Investors who've been hanging onto shares in British Empire Securities & General Trust (BTEM) over the past five years are unlikely to be smiling now. After a run of sterling performance in the 2000s, the trust lost momentum and now lags well behind a number of other trusts in its Morningstar peer group (global equity). The performance, even compared with the benchmark, has been underwhelming. Over five years, the trust has risen around 9 per cent a year, which isn't bad in absolute terms, but the FTSE 100 Index has risen by about 14 per cent over the same period, while MSCI World has managed 13 per cent, according to Financial Express.
So has this previously impressive investment trust just had a bad run or has it totally lost its touch? Investors Chronicle paid the trusts' directors a visit to get an explanation straight from the horse's mouth.
There are four main reasons why the trust has been looking beleaguered, says executive director Joe Bauenfreund. The first is the decision to hold a lot of cash in 2013. The trust started the year with around 15 per cent of its assets in cash, which Mr Bauernfreund admits was overly defensive and has cost it dearly in missed opportunities.
The second was having less exposure to sterling currency, which has been very strong over the last year, while the third was holding around 3 per cent of the portfolio in two small, old mining companies, which lost around 80 per cent of their value when the gold price collapsed in May last year.
Finally, the core of the trust's strategy is a hunt for value, which means it digs out companies with discounted shares and lots of potential, to shift to a premium and then sell. At the end of the trust's winning streak in 2006, it was buying stocks on an average discount of 10 per cent. But it widened steadily during the financial crisis, and by 2011 the average discount peaked at around 38 per cent. The discount is slowly narrowing, though, says Mr Bauenfreund, and today the average discount on companies the fund buys is 27 per cent.
This trend is important because reducing discounts on purchases contributes to the narrowing of the discount to net asset value (NAV) of the trust itself - although there's some time lag.
A new global resurgence of corporate activity, including mergers and acquisitions, as well as a flurry of corporate activism among investors are sure signs that company discounts are set to narrow over the next few years, according to Mr Bauernfreund. "Investors are trying to unlock more value from their shares - and what we're constantly on the look out for are catalysts for this," he says.
This is a trust that's been building a solid reputation since it was started in 1985, and it's not about to change its strategy now. What sets it apart from other global investment trusts is a strong tendency to favour family-run businesses. Mr Bauernfreund sees value in their long-term and sustainable approach to business as most of them are heritage brands. "We like aligning ourselves to families because they tend to have good control over the business and we can sit down and get to know them. We see forming tight relationships with these families as our expertise," he says.
Blood is always thicker than water, though, and the trust has occasionally had its fingers burned when working with family-run companies. Once one of British Empire's darling stocks Great Eagle, a property conglomerate listed in Hong Kong, fell out of favour after it chose not to use a large amount of cash it raised from selling property into a real estate investment trust (reit) to pay investors a proper dividend. Instead, the family bought an office in San Francisco for their son. Investors received a disappointing dividend - far smaller than the trust was hoping for given the amount of cash available.
Between them the four directors of AVI (the asset manager) own more than £3.8m in shares. This is some serious skin in the game, which should provide some much needed reassurance to investors that while their strategy has had some dark days over the last five years, signs are emerging that the sun could rise again.
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