Top 100 funds update: British Empire Securities & General Trust

British Empire is a closed-end investment trust with shares listed on the London Stock Exchange and is part of the FTSE 250 index. The investment objective is to achieve capital growth through a focused portfolio of investments, particularly in companies with share prices that stand at a discount to estimated underlying net asset value.

The trust's manager since 2002, John Pennink, has a clear focus to invest in undervalued assets on a global basis. He specialises in stocks that at first glance don't necessarily offer themselves as a potential high-return investment opportunity. The technical term is 'undervalued asset securities' - investments that for one reason or another are priced below their true value but can be made into profitable performers.

The last IC recommendation on British Empire Securities and General Trust shares was Buy at 502p on 7 January 2011. The trust now trades at 451.4p, a 12.7 per cent discount to net asset value (NAV).

But the trust has seen a recent uptick in NAV performance. This month, its top holding, Vivendi, benefited from billionaire industrialist Vincent Bolloré increasing his stake, sending its share price up 25 per cent. Mr Bolloré, who is the chairman and largest shareholder in French advertising group Havas, is now one of the largest shareholders in Vivendi after his investment vehicle increased its stake in the music and pay-television group from 4.4 per cent to 5 per cent. Mr Bolloré has a track record of making canny strategic investments.

On a five-year view the trust's performance has disappointed - its share price performance has turned a £100 investment into just £104.50, compared with the average performance from its peers in the AIC Global Growth sector of £114.90. But on a 10-year view the trust's share price performance looks impressive, turning £100 into £322.20 compared with £263.40 from its peer group.

Underperformance in 2011 resulted primarily from its discount widening as value and illiquidity fell out of favour while large liquid mega caps were in vogue. British Empire suffered due to a widening of conglomerate and holding company discounts in the face of market uncertainty. In addition, the trust's relatively high 38 per cent weighting to continental Europe did not help performance in the first half of 2012.

Oriel Securities says: "BTEM's performance is likely to continue to bear little correlation with any index, reflecting its distinctive and disciplined investment style. The big question facing investors is whether the recent run of short-term outperformance can be sustained. We view the fund as defensively positioned given both the discount on the fund and on underlying holdings and we see scope for surprise on the upside from current levels. In short, we continue to expect BTEM's strategy to add value over the long term."

The AIC calculates that the trust's ongoing charges are 0.73 per cent, which is reasonable compared with peers in the global growth sector and among open-ended funds. The performance fee adds complexity, though - the manager is entitled to a base management fee of 0.6 per cent per year, and a performance fee at 6 per cent on all outperformance of the benchmark index.

But investors can be comforted that the trust's annual aggregate fees remain subject to a cap at 1 per cent of the company's NAV at the preceding year-end. Any underperformance or outperformance in excess of the cap is available to carry forward for use in the next three years' fee calculations.

http://www.british-empire.co.uk/

Source: Morningstar. As at 22 October 2012

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