British & American gives its sector a lesson in conviction

This week we cover the Association of Investment Companies’ Global Equity Income sector, a sector that includes investment trusts that invest in the shares of larger quoted global companies for both capital growth and income. The best performing fund in the sector is the GBP8.4m British & American Investment Trust LON:BAF, a London-based investment trust established in 1947.

In fact, across all investment trusts, British & American is the best-performing investment trust in the AIC universe over one-year, with a +105.7% return (on a share price total return basis to 8th November) against a sector average of +18.1% and an all-investment trust average of +21.9%. The fund is benchmarked against the FTSE All Share index.

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British & American is managed by Jonathan Woolf and aims to achieve a balance to investors of growth in income and capital in order to sustain a progressive dividend policy. The policy is to invest predominantly in investment trusts and other leading UK and US-quoted companies to achieve a balance of income and growth. Liquidity and borrowings are managed with the aim of increasing returns to shareholders and the company may borrow to achieve this. This will magnify any gains or losses made by the company.

Conviction-driven investors

The management team are very conviction-driven. The fund’s biggest holding is Geron Corporation NASDAQ:GERN, a Californian biotechnology company that principally works on treatments against cancer, and as at end-June the fund had 33% of its assets in the biomedical company.

The company received formal approval for it to market its haematological cancer drug Rytelo in June and from a modest investment 20-years ago, British & American held the stock despite, said Woolf: “[…] The extreme share price volatility shown by this stock over many years has made it a difficult stock to hold, but equally these price fluctuations, which did not necessarily reflect its true value and potential, enabled us over time to build up our investment in a cost effective way, even though on many occasions its poor performance has weighed heavily on our own portfolio performance.”

The next biggest holding is fellow investment trust, Dunedin Income Growth Trust [LON:DIG] with a 6.5% holding, so it seems that the management of British & American were well-prepared to heavily back Geron.

Although the performance of British & American has been outstanding over the past year, the longer-term performance is a different picture. In the seven-fund sector, over five-years the fund returned +39.3% against a sector average of +42.2%, so just below middle-of the road in fifth place. Over ten-years the fund was bottom-of-the-pile by some distance, returning -0.93% against a sector average of +129.4%. The fund was more that eighty-eight percentage points behind the next-worst fund, the Murray International Trust [LON:MYI].

British & American Investment Trust top five holdings:

It’s not your average fund, and as such doesn’t give you average performance. The fund only had 18 holdings as at end-June, with one-third in one stock, and seems to have a biotech/healthcare bias. You could argue that the last year’s performance was attributable to the fund manager picking a stock and when it underperformed double-downing on the bet and backing the horse until it won. Whether that trick is repeatable is a moot point.

Finding diamonds in the rough

However, one could equally argue that the manager saw a diamond in the rough, a unicorn-type stock, which the market just didn’t see the value of and followed his convictions and held on, increasing his holdings in the stock, buying the dip and waiting until the market caught up. Again, whether the trick can be repeated is moot.

The last year’s performance was head and shoulders above the rest of the investment trust universe, some thirty-three percentage points ahead of Richard Bernstein’s Crystal Amber Fund [LON:CRS], which as we previously reported is winding-down in second place. It’s worth keeping an eye on British & American and seeing if the last year’s performance is a sustainable trend or just a lucky flash-in-the-pan.