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British Empire looks secure

INVESTMENT TRUST OF THE YEAR: British Empire Securities and General (BTEM)
January 7, 2011

BULL POINTS:

■ High-level of liquidity

■ Portfolio of undervalued assets

■ Manager's strong track record

■ Good global spread

BEAR POINTS:

■ Discount narrower than its average

■ Performs out of sync with market

IC TIP: Buy at 502p

Approaching 2011 with a degree of investment caution looks sensible. With this in mind, shares in British Empire Securities and General investment trust look a particularly interesting play. The trust's manager has a clear focus to invest in undervalued assets, which should help underpin the trust's net asset value (NAV). What's more, the manager - John Pennink since 2002 - favours companies with little or no debt and relatively low volatility in their share price, as well as tangible fundamental value. In addition, at the end of November, 21 per cent of the trust's investments were in liquid assets. In the past, the manager has been good at deploying the fund's liquidity at opportune times, but now it represents a buffer against uncertainties.

IC TIP RATING
Risk ratingLOW
TimescaleLONG TERM
What do these mean? Find out in our

While the restrained focus meant the trust's investment performance was lacklustre at various stages of the stock market's cyclical rally, more recently the trust's style of investment has become more in vogue and the trust has outperformed both its peers and its benchmark over the past one, three and five years (see table).

BRITISH EMPIRE SECURITIES & GENERAL INVESTMENT TRUST (BTEM)
PRICE502pNAV522p
MARKET CAP£804mPRICE DISCOUNT TO NAV4%
SET UP DATE1886 1-YEAR PRICE PERFORMANCE22%
MANAGER START DATEDecember 20023-YEAR PRICE PERFORMANCE16%
YIELD1.5%5-YEAR PRICE PERFORMANCE12% 
TOTAL EXPENSE RATIO0.74%MORE DETAILSwww.british-empire.co.uk

HoldingPercentage
Vivendi7.1
Jardine Strategic6.7
Groupe Bruxelles Lambert5.1
Jardine Matheson4.9
Orkla4.8
Investor AB "A"4.6
Deutsche Wohnen4.1
Sofina4.0
Exor pref shares2.8
Swire Pacific2.6

Sector breakdownPercentage
Continental Europe43
Liquidity21
Pacific ex-Japan17
US & Canada6
UK5
Japan4
Middle East3

According to data from broker Numis, over one year the trust has increased its net asset value (NAV) by almost 20 per cent compared with 17 per cent for its benchmark, the FTSE World ex-UK index; it has managed a 17 per cent rise over three years, almost the same as the world index and, over five years, it is 38 per cent ahead, compared with 35 per cent for the benchmark. Most impressively, over the past 10 years it has returned 185 per cent compared with 32 per cent for its benchmark. It has only underperformed in one of the past 10 years.

The manager has built a strong reputation for being able to find assets that really are valued beneath their true worth. The manager estimates that the discount to true value on British Empire's entire portfolio was 23 per cent at the end of September. On top of that, British Empire's shares are valued below the market value of their net assets. Currently that discount is 7 per cent (see table), which is a bit better than the average for 2010.

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The fact that any company's shares trade at an apparent discount to their real value tells us that there can be a fair degree of subjectivity about estimating the value of an investment trust's assets. But British Empire's track record speaks volumes about the ability of its manager to identify genuine opportunities. Importantly, the manager has frequently proved that he has the commitment to the investment plan and the patience to deliver results. For example, in the last financial year the manager shruged off underperfomance in the first half and produced a spell of significant outperformance in the second half.

Examples of the type of investment British Empire likes include family-controlled holding companies, such as Asia-focused Jardine Strategic and Jardine Matheson, controlled by the Keswick family, or Investor, controlled by Sweden's Wallenbergs. Other top-10 holdings, such as Exor, are chiefly a play on a single asset. Exor's main holding, accounting for more than half its assets, is a 30 per cent stake in Italian car maker Fiat. At the time of the trust's latest results, Exor's shares were trading at a 47 per cent discount to their underlying asset value. Other holdings look more conventional, such as Belgium investment holding company Sofina.

While the trust is not an index follower and its NAV performance is likely to follow its own merry path, its shares provide a good spread of exposure to the world's regions and currencies. It can also hedge against currencies and made a handy profit last year with hedges against its euro exposure.