Dutch Auction Reveals Economic Investment Trust Shares Are Reasonably Cheap

By Will Ashworth

• Economic Investment Trust (TSE:EVT) has existed for a whopping 96 years.  

• The Dutch auction suggests its shares are reasonably cheap.

• It’s delivered above-average returns over the years. 

I'm a sucker for unusual investments. I always have been. The more moving parts involved, the more intrigued I am. That's why I've always followed Berkshire Hathaway (NYSE:BRK.B) and Warren Buffett. 

If you read Berkshire’s 10-K and Buffett’s annual shareholder letters, you’ll find all kinds of rabbit holes full of interesting information. Or, at least, it’s interesting to me. 

Anyway, next up in my quest to create the Canadian Investor portfolio is Economic Investment Trust (TSX:EVT, OTCMKTS:ECVTF), a closed-end fund created in 1927. Sponsored by accounting firm George A. Touche & Company -- founded in the UK in 1898, a Canadian branch was opened in 1911 -- its initial capital was $2.6 million with $1.6 million in common equity and a $1 million, 30-year 5% Collateral Trust Gold.

It is trading higher since falling to 2023 lows in October, and set to open this morning at a price-to-earnings multiple of 6.7x.

It has always been a closed-end fund and will likely remain so. In fact, EVT stock has outperformed the Saba Closed-End Funds ETF (BATS:CEF) both year-to date (up 2.7% vs. down 1.3%) and over the last five years (up 23.1% vs. down 7.6%)

Investors buy closed-end funds primarily because they trade at a discount to the portfolio's net asset value (NAV). Why pay a dollar for something when you can get it for 70 cents?

Here’s why I find EVT a possible opportunity as a long-term buy.

The Game is Afoot 

Before I get into the specifics of its investment holdings, I want to highlight recent news that should pique your interest.

In March 2023, the trust issued a press release announcing that it would pursue its normal course issuer bid (NCIB) over the next year to purchase up to 273,231 shares of its common stock, accounting for 5% of its 5.46 million shares outstanding. It has until March 8, 2024, to buy back its shares.

On Nov. 7, EVT announced that it would buy back up to $5 million of its stock through a modified Dutch auction where existing shareholders can specify the number of shares they’d like to tender between $125 and $145. Alternatively, shareholders could specify the number of shares to tender with no price offered, agreeing to accept the price ultimately set by the auction tenders. 

The offer began on Nov. 10 and continues until 5 p.m. on Dec. 15. 

I mention this upfront because it’s an indication that the board feels the shares are relatively cheap at the moment, trading at a discount of 33.05% as of Nov. 1. Over the past decade, the shares have traded at discount to NAV ranging from 18% to 37%. 

It also suggests they feel other stocks aren’t a great buy at the moment, either, because of valuation concerns or a future economic slowdown. Either way, investors keeping their shares will own a slightly larger piece of the trust come mid-December. 

Focused Portfolio

The trust’s investment strategy is to generate an above-average rate of return through long-term capital appreciation and dividend income. It invests in the common stock of Canadian and foreign investments to generate this return. 

As of the latest quarter ended Sept. 30, Canada had a weighting of 51.1% of its assets, the U.S. accounted for 29.5%, and the remaining 19.4% is invested in Europe, the UK, emerging markets, Japan, and Australia. 

Now, here’s where you’ll have to decide whether this is your investment type. 

As of Sept. 30, EVT held 218 stocks valued at a total $1.06 billion. The largest holding by far is 386,206 shares in E-L Financial (TSX:ELF), representing 32.3% of the net assets. 

E-L Financial is an investment and insurance holding company controlled by Toronto’s Jackman family. Its primary operating asset is 99.4% of Empire Life, one of Canada’s most important life and health insurance companies. It also owns 37.2% of Algoma Central (TSX:ALC), operating Canada’s largest fleet of self-unloading and gearless dry-bulk carriers and product tanker vessels.

E-L Financial’s other investments include 24.7% of EVT, 54.9% of United Corporations (TSX:UNC), also a closed-end fund; the value of its corporate investments (primarily stocks) at the end of 2022 was $5.6 billion, while the value of its investment in Algoma and EVT were $443 million.     

It’s kind of an incestuous thing, but that’s what I like about it.          

Why Buy?

There’s no question that I will need to study the business more closely because of all the moving parts. Investors can value publicly traded investments closely, but Empire Life's valuation takes more digging and comparative analysis with publicly traded peers. 

The best way to own EVT is to commit to buying trust shares whenever they get closer to the high-end range of its discount to NAV. If you return 23 years to 2000, its discount hit 46.13% on June 22. 

Maybe put in place a plan to buy an equal-dollar amount once or twice a year when it’s in the 30s. If it ever gets back to 46%, back up the truck.

Most importantly, while the investment management provided by Neuberger Berman isn’t free, it’s a low 0.28% of the trust’s NAV.   

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. None of the above should be construed as investment or financial advice. Investing is inherently risky. Please perform your own due diligence.

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