British Empire Trust (BTEM) has named Joe Bauernfreund as sole lead manager and successor to John Pennink, who had run the trust since 2002. The IC Top 100 Fund has also changed its name from British Empire Securities & General Trust. Over one, three and five years it has underperformed its benchmark, the MSCI AC World Index Ex USA, as well as broader global indices and the Association of Investment Companies (AIC) Global sector average.
Cumulative share price return of British Empire versus key indices
| 1 year (%) | 3 years (%) | 5 years (%) | 10 years (%) | |
|---|---|---|---|---|
| British Empire ord | -5.6 | 13.4 | 7.9 | 38.8 |
| AIC Global sector average | 6.0 | 40.2 | 50.1 | 107.4 |
| MSCI ACWI All Cap NR GBP | 4.1 | 41.6 | 49.1 | NA |
| MSCI ACWI Ex USA NR USD | -1.5 | 19.7 | 15.4 | 68.2 |
Source: Morningstar, as at 10 November 2015
Mr Bauernfreund says the main reasons for the underperformance include "sticking to their knitting as value investors". "Our style of companies are on discounts to net asset value (NAV), which remain wide," he says. "It is impossible to predict when value investing will come back into its own, but it makes a lot of sense to back assets that you can buy for less than they are worth. Over the long term we would expect our focus on quality companies and cheap valuations to result in stronger performance than broad market indices and growth investing. This has been the case over the long term, and it is a bad time in the cycle to give up on value investing. History is littered with managers who have capitulated at the wrong time."
The trust is on a 13 per cent discount to NAV. Mr Bauernfreund expects investors to get a "double whammy" from value stocks going up when the market turns and the trust's discount tightening.
British Empire has a 2.5 per cent yield and a 0.9 per cent ongoing charge.
Mr Bauernfreund asserts that the poor performance is not the reason why Mr Pennink stepped down. "This is absolutely not the case - he had run it for the past 13 years and didn't want to continue. There was a need for a new pair of hands to drive the trust forward - and that is me."
Mr Bauernfreund has taken on increasing responsibility for the portfolio as co-manager over the past two years. Mr Pennink will remain a member of the investment team, "but he will not have the final say".
"I have been at Asset Value Investors (which runs British Empire) for 13 years and signed up to the investment philosophy, which I have no intention of changing," says Mr Bauernfreund. "But how I execute that may change a bit."
There will be greater portfolio concentration, and little or no cash. "We will back our best ideas significantly," he says.
Cash drag was particularly detrimental in 2013 when the trust started the year with 15 per cent of assets in cash. When a fund holds a lot of cash and markets are doing well it will not do as well as them or funds that are more invested in them.
The core types of companies the trust invests in are family-controlled vehicles, investment trusts where there is a catalyst for the discount to NAV to be eliminated and property companies.
"The kind of companies we own are fairly diversified, so we can afford to be a bit more concentrated without increasing the risk profile," he says. "And where we have conviction in names we can add to them. This is a way to get performance that is different to the benchmark. It is not a case of getting rid of things stock by stock, but questioning what we have, and if we anticipate upside in an existing holding making it bigger."
The top 30 holdings account for around 90 per cent of assets, whereas two years ago this was more like 75 per cent.
Underperformance
Low exposure to the US, an area that has massively outperformed over the past six years, contributed to the trust's underperformance. But Mr Bauernfreund says few US companies meet the trust's investment criteria.
He adds: "Because of the relatively stronger returns in the US, markets look expensive. But as investors who believe that the price paid for a stock is the most important predictor of its future return, our fundamental perspective supports the argument in favour of cheaper international markets over the US."
The trust has not been helped by the strength of the pound and over the past three years almost 6 per cent of NAV has been lost in translation back to sterling. Most of its investments are outside the UK and denominated in currencies such as the euro, the Swedish and Norwegian Kronor, and the Canadian dollar.
"The weakening in the euro and the yen helps exporters in those regions," he says. "That could be a trigger and we are beginning to see this happen: there are better earnings among euro-denominated companies and they are strong in Japan."
Portfolio changes
Mr Bauernfreund recently added Swire Pacific (19:HKG) (pictured, above) which controls a large property empire in Asia - mainly Hong Kong. Its share price fell by 20 per cent in August alone and its discount to NAV widened over the period.
"We have also been adding to what we already own where we see a near-term catalyst or big price dislocation," he says.
This includes to JPMorgan Private Equity (JPEL), Wendel (MF:PAR) and Symphony International (SIHL).
JPMorgan Private Equity's discount had widened in September along with other listed private equity vehicles, and was as wide as 28 per cent at the start of October. "We deemed this far too wide given the opportunity to switch into a redemption share class in early 2016, and the strong growth of many of their new direct co-investments," he says.
He has sold out of Eurazeo (RF:PAR), Detour Gold (DGC:TOR), and Marwyn Value Investors (MVI).
