AVI Global Trust (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 managers’ estimate of fair value.
Under current 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 focussing solely on this opportunity.
Whilst focussed on accessing high-quality assets, the managers of AGT are cognisant of the price they pay for these holdings and look to acquire them at substantial discounts to their assessment of fair value. Presently, the look-through double discount to ‘fair value’ stands at c. 50% (as at 30/04/2020); as discussed in the Portfolio and Performance sections, this is anomalously wide relative to AGT’s history. Previous instances where the double discount has reached this level have tended to lead to subsequent periods of outperformance.
Gearing has been tactically utilised in recent months, and the team tell us the recent market sell-off has created new buying opportunities in high-quality assets.
The recent, relatively indiscriminate sell-off in equity markets should create opportunities for precisely this sort of strategy. Indeed, the move to an unprecedentedly wide double-discount within AGT would suggest to us the existing holdings themselves likely offer significant relative and absolute upside in the coming months, as discussed under Performance. Added to the tactical flexibility that the recent increase in Gearing has afforded the team, this would seem a potentially attractive entry point. This perhaps needs to be caveated; we do not know the full economic impact of the pandemic, or what form the impact will have. If the effects prove transitory, and we see a rapid return to equity markets from capital ‘on the sidelines’, AGT will probably not be the immediate beneficiary in our view, as previous winners and the largest and most liquid stocks are likely to maintain momentum. However, Joe’s move to tilt the portfolio tactically towards more liquid holdings should offset this somewhat as these holdings should prove beneficiaries and afford the opportunity to build exposure to some of the strongest long-term opportunities.
Strategically, the long-term opportunity set looks attractive. The move to a more concentrated strategy, with a greater emphasis on long-term compounding opportunities, should help the managers to catalyse improvements in shareholder returns. Short-term fluctuations on unforecastable macro variables mean immediate upside from discount narrowing should not be assumed, but as an entry point the double discount suggests attractive valuations.
|Very wide double discount||Positive sensitivity to falling sterling has been a tailwind, but could reverse|
|Relatively idiosyncratic return profile offering diversification to portfolios||Illiquid nature of many closed-ended holdings makes discounts vulnerable to market reversals|
|Exposure to an array of otherwise hard-to-access, high-quality opportunities||High level of KID RIY|