Interactive Investor

Value opportunities in British Empire trust

16th April 2014 16:02

Rebecca Jones from interactive investor

After an extremely disappointing 2013, the value-oriented British Empire Securities and General Trust is enjoying a change in fortune, outperforming both its sector and benchmark year to date.

Since 1 January, the £755 million trust has returned 1.32%, compared to a loss of 1.31% from its sector, IT global, and a modest gain of 0.56% from its benchmark, MSCI World.

This positive performance follows a disastrous period for the 125-year-old fund. In 2013 British Empire returned only 5%, compared to a gain of 21% from both its sector and benchmark, topping off a disappointing five-year slump during which the fund has returned half that of the sector. This led to the trust being dropped from Money Observer's Rated Funds list last month.

Same investment approach

Commenting on the fund's positive return year to date, manager John Pennink says: "Recent returns since 1 October have been ahead of the benchmarks which is gratifying, but we haven't changed our approach.

"Value as a theme is starting to perform better on a relative basis as large-cap growth is perceived to be expensive."

As well as the fund's overarching value style, which has been largely out of favour in recent times, analysts also pinpoint the fund's lack of exposure to the US and high cash levels as reasons for recent underperformance.

"British Empire has struggled in what has for them, been almost a perfect storm in recent years. A focus on high-quality undervalued assets, material underweight of US equities, and a relatively high level of liquidity have caused material headwinds and the manager has struggled to extract value," says Alan Brierley, director of investment companies at Canaccord Genuity.

Recent performance has picked up and if this could be sustained we believe that British Empire could be re-rated"Simon Elliott

As a result, the trust is currently on a discount of 12.4%, the second widest of its sector, which is currently averaging a discount of 5%. However, the estimated weighted average discount, which accounts for the discounts on the investment trusts British Empire holds, is currently around 26%.

Commenting on his fund's style, Pinnink says: "We manage the trust without regard to benchmark weightings so it is not surprising that our performance has diverged from the benchmark.

"However, over time we are confident that the divergence will be a positive one as we have a disciplined process of investing in stocks that are less expensive than the index and we believe that is a good predictor of longer-term returns."

Corporate activity

Pinnink adds that he believes the tide is turning for some his holdings as corporate activity picks up. In particular he pointed to one of his top holdings, French telecommunications firm Vivendi, which he said had recently found a buyer for SFR, Altice as a result of the latter's $10 billion (£5.95 billion) bond raise.

According to analysts, the fund's historically wide discount combined with positive recent performance could make British Empire an attractive value opportunity.

"Recent performance has picked up and if this could be sustained we believe that British Empire could be re-rated. In short, we believe the current discount of 14% provides an attractive entry point to a fund with an experienced management team with a differentiated value approach," says Simon Elliott, head of investment trust research at Winterflood Securities.

However, Monica Tepes, investment trust analyst at Cantor Fitzgerald, sounds a note of caution: "British Empire has suffered heavily from the risk-off attitude of recent years and its future performance depends on strong markets and sustained corporate activity. Investors that feel less positive about the global story should bear this mind."