Like many investment companies, the British Empire Trust has a long history, having been established in 1889. Joe Bauernfreund is only the third manager of the trust since Asset Value Investors (AVI) was set up in 1985 to manage the vehicle’s assets.
He had been co-managing the investment trust alongside John Pennink for two years before taking over as sole manager on October 1 last year, and as a result Mr Bauernfreund refers to the succession as “only natural”.
“I think it’s been an evolutionary process,” he explains. “I started working with John Pennink and his predecessor John Walton 13 and a half years ago as a junior analyst, so I’ve learnt the trade with them and been involved with the investment process in all that time.”
Mr Pennink remains at AVI, despite stepping down from the day-to-day running of the trust at a time when its performance has been rather underwhelming. When pressed on why he took that decision, Mr Bauernfreund replies: “He’s still part of the investment team here, he’s still deliberating with us and involved in research and contributing ideas and suggestions, but he didn’t want to be involved in the day-to-day management of the trust, meeting investors and shareholders, and felt it was time to step back from that.”
AVI’s philosophy, as its name suggests, is to hold stocks in the portfolio that are trading at a discount to net asset value. Mr Bauernfreund points out this typically leads them to family-controlled holding companies, closed-ended funds and property companies.
He adds: “The philosophy we’ve adopted here at AVI for the last 30 years has been a constant. In practice, when you have different people running the fund and taking responsibility, you’re likely to see some changes at the margin.”
Mr Bauernfreund reveals he is aiming to narrow the portfolio’s focus so it becomes more concentrated.
“Currently we have just over 40 holdings,” he notes. “The idea is that over a period of time we’ll try to get that down to 30 holdings.
“I think that if we have conviction in certain companies, we like them, we know them well, we should allow them to feature heavily in the portfolio. And allow their performance to really make a difference to the performance of the portfolio.”
He continues: “If you have 40 or 50 holdings then on average your best ideas may be 2-3 per cent of the portfolio. If something good happens it doesn’t actually move the needle, so we want to make sure the good ideas we have are actually working for us.
“The important part of our style is a lot of the companies we’re investing in, although they’re individual companies, themselves have diversified businesses. So by owning 30 stocks it’s not as concentrated as it may suggest.”
Whether this change will improve performance, which has lagged that of both its peer group and benchmark recently, remains to be seen. According to data from FE Analytics, over three years the British Empire Trust is down 5.7 per cent, at a time when the average return from the Association of Investment Companies (AIC) Global sector is 30.3 per cent and the MSCI AC World ex US index was up 4.7 per cent.
In the 12 months to January 11, the trust’s loss has widened to 13.7 per cent, while the benchmark was down 6.9 per cent.
Mr Bauernfreund acknowledges this underperformance. He suggests: “Parts of the portfolio that have been working have typically been closed-ended funds, and within that funds that are in the listed private equity sector – they’ve held up well in an otherwise volatile market. Property companies around the world also added some value to our returns.
“The areas that haven’t worked and really hurt us were any companies that had exposure to energy, oil or emerging markets, and those were the weakest performers in the portfolio.”
But he believes stocks tend to go out of favour because they are cyclical in nature, and the bigger question for him is whether they will prosper again when the cycle turns.
“Rather than try to time and guess when the oil price might recover, what I’m interested in is how financially sound these companies are,” he says. “And very often if we have conviction in these companies, rather than sell and capitulate at a low point in the market we add to these holdings and demonstrate conviction.”
The manager acknowledges that in the short term that can lead to difficult performance, but in the long term he thinks it pays off as the upside in these companies can be great.
Mr Bauernfreund suggests the structure of investment trusts suits this deep value, long-term approach to investing. “It’s very hard to run a long-term conviction portfolio if you have to have one eye on fund flows, redemptions and subscriptions,” he says of the restrictions of the open-ended fund structure.
“So being in a closed-ended fund structure gives us the advantage of being able to take that long-term perspective, which I think is important for our investment philosophy,” he remarks.
“And from an investor’s perspective, the opportunity to be able to buy into investment trusts below net asset value on discount – in our case on a fairly wide discount, currently – is again an extra level of appeal because as our style comes back into favour, one would expect our discount to narrow, which would boost shareholder returns even further.”
The AIC has been promoting investment trusts for many years and actively trains advisers on the merits of closed-ended vehicles versus open-ended funds. But could the individual investment trusts themselves do more in this regard?
“I think the investment trust industry makes a very big effort getting this message across,” insists Mr Bauernfreund. “The publicity is good, the investment trust managers are out there meeting wealth managers and investors.”
Turning to where he sees opportunities for the portfolio, the manager maintains these can be found across his global ex US universe. He points out: “If you look at Europe, companies there are doing well despite the anaemic growth that we see. Some of them have benefited from a weaker euro, which has boosted profitability.
“Asia generally has been an area we’ve had less exposure to over the past few years and that’s been the right decision, but valuations there are beginning to look more interesting. I’m thinking about Hong Kong and Singapore-based companies, not Chinese companies necessarily.”
He calls Japan an interesting market “because I think profit growth in Japanese companies has been strong, valuations are relatively more attractive there than they are in the rest of the world, there’s very strong monetary stimulus going on, and with attractive valuations we’re still seeing some interesting companies there, too”.
Mr Bauernfreund adds: “The point is, I guess, that we’re constantly rotating the portfolio to ensure we have the best, the most attractive combination of valuations and catalysts to generate upside for shareholders, and that’s an ongoing process.
“So it’s hard for me to say what the portfolio will look like in three years’ time. There have been times in the past where we’ve had nothing in closed-ended funds and a lot more in Asian holding companies – currently it’s the reverse.”
If he has a rule for investing, it is that “patience is good” and “chopping and changing is bad”.
“And the same goes for individuals,” he suggests, citing the typically long tenure of the British Empire Trust’s managers.
“So allowing individuals the time for their ideas to materialise, to come through, to deliver returns, is a positive, rather than putting the manager under pressure to say, ‘If you don’t perform over the next six months or 12 months you’re out of here’.”
CV
Joe Bauernfreund
2015 – present
Portfolio manager, British Empire Trust, and chief investment officer, Asset Value Investors
2013 – 2015
Co-manager, British Empire Trust, and executive director, Asset Value Investors
2002 – 2013
Senior investment analyst, Asset Value Investors
2001 – 2002
Masters candidate, London Business School
1997 – 2001
Property investment manager, Wolfe Securities
