AVI Global 09 April 2021

AVI Global Trust (AGT) – previously named British Empire Trust (BTEM) – seeks to generate capital growth for investors through investment in a concentrated portfolio of companies trading at a wide discount to NAV.

AGT currently trades on a share price discount of c. 7.9% (as at 26/03/2021). However, when the discount to fair-value of the underlying holdings is accounted for, AVI estimates that the trust trades on a ‘double-discount’ of c. 39% (as at 28/02/2021), as discussed under discount. Historically such levels have proven attractive entry points, which we discuss under performance. Performance in recent months has indeed been very strong, boosted by astute tactical adjustments to positioning. Despite the relatively low allocations made to the US market for a global strategy and the outperformance of US equities compared to global peers, AGT has outperformed global equities over the past five years.

Since taking over as sole lead manager in 2015, Joe Bauernfreund has transformed the AGT process and portfolio. Joe and the team look to identify high-quality assets which are trading at a significant discount to their intrinsic value, often as a result of the holding’s structure.

Since the second half of 2020, the team has been tilting the portfolio to increase exposure to ‘recovery beneficiaries’, anticipating economic acceleration as lockdown ends and pent-up demand is released back into the economy. They have been able to build positions which they note give them exposure to high-quality assets at substantial discounts to market-level fair value.

Gearing has been tactically utilised in recent months, and the team tell us the recent market volatility has continued to create new opportunities in high-quality assets.

Returns have been strong coming out of the crisis, and boosted by tactical decisions by the team. We note that the ‘double-discount’ on AGT’s portfolio at its present substantial level has historically represented an attractive entry point, and thus we do not particularly fear any short-term mean reversion in relative returns after substantial outperformance in the market recovery. With COVID-19 cases seeing a resurgence in parts of the world and many parts of the global economy lagging in their vaccination programmes, having exposure to high-quality assets with strong pipelines of NAV growth at significantly discounted valuations seems attractive to us given the inherent uncertainty of the future. Markets remain volatile and, as we have seen in recent weeks and months, rotations in style outperformance can be sharp, reflecting the greater than usual uncertainties about the near-term future the world continues to face. In these circumstances in particular, we think there are clearly benefits to having a foot in each camp, as AGT’s portfolio would appear to.

The themes driving much of the portfolio construction remain compelling to us over the long-term, in particular the Japanese allocation, where underperformance at the share price level does not reflect strong operational performance. Yet we note that, historically, periods of sharp market drawdown tend to see discounts widening within AGT too, and investors should be prepared that this could again prove a short-term headwind in a generalised sell-off (whilst likely creating more buying opportunities).