to sell at one too? You can’t buy at a 40% discount and sell at 0%, accepts Bauernfreund. But by owning and actively-managing quality assets, and using very low-cost structures (the likes of Jardine can run themselves for 0.15% a year), “many of these companies have outperformed broad market indices for 20-plus years.”
So it’s not about narrowing the discount to the NAV. It’s about the growth of the NAV itself. Any events that reveal hidden value, or governance changes that close the discount, are just bonuses. Consider Investor AB. Over the last 30 years, as the family has grown (so that more members have no professional connection to the business), they have focused more on the discount (no family member wants to sell at a discount when they need capital). That changes the dynamic.
The upshot: every investor is looking for long-term perspective, active ownership and low costs. That’s what you get with this kind of firm. So what’s his favourite family firm? Exor, the firm controlled by the Agnelli family (think Fiat). Over the last decade, John Elkann, who succeeded his grandfather Gianni Agnelli as chair and CEO, has simplified Exor’s structure, and together with Sergio Marchionne, CEO of Fiat Chrysler, “created a lot of value” at Fiat. CNH, an agricultural vehicle business, and Ferrari have been spun out; Fiat (which he also chairs) merged with Chrysler; and Partners Reinsurance was purchased.
The portfolio trades at a big discount (32% at the time of the interview), even though “Fiat has massive value… thanks to the Maserati brand, the Alfa brand which can be spun out… a car-parts business which they are looking to sell or spin out and… the very lucrative and attractive Jeep business in the US.” The sum-of-the-parts value “is probably 50% to 75% higher than the current share price”.
Constructive activism
We move on to the second type of firm – closed-end funds. The goal again is to find companies that own assets trading at discounts to NAV. With family companies, the families themselves often end up being the activists, but with these funds, Bauernfreund and his team seek to take big stakes, then drive change as “constructive activists”.
That means talking to “boards to try and implement policies to unlock value, sell assets, communicate better, buy back shares… and in the most extreme cases… liquidate.” One big theme for the last four or five years has been private-equity trusts – even three years ago you could buy something with cheaply valued assets on a discount of 30%-40%. Wind it up (thus getting the discount to 0%) and “that’s a pretty healthy return”.
Today, “there are still a good handful of opportunities”. Such as? NB Private Equity, which has just improved its governance structure due to British Empire taking a 10% stake – “enough to get your voice heard”. Or look for value in the activist funds themselves. It sounds a tad circular, but the likes of Pershing Square and Third Point, “who portray themselves as the guardians of shareholder rights, and are busy beating up companies” for not prioritising shareholder value, actually trade at discounts (Pershing on 24% and Third Point at 18% at the time of interview).
There are reasons, of course – Pershing lost a lot of money on pharmaceutical firm Valeant, and has a short position in Herbalife which may well not work out. Both also have iffy shareholder structures. But while you “can’t actually win an AGM resolution, you can embarrass them” and hope, for example, that they might buy back shares to close their discounts. Also, these big funds do have “quite attractive” listed and liquid portfolios. Nestlé is held by many big funds, for example. But you get it a lot cheaper if you buy via a trust on a wide discount.
That’s all compelling, but I am keen to get on to the third type of investment – the one I reckon MoneyWeek readers will be most interested in. It is “special-situation” stocks – and that, for Bauernfreund, means Japan, which now makes up 20% of the total portfolio. Why? First, valuation. “Japan sticks out as a country where there are cheap, good value companies.” Second, “the corporate governance revolution – and the opportunity that brings to benefit from some of the actions that managements may take in future”. British Empire has built a basket of companies that have “on average, 60% of their market cap in their cash”.
The implied valuations of the businesses themselves are in the mid-to-low single digits, with double-digit cashflow yields and rapidly growing earnings. Cheap companies, paying dividends and with the cash to pay better ones – that’s good in itself. But those companies could also do something themselves to unlock value, or could be taken over. And in one or two cases, “there are also things that we can do to help unlock value”, says Bauernfreund.
Unlocking value in Japan
Interesting. Foreign investors haven’t a great record of forcing change in Japan, I say. Things are changing, says Bauernfreund – “even this year foreign activist investors have succeeded in changing the behaviour of management”. Asset Value Investors itself has just launched a campaign to get television production company Tokyo Broadcasting Systems Inc to sell some of its vast $4bn stock portfolio and return the money to shareholders (lots of Japanese firms have big shareholdings in firms they have historically done business with).
Tokyo Broadcasting’s business is worth around $1bn-$1.5bn, says Bauernfreund. It owns real estate worth another $1bn-plus. Add that to the share holdings and you are up to $6.5bn-plus. Yet its market value is only $4.5bn. So buy it, and you are essentially getting a cheap ETF with the optionality in the real estate and the television business”. Toyota Industries (which has a 6% stake in Toyota Motor) is a similar situation: until a few months ago, its equity portfolio was worth much the same as its total market capitalisation.
Its unlisted holdings – Toyota Forklift, for example – came for free. That sounds like MoneyWeek’s kind of thing. The British Empire Trust comes with a pretty eclectic portfolio, but its focus on value looks attractive – particularly given that it trades on a 10% discount to the (discounted!) value of its own assets. If you are worried about everything being expensive (and are keen on Japan), take a look.
Fact file: Joe Bauernfreund
Joe Bauernfreund is chief executive and chief investment officer of Asset Value Investors (AVI), which was set up in 1985 to manage the assets of British Empire Trust (LSE: BTEM).
He has been the trust’s named portfolio manager since 2015, and is only the third such manager in 30 years. He first joined AVI as an investment analyst in 2002, after completing a masters in finance at London Business School. Prior to that he spent six years working in real-estate investment.
* A book on the trust’s history was published to celebrate its 125-year anniversary two years ago. Request a copy at British-Empire.co.uk.