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Investment trusts can offer opportunities in uncertain markets. The £760 million British Empire investment trust is currently trading one of its widest discounts for years.
The value style, which is strictly followed by manager John Pennink, has been out of favour with stockmarkets. But he says the companies held are materially undervalued, as the sum of their parts is worth a lot more than current share prices imply.
As his holdings are in effect discounted, as well as the trust itself being at a discount to its net asset value, long-term investors could stand to benefit from both discounts narrowing.
Investors will require patience to unlock the potential, and you can find out more about how the trust is positioned by watching this video.
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Hello I'm JM and welcome to fund of the week.
So we’ve seen some profit taking after a strong first quarter for equities and riskier parts of the bond market, but there’s now renewed anxiety from political concerns on the continent.
France looks like it will see a change in leadership, and the Dutch prime minister has resigned. Markets don't like uncertainty, and we've now got renewed questions on how a co-ordianted resolution to Europe's woes will materialise and voters are venting their frustration by opposing economic austerity measures.
With the global equity index nearly 5% off its recent high, it’s understandable that nerves are returning. Indeed there might be further falls, giving opportunities to invest at more attractive levels and take advantage of market extremes.
You can also look at investment trusts, spotting those who are trading below the value of their net assets. This is currently the case for the British Empire investment trust whose discount of over 10% is nearly the widest it’s been for a number of years. The manager John Pennink also sees the stocks he owns as materially undervalued too – in effect giving a double discount.
Pennink’s a true advocate of value investing. In simple terms this means that he looks at the sum of all the parts in a business and sees if there’s a mismatch with where the shares are trading. The overall premise being to buy more assets than is implied by the share price.
This often means buying unloved companies with turnaround potential, much in the vein of legendary investor Warren Buffet.
For example top holding Vivendi has seen its share price falling this year - the dividend’s been cut and its French telecom operation has been under scrutiny. But Pennink thinks the wider interests of this conglomerate, that stretch across music, games and video operations, are being ignored.
Investing in holding companies, where there are a host of interests under one umbrella, makes up around half the portfolio. Some of these are run by wealthy families who are large shareholders themselves. One of these positions is Jardine Strategic in Asia. It’s an investment vehicle for an influential family whose interests include property, a dairy farm and the Mandarin Oriental hotel group.
This style’s been out of favour over the last few years leading to underperformance, and Pennink admits it’s impossible to pinpoint when there’ll be a turnaround. The same is true for the dislocation between the performance of gold and mining companies. He owns some gold miners and is waiting patiently for a reversal in their fortunes. With cash at around 13%, Pennink is also sitting tight for new opportunities, or to add to his favoured positions if markets fall further.
The value approach is generally seen as a style that outperforms over the long term, so I don’t believe it’s time to write the trust off just yet. And as I mentioned earlier, there’s a double discount in play, meaning this could be an attractive entry point for long term investors.
You can do more research on this, and all our other picks in Citywire Selection, by following the on-screen link.