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British Empire returns 31.0% beating its benchmark

British Empire Trust has announced its annual results for the year ended 30 September 2016. The company says that, during the period, its NAV total return per share was 31.0%, its benchmark return was 28.0% (the MSCI All Country World ex-US Index), whilst its share price total return was 34.3%, reflecting a narrowing of the discount during the period fromm11.6% to 9.6%. The Trust’s board has proposed a final dividend of 9.7p a special dividend of 2.8p (per ordinary share).

In terms of performance attribution, the company says that stock selection was a major contributor to outperformance and that, with a significant proportion of its portfolio exposed to non-Sterling assets, British Empire, has also benefited from Sterling’s weakness following the Referendum vote to leave the EU. Looking at specific holdings, the manager Joe Bauernfreund (pictured) says that the largest contributions came from Aker (which increased returns by +5.2%), Vietnam Phoenix Fund (+1.9%), Symphony International (+1.9%), Conwert (+1.8%) and Investor (+1.8%). The only significant detractor was Dolphin Capital, which reduced returns by 0.9%. The mark to market effect of the Trust’s debt and its Japanese Yen hedge had adverse impacts of 1.2% and 0.5% respectively. Details of some of these are provided below, further details of other large contributors are available in the company’s annual report.

The manager says that, last year, Aker was the Trust’s single largest detractor but this year, it has been its greatest contributor by a long way. The trust has held Aker since mid-2008, first making an investment when the share price had fallen 40% from its peak with the discount widening substantially from a near premium to a high 30s discount. The manager says that they have added to teh position every year since, including this financial year when they increased the trust’s position size by 22% at an average price of NOK 149. He says that their high level of conviction has allowed them to add opportunistically when Aker is most unloved and they have achieved an average buy price of NOK 154 and an average entry discount of some 44%. The share price at year end was NOK 275.

The manager says that the trust’s position in Vietnam Phoenix Fund is now in the final innings of what has been a very successful investment (in GBP +80% total return, +30% IRR), yet he sees scope for further upside given the current discount. AVI have accumulated an 18% stake in the company and, over the life of their holding, have removed the three management representatives from the board and had two of our nominees appointed as directors. The company has cancelled the 10% of its shares held in treasury and begun a new buyback programme. Most significantly, we extracted a public commitment from the board that the manager’s contract would not be extended on the same terms and to hold restructuring proposals to open-end the fund. On the last day of the financial year, these restructuring proposals were passed at the company’s AGM with 92% of votes in favour.

According to the manager, Symphony International generated healthy returns over the year despite ending the year on exactly the same discount to NAV on which it began (39%). This statistic, however, masks the positive impact of a $0.0625 distribution that equated to a near-9% yield on the undisturbed share price prior to the announcement.

Joe Bauernfreund officially became the sole manager on 1 October 2015. The company says that, since his appointment there have been some important changes in emphasis in the portfolio, but there has been no change in British Empire’s fundamental value investing philosophy and no “style drift”. Joe says that, following a period of lacklustre returns, he felt it was important to ensure the portfolio reflected the conviction and the opportunities the investment team had identified. As such, the manager has reduced the number of holdings in the portfolio, boosting concentration. The top 20 holdings now make up 90.5% of the portfolio, compared to 69.5% at this time last year, and the trust took on additional gearing for the first time since 1996.

The manager says that, whilst in headline performance, the increase in fair value of this debt has cost the trust 1.2% of NAV during the year, he believes that they will achieve long-term returns substantially above the cost of that debt. He says that it has already proved beneficial through the returns made from investing the proceeds of this debt (he reports that most of that gearing was put to work towards the end of January 2016 after the market had fallen 21%) and so he added substantially to companies in which he had strong conviction, and were doing so at attractive levels. The manager says that the trust has continuously utilised the gearing since that time. He says that the Yen hedge cost the trust 0.5% of NAV, but only a part of our Japanese exposure was hedged, and the currency gain from the investments since the time the hedge was closed, far outweighed the cost of the hedge.

In terms of outlook, the trust’s chairman, Strone Macpherson, says that there are an unusually large number of risks for investors at the present. On the geopolitical front, the consequences of the outcome of the US election, the Brexit arrangements to be negotiated, the German, French and other European elections in the year ahead, and the turmoil in the Middle East, are all major uncertainties. The risk of significant policy errors by Central Banks also remains high. However, despite all these difficulties, and the volatility that they bring to the investment markets, such volatility often produces pricing anomalies for value investors such as British Empire.

British Empire returns 31.0% beating its benchmark : BTEM

 

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