British Empire Trust’s June Newsletter

British Empire Trust (British Empire) recently published their June 2017 letter, which is available for download from their website. The company is a closed-end investment trust with shares listed on the London Stock Exchange. It is managed by Asset Value Investors Limited.

As per their website, the trust’s investment objective is to achieve the creation of long-term value and capital growth through a focused portfolio of investments, particularly in companies whose share prices stand at a discount to estimated underlying net asset value. Some of their Asia holdings include Jardine Strategic, Swire Pacific, Symphony International Holdings and the Vietnam Phoenix Fund.

One market they are currently finding interesting opportunities in is Japan (the overall portfolio weighting is now up to ~16%). Here’s an excerpt of their macro view, taken from their June letter:

“Japan has long been a market with a glut of value opportunities, but we are now seeing genuine and tangible changes in attitudes from management and boards towards corporate governance and capital allocation. This year is the first in which Japanese institutions must disclose how they have voted at each of their holding’s AGMs, while the shareholder advisory service ISS now recommends that directors are not re-elected if their company has failed to hit minimum ROE targets.

Increasing numbers of independent directors are being appointed, and distributions via buybacks and dividends are at record levels. We are also seeing a spate of parent companies buying out their (typically over-capitalised) listed subsidiaries, while recent activist successes are fuelling a virtuous circle with greater amounts of capital being devoted to actively fighting for good governance and shareholder value.”

They recently began building a basket of 11 Japanese “net cash” stocks with valuation characteristics they say would be difficult to find today anywhere outside of Japan. The aggregate free cash flow yield for the basket of stocks is ~7% but even more attractive if you strip out cash on the balance sheet. On an adjusted basis, the basket trades at an aggregate free cash flow yield of ~30% and an EV/EBIT of ~2.7x. Furthermore, the basket consists of sound businesses with steady operating margins and a ~6% aggregate CAGR of operating profits over the last 10 years.