The Empire strikes back

Last year, December saw investment trust discounts widen to extreme levels and, while some of the de-rating was justified, a lot of the downward moves were overdone. Since then, discounts have narrowed, as confidence has recovered and investors' risk tolerance increased. But the moves have not been across the board - a number of discounts remain persistently wide and, says Donald Robertson, co-manager of the SVM Global Fund and SVM Global Opportunities Fund, it is in these trusts where the opportunity now lies.

But a wide discount in itself does not necessarily warrant an investment . The discount has to narrow, and the asset value has to stabilise, in order to achieve a profit. The strong outperformance enjoyed by British Empire Securities and General Trust (British Empire) in 2009, as its underlying discounts narrowed, is a good example of what a powerful combination narrowing discounts and rising asset values can be.

Analysts at WINS Investment Trusts laud British Empire for its strong long-term performance record. The fund's net asset value (NAV) is up 192 per cent over the last 10 years, compared with a rise of 8 per cent for the MSCI World and 35 per cent for its benchmark, the Fundamental Data Global Growth Investment Trust index.

Since 2002, the fund has been managed by John Pennink of Asset Value Investors (AVI), an independent boutique that is responsible for £1.6bn of funds under management. AVI took over the management of the fund, originally launched in 1889 as The Transvaal Mortgage Loan and Finance Company, in 1984. Mr Pennink boasts an impressive track record having only underperformed the MSCI World once in the last eight years.

"AVI has a well-defined value investment style focused on companies trading at below the asset value. Many of the opportunities are discovered through in-house research, helped by knowledge of specific areas, notably property, commodities, investment trusts and European holding companies," comments Simon Elliott, analyst at WINS.

The fund, which has 45 per cent of its net assets in investment holding companies, uses a bottom-up investment process with top-down asset allocation to ensure diversification. Emphasis falls on good quality assets on substantial discounts that provide what Mr Pennink describes as a "margin of safety". He will raise cash when value opportunities are limited or the market outlook is uncertain. The fund's net liquidity, currently at around 16 per cent of net assets, is a reflection of Mr Pennink's cautious stance given western indebtedness and the looming risk of asset inflation.

Mr Pennink has increased the fund's exposure to European holding companies in this year, investing in well-financed companies such as Groupe Bruxelles, Lambert, Sofina and Investor AB. The fund also has a number of investments in Asian holding companies providing broad exposure to the region.

Currently, the fund has no currency hedges, although both its yen and euro hedges were closed out earlier in the year for a profit of £7.9m. The manager will not look to hedge the fund's yen exposure again, but given its strength, he might consider hedging the euro again.

"At the current discount of 7 per cent, we believe that British Empire offers value, particularly given that the underlying discount is wider than 20 per cent. When both are considered, the fund currently provides exposure to the asset value of the underlying companies on a discount wider than 25 per cent," comments Mr Elliott. "Given the focused nature of the fund's exposure, this fund will not perform in line with the market. However, we believe the manager's contrarian approach, investment focus and emphasis on capital preservation should continue to deliver attractive returns over the long term."

Key fund data:

Source: Thomson Datastream, WINS Analysts

Notes: Performance as at 1 December

Top 10 Holdings 30/09/09

Geographical Breakdown