I have slightly mixed feelings about the British Empire Trust. I’ve held the venerable investment trust for many years but sold out a while ago. I like its style – value driven – and traditionally own many stocks within its portfolio (as is also the case with Mitons Global fund). Conversely, I’ve never quite seen what the catalyst for an uplift might be (unlike Miton which has rebounded nicely). I also like its willingness to bet on contrarian ideas such as Japan but worry that it might get its timing wrong. Crucially I’ve been slightly cagey about that constant, big discount – currently running at just under 10%.
A note out this week from Matt Hose at Jefferies reminds us that in fact, British Empire benefits from a double discount. It’s own shares trade at a discount but many of the underlying funds and family-owned firms that it invests in also trade at a discount. According to Mose “ the double discount has often been in the seemingly attractive range of 30% to 40%”. Unfortunately, this double discount has proved to be largely illusory”. As Matt Hose reminds us the “issue is that many holding companies trade with structural discounts to reflect their diversification, concentrated ownership stakes and/or the presence of founder/family voting rights. While there is the potential to capture a degree of discount narrowing on holding company investments, the value present is more often at the level of the underlying assets, with little opportunity to exit close to NAV via a restructuring or wind up. Size is also frequently an issue here, as the large size of many holding companies/conglomerates makes engagement/activism more problematic.” I’ve itemized the top ten holdings below for BTEM, as at 30/04/18
Holding % of total assets
- Japan Special Situations 12.4
- Exor 6.5
- Pargesa 6.0
- Tokyo Broadcasting System 5.9
- Fondul Proprietatea 5.4
- Symphony International 5.4
- Riverstone Energy 5.3
- Pershing Square Holdings 5.1
- Wendel 4.9
- Third Point Offshore 4.9
And what of those catalysts and contrarians? The big bet of recent years has been on Japan, which I happen to think represents great value. In the case of British Empire that means a basket of 17 Japanese stocks, representing 12.4% of the portfolio as at 30/04/18. According to Hose at Jefferies ,this portfolio “contains a diverse collection of companies that have a significant proportion of their market cap in net cash, which is being underappreciated by the market. The trend of improving corporate governance in Japan bodes well for improved balance sheet efficiency and therefore increased value being reflected in these holdings. As at 28/02/18, the basket had a free cash flow yield of 8% and net cash/market cap of 59%.”
I’d observe that Samarang and their Asian fund vehicles have a similar focus on Japanese stocks and its’ worked wonders for their investors. Lots of smart investors are long Japan value at the moment. The contrarian in me also says that in a rising interest rates environment, value stocks should outperform – which will help the venerable British Empire. By contrast the cynic in me says that those holdings are just too illiquid and difficult to realise real short-term value.
On a side note, I’d draw attention to holding number seven – Riverstone Energy which I also hold alongside British Empire.
I’m an enthusiastic holder of this US shale-focused PE fund but I must admit to being slightly perplexed about its catatonic share price. For much of the last year, the fund has traded sideways in a range between 312 and £13.50 despite the fact that the price of oil has shot up. On the chart below – courtesy of Sharepad – I’ve mapped out the share price of Riverstone for the last two years against that of another energy stock in my portfolio, Premier Oil which is in black (Riverstone is in Red).
As you’d expect Riverstone outperformed for most of this period, whereas Premier was stuck with worries about its debt position. But as the oil price has blown past $70 a barrel, Premier’s share price has shot up – Riverstone (in red) has barely moved. Logic suggests that the funds focus on Bakken and Permian basins should start paying off in spades very soon as those PE deals start getting rerated. I’d be watching out for some positive NAV announcements and then a consistent move above £14 a share for the fund.
source – Sharepad. Riverstone in red, Premier Oil in Black. Two year time frame.