Hello, and welcome to the Morningstar series, "Why Should
I Invest With You?"
I'm Emma Wall and I'm joined today by Joe Bauernfreund, manager of the British Empire
Trust.
Hi, Joe.
Good morning.
Wall: So, you've been running the Trust for two-and-a-half years now and one of the things
that you've done versus the previous process is to concentrate the holdings, bringing things
down and consolidating.
What was behind that decision?
Well, as you know, we are a slightly differentiated Trust in terms of our investment strategy.
We are focusing solely on holding companies trading at discounts to net asset value.
And it's an entirely benchmark-agnostic strategy.
And in order to make our best ideas count, I felt that we had to restrict the size of
the portfolio and really back those ideas that we have the greatest conviction in.
With a portfolio that's invested in holding companies that themselves are diversified
there is a risk that on a look-through basis the portfolio begins to look like the market
with so many underlying holdings.
And by restricting the number of holdings and boosting the concentration we really have
a high conviction differentiated portfolio that's got a good chance of outperforming
broad benchmark indices.
And things could be "good value" for a number of reasons trading at discount to their net
asset value.
How do you avoid a value trap?
So, I know you take quite a diligent approach in terms of the themes where you look through
for potential investments.
Well, what we try and so is try and understand why the discount exists.
Now, of the hundreds of companies, if not thousands of companies, around the world trading
at discounts, many trade at these discounts for good reason.
And as you suggest, the discount is there as a warning of a value trap.
And typical examples include companies with poor standards of corporate governance, high
balance sheet debt, poor-quality assets and the like.
In trying to understand why the discount exists, what we are trying to sift out are those particular
opportunities where the discount is an anomaly, something that the market has missed, an inefficiency.
And because of the nature of these holding companies very often the inefficiencies arise.
And that's really what we are trying to identify and trying to capitalise on.
Now, the way we gain conviction that we are right, and we are not investing in value traps
is by doing as much research as possible on the valuations of the underlying companies
on trying to understand why the discount exists and also, trying to think about what kind
of event or catalyst could arise in order to help narrow that discount.
And so, in a market such as this – I mean, it's been a pretty phenomenal start to the
year in terms of market movement.
Volatility has returned, which seemed to come as a shock to everyone, because it's been
so sanguine for a couple of years.
Do you look to a market like this with joyous anticipation because it throws up more of
the examples of what you are saying?
Or is it about sort of hunkering down and riding that volatility through?
Well, it's a difficult environment for us, because as everybody is commenting on, markets
are at all-time highs or close to all-time highs.
And naturally, that gives rise to some caution.
We try not to think about that too much.
We try to focus on the opportunities that we find within our universe.
And the interesting thing is that today we are able to find even at these late stages
of a bull market cycle companies within our universe trading at very wide discounts to
NAV with high-quality assets, good standards of corporate governance and pretty exciting
and compelling events in the pipeline that will unlock some of that hidden value and
narrow those discounts.
Joe, thank you very much.
Thank you.
This is Emma Wall for Morningstar.
Thank you for watching.