Buy, Hold, Sell: British Empire on the hunt for value buys

Joe Bauernfreund, manager of the celebrated British Empire Trust, talks to Tom Bailey about some of the stocks he has been buying and selling.

We are a ‘global-focused, long-only equity trust, focusing on companies trading below their net asset value,’ says Joe Bauernfreund, manager of British Empire Trust. While the trust sits in the Association of Investment Companies global sector, it is underweight North American equities, which comprise 22 per cent of its holdings. Other global funds have 50 per cent in the US.

‘We are generally underweight in the region because of the kind of companies we look to invest in,’ says Bauernfreund. ‘The US market is the most researched and therefore the most price-efficient in the world, so the region has a lack of fi rms ‘with attractive valuations.’

Bauernfreund joined British Empire in 2002, and has been sole manager since 2015. Since he took over, the trust has delivered three-year returns of 49.5 per cent, less than the global sector return of 56.4 per cent.

Buy

Oakley Capital Investment (LON: OCI)

British Empire is unusual (although not unique) among investment trusts, in that it invests in other investment trusts when the manager sees a good opportunity. In April, Bauernfreund purchased a stake in Oakley Capital Investment, an investment trust owned by Oakley Capital Private Equity.

Oakley Capital Private Equity ‘has had strong performance and a solid track record’. Its strategy entails investing in growth businesses in education, telecoms and digital sectors. Its largest stake is in the media brand Time Out. It also has a strong advantage in that it was founded and is still run by an entrepreneur, Peter Dubens, whose corporate acquisition experience allows him to ‘avoid higher prices by doing more complex deals’. Unfortunately, the returns seen by Oakley Capital Private Equity haven’t trickled down to the trust’s share price so far, and it sits on a 30 per cent discount. Among the reasons for this, Bauernfreund says, is the dilution of shares through issuances.

This makes it a great time to buy for British Empire. ‘We have seen a recognition of past mistakes [from Oakley],’ he says. The trust has agreed to stop issuing new shares at a discount and to improve its disclosure level.

Bauernfreund believes more can be done. British Empire will push for further improvements at the trust: ‘We will use our stake in a constructive fashion to see through other changes.’ British Empire announced its stake in April 2018, at 164p per share.

Hold

Exor (BIT: EXO)

British Empire often favours conglomerates and holding companies; at present such businesses comprise over 50 per cent of the trust’s portfolio. One such holding is Exor, the investment company controlled by Italy’s Agnelli family, with a market capitalisation of over $17 billion.

‘This company holds stakes in well-known fi rms including Chrysler, Ferrari, CNH Industrial and the football club Juventus, the latter being owned by the Agnelli family since the 1920s,’ says Bauernfreund. He is attracted by the fact that Exor currently trades at around 30 per cent below the net asset value (NAV) of the businesses it holds, but sees ‘a lot of upside to come from the underlying portfolio’.

In particular, he says, Chrysler should do well in the near future. Over the past year or so the company has been transforming its balance sheet from nearly €5 billion (£4.4 billion) of debt; the aim is to be in positive territory by June 2018. At the same time CNH Industrial has seen a turnaround in recent years, while Ferrari ‘continues to deliver strong operating performance’. This potential for strong future performance makes Exor a hold.

Exor was purchased in December 2016 at around €40 a share.

Sell

Digital Garage (TYO: 4819)

In April 2018, British Empire decided to sell its holding in the Japanese investment company Digital Garage. The company is a so-called ‘business context company’ which purchases small technology firms.

The main reason for selling is straightforward: the fi rm’s price now exceeds its NAV. ‘We sold it because when we bought, the share price was at around 30 to 40 per cent discount to NAV,’ says Bauernfreund. ‘By the time we sold it was at a small premium.’

This was largely driven by the fi rm’s move to invest in businesses developing uses for blockchain technology, the technology underlying cryptocurrencies such as bitcoin. This excited many investors, sending the fi rm’s share price upward and ultimately prompting British Empire to sell its stake. ‘We like to buy companies that are overlooked by other investors – by the time investors get excited, that’s the time for us to take money off the table.’

British Empire bought Digital Garage shares in December 2016, at around 2,100 yen. By March 2018, when the trust sold, that had surged to 3,500 yen per share.

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