British Empire trust’s Bauernfreund on the investment trusts he holds

The largest holding in the British Empire trust has been controlled by the same family for more than three centuries. French investment company Wendel, headquartered in Paris, accounts for 7.1 per cent of the portfolio.

The £977m British Empire trust also owns a 5.7 per cent stake in Sweden’s AB Investor, controlled by the Wallenburg family.

The global equities trust seeks companies that trade at a discount to net asset value. In fact, fund manager Joe Bauernfreund, who took over in October 2015, completed his Master’s dissertation in this very area, focussing on closed-ended funds and real estate. Today he finds these opportunities within a very specific universe: listed family businesses and other investment trusts. The largest holdings of the latter category are JPEL Private Equity and NB Private Equity, both accounting for 5.5. per cent.

The trust takes an activist approach ranging from “constructive engagement” to forcing a sale, Bauernfreund says. “There is possibly the odd exception where people say we aren’t being very friendly, but generally we try to be supportive.” In a twist of fate, activist investor Elliot Advisors took a 5 per cent stake in British Empire last June. The fund has since outperformed delivering 46.3 per cent over one year compared to 35.7 per cent in the Global sector.

Family businesses might not present obvious parallels with investment trusts, but British Empire focuses on listed, diversified holding companies in the former category. At Wendel, Bauernfreund names three of its unlisted holdings as a source of interest: IHS, the largest owner of mobile phone towers in Africa; US security guard company AlliedBarton and Constantia Flexibles, an aluminium foil manufacturer for “yogurt pots, contact lenses and Easter bunnies”.

“Each of those three businesses, which make up 40 per cent of the value of Wendel, have been identified as potential sale candidates in the next 18 to 24 months,” says Bauernfreund, who adds Wendel is trading at a “30 to 35 per cent discount”.

Investor AB demonstrated the undervalued opportunities Bauernfreund is interested in earlier this year, when it revealed its unlisted healthcare business Molnlycke, was actually worth 56.2bn kronor (£4.9bn) rather than the 21.6bn kronor previously reported.

Within investment trusts, the fund is primarily invested in the private equity sector. Bauernfreund points to JPEL Private Equity, which is now in realisation mode with money being returned to shareholders.

“Although it’s trading at 15 per cent discount we estimate that over the next two years the majority of those businesses would have been sold and the proceeds returned to us at zero discount, because you’ve got the natural pull towards the NAV. Should the realisation values be any greater than the NAV, and we believe that to be the case, then the returns will be even stronger.”

When it comes to activism, Bauernfreund uses Symphony International, focused on South-east Asia, as an example of an investment trust they’ve engaged with over several years. “We worked with management there to encourage a more proactive policy of marketing. Ultimately they appointed a new corporate broker at the start of 2017 that saw them adopt a share buyback policy, which had pretty good effects on the share price.”

Europe accounts for 34 per cent of the fund, followed by North America (22 per cent) and Asia (16 per cent). Family business corporate governance can influence the regional make-up. “Generally it’s much harder to have the same degree of conviction about the standard of corporate governance and the alignment of interests in Asia than it is in Europe,” Bauernfreund says. “It is changing, but it’s going to be a generational change and in many of the Asian businesses you find the patriarch of the family retaining control up until their deathbed.”