British Empire Trust (LSE: BTEM) flies under the radar of most investors because it’s not one of the market’s glamour stocks. However, over the past year, the £810m market cap trust has achieved staggering returns for investors, and it looks as if these returns are set to continue.
Explosive returns
Over the past 12 months, shares in closed-end investment trust have risen 44% as the enterprise’s net asset value (NAV) has expanded. According to the unaudited results for the half year ended 31 March 2017 published today, NAV increased by 15% compared to the previous period, to a high of 770.9p. Still, despite this rapid growth, the shares continue to trade at a discount to that value. At the end of the period, the value was 753p compared to the current market price of 678p. Year-on-year NAV has risen 39% from 544p.
Investment returns
The trust’s best-performing investment during the period was AP Alternative Assets, which helped add 3.53% to NAV by its value increasing 48% on a dollar basis. This massive gain was driven by the long-awaited IPO of Athene Insurance — the sole asset owned by AP Alternative — that came at a premium to its carrying value.
The trust first invested in AP back in 2012 and the asset has generated an outstanding return since the initial investment. The internal rate of return over the past five years is 55% per annum. Now the IPO of Athene has been completed, British Empire has reduced its holding in AP but continues to see upside in the publicly traded insurance company.
The trust’s second largest contributor during the period was JPEL Private Equity. Like AP, JPEL has achieved some impressive returns on its investments, which have in turn led to substantial profits for British Empire.
After the sale of two substantial businesses from the JPEL portfolio (both of which achieved internal rates of return of 50% or more) JPEL was able to return 19% of its NAV to investors.
Management success
With any investment trust, it’s always difficult to assess whether or not the investment managers in charge have enough investment skill to be able to produce lucrative returns for investors. British Empire’s management looks as if it ticks this box.
By outsourcing capital to experienced private equity businesses, the trust has been able to achieve market-beating returns and shareholders have reaped the rewards. Almost all of the assets owned by the trust are private equity businesses acquired when trading at a discount to NAV. This shows British Empire’s management has shareholder interests at heart and is unlikely to overpay for assets.
As the trust continues with this investment strategy NAV should only increase, and management is trying to reduce the trust’s trading discount to NAV via an ongoing share buyback programme — another sensible capital allocation decision.
The bottom line
So overall, as British Empire continues to reap the rewards from its private equity investments, shares in the trust look as if they can head much higher from current levels. This is one undervalued growth stock you might not want to miss.
