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Just been looking at BTEM – British Empire Securities.

I am generally impressed – although there is not high enough return for me in itself. I think it should do well over the next few years.  BTEM is a UK listed investment trust specialising in assets trading at less than their real value.

Please note my analysis is very broad brush, I have needed to cover a fair bit of ground reasonably quickly – so likely I have missed quite a bit.

I found it by working backwards from my holding in SIHL seeing who held it then working out what else they held which I might like.

BTEM is quite large – £712m currently trading at a discount to its NAV of about 18%.  Its holdings are also trading at a weighted  26% discount to their NAV’s. this compounds so for every £1 you invest you get £1.40-£1.50 worth of assets (approx), not a bad deal all in all.  No guarantee of course on when you can realise these assets but it should happen eventually.  The discount at its worst was 40%.

Fees are a relatively cheap 0.7%.  Yield is about 2.2%.  PE of about 7

I like quite a lot of their holdings – Nordic conglomerates, European Family holdings, others I am unsure of and others I don’t like – not to say of course that they may not turn out to be good investments.  I am very much looking at this thing from the perspective of what do they have that is trading well under book, why is it there and are there any chances of it rising over the next year or two.

I think the position on Hong Kong property is unwise – they are holding property development cos which are trading at half book.  I dont like this as Hong Kong property as with London and many other large cities is something of a con.

It works something like this.  The elite (who already own property) restrict the supply or land or permissions to build, this allows them to charge high prices for property a high economic rent, extracting the surplus produced by the ordinary working people in the city.  This model has been very successful over the past 30 or so years however I dont think it will be sustained.

There is no need for people to base themselves in a city to work, OK there are advantages but the higher property prices get the bigger the disadvantage.  Further to this smaller cities and locales without higher property price become more attractive on a relative basis – eventually businesses will move out of large cities for lower costs, workers will realise their standard of living is determined by net salary – housing costs – commuting costs, (perhaps, if they are really smart they will start to consider hours worked too!) Many now simply look at net salary – rationalising the rest as “career progression”.

Eventually I expect this to result in growing movement of people, businesses and economic activity out of Hong Kong, London etc.  In the UK it is simply nuts to have such a large proportion of economic activity concentrated in the South East – I am surprised it has gone on this long.

Even if you don’t buy into these ideas which I realise are highly non-consensus as people seem to believe property prices in global centres will rise indefinitely  property prices in Hong Kong are high relative to incomes, affordability and I believe they are a something of a value trap.  Having said this it is only 4-10% of the portfolio (depending on what you count) – so not exactly killer.

The other holdings I am more ambivalent are Private equity funds.  These are trading at large discounts to NAV.  The problem with these is I simply do not trust the NAVs, determined by the private equity companies themselves (no doubt with the “proper” checks),  As with many other situations like this they have an incentive to pump up valuations to charge higher fees based on those valuations.  This may be down to my lack of understanding and deeply mistrustful nature.  I also dont really believe in private equity intellectually. Although I am aware of the advantages of managing companies in a non public fashion I value price transparency far too much to see these advantages as a good thing.

Private equity is 10% of BTEM holdings so again this is not fatal.

Best holdings as far as I can see for additional money are Aker,  Forterra Trust and my current favourite Dundee Corp.  Next post I will look into each of these and see what I can see…

Spreadsheet summarising is attached Please note this has not been thoroughly checked so should be used as a starting point NOT wholly relied upon…

BTEM Analysis (Excel 97-2003 Link)

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