Remaining committed to investment strategy

Why commitment is crucial to long-term outperformance.

Joe Bauernfreund, Manager, British Empire Securities & General

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British Empire Securities and General Trust Plc (British Empire) was established in 1889.  Whilst the trust has experienced many changes since its inception, Asset Value Investors (AVI), the trust’s managers, continue to follow the investment strategy implemented back in 1985 – investing in companies trading at discounts to net asset value. The trust’s longevity and its long term performance record is evidence of the robust and high-quality nature of British Empire’s investment strategy which remains unwavering and focused.

AVI manages British Empire based on a specialised, deep value investment strategy which has evolved over the years and has seen the trust grow from a £6 million vehicle to one of the UK’s top 25 investment trusts with assets of over £850 million. Over the past 30 years we have witnessed and survived many financial storms including the Asian Financial Crisis,  1987’s Black Monday, the Russian Crisis, the DotCom crash and of course the more recent global financial crisis. Remaining committed to a proven investment strategy, particularly during those times when a style is out of favour, is crucial to generating long term out performance. We believe that it is particularly during those hard and uncertain times that a resilient investment strategy is needed by investors more than ever.  This is supported by British Empire’s average annual performance of 12.4%* compared to MSCI World ex US Index of 8.5%* over the last 29 years. 

British Empire has a focused portfolio of 40-50 stocks, consisting of companies whose shares trade at a discount to their estimated underlying net asset value. AVI’s investment process targets three specific types of companies that are found across the globe.  These are family controlled holding companies, listed closed end funds and asset backed companies. When we consider investing in these types of companies our objective is to identify companies that have the potential to appreciate in value and also to benefit from a narrowing discount. It is the combination of both of these factors that leads to strong returns.

In today’s environment where corporate activity levels are elevated and M&A levels are increasing, we are seeing a lot of activity amongst our portfolio holdings. This is leading to narrowing discounts and is an important source of performance. In recent years, discounts have generally remained wide. This has acted as a headwind to our performance and as a consequence our performance relative to the benchmark and to the peer group has been muted.  The environment for our style of investing seems to be improving. With companies becoming pro-active in adopting measures to narrow their discounts and with a vibrant IPO and M&A market, discounts on companies within our universe are beginning to narrow. This is a key source of future performance. With our portfolio standing on a 28% discount to its underlying net asset value there is plenty of scope for discounts to narrow further. In addition, with British Empire shares now trading on a discount of over 13% the look through discount is almost as wide as it has ever been.

British Empire’s investment strategy is one designed for the long-term investor. Our strategy will endure a wide variety of market conditions and despite experiencing periods of underperformance our long term record shows that by remaining true to our style we can deliver strong returns over the long term. After all, why not pay 65 pence for a pound’s worth of assets?

*Source: Morningstar, performance from 30 June 1985 to 30 June 2014