British Empire beats its World ex US benchmark – British Empire achieves an 18.8% return on net assets for the year ended 30 September 2017. 2.5% ahead of the return on its principal benchmark, the MSCI AC World ex US index. The Board has elected to increase the final dividend to 10.0p per share, which will result in a total dividend for the year of 12.0p per share.
Key contributors to investment performance were AP Alternative (+3.3%), Wendel (+2.3%), Investor AB (+1.7%), JPEL Private Equity (+1.4%) and Aker (+1.3%). There were two detractors of note over the period: Hudson’s Bay (-1.8%) and Pershing Square (-1.0%).
The position in AP Alternative Assets was by some distance the largest positive contributor over the financial year, adding 332bps to British Empire’s NAV as the position climbed in value by 24.5%. that fund was invested in a privately-held life insurance company called Athene. Athene’s successful IPO in the first half of December saw the managers reduce the position, and they sold the remainder of the combined holding over the next six months as Athene’s share price climbed further. Over the life of this investment, the position recorded a return on investment in US Dollars of 115% and an internal rate of return (‘IRR’) of 44% (140% and 52% respectively in GBP).
Wendel has been a high conviction investment for over three years now and the largest position for much of the past year. The share price total return from Wendel over the year was 34%, with 21% of that coming from NAV return and the remainder from the effects of discount contraction.
Investor took steps to publicly disclose their estimated realisable valuations of the unlisted assets in its portfolio. Investments had previously been held at book value; masking the true value in the portfolio and causing an artificially wide discount. The impact from such a disclosure was greater than they had anticipated which saw a narrowing of the discount and an increase in the market’s assessment of Investor’s NAV, adding 13% of previously hidden value to the reported NAV.
JPEL Private Equity has been a strong source of returns, particularly following its move into run-off in early 2016. The position returned 26.8% over the year, adding 144bps to British Empire’s NAV. Two returns of capital were also made at NAV (i.e., at zero discounts).
Aker was by far the greatest contributor to performance in 2016, and was once again a key driver of returns this year. Its discount narrowed from 43% 18 months ago to 18% at some points during the current year. They used this substantial re-rating to reduce the holding in a substantial way for the first time since the initial investment in 2008.
Over the whole year, Aker’s NAV, including dividends, appreciated by 21% following on from a NAV return of 55% in the prior year, with AkerBP being the main driver of returns given its 60% weight in Aker’s NAV. Aker has taken full advantage of the oil downturn in some asset categories, investing counter cyclically in unloved sectors. They think that the 30% discount on which Aker trades seems too wide for a company with a predominately listed portfolio. While they wait for this to narrow, they are being paid a 5% yield
EXOR was a new investment and is now the second largest holding. EXOR is run by the Agnelli family with a history dating back to the late 19(th) century. Originally the holding company for FIAT, through value enhancing transactions and a commitment to diversifying the group’s assets, Fiat Chrysler Automobiles (‘FCA’) now accounts for only 31% of EXOR’s portfolio. Other assets include reinsurer PartnerRe (26%), Ferrari (19%) and CNH Industrial (17%). t
Pargesa is a Swiss-listed holding company whose sole asset is a stake in Belgian-listed holding company Groupe Bruxelles Lambert (‘GBL’): on a look-through basis, the two companies’ assets are therefore identical and include stakes in listed companies LafargeHolcim, Imerys, SGS, Adidas, Pernod-Ricard, Umicore, Engie and Ontex on an anomalously wide discount of 34%. Pargesa is the largest position.
Detractors
Despite only being acquired late in the financial year, Pershing Square Holdings (‘PSH’) was the second largest detractor (-104bps). This was due mainly to discount widening, but also as a result of share price weakness in its holdings in Mondelez and Chipotle Mexican Grill.
The reputation of Pershing Square Capital Management, the manager of PSH, has been damaged by the catastrophic losses experienced in their out-sized position in Valeant Pharmaceuticals, but the corollary of this is that the managers were able to make the investment in PSH at wide discounts to NAV.
They see clear scope for upside in several of PSH’s largest holdings, in particular Mondelez. Mondelez has a compelling collection of brands with enviable emerging market exposures, and its sub-par margins (notwithstanding improvements over the last few years) offer a purchaser huge scope for efficiency gains. If M&A is not forthcoming, the prospect of margin expansion is an attractive plan B.
They also believe it is untenable for Pershing Square to preside over a public vehicle trading at a wide discount to NAV given their high profile and vocal championing of shareholder rights during various activist battles over the years.
Hudson’s Bay was the largest detractor from performance this year, costing 182bps of NAV. In addition to owning a number of retail brands (Hudson’s Bay, Saks 5(th) Avenue, Lord & Taylor and Kaufhof), it also owned the real estate from which these brands operated. Management had already started the process of unlocking this real estate value by spinning off a large part of their portfolio into separate joint venture companies, and the managers had high hopes that this process of monetisation would continue and narrow the very wide gap between the share price and the value of its real estate assets.
The investment did not work out as planned and they decided to sell the entire investment this year and realise a loss of GBP9.4m. Like many retailing businesses around the world, Hudson’s Bay has been hit hard by the “Amazonisation” of the retail industry. This affected Hudson’s Bay as, not only were retail profits under pressure, but at the same time, the value of its real estate assets were hit hard.
BTEM : British Empire beats its World ex US benchmark