REG - AVI Global Trust PLC - Annual Financial Report 30 September 2022
08/11/2022 07:00
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RNS Number : 6013F AVI Global Trust PLC 08 November 2022
AVI GLOBAL TRUST PLC
('AGT' or the 'Company')
LEI: 213800QUODCLWWRVI968
Annual Financial Report for the year ended 30 September 2022
A copy of the Company's Annual Report for the year ended 30 September 2022
will shortly be available to view and download from the Company's website,
https://www.aviglobal.co.uk. Neither the contents of the Company's website nor
the contents of any website accessible from hyperlinks on the Company's
website (or any other website) is incorporated into, or forms part of, this
announcement.
Copies of the Annual Report will be sent to shareholders shortly. Additional
copies may be obtained from the Corporate Secretary, Link Company Matters
Limited, on 01392 477500.
Notice of Annual General Meeting
The Annual General Meeting ('AGM') of the Company will be held on 20 December
2022 at 11.00am at 11 Cavendish Square, London, W1G 0AN. The formal Notice
of AGM can be found within the full Annual Report.
Dividend
The Directors have proposed the payment of a final dividend of 2.1p per
Ordinary Share which, if approved by shareholders at the forthcoming AGM, will
be payable on 3 January 2023 to shareholders whose names appear on the
register at the close of business on 2 December 2022 (ex-dividend 1 December
2022).
The following text is copied from the Annual Report and Accounts:
COMPANY PURPOSE
The Company is an investment trust. Its investment objective is to achieve
capital growth through a focused portfolio of mainly listed investments,
particularly in companies whose shares stand at a discount to estimated
underlying net asset value.
BUSINESS MODEL
Strategy
The Company's strategy is to seek out-of-favour companies whose assets are
misunderstood by the market or under-researched, and which trade significantly
below the estimated value of the underlying assets. A core part of this
strategy is active engagement with management, in order to provide suggestions
that could help narrow the discount and improve operations, thus releasing
value for shareholders.
Investment Approach
The Company's assets are managed by Asset Value Investors Limited (AVI, or the
Investment Manager). AVI aims to deliver superior returns and specialises in
finding companies that, for a number of reasons, may be selling on anomalous
valuations.
The Investment Manager has the flexibility to invest around the world and is
not constrained by any fixed geographic or sector weightings. There is no
income target set and no more than 10% of the Company's investments may be in
unlisted securities. Over the past five years, there has been an average of 43
stocks held in the AGT portfolio.
KEY PERFORMANCE INDICATORS ('KPIs')
The Company uses KPIs as an effective measurement of the development,
performance or position of the Company's business, in order to set and measure
performance reliably. These are net asset value total return, discount to net
asset value and the expense ratio.
NAV TOTAL RETURNS TO 30 SEPTEMBER 2022*
1 Year 10 Years (Annualised)
-7.3% 9.4%
DISCOUNT*
30 September 2022 30 September 2021
10.4% 6.7%
EXPENSE RATIO*
2022 2021
0.88% 0.83%
OTHER KEY STATISTICS
NET ASSET VALUE PER SHARE*
30 September 2022 30 September 2021
197.27p 221.95p**
NUMBER OF INVESTMENTS
30 September 2022
46
TOP TEN INVESTMENTS REPRESENT
30 September 2022
54.6% of net assets*
ESTIMATED PERCENTAGE ADDED TO NET ASSET VALUE PER SHARE FROM BUYBACKS*
2022 2021
0.4% 0.3%
* For definitions, see Glossary in the full Annual Report.
** Restated for Share Split.
COMPANY PERFORMANCE
Financial Highlights
- Net asset value (NAV) per share total return was -7.3%.
- Final dividend of 2.1p, and total dividend maintained at 3.3p
- Share price total return of -10.8%
Performance Summary
30 September 30 September
2022 2021
Net asset value per share (total return) for the year(1)* -7.3% 36.2%
Share price total return for the year* -10.8% 40.3%
Comparator Benchmark
MSCI All Country World ex-US Index (£ adjusted total return(†)) -9.6% 18.8%
Discount*
Share Price Discount (difference between share price and net asset value)(2) 10.4% 6.7%
Year to Year to
30 September 30 September
2022 2021
Earnings and Dividends
Investment income £23.10m £20.40m
Revenue earnings per share 3.24p 2.74p(3)
Capital earnings per share (25.30)p 54.62p(3)
Total earnings per share (22.06)p 57.36p(3)
Ordinary dividends per share 3.30p 3.30p(3)
Expense Ratio*
Management, marketing and other expenses (as a percentage of average 0.88% 0.83%
shareholders' funds)
2022 Year's Highs/Lows High Low
Net asset value per share 242.71p(3) 197.27p(3)
Net asset value per share (debt at fair value)* 239.44p(3) 195.11p(3)
Share price (mid market) 222.00p(3) 172.00p(3)
Buybacks
During the year, the Company purchased 19,115,057 Ordinary Shares(3).
3,889,335 Ordinary Shares(3) bought back were initially placed into treasury
(2021: 17,192,025 Ordinary Shares(3)) and 15,225,722 Ordinary Shares(3) were
bought back for cancellation (2021: none). During the year, 27,737,419
Ordinary Shares(3) which had been held in treasury were also cancelled (2021:
none).
(1) As per guidelines issued by the AIC, performance is calculated using net
asset values per share inclusive of accrued income and debt marked to fair
value.
(2) As per guidelines issued by the AIC, the discount is calculated using the
net asset value per share inclusive of accrued income and debt marked to fair
value.
(3) Restated for Share Split.
The Share Split
The Share Split which was approved by shareholders at the 2021 Annual General
Meeting took effect on 17 January 2022, and where relevant the numbers quoted
in this report take account of the fact that each existing share was replaced
by five new shares.
(†) The Company uses the net version of the MSCI All Country World ex-USA
Index, which accounts for withholding taxes incurred. If the gross version of
the Index had been used, the comparative figures for the years ending 30
September 2022 and 30 September 2021 would have been -9.1% and 19.3%,
respectively.
* Alternative Performance Measures
For all Alternative Performance Measures included in this Strategic Report,
please see definitions in the Glossary in the full Annual Report.
CHAIRMAN'S STATEMENT
"It would be unwise to predict a smooth path, but my fellow Directors and I
are confident that over the long term your Company will be able to produce
attractive returns for shareholders."
Overview of the Year
The clouds have darkened considerably since I wrote to you this time last
year.
During this period it has become clear that inflation is not the transitory
phenomenon that it was once hoped. All of this has been accentuated and
exacerbated by Russia's invasion of Ukraine, which has led to higher energy
prices and a spiralling cost of living.
Western Central banks have been steadfast in their determination to bring
inflation back under control, raising interest rates and tightening financial
conditions. This has put considerable downward pressure on asset prices - from
high-flying tech stocks to index linked bonds - and on global economic growth.
Within this context, over the twelve months under review the Company's NAV
Total Return was -7.3%. Over the same period, the comparator benchmark, the
MSCI AC World ex-US, returned -9.6%. We always remind shareholders that our
Investment Manager invests for the long term, and over five years the NAV
total return was +41.9%, compared with a benchmark return of +15.4%, while
over ten years the return was +144.6%, compared with 94.5%.
Share Split*
Shareholders approved a Share Split at the 2021 Annual General Meeting (AGM)
and this took effect on 17 January 2022. The numbers quoted in this report
take account of the fact that each existing share was replaced by five new
shares in January.
Revenue and Dividends
Our revenue account showed a marked improvement over the previous year, with
net revenue of 3.24 pence per share, compared with 2.74 pence last year. The
Company paid an interim dividend of 1.2p per share on 15 July 2022. We are
proposing a final dividend of 2.1p per share for approval at the AGM which
will bring the total dividend for the year to 3.3p, which is unchanged from
last year.
As I have noted in the past, the portfolio is managed primarily for capital
growth and we do not place income constraints on the investment portfolio.
However, the Board does recognise that a dividend which is steady and able to
rise over time is attractive to many shareholders.
Gearing
On 7 July 2022, taking advantage of low interest rates, we announced the issue
of Japanese Yen (JPY) 8bn fixed rate debt at an annual interest rate of 1.38%
and with a life of ten years. The amount issued was equivalent to £49 million
at the date of issue.
While the Board oversees the strategy and discusses gearing at every meeting,
deployment of debt is a portfolio management decision which is delegated to
our Investment Manager. AVI have taken a cautious approach to usage of gearing
over recent months, which has so far proven to be a correct decision. As set
out in the Investment Manager's report, they have recently invested some of
the cash which was on the balance sheet at the year end and have significant
capacity to invest in further opportunities. As always, I would emphasise that
deployment of debt is based on views of the value available in individual
investments, rather than attempting to time overall market movements.
Share Price Rating and Marketing
At the end of September 2022, the shares were trading at a discount of 10.2%,
which was wider than the 6.7% at the 30 September 2021 year end. We use share
buybacks when the Board believes that these are in the best interests of
shareholders and with the intention of limiting the volatility in the
discount. During the twelve months under review, 19.1 million* shares were
bought back, representing 3.7%* of the shares in issue as at the start of the
period under review.
Shares were bought back when the Board believed that the discount was
unnaturally wide and will continue to follow this approach, which is also an
approach that our Investment Manager encourages for many of our investee
companies. At times when the market was volatile this has meant buying back
shares on most days. As well as benefitting shareholders by limiting the
discount at which they could sell shares if they so wish, buying back shares
at a discount also produced an uplift in value to the benefit of continuing
shareholders, by approximately 0.4%.
The Board
As previously announced, I will retire from the Board at this year's AGM. It
has been a pleasure to work with AVI and all those involved with running AGT.
I would like to record my thanks for all of the help and support that I have
received throughout my time as a Director.
My fellow Directors have agreed that Graham Kitchen will take over the role of
Chairman when I retire on 20(th) December. Graham has been a Director since
January 2019, and I am sure that I am leaving the Board and the Company in
very capable hands.
Annual General Meeting
I am pleased to be able to invite all shareholders to attend our AGM at 11
Cavendish Square on Tuesday 20(th) December 2022. We do recognise that some
shareholders may be unable to attend the AGM and if you have any questions
about the Annual Report, the investment portfolio or any other matter relevant
to the Company, please write to us either via email at agm@aviglobal.co.uk or
by post to The Company Secretary, AVI Global Trust PLC, Beaufort House, 51 New
North Road, Exeter, Devon, EX4 4EP.
If you are unable to attend the AGM, I urge you to submit your proxy votes in
good time for the meeting, following the instructions enclosed with the proxy
form. If you vote against any of the resolutions, we would be interested to
hear from you so that we can understand the reasons behind any objections.
Outlook
This is a time of great economic uncertainty. In reaction to high and
apparently persistent levels of inflation, central banks have been raising
interest rates while signaling that further increases are likely. It remains
to be seen whether government and central bank policies will be able to tread
the fine line between controlling inflation and avoiding a recession.
Whilst we are in difficult times, as illustrated by the fall in net asset
value covered by this report, your Investment Manager has demonstrated an
ability to navigate turbulent markets, and indeed exploit them. It would be
unwise to predict a smooth path, but my fellow directors and I are confident
that over the long term your Company will be able to produce attractive
returns for shareholders.
Susan Noble
Chairman
7 November 2022
(*) Where appropriate, the numbers quoted in this report take account of the
fact that each existing share was replaced by five new shares on 17 January
2022.
KEY PERFORMANCE INDICATORS
The Company's Board of Directors meets regularly and at each meeting reviews
performance against a number of key measures.
In selecting these measures, the Directors considered the key objectives and
expectations of typical investors in an investment trust such as the Company.
NAV total return*
Company 1 Year 10 Years (Annualised)
-7.3% 9.4%
The Directors regard the Company's NAV total return as being the overall
measure of value delivered to shareholders over the long term. Total return
reflects both the net asset value growth of the Company and also dividends
paid to shareholders. The Investment Manager's investment style is such that
performance may deviate materially from that of any broadly based equity
index. The Board considers the most useful comparator to be the MSCI All
Country World ex-US Index. Over the year under review, the benchmark
decreased by -9.6% on a total return basis and over ten years it has increased
by 6.9% on an annualised total return basis.
A full description of performance and the investment portfolio is contained in
the Investment Review, parts of which are included below.
Discount*
30 September 2022 30 September 2021
Year end 10.4% 6.7%
High for the year 14.1% 11.8%
Low for the year 4.8% 4.6%
The Board believes that an important driver of an investment trust's discount
or premium over the long term is investment performance. However, there can be
volatility in the discount or premium. Therefore, the Board seeks shareholder
approval each year to buy back and issue shares, with a view to limiting the
volatility of the share price discount or premium.
During the year under review, no new shares were issued and 19.1m shares were
bought back, adding an estimated 0.4% to net asset value per share to the
benefit of continuing shareholders. The shares were bought back at a weighted
average discount of 10.3%.
Expense ratio*
Year ended 30 September 2022 Year ended 30 September 2021
0.88% 0.83%
The Board continues to be conscious of expenses and aims to maintain a
sensible balance between good service and costs.
In reviewing charges, the Board's Management Engagement Committee reviews in
detail each year the costs incurred and ongoing commercial arrangements with
each of the Company's key suppliers. The majority of the expense ratio is the
cost of the fees paid to the Investment Manager. This fee is reviewed
annually.
For the year ended 30 September 2022, the expense ratio was 0.88%, up slightly
from the previous year. These running costs in monetary terms amounted to
£9.6m in 2022 (£8.8m 2021).
The Board notes that the UK investment management industry uses various
metrics to analyse the ratios of expenses to assets. In analysing the
Company's performance, the Board considers an Expense Ratio which compares the
Company's own running costs with its assets. In this analysis the costs of
servicing debt and certain non-recurring costs are excluded. These are
accounted for in NAV Total Return and so form part of that KPI. Further, in
calculating a KPI the Board does not consider it relevant to consider the
management fees of any investment company which the Company invests in, as the
Company is not a fund of funds and to include management costs of some
investee companies but not of others may create a perverse incentive for the
Investment Manager to favour those companies which do not have explicit
management fees. The Board has therefore chosen not to quote an Ongoing
Charges Ratio per the AIC's guidance as part of its KPIs but has disclosed an
Ongoing Charges Ratio in the Glossary in the full Annual Report.
* For definitions, see Glossary in the full Annual Report.
TEN LARGEST EQUITY INVESTMENTS
1. PERSHING SQUARE HOLDINGS
Classification: Closed-ended Fund
Valuation: £87.1m
% of net assets: 9.0%
Discount: -34%
A Euronext and London listed closed-ended fund managed by a high-profile
activist manager. The fund owns a concentrated portfolio of quality US
companies. Pershing Square trades on a 34% discount to NAV, which we regard as
unsustainably wide for a portfolio of large-cap, liquid securities,
particularly given the manager's activist strategy.
2. EXOR
Classification: Holding Company
Valuation: £71.3m
% of net assets: 7.4%
Discount: -43%
EXOR is an Italian listed holding company run by the Agnelli family, which
traces its roots back to the formation of FIAT in 1899. It has exposure to
three main assets, all of which are listed: Stellantis, Ferrari and CNH
Industrial. Having sold its stake in private business PartnerRe, EXOR now has
significant cash to put to work. The Agnelli family has a strong history of
value creation and, by aligning investors capital with theirs, we believe
there is a good prospect of achieving outsized returns.
3. AKER ASA
Classification: Holding Company
Valuation: £69.0m
% of net assets:7.1%
Discount: -24%
Aker is a Norwegian holding company with investments principally in oil &
gas, renewables & green tech, marine-related activities and industrial
software. Its largest assets are Aker BP, a Norwegian oil exploration and
development company, and Aker Horizons, a holding company established to
invest in renewable energy and technology. Aker has a history of active
portfolio management, dealmaking and value creation, with a track record of
strong shareholder returns since Initial Public Offering (IPO) in 2004.
4. Oakley Capital Investment
Classification: Closed-ended Fund
Valuation : £60.9m
% of net assets: 6.3%
Discount : -42%
Oakley Capital Investments (OCI), is a London listed closed-ended fund which
invests in the private funds run by Oakley Capital, a UK-based private equity
firm. OCI owns a portfolio of fast growing businesses in the consumer,
education and technology sectors. Its process focuses on less intermediated
markets and complex deals (e.g., carve-outs), which avoids the auction
process, sourced by a network of entrepreneurs who believe in the Oakley
philosophy. We believe that OCI's significant discount will narrow from
continued NAV outperformance arising from realised exits, and the continued
earnings growth of its tech-enabled portfolio.
5. KKR AND CO
Classification: Holding Company
Valuation: £53.2m
% of net assets: 5.5%
Discount: -44%
A US listed alternative asset manager with c. USD470bn of assets under
management. KKR is one of the largest companies in an industry with appealing
structural characteristics, underpinned by valuable fee-related earnings.
6. CHRISTIAN DIOR
Classification: Holding Company
Valuation: £46.7m
% of net assets: 4.8%
Discount: -16%
Christian Dior's sole asset is a 41% stake in LVMH, the luxury goods
conglomerate. We view LVMH as a highly attractive asset, with diverse exposure
across Fashion & Leather, Wine & Spirits, Perfume & Cosmetics,
Watches & Jewellery, and Selective Retail. LVMH's collection of brands is
unique and the rich cultural heritage underlying them is impossible to
replicate. These factors drive strong demand, high pricing power and
attractive margins. We see strong earnings upside from LVMH, as well as
potential returns from the collapse of the holding structure.
7. FEMSA
Classification: Holding Company
Valuation: £40.5m
% of net assets: 4.2%
Discount: -39%
FEMSA is a Mexican family controlled holding company with roots dating back to
the establishment of Mexico's first brewery in 1890. The bulk of the value
(72% of NAV) lies in unlisted FEMSA Comercio, which operates Oxxo-branded
convenience stores, and other small-format retail stores, across Mexico and
Latin America. These stores have a long growth runway, which should drive low
double-digit sales growth and low teen EBIT growth as operational leverage
expands margins. On top of this store network (1.5x more Oxxo stores than
banks in Mexico), Oxxo have layered digital payments solutions catering for
Mexico's large unbanked population.
8. GODREJ INDUSTRIES
Classification: Holding Company
Valuation: £34.1m
% of net assets: 3.5%
Discount: -65%
Godrej Industries is an Indian listed holding company with a track record of
significant value creation under the stewardship of the Godrej family, who
hold a 67% stake. Through its two main assets, Godrej Consumer and Godrej
Properties, Godrej offers exposure to high quality well-managed companies that
are highly geared to India's long-term economic growth generally, and consumer
spending power specifically, at a very wide 65% discount.
9. APOLLO GLOBAL MANAGEMENT
Classification: Holding Company
Valuation: £32.7m
% of net assets: 3.4%
Discount: -45%
A value-orientated US listed alternative asset manager with c. USD500bn of
assets under management. Following its merger with Athene Insurance, Apollo
has ambitious plans to grow its "Fixed Income Replacement Opportunity"
offering within a $40 trillion market.
10. THIRD POINT INVESTORS
Classification: Closed-ended Fund
Valuation : £32.6m
% of net assets: 3.4%
Discount : -17%
A London listed closed-ended fund run by a high-profile activist manager. The
fund invests in both long and short equity and credit, with a long equity
bias.
INVESTMENT PORTFOLIO
AT 30 SEPTEMBER 2022
Company Portfolio classification % of IRR ROI Cost Valuation % of
investee (%, £)(1) (%, £)(2 ) £'000(3) £'000 net
company( ) assets
Pershing Square Holdings Closed-ended Fund 0.8% 18.8% 40.2% 62,984 87,138 9.0%
EXOR Holding Company 0.5% 8.3% 25.2% 60,590 71,307 7.4%
Aker ASA Holding Company 1.6% 17.5% 83.7% 56,389 69,000 7.1%
Oakley Capital Investments Closed-ended Fund 9.2% 23.7% 106.6% 28,760 60,886 6.3%
KKR and Co Holding Company 0.2% 32.3% 80.4% 30,305 53,210 5.5%
Christian Dior Holding Company 0.1% 25.2% 67.2% 28,576 46,707 4.8%
Fomento Economico Mexicano Holding Company 0.3% 4.2% 5.0% 39,314 40,529 4.2%
Godrej Industries Holding Company 2.1% -1.1% -3.0% 35,201 34,055 3.5%
Apollo Global Management Holding Company 0.1% 4.0% 5.0% 32,245 32,736 3.4%
Third Point Investors Closed-ended Fund 3.9% 9.7% 44.4% 23,226 32,574 3.4%
Top ten investments 397,590 528,142 54.6%
Symphony International Holdings Closed-ended Fund 15.7% 8.5% 50.4% 26,636 32,452 3.4%
Schibsted ASA B Holding Company 2.2% nm -14.1% 37,813 32,232 3.4%
Wacom Asset-backed Special Situation 4.4% -10.8% -10.3% 36,361 31,849 3.3%
DTS Corp Asset-backed Special Situation 2.7% 17.0% 35.7% 21,935 28,413 2.9%
Sony Corp Asset-backed Special Situation 0.0% 13.4% 37.7% 20,842 27,993 2.8%
IAC Inc. Holding Company 0.6% -54.7% -50.2% 51,667 26,719 2.8%
Eurazeo Holding Company 0.7% -29.6% -23.0% 34,439 25,341 2.6%
Third Point Offshore Fund Closed-ended Fund 3.9% 4.4% 2.1% 23,384 24,117 2.5%
Fujitec Asset-backed Special Situation 1.4% 18.6% 43.9% 14,220 20,277 2.1%
D'Ieteren Group Holding Company 0.3% nm 17.0% 17,455 20,216 2.1%
Top twenty investments 682,342 797,751 82.5%
Pantheon International Closed-ended Fund 1.2% nm -2.5% 15,609 15,218 1.6%
NS Solutions Asset-backed Special Situation 0.7% 1.7% 3.2% 14,707 14,612 1.5%
Harbourvest Global Private Equity Closed-ended Fund 0.8% nm -3.4% 14,214 13,727 1.4%
SK Kaken Asset-backed Special Situation 1.8% -9.2% -29.2% 19,056 13,037 1.3%
Molten Ventures Closed-ended Fund 2.7% nm -24.3% 16,758 12,679 1.3%
Pasona Group Asset-backed Special Situation 2.1% 12.1% 35.7% 9,139 11,056 1.1%
Jardine Matheson Holdings Holding Company 0.1% nm 8.5% 9,961 10,745 1.1%
Cannae Holdings Holding Company 0.7% nm -4.9% 10,876 10,340 1.1%
Digital Garage Asset-backed Special Situation 1.0% 1.8% 3.4% 10,901 9,780 1.0%
ICG Enterprise Trust Closed-ended Fund 1.4% nm -7.8% 10,364 9,556 1.0%
Top thirty investments 813,927 918,501 94.9%
Hipgnosis Songs Fund Closed-ended Fund 0.8% -0.7% -0.8% 11,911 9,108 0.9%
VNV Global Holding Company 4.0% 68.4% 41.5% 11,492 8,817 0.9%
Konishi Asset-backed Special Situation 2.1% -2.1% -6.8% 9,759 8,231 0.9%
JPEL Private Equity Closed-ended Fund 18.4% 20.4% 103.4% 2,010 6,280 0.6%
Toagosei Asset-backed Special Situation 0.7% -2.9% -9.1% 7,307 5,776 0.6%
NB Private Equity Partners Closed-ended Fund 0.8% nm 0.8% 5,378 5,418 0.6%
VEF Holding Company 2.9% nm -7.0% 5,571 5,172 0.5%
T Hasegawa Asset-backed Special Situation 0.7% nm 8.7% 4,458 4,800 0.5%
Nihon Kohden Asset-backed Special Situation 0.2% nm -0.4% 4,127 4,113 0.4%
Teikoku Sen-I Asset-backed Special Situation 1.5% -0.5% -1.4% 6,177 4,029 0.4%
Top forty investments 882,117 980,245 101.2%
Shin Etsu Polymer Asset-backed Special Situation 0.5% 19.0% 4.2% 2,887 2,956 0.3%
abrdn Private Equity Opportunities Closed-ended Fund 0.2% nm -3.9% 1,248 1,193 0.1%
Better Capital (2009) Closed-ended Fund 17.4% 22.2% 41.4% 1,962 978 0.1%
Seraphim Space Investment Closed-ended Fund 0.5% nm 4.6% 670 700 0.1%
Ashmore Global Opportunities - GBP Closed-ended Fund 8.5% 3.3% 6.5% 48 336 0.0%
Toyo Construction Asset-backed Special Situation 0.1% 12.8% 3.3% 22 23 0.0%
Equity investments at fair value 888,954 986,431 101.8%
Short-term debt instruments, other net current assets less current liabilities 105,970 10.9%
Non-current liabilities (122,893) -12.7%
Net assets 969,508 100.0%
1 Internal Rate of Return. Calculated from inception of AGT's investment.
Refer to Glossary in Full Annual Report.
2 Return on investment. Calculated from inception of AGT's investment. Refer
to Glossary in Full Annual Report .
3 Cost. Refer to Glossary in Full Annual Report.
INVESTMENT MANAGER'S REVIEW
"Sustained periods of panic and market decline create compelling
opportunities. We remain nimble and ready to seize them"…
PERFORMANCE REVIEW
We closed last year's Annual Report by saying that "inflation remains the
predominant fear playing on investors' minds". Unfortunately, this fear has
become a reality.
In December 2021, the Chairman of the Federal Reserve conceded that it was
time to "retire" the word "transitory" in relation to inflation. Throughout
2022, rates of inflation have hit elevated levels that few could have
imagined.
Central Banks have made it clear they will do "whatever it takes" to rid us of
inflation, with an increasing consensus that the "whatever" part includes
inducing a recession. The era of ever declining interest rates and central
banks having the backs of equity investors appears well and truly behind us.
As we noted in last year's Annual Report, on a look-through basis our
portfolio companies are typically characterised by strong competitive
positions, pricing power and low levels of gearing. This has stood them in
good stead operationally to deal with inflation. However, this has not
insulated their share prices, as higher bond yields have fed through to higher
discount rates and created considerable volatility.
Moreover, markets don't operate in a vacuum. Rather, they are jolted by events
in the real world. Russia's invasion of Ukraine has done just this,
accentuating inflationary pressures, and causing an energy crisis that
European governments are working hard to resolve. Whether this spills into a
full-blown economic crisis remains to be seen.
As is expected in such an environment, discounts have widened, acting as a
headwind to performance. The weighted average discount to NAV of our portfolio
stands at 38% today, versus 29% a year ago.
Within this context AVI Global Trust's NAV declined by -7.3% on a total return
basis*. This compares to a -9.6% decline for the MSCI AC World ex-US index
(our comparator benchmark) and a -4.2% return for the broader MSCI AC World
Index (all figures in GBP).
In a challenging macro environment, it is notable that a number of the largest
positive contributors - namely Fondul Proprietatea and DTS - are positions
where we have engaged as active owners. We believe such engagement, and other
types of idiosyncratic opportunities that can generate absolute returns
regardless of the performance of broader markets, is an increasingly relevant
part of our arsenal, particularly during periods that are less hospitable for
equities en masse.
As readers will know by now, our portfolios are constructed from the bottom
up, based on fundamentals and the prospects for NAV growth and discount
narrowing, as opposed to some over-arching economic theory or concern for
index constituent weights. We see little merit in trying to time markets and
wholly subscribe to the adage that it is time in the market, not timing the
market, that matters. As such, we typically aim to stay more or less 100%
invested at all times.
As an Investment Trust however, we have the capacity to use gearing. We
explained in the interim report how, as markets rose in calendar 2021, we
maintained our sell discipline and exited positions where discounts and
valuations had become less compelling, selling Kinnevik on a large premium and
exiting Investor AB on a tight discount. Come the end of February 2022, we
were not employing any of the available gearing and by the summer we were in a
net cash position of 7%, having exited Fondul Proprietatea.
Over the last few months we have cautiously redeployed capital such that we
are now approximately fully invested once again, but with our gearing still
available to deploy. We have taken advantage of write-downs in valuations to
build positions in two new European holding companies (Schibsted and
D'Ieteren), and a new North American Holding Company (Cannae Holdings).
We continue to find highly attractive valuations in Japan, where there is room
for us to add value through engagement, and have also taken a basket-like
approach to investing in a group of closed-end funds offering exposure to
private equity and venture capital trading at abnormally wide discounts, even
after incorporating the impact of public market movements onto private company
valuations.
In times of market stress it is easy to be melodramatic. This feels
particularly relevant, as the now former UK government's recent budget proved
to be anything but "mini". Volatility in Sterling and the UK Gilt markets has
been extreme. There has been much financial press focus on pension funds'
Liability Driven Investing strategies - attesting to the fact that potential
pain points across the financial system only become apparent in times of
stress.
As a global fund we will always be correlated with broader markets. With that
said, our experience shows that discount widening and panic provide
opportunities. Valuations - both within the portfolio and our wider universe -
are increasingly attractive. Through our own activism, engagement and
corporate events, there is scope for unlocking value, independent of the
broader market. We believe that this will play an increasingly important role
in our returns in an uncertain world. With the opportunity to deploy gearing
in due course, we remain confident in our ability to take advantage of this
and drive attractive long-term returns.
* For definitions, see Glossary in the full Annual Report.
PORTFOLIO REVIEW
CONTRIBUTORS
FONDUL PROPRIETATEA (Contribution: +1.02%)
Classification: Closed-ended Fund
% of net assets(1): 0.0%
Discount: -38%
% of investee company: 0.0%
Total return on position FY22 (local)(2): 23.1%
Total return on position FY22 (GBP): 22.5%
Contribution (GBP)(3): 102bps
ROI since date of initial purchase(4): 133.0%
We exited from Fondul Proprieteatea (FP), our largest contributor for the
financial year, shortly before the period end.
Over the lifetime of AGT's investment in FP (initiated in 2014) we generated
an ROI of +133% which compares to +30% and +56% for the MSCI AC World ex-US
and the MSCI AC World respectively, and an IRR of +21% vs +6% and +11% for the
indices over the same period.
FP was established to provide restitution to Romanian citizens whose property
was expropriated by the former Communist government. As shareholders we have
played an engaged role, last year nominating a new director to the board, and
recently working with the board and other shareholders to negotiate a revised
Investment Management Agreement that better incentivises management. FP is a
case study in what optimal capital allocation can achieve, with the company's
policy of making no new investments and instead returning proceeds from
realisations to shareholders (via buybacks, tenders, and dividends)
turbo-charging strong underlying NAV growth. Remarkably, the company's shares
outstanding more than halved over our holding period.
FP's crown jewel asset, Hidroelectrica, has been a key driver of FP's NAV
growth and our expectation had been that the long-awaited IPO of their 20%
stake in the company would result in further gains for FP shareholders. But
political and regulatory risks are mounting, and uncertainty remains over
whether a dual listing of Hidroelectrica (i.e. in London as well as the
approved Bucharest listing) will ultimately be permitted by the Romanian
government. With the anti-business PSD party well ahead in the polls and
elections to be held in 2024, the window for a successful IPO is narrowing. We
note that subsequent to our exit, the existing windfall tax on electricity
sales over the RON450MW/h threshold has been increased from 80% to 100%, and
its expiry date extended from 31 March 2023 to 31 August 2023. FP's share
price was not, in our view, sufficiently discounting the risks of such
additional measures and, with FP's relative attractiveness versus the rest of
our universe reduced by its material outperformance over the last few years,
we took the decision to exit our investment. This began with us taking
advantage of a tender offer held in late-June that saw us a sell a quarter of
our shareholding back to the company at a premium to share price and a low
double-digit discount to NAV.
DTS CORP (Contribution: +0.64%)
Asset-backed Special Situation
% of net assets(1): 2.9%
Discount: -22%
% of investee company: 2.7%
Total return on position FY22 (local)(2): 38.1%
Total return on position FY22 (GBP): 28.6%
Contribution (GBP)(3): 64bps
ROI since date of initial purchase(4): 34.2%
Despite starting the year with only a 2.0% weight DTS was the second largest
contributor with a +38% share price increase over the period, as its EV/EBIT
valuation increased from 6.3x to 9.2x. We first invested in DTS in January
2020 as part of our focus on Japanese equities and the potential upside from a
structural improvement in corporate governance and a greater focus on
shareholder returns.
DTS is an IT systems developer, and our investment was premised on a focus by
the Japanese government and corporates to upgrade their IT infrastructure.
Japan's IT systems are outdated, inefficient and in much need of improvement.
For example, virtually every government office and company in Japan has a fax
machine which relates to Japan's reliance on the archaic practice of hanko
stamps - a stamp required for over 11,000 procedures to sign off documents.
During the coronavirus pandemic workers would have to go into the office to
stamp paper documents before either mailing or faxing them - an archaic task.
Compared to the US, Japanese companies rely more heavily on the services of
third-party IT providers (65% vs 28%). As we approach 2025, a year that METI
(Ministry of Economy, Trade and Industry) has coined the digital cliff,
Japanese companies will need to increasingly utilise DTS' services, and with a
shortage of IT professionals, it should prove a boon for both sales growth and
margin expansion.
As DTS' largest shareholder, owning just under 10% of the shares across our
managed funds (of which AGT owns 3.1%), we have been working closely with
management and the board behind the scenes. DTS' response to our engagement
has been exemplary - they allowed us frequent dialogue with senior board
members and, aside from a few minor issues, actioned all our suggestions in a
comprehensive mid-term plan announced in May 2022. Since then, DTS' share
price has appreciated by +22% vs +2% for MSCI Japan Small Cap, and for the
year to end of September is up +38% versus -6% for MSCI Japan Small Cap, in
JPY.
The positive share price performance, and significant outperformance vs the
market, is we believe, a testament to our efforts and clearly demonstrates the
value of AVI's constructive activism - something that we hope will not have
gone unnoticed by our other investee companies as well as other investors in
the Japanese markets.
DTS' valuation, albeit less compelling than when we initiated the position, is
still attractive with the shares trading on an EV/EBIT multiple of 9.2x vs
peers on 13.5x. We believe that as the company executes its plan to double
EBITDA by 2030 and return up to 30% of its market cap to shareholders, there
is still further upside.
SYMPHONY INTERNATIONAL HOLDINGS (Contribution: +0.54%)
Classification: Closed-ended Fund
% of net assets(1): 3.4%
Discount: -48%
% of investee company: 15.7%
Total return on position: FY22 (local)(2): 2.1%
Total return on position: FY22 (GBP): 23.2%
Contribution (GBP)(3): 54bps
ROI since date of initial purchase(4): 50.4%
Buoyed by robust NAV performance, even more so in local currencies (+23%)
before the translation into its reporting currency of USD (+10%), Symphony
International Holdings (SIHL) was our third largest contributor despite the
headwind of a widening discount (from 44% to 48%). As with many of our
holdings this year, weak Sterling significantly added to the returns
experienced by AGT.
Two unlisted holdings were responsible for the majority of SIHL's NAV
progression over the year: Indo-Trans Logistics Corporation (ITL) and ASG
Hospitals (ASG).
ITL is Vietnam's largest independent integrated logistics company with a
network covering aviation services, freight management, contract and port
logistics spread across Vietnam, Cambodia, Laos, Myanmar, and Thailand. ITL's
strong operating performance, and a secondary transaction that saw Mitsubishi
Logistics Corp acquire a stake in the company, led to SIHL's investment being
written up by +60% over the period. The investment, initiated in 2019, is now
valued at over 3x cost.
Founded in 2005, ASG runs 46 eye healthcare clinics across India, Africa, and
Nepal. Benefitting from both organic growth and M&A, the business recorded
EBITDA growth in excess of 20% in the year to 30 June 2022. In August 2022,
SIHL sold just over a third of its shareholding as part of a funding round,
realising an annualised return of +38% on the investment that was initiated in
2019.
Notwithstanding relatively robust NAV performance this year, SIHL's discount
remains at a persistently extreme level and represents the market's verdict on
the manner in which the company continues to be managed. That is, we believe,
for the benefit of management rather than shareholders. Following a prolonged
private engagement with management and the board in an attempt to address
these issues, we released a public letter to SIHL shareholders which can be
found at
https://www.assetvalueinvestors.com/content/uploads/2021/04/Save-Symphony-Letter-Final.pdf
(https://www.assetvalueinvestors.com/content/uploads/2021/04/Save-Symphony-Letter-Final.pdf)
Our view remains that a change to the company's strategy and to its board will
be required for shareholders to capture the latent value trapped within the
discount to NAV, and we continue to engage with shareholders on this and other
matters.
OAKLEY CAPITAL INVESTMENTS (Contribution: +0.36%)
Classification: Closed-ended Fund
% of net assets(1): 6.3%
Discount: -42%
% of investee company: 9.2%
Total return on position FY22 (local)(2): 7.2%
Total return on position FY22 (GBP): 7.2%
Contribution (GBP)(3): 36bps
ROI since date of initial purchase(4): 106.6%
Oakley Capital Investments (OCI) was one of the largest contributors in FY22
generating a NAV total return of +45%. The discount widened from -20% to -42%
in the broad market sell-off, leading to a share price return of +6%. OCI has
now achieved an impressive five-year NAV CAGR of +23%. Encouragingly, the
majority of returns have come from EBITDA growth, which has averaged +18%
across the portfolio over the last twelve months. Alongside this, OCI has
generated further upside from realised multiple expansion due to exiting
portfolio holdings at an implied valuation above book value.
Oakley, like all PE managers, are paid fees on committed/invested capital
rather than mark-to-market gains and have no incentive to unduly mark up, and
we believe Oakley are very much at the conservative end of the peer group when
it comes to valuations. We note OCI's portfolio is currently held on a very
reasonable 14x EV/EBITDA. In H1 alone, OCI achieved portfolio value growth of
+13%; with a quarter of this from realisations. In an environment where
questions have been raised over private company valuations, OCI has
successfully proved the conservatism of its NAV to the market through exits at
premia to carrying values, averaging 60% since 2018, and 67% over 2022.
It was a busy year for OCI, with four new investments, four follow-on
investments and one partial exit, as well as bolt-on deals and refinancings.
New investments were Vice Golf (leading direct-to-consumer digitally native
golf brand), Affinitas Education (a private school group), Phenna Group &
CTS Group (two leading platforms in the Testing, Inspection, Certification,
and Compliance sector), and vLex (an online legal information subscription
platform). With 70% of the portfolio now delivering services digitally, and
with 75% having subscription-based or recurring revenues, OCI's portfolio
should prove resilient in economic downturns.
The crown jewel of the portfolio is IU Group, Germany's largest private
university group. It boasts the largest portfolio of Bachelors and Masters
degrees in Europe, offering both digital and in-campus learning across 28
German cities. As of this year, the group has over 100k students enrolled on
its 200 courses, growing from just 23 enrolled students during the
university's first semester in 2000. IU Group provides high-quality, German
state-accredited degrees, recognised by universities and employers globally.
Approximately one third of IU Group's revenues come from its Business to
Business (B2B) segment, which involves providing degrees/vocational courses to
10,000 partner companies. These partners can range from major corporations
such as VW to small German enterprises. The students sign up to work in an
apprentice-style role with a company, earning a small wage while earning a
degree. IU Group provides a matching service to link students to businesses
offering this scheme, which creates a high barrier to entry as this would be
difficult to intermediate. The rest of the company's revenues come from
standard university student enrolment.
IU Group is held on a very conservative 14x EV/EBITDA vs recent transactions
in the sector closer to 20x. This is despite the business being one of the few
education assets of scale globally, being the fastest-growing university on
the continent, and having unique sticky B2B revenues as a result of Dual
Studies programme in Germany. In our view these attributes mean that IU Group
should warrant a premium valuation to its peers. As a business that is growing
its top-line, EBITDA, and student cohort 30-50% year on year, and with a three
to six-year lifetime for its customers, IU Group is a very exciting asset. The
Group is now actively marketing its B2C segment outside of Germany, only
increasing the trajectory for future growth and prospective returns.
OCI offers a fast-growing, high-quality portfolio with attractive growth
opportunities and recurring revenue businesses, backed by a manager with a
distinct deal sourcing strategy, and all available at a discount of 42%. We
remain enthusiastic holders of OCI.
INVESTOR AB B (Contribution: +0.27%)
Classification: Holding Company
% of net assets(1): 0.0%
Discount: -16%
% of investee company: 0.0%
Total return on position FY22 (local)(2): 12.4%
Total return on position FY22 (GBP): 6.9%
Contribution (GBP)(3): 27bps
ROI since date of initial purchase(4): 84.6%
In January 2022, AGT exited its position in Investor AB as the discount
narrowed to low double-digit levels versus a long-term average closer to 25%.
Over the course of AGT's financial year the position contributed +27bps to
returns.
Across the A and B shares we had held the position for over twenty years,
having (re) built a position in Investor A during 2001.
Over the life of the investment AGT has earned a GBP IRR of +14.3% from its
investment in Investor AB, compared to +7.1% for the MSCI ACWI ex-US and +8.7%
for the MSCI AC World.
Re-reading the 2001 British Empire Securities and General Trust (the former
name of AVI Global Trust) Annual Report, it explains that at the turn of the
century Investor had been under activist pressure from Martin Ebner of BZ
group. At the time there was a perception that Investor management had to
become more dynamic and improve performance. Reading this more than 20 years
later, it is striking to think how Investor has evolved: Investor today has a
very clear governance model and focus on creating best in class companies
through a subtle combination of decentralisation and accountability. Moreover,
Investor have proved themselves to be active owners, splitting Atlas Copco,
selling ABB's power grids business, splitting Electrolux and listing EQT - all
within the last few years.
The Wallenberg family have shown themselves to be excellent stewards of
capital. There will likely be times in the future where we can invest
alongside them once again, with higher prospective returns from the discount -
which had narrowed - and the NAV - where underlying valuations had become less
compelling.
(1) For definitions, see Glossary in the full Annual Report.
(2) Weighted returns adjusted for buys and sells over the year.
(3) Figure is an estimate by the managers and sum of contributions will not
equal quoted total return over the financial year.
(4) Figure quoted in GBP terms. Refer to Glossary in the full Annual Report
for further details.
DETRACTORS
IAC INC (Contribution:-2.28%)
Classification: Holding Company
% of net assets(1): 2.8%
Discount: -41%
% of investee company: 0.6%
Total return on position FY22 (local)(2): -58.0%
Total return on position FY22 (GBP): -49.2%
Contribution (GBP)(3): -228bps
ROI since date of initial purchase(4): -50.2%
IAC - the North American internet-focused holding company controlled by Barry
Diller - was the greatest detractor from your company's performance this year,
reducing returns by -228bps. Over the last year the shares have declined -57%,
as a -46% decline in the NAV has been compounded by a widening of the discount
from 25% to 41%.
IAC specialises in building businesses that are trying to transition sectors
from offline to online, such as Expedia for travel, and Match for dating. IAC,
who describe themselves as the "anti-conglomerate conglomerate", have a track
record of spinning these off to shareholders when they reach maturity, having
spawned 10 public companies. The company has a track record of immense value
creation and the spinning off of assets pulls the discount to par.
We first invested in IAC in December 2020 with a thesis predicated on Vimeo,
the video enterprise software business, and made highly attractive absolute
and relative returns on a small position. Following the spin-off of Vimeo in
May 2021, we have subsequentially started to scale up a position in IAC -
whose portfolio today comprises of: 1) Dotdash Meredith, a digital media
company formed in 2021 when IAC's Dotdash acquired the illustrious media
assets of Meredith Corp; 2) a listed stake in Angi, the homeservices
marketplace trying to transition one of the last major offline consumer
categories online; 3) a listed stake in MGM Resorts International, whose
BetMGM is a leader in the nascent US sports betting and online gaming market;
and 4) a collection of smaller unlisted assets, the most promising of which
are Care.com, a marketplace for caregivers, and a minority stake in Turo, the
peer-to-peer car rental company.
So what's gone wrong? The short answer is lots.
Starting with the NAV. Dotdash Meredith has suffered from dual issues of a
slowdown in digital advertising as recessionary fears have loomed, and slower
than anticipated integration of the Meredith assets, and accordingly their
$450m digital EBITDA target for 2023, has been pushed back by 6-12 months. In
our view these issues are, by definition, temporary in nature and the
strategic logic and long-term financial profile is still intact. Indeed,
intent-driven advertising is becoming increasingly valuable in a world where
Apple have upended the cookie-based iOS ad market.
Shares in Angi declined -76% over the last year. Some (although not much)
solace is sought from the fact that the drastic share price decline is in
keeping with the US and EU internet businesses against which we track Angi.
The fact that Angi was trading at a steep discount to peers a year ago has
provided no protection as valuations have reset. This has been compounded by
operational missteps in the Roofing category, which will impair growth for the
rest of the year. The jury is very much out on Angi, but the current $1.6bn
enterprise value equates to a mid-single-digit multiple of estimated free cash
flow in a "no-growth" scenario. IAC have a "real option" as to whether to
persevere with the current strategy or to exercise this option and monetise
these cash flows (either through a take private or sale of the business).
Finally, shares in MGM - the casino operator whose BetMGM is a leader in the
nascent US sports betting and iGaming market - have declined by -31% over the
last year, as investors have grown cautious over the sustainability of margins
and demand outlook in light of a slowing US economy. The stub domestic
operations trades at 5x EBITDA (assigning zero value to the BetMGM JV). This
is a steep discount to the 12-17x EBITDA at which MGM has sold assets in
M&A transactions in recent years. Clearly MGM management see value in the
shares - having reduced the share count by 20% since the start of 2021, as do
IAC, who have increased their stake this year.
This weak NAV performance has been compounded by a widening of the discount.
Given IAC's long and successful history of spinning off assets to
shareholders, we believe that the fair discount is zero. Combined with the
prospects for NAV growth from Angi, MGM and Dotdash, and further optionality
around how IAC deploy their $1.2bn (14% of NAV) cash pile, there is much to be
excited about. It has been a painful last twelve months, but the ingredients
for attractive long-term returns appear to be in place.
SONY GROUP (Contribution: -1.52%)
Classification: Asset-backed Special Situation
% of net assets(1): 2.8%
Discount: -34%
% of investee company: 0.0%
Total return on position FY22 (local)(2): -21.3%
Total return on position FY22 (GBP): -27.3%
Contribution (GBP)(3): -152bps
ROI since date of initial purchase(4): 37.5%
Sony was the second largest detractor to returns over the period, deducting
209bps from performance, with a share price return of -25% vs TOPIX -10%.
Despite being the fourth-largest contributor to returns in FY21 (+2.1%), FY22
has been a difficult year for the Japanese listed conglomerate. The aggressive
actions from Xbox/Microsoft since the start of 2022 stoked this
underperformance, with the competitor announcing its intention to acquire
Activision Blizzard for $68.7bn on the 18th January - the largest gaming deal
in history. This sent Sony's shares down -13% on the day.
By way of reminder, we first invested into Sony in 2019 with our investment
predicated on the opportunity to own Sony's unmatched combination of media
content assets and consumer hardware technology which, due to misperceptions
about Sony's conglomerate structure, traded at a very reasonable EV/EBIT
valuation (11.2x).
In 2022, investors have grown increasingly critical of Sony's individual
businesses, voicing particular concerns over what is arguably Sony's crown
jewel asset, and the one subjected to most scrutiny, Sony's PlayStation
business (33% of NAV). Since the introduction of the Microsoft Game Pass, and
the announced acquisition of Activision Blizzard, there has been increasing
uncertainty of what the gaming industry could look like in the future.
Microsoft has aggressively introduced a Netflix-like subscription model into
the industry, shifting away from the £50-70 per individual title, instead
requiring consumers to pay c. £11/month for an immediately available
catalogue with over 100 blockbuster AAA titles.
As a refresher, Sony's gaming model has been to acquire small, high-quality
studios and have them develop new story-driven, single-player IP of very high
quality. In stark contrast, Microsoft has taken a content-first approach -
buying up large established publishers, and any studios they own, to acquire
as much popular IP as possible. They then make these games exclusive to the
Xbox Game Pass platform in the hope of acquiring new subscribers to the
network. For example, Microsoft acquired Bethesda Softworks in 2021 for
$7.5bn, and is now hoping to do the same with Activision Blizzard for $68.7bn
While this aggressive route to capturing market share could be successful, the
sustained profitability of Xbox's new model is entirely unproven both within
gaming and across other streaming mediums. It is a large bet by Microsoft, who
are utilising their financial firepower to disrupt Sony. It remains unclear
whether this can be sustained financially long-term, as evidenced by Sony CFO,
Hiroki Totoki, who explained during a recent investor Q&A that "putting
AAA titles straight onto their subscription service will result in a
deterioration in quality due to less funds being available."
How this will ultimately impact Sony remains unclear, but management have been
measured in not blindly following Microsoft guns blazing down the streaming
path. Sony did introduce an all-new PlayStation Plus subscription service in
June, but this offered a back-catalogue of games in the service and no day-one
exclusive releases. This ensured that Sony's current model with new game
releases can continue on the PS5, while offering players more content for
their subscription. A sensible step by management.
Sony's share price has now fallen -40% from its peak and the stub* valuation
stands at 10.4x forward EV/EBIT. While it is unclear what the inflationary
environment might look like for the Electronics segment, Music accounts for a
further 31% of NAV and is expected to see further earnings growth this year.
The new iPhone is continuing to use Sony sensors, and the PlayStation
continues to outsell the Xbox each week. While the business may not be firing
on all cylinders currently, this is a result of the uncertain environment we
find ourselves in. Sony remains a unique opportunity to own four high-quality
assets with proven synergies between the consumer and entertainment segments.
We remain confident in our investment in Sony and feel that it is a company
that will continue to excel in its respective industries for years to come.
*The stub valuation of Sony is the market capitalisation, less the value of
all listed assets, the value of Sony Financial, and the net financial position
of the business.
EXOR (Contribution: -0.89%)
Classification: Holding Company
% of net assets(1): 7.4%
Discount: -43%
% of investee company: 0.5%
Total return on position FY22 (local)(2): -9.6%
Total Return on position FY22 (GBP): -7.7%
Contribution (GBP)(3): -89bps
ROI since date of initial purchase(4): 25.2%
Having been one of the strongest performers last year, this year EXOR was a
meaningful detractor from your company's returns. The shares declined -10%
over the period, as a -4% decline in the NAV was compounded by a widening of
the discount from 39% to 43%.
Starting with the NAV side of the equation, the dynamic which we described in
the interim report continues to be the case: strength at Ferrari is being
offset by weakness at Stellantis. Over the last year Ferrari shares returned
+7%, during a period in which the company reported record results.
Importantly, Ferrari continue to report their strongest ever order book
intake, with minimal cancellations. Ultimately everything - sales growth,
pricing power, margins - flows from this unparalleled brand equity and the
competitive advantage it yields. Investors recognise this and award Ferrari a
relatively high multiple for such certainty in an uncertain world.
Turning to Stellantis, the shares have declined -20% over the last year,
despite consensus forecasts for this year and next year's operating profits
having been revised up +42% and +17%, respectively. We are generally sceptical
when investors claim that the market is just plain wrong, but the divergence
between fundamentals and share price is hard to justify. Investors have grown
increasingly cautious over the state of the global economy generally, and the
US consumer specifically, whilst there is a broader debate in autos as to
whether current record high margins and low dealer incentives will stick when
volumes (hitherto restricted by shortages of semiconductor chips) return.
Stellantis management, however, contend that the company can generate a 10%
operating margin in a "reasonable crisis" and that they would be breakeven
even below 50% of volumes. Stellantis now trades at 3x consensus 2023 earnings
- just over half that of Ford and GM once adjusting for accounting
differences. As one sell side analyst put it in a recent note: "What does the
market fear? Clearly the answer is a lot". With such low expectations there
appears ample room for surprise on the upside - much to the benefit of EXOR's
NAV.
As we discussed in the interim report, in late calendar year 2021 EXOR agreed
(for the second time!) to sell their reinsurance business, Partner Re, to
Covea. The deal was struck at $9.2bn and completed in July 2022. Just over
half of the capital was paid in dollars, which EXOR have not hedged,
benefiting their NAV as the dollar has continued to surge against the Euro.
This gives the company considerable firepower to make new investments, with
€3.8bn of net cash on hand.
Although it has narrowed from the 50% level it touched briefly in the summer
of 2022, the widening of EXOR's discount has been a headwind to performance
over the last year. Unlike many other holding companies, EXOR's discount has
never recovered to pre-COVID levels, having briefly traded on a c.20% discount
in early 2020. A return to such a level from the current 43% level would yield
a return of +40%.
KKR AND CO (Contribution: -0.75%)
Classification: Holding Company
% of net assets(1): 5.5%
Discount: -44%
% of investee company: 0.2%
Total return on position FY22 (local)(2): -28.3%
Total Return on position FY22 (GBP): -13.7%
Contribution (GBP)(3): -75bps
ROI since date of initial purchase(4): 80.4%
KKR was one of the largest contributors to AGT's returns in the previous
financial year 30 September 2021.. This year, it was amongst our greatest
detractors. The company's share price fell by -29% and ended the period -48%
down from its November 2021 all-time high. By contrast, the S&P 500 Index
declined -16% and -22% respectively (all figures in USD).
This suggests that KKR is regarded as a levered play on financial markets. But
while KKR does have a large balance sheet of investments in its own funds, and
also operates a capital markets business which is subject to cyclicality,
similarly weak share price performance from balance sheet-light peers from
their November 2021highs (e.g., Blackstone -40%; Carlyle -54%) implies that
this view extends across much of the listed alternative asset management
(AAMs) sector.
We believe this perception is misplaced. For the most part, the alternative
asset manager's assets under management (AUM) are not at risk of redemptions,
nor are meaningful proportions of their fees subject to mark-to-market risk
i.e., the vast majority of assets are tied up in long-term or perpetual fund
structures with management fees charged on committed capital.
In the case of KKR, almost half of its AUM is either perpetual capital or
long-dated strategic investor partnerships (separately managed accounts in
which capital is recycled following exits); just 10% of AUM is from vehicles
with a life of less than eight years at inception.
Second-quarter results have confirmed the resilience and defensive
characteristics of scale-advantaged AAMs with KKR's fee-paying AUM growing
+20% year-on-year. While its fee-related earnings (FRE)* fell -2%, this was
entirely driven by a decline in capital markets fees (to which we assign only
a modest multiple in our sum-of-the-parts valuation) with management fees up
+36% (and +5% quarter-on-quarter). A combination of shorter gaps between fund
raises (due to more rapid deployment) and the "denominator effect" (under
which some institutions have become overly-allocated to Alternatives due to
the fall in public markets) has resulted in now widespread reports of Limited
Partners (LPs) facing indigestion, spurring fears around fundraising
prospects.
Importantly, however, KKR - along with its listed peers - benefit in this
environment, both from LPs prioritising relationships with larger managers and
from their diversification across asset classes given that the "indigestion"
referred to above primarily relates to private and growth equity fund raises.
KKR is also in the enviable position of having already raised its latest
flagship private equity funds over the last couple of years.
Furthermore, just 35% of KKR's AUM is from private equity funds vs double that
ten years ago. In recognition of the increased significance of their Real
Assets business (Infrastructure and Real Estate), KKR recently hosted an
analyst presentation at which they highlighted that 30% of growth in total
management fees has come from Real Assets over the last three years, with the
segment's AUM three times what it was in 2019. Given that institutional
investors are under-allocated to Infrastructure and with continued heightened
inflationary concerns, we expect KKR's Real Asset business to be an even more
material contributor to future growth on the back of further international
expansion and penetration into the still nascent retail market.
Given its resilience and secular growth prospects, the 8x stub fee-related
earnings multiple* on which we estimate KKR trades (or 13x if we punitively
assign zero value for earnings from carried interest) represents, in our view,
one of the most glaring mispricings in our portfolio.
KKR's management are convinced that their balance-sheet heavy strategy is the
correct one. And we have a lot of sympathy with their arguments that the
balance sheet - aside from being a generator of attractive long-term returns
in its own right - helps grow AUM and FRE quicker through the seeding of new
funds and through demonstrating a strong alignment to LPs, and provides
optionality around M&A during market downturns when issuing equity would
be expensive.
However, KKR does trade on a very material discount to balance-sheet light
peers, such as Ares and Blackstone. Notwithstanding the above arguments in
favour of their balance sheet approach, our discussions with KKR management
confirm public statements made on earnings calls that they are laser focused
on shareholder value. With KKR employees owning c.30% of the company, we are
confident that this valuation disconnect will not be tolerated indefinitely.
Indeed, upon their appointment last year KKR's co-CEOs were awarded seven-year
share options that could see them receive shares worth up to $1bn if the share
price were to hit a target level 3.2x the current share price (with zero value
received unless the share price more than doubles from here).
Intriguingly, Brookfield Asset Management, a balance-sheet heavy peer of
KKR's, is moving ahead with a spin-off of its asset management business. KKR
shareholders and management will be watching how the two parts trade, with any
value creation from the split pointing to a source of optionality for KKR.
*FRE, or Fee-Related Earnings, are management fees less any operating
expenses.
THIRD POINT INVESTORS LTD (Contribution: -0.71%)
Classification: Closed-ended Fund
% of net assets(1): 3.4%
Discount: -17.0%
% of investee company: 3.9%
Total return on position FY22 (local)(2): -20.7%
Total Return on position FY22 (GBP): -11.7%
Contribution (GBP)(3): -71bps
ROI since date of initial purchase(4): 44.4%
Third Point Investors Ltd (TPOU) is a London listed closed-end fund that, via
its investment in the unlisted underlying Master Fund, provides exposure to
Third Point's event-driven opportunistic strategy which it pursues across
listed equity, credit, and venture capital investments. The listed equity
portion of the portfolio includes companies such as Disney, SentinelOne, and
Colgate-Palmolive. Having been our largest contributor over the previous
financial year (to 30 September 2021), TPOU was our fifth-largest detractor
this year on the back of a NAV decline of -30% exacerbated by a widening
discount (from 15% to 17%) and resulting in a fall in the share price of -32%.
Over the same period, the S&P 500 fell -16% and the MSCI World -19%.
USD strength/GBP weakness significantly muted the impact of this poor
performance for AGT shareholders with the -32% share price fall in USD
translating to an -18% decline in GBP. Two of TPOU's previously highflying
positions (Upstart Holdings and SentinelOne) fell back to earth - we estimate
that these two stocks were collectively responsible for c.40% of the total NAV
decline over the period. We are more comfortable with the portfolio
composition and balance today than we have been for some time, with the
allocation to credit (one area where we believe the manager has historically
demonstrated an ability to add value) at its highest since the aftermath of
COVID, and we would hope that this will lead to improved returns from here.
Readers will likely be aware of our public activist campaign in TPOU that
began in mid-2021. This came to an end with the appointment of an independent
director we had proposed to the board
(https://www.investegate.co.uk/third-point-investors-ltd--tpou-/prn/board-and-shareholder-update/20220218123552PDE52)
.
During the year, AGT participated in the materially accretive exchange
facility offered to TPOU shareholders. This mechanism allowed qualifying
shareholders to exchange a portion of their TPOU shareholding for shares in
the underlying Master Fund at a 2% discount to NAV (vs the double-digit
discount on which TPOU shares were trading at the time), and was introduced
during our campaign. We saw 44% of our position exchanged for shares in the
Master Fund, 25% of which can then be redeemed every quarter after an initial
six-month lock-up. We redeemed the first portion of our Master Fund shares at
the first opportunity (the end of the period covered by this Annual Report),
and intend to do the same at the next three subsequent quarter-ends.
(1) For definitions, see Glossary in the full Annual Report.
(2) Weighted returns adjusted for buys and sells over the year.
(3) Figure is an estimate by the managers and sum of contributions will not
equal quoted total return over the financial year.
(4) Figure quoted in GBP terms. Refer to Glossary in the full Annual Report
for further details.
OUTLOOK
Following the unprecedented pandemic-induced fiscal and monetary stimulus,
2022 has seen developed economies wake up to the consequences: entrenched
inflation, and a likely upcoming recession induced by the monetary tightening
required to combat it. As such, the attention of market participants has been
firmly focused on the comments and actions of central banks with volatile (and
falling) markets the result. We try not to get caught up in this, aware of our
inability to predict the future macroeconomic landscape, and remain open
minded about what might come next. Rather, our experience shows that the key
to long-term success is to focus on company fundamentals - earnings
resilience, balance sheet strength and valuations. We remain confident in the
outlook for our portfolio. The portfolio weighted average discount has moved
from 29% to 38% over the last twelve months, and now stands in-line with
levels observed during previous periods of market stress. Sustained periods of
panic and market decline create compelling opportunities. We remain nimble and
ready to seize them, patiently deploying our capital to sow the seeds of a
powerful recovery for the portfolio as and when volatility subsides.
Joe Bauernfreund
Chief Executive Officer
Asset Value Investors Limited
7 November 2022
FURTHER INFORMATION
AVI Global Trust Plc's annual report and accounts for the year ended 30
September 2022 (which includes the notice of meeting for the Company's AGM)
will be available today on https://www.aviglobal.co.uk.
It will also be submitted shortly in full unedited text to the Financial
Conduct Authority's National Storage Mechanism and will be available for
inspection at data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) in accordance with
DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and
Transparency Rules.
ENDS
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