AVI Global 12 December 2019

AVI Global (AGT- previously British Empire Trust) seeks to generate capital growth for investors through investment in a reasonably concentrated portfolio of listed companies whose shares trade at a discount to the manager’s estimate of fair value. AGT is managed by Joe Bauernfreund, CIO of Asset Value Investors.

With a history stretching back over 130 years, this is one of the oldest trusts in the UK, and has seen gradual but ultimately substantial changes to the investment strategy over this time period. Under manager Joe Bauernfreund, who took over in 2015, AGT has evolved its investment strategy, looking to increase portfolio concentration, utilise attractive borrowing rates on long-term debt, and place a greater emphasis on identifying a catalyst for value realisation, amongst other factors.

Holdings can be categorised as either: 1) closed-ended funds, 2) family-backed holding companies, or 3) asset-backed special situations, which currently consists primarily of Japanese cash-rich operating companies. The exposure to Japan has been gradually increasing in recent years, as AVI believes there is a substantial investment opportunity in their investment strategy in this area, so much so that they launched a separate investment vehicle focusing solely on this opportunity.

Despite having outperformed its benchmark under the current manager, AGT has remained fairly stubbornly at a discount to NAV. The board has undertaken buybacks, aimed at limiting discount volatility, and there is evidence that they have been successful at reducing discount volatility in recent years, as detailed in the Discount section. On a look-through basis (i.e. factoring in the underlying discounts on the various holdings), there is a substantial double discount of c.37%.

Whilst a number of AGT’s holdings are listed in the UK, it is truly global in its outlook, and has very low exposure to the UK on a look-through basis. This tends to give it a positive sensitivity to any fall in sterling, though this is partially mitigated by borrowings in foreign currencies.

The structural changes implemented to AGT over the past few years seem to have made it well suited to the evolving global financial landscape. Increased concentration and the focus on smaller companies generally means that AGT is a significant shareholder in many of the holdings (especially closed-ended funds or small-cap Japanese companies) within the portfolio, giving them significant leverage to push company managements to realise the latent value in their firms. The focus on high- quality underlying assets and the effectiveness of identifying catalysts can be seen in the sources of returns. For holding companies, c. 75% of returns come from NAV growth and 25% from discount narrowing. For closed-end funds, the split is 50:50.

AGT defies easy categorisation, with a highly differentiated strategy. It does not sit easily in a broad-brush asset allocation model, but we believe the sometimes idiosyncratic nature of the sources of return are attractive. Whilst the trust may, at first glance, appear to have a value focus because of the emphasis on buying assets at a discount to fair value, the underlying assets to which it holds exposure typically exhibit high-quality, cyclically resilient characteristics, and have generally been able to grow NAV strongly (with the expectation they can continue to do so). The atypical manner (via methods such as tender offers, special dividends or buybacks) in which returns are sometimes generated means periods of outperformance may occur suddenly and sharply.