Growth and momentum investing strategies have outperformed value over the last decade of historically unprecedented low interest rates and other economic stimulus measures. This has been an extraordinary time. However, with interest rates now beginning to rise, I’m expecting the longstanding superiority of value investing to reassert itself.
British Empire(LSE: BTEM) and Caledonia(LSE: CLDN) are two investment trusts that are very much focused on value. While they’ve delivered decent enough returns over the past decade in absolute terms, they’ve underperformed relative to many of their peers. I believe the stage is set for this to reverse.
Out of favour
The table below shows recent share prices and net asset values (NAV) for the two trusts and their 10-year total returns in terms of share price-plus-dividends and NAV-plus-dividends.
| Recent share price (p) | Recent estimated NAV (p) | Discount (%) | 10-year total return based on share price (%) | 10-year total return based on NAV (%) | |
| British Empire | 752 | 832 | 10 | 96 | 109 |
| Caledonia | 2,680p | 3,386 | 21 | 72 | 90 |
As you can see, the 10-year return of the shares has significantly lagged the 10-year return of NAV. This, and the current discounts to NAV, shows how out of favour the two trusts have become over the period.
In contrast, in the investment trust global sector as a whole, the current average discount to NAV is less than 2% with a number of trusts actually trading at a premium. Furthermore, over the last 10 years, the sector’s average share price return of 226% has been well ahead of the NAV return of 182%. This shows how popular many more growth-orientated trusts have become over the period.
I’d happily buy British Empire and Caledonia today on the expectation of high returns over the next decade from the double drivers of an improving performance from value strategies and a change in investor appetite to value from growth. If this plays out, I would expect the two trusts not only to beat the FTSE 100, but also to be prominent performers in the investment trust global sector.
Value hunters
British Empire and Caledonia are both long established and have a geographical go-anywhere approach in their hunt for value. They also don’t restrict themselves to quoted companies and the big stock market names that feature in many global trusts.
British Empire, in which my Foolish colleague Rupert Hargreaves has recently invested, looks to identify discounts to intrinsic NAV in its investments and has particular focus on closed-end funds and family-owned holding companies. Its current largest holding, Japan Special Situations, is a basket of 18 deep-value stocks. Its second-largest holding, Exor, is an Italian-listed holding company run by the Agnelli family.
Similarly, while Caledonia is invested in some familiar names, its top two holdings are Cobehold, a Belgian investment company, and Seven Investment Management, a boutique UK business. Both companies are unlisted.
As well as their focus on value, British Empire and Caledonia actively engage with companies in which they’re invested. Both trusts are also prudently managed, with the former having very modest gearing of 4% and the latter currently having a net cash position.
