AVI Global 18 October 2024
Disclaimer
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by AVI Global. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
AVI Global Trust (AGT) seeks quality assets that are trading at a discount to NAV, are overlooked by the market, and have a potential catalyst for share price rerating. These fall into one of three categories: closed-ended funds, holding companies, and asset-backed special situations mainly consisting of over-capitalised companies in Japan.
Manager Joe Bauernfreund and his team report that the discount opportunity in the portfolio is currently as good as it has ever been, thanks not only to the considerable discounts in their portfolio but also the fact that the fair value of many of the discounts is zero, in their view, meaning the potential returns in the portfolio are exceptionally high. Joe argues the current environment is the best for their strategy that they can recall, with investors often slow to catch on to the determination of management teams to narrow discounts and unlock value. As well as this, the c. 9% Discount of AGT’s own shares to NAV has to be considered, which means the double discount is currently c. 47%.
AGT has been one of the top-performing trusts over the past three years in NAV total return terms and performed particularly well in 2023 (see Performance section). In recent months, the trust has increased its stake in News Corp, the holding company that owns a controlling stake in listed Australian real estate classifieds business, REA Group, and unlisted investments including Dow Jones. Although the management has signalled its intention to tackle its discount issue, Joe believes that the market has not yet recognised this catalyst.
AGT has also recently added two closed-end funds trading on wide discounts to its portfolio: Chrysalis Investments (CHRY) and Cordiant Digital Infrastructure (CORD). CHRY focusses on high growth opportunities in both public and private markets, whilst CORD holds assets such as broadcast towers and data centres. Softbank Group, Rohto Pharmaceutical, and Reckitt Benckiser are among the other recent additions.
In our view, AGT’s double discount is a compelling feature of the trust. With interest rates looking likely to come down, there is one potential underlying driver behind discounts closing in the closed-ended space, whilst the recent changes to the fee disclosure rules for the sector could also see demand return. Although AGT’s own discount has narrowed over the past year, we think the current discount of c. 9% remains particularly attractive when considering the value in the underlying portfolio. Joe and the team report no shortage of ideas and have had some big successes when it comes to engagement, notably the sale of the portfolio of Hipgnosis Songs (SONG) which delivered a material return to AGT’s shareholders. This is a good example of the sort of idiosyncratic situation that is common in AGT’s portfolio and means it has strong return potential even if the rate-cutting cycle is slower and shallower than expected.
All three categories of the portfolio appear to be throwing up ideas, and it is interesting to note the managers are finding holding companies like Bolloré and News Corp which are at deep discounts to the sum of the parts valuation and with a clear path to a rerating—not least because management teams are determined to deliver one. It is perhaps indicative of the mood in the market this year, which has been dominated by a dash for AI-related names, that these sorts of opportunities have been left to one side, but this provides the opportunity for a value-focussed strategic investor like AGT.
Bull
- Offers exposure to idiosyncratic situations
- Wide ‘double discount’ adds potential for outperformance
- Strategy is less reliant on macro-environment
Bear
- OCF higher than the AIC Global sector’s average
- Concentrated portfolio means that a few underperforming key investments can strongly impact overall performance
- May lag in a high-growth-driven environment