REG - AVI Global Trust PLC - Annual Financial Report
10/11/2023 07:00
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RNS Number : 0140T AVI Global Trust PLC 10 November 2023
AVI GLOBAL TRUST PLC
('AGT' or the 'Company')
LEI: 213800QUODCLWWRVI968
Annual Financial Report for the year ended 30 September 2023
A copy of the Company's Annual Report for the year ended 30 September 2023
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 0333 300 1950.
Notice of Annual General Meeting
The Annual General Meeting ('AGM') of the Company will be held on 20 December
2023 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 ordinary dividend of 2.3
pence per Ordinary Share and a special dividend of 0.2 pence per Ordinary
Share which, if approved by shareholders at the forthcoming AGM, will be
payable on 4 January 2024 to shareholders whose names appear on the register
at the close of business on 1 December 2023 (ex-dividend 30 November 2023).
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.
OUR 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 unlocking
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 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 45
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 2023*
+15.3%
3 Years +45.6
10 Years +149.3%
DISCOUNT *
10.9%
2023 discount high 12.9%
2023 discount low 7.0%
EXPENSE RATIO*
2023 2022
0.86% 0.88%
OTHER KEY STATISTICS
NET ASSET VALUE PER SHARE*
226.77p (2022: 199.76p**)
NUMBER OF INVESTMENTS
44 (2022: 46)
TOP TEN INVESTMENTS(±)
60.7% (2022: 54.6%)
ESTIMATED PERCENTAGE ADDED TO NET ASSET VALUE PER SHARE FROM BUYBACKS*
0.6% (2022: 0.4%)
* For definitions, see Glossary in the full Annual Report.
** Net asset value per share with debt at fair value.
(±) Of net assets.
FINANCIAL HIGHLIGHTS
Performance Summary
- Net asset value (NAV) per share total return was +15.3%
- Final ordinary dividend of 2.3p, and total dividend increased to 3.7p, which
includes a special dividend of 0.2p
- Share price total return of 14.8%
30 September 30 September
2023 2022
Net asset value per share (total return) for the year(1)* +15.3% -7.3%
Share price total return for the year* +14.8% -10.8%
Comparator Benchmarks
MSCI All Country World Index (£ adjusted total return(†)) +10.5% -4.2%
MSCI All Country World ex-US Index (£ adjusted total return(†)) +10.1% -9.6%
Discount*
Share Price Discount (difference between share price and net asset value)(2*) 10.9% 10.4%
Share Price Discount High: 12.9% 14.1%
Share Price Discount Low: 7.0% 4.8%
Year to Year to
30 September 30 September
2023 2022
Earnings and Dividends
Investment income £24.45m £23.10m
Revenue earnings per share * 4.19p 3.24p
Capital earnings per share* 23.83p (25.30)p
Total earnings per share 28.02p (22.06)p
Ordinary dividends per share 3.50p 3.30p
Special dividends per share 0.20p -
Expense Ratio*
Management, marketing and other expenses 0.86% 0.88%
(as a percentage of average shareholders' funds)
2023 Year's Highs/Lows High Low
Net asset value per share* 225.53p 195.03p
Net asset value per share (debt at fair value)* 227.99p 197.80p
Share price* (mid market) 205.50p 174.60p
Buybacks
During the year, the Company purchased and cancelled 29,277,886 Ordinary
Shares (2022: 19,115,057 purchased).
(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.
(†) The Company uses the net version of the two indices, 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 2023 and 30
September 2022 would have been 11.0% and 10.7%, 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 is pleasing to report a NAV total return of 15.3%, which was both a strong
absolute return and notably higher than our benchmark index... We look forward
to the future with optimism and continue to believe that, over the long term,
AVI will deliver attractive returns to AGT's shareholders."
Overview of the year
Having emerged from restrictions intended to minimise the effects of the
Covid-19 pandemic in 2022, the world entered a period of heightened
geopolitical tensions. The two combined led to higher levels of inflation and,
as a result, interest rates not seen for over a decade, albeit arguably more
"normal". Central bankers continue to try to walk a fine line in attempts to
control inflation while not raising interest rates to a level which stifles
economic growth. As our Investment Manager mentions in their report, the
developed world in particular has been forced to move on from a period when
the cost of capital was kept artificially low.
I said at the half-year stage that our Investment Manager was seeing a range
of investment opportunities and over the year many of those opportunities bore
fruit. Against a difficult economic and political background, it is pleasing
to report a NAV total return(1) of 15.3%, which was both a strong absolute
return and notably higher than our benchmark index.
Comparator benchmark index
There is no benchmark index which closely matches our Investment Manager's
approach and investment philosophy. Nevertheless, we are aware that some (but
by no means all) shareholders measure returns compared with an index. For the
past several years our benchmark has been the MSCI AC World ex-US Index,
reflecting the fact that when we adopted that benchmark AGT had no direct
exposure to the USA and relatively little indirect exposure. Over the last few
years our exposure to the USA, especially considering our underlying exposure,
has increased. How we measure AVI's performance has been a regular subject for
discussion by the Board and we have now concluded that the MSCI AC World Index
(that is, the version of the index including the USA) is the most appropriate
comparator benchmark.
In making this change, it is important for shareholders to recognise that we
are still unlikely, nor is the investment manager targeting, to have similar
weightings in the Company's portfolio to those in the index and that this
change of benchmark will not affect in any way the approach to investing or
the investments in the portfolio. I set out below our performance versus the
new and previous comparator benchmarks. We will continue to report performance
against both for historic reference. Having taken the considered decision to
make this benchmark change, we expect this to remain our benchmark going
forward.
Total return (£) 1 year 5 years
AVI Global Trust NAV +15.3% +48.7%
MSCI AC World Index +10.5% +41.1%
MSCI AC World ex-US Index +10.1% +21.3%
Revenue and dividend
Revenue earnings for the year under review were 4.19 pence per share. At the
half year stage we paid an interim dividend of 1.2 pence per share, which was
the same as last year. The proposed final dividend is 2.3 pence per share.
This year's income includes elements of revenue that the Directors consider to
be one off and we have therefore decided to pay a special dividend of 0.2
pence per share. The one off increase in revenue includes refunds of
previously charged taxes and interest on cash. The total ordinary dividend for
the year will therefore be 3.5 pence per share, an increase of 6% compared
with the previous year's total of 3.3 pence and the total including the
special dividend will be 3.7 pence. The Board recognises that a dividend which
is steady and able to rise over time is attractive to many shareholders but,
as we have consistently said, the portfolio is managed primarily for capital
growth.
Gearing
On 25 July 2023, we completed an agreement to issue Japanese Yen (JPY) 4.5bn
fixed rate unsecured debt, for a term of ten years. The annual interest rate
on the debt is 1.44%. The debt is denominated in JPY and was equivalent to
approximately £25m when issued. In recent years the Company has issued
several tranches of debt at attractive interest rates and our Investment
Manager uses gearing flexibly to take advantage of investment opportunities.
As well as providing funding at an attractive rate of interest, borrowing in
Japanese Yen provides a natural hedge against exposure to the currency, as the
borrowing offsets some of the exposure to JPY in the portfolio.
As at 30 September 2023 net gearing, with debt at fair value, was 7.4%.
Share price rating and marketing
AGT has a substantial marketing budget and the Board works closely with AVI as
it seeks to generate demand for the shares. Each month AVI produces an
informative fact sheet which is available on our website and I encourage you
to register on the site to receive these when they are published. AVI is also
active in the media - both traditional and increasingly social media - as we
seek to promote our investment proposition to a growing investor base. We were
pleased that our team's efforts were rewarded with the accolade of "Best
Report and Accounts" in its category in the AIC's annual shareholder
communications awards in September 2023.
Our shares traded at a persistent discount which, at the end of September
2023, stood at 10.9%. We continue to use share buybacks when the discount is
unnaturally wide and when the Board believes that buying back shares is in the
best interests of shareholders. This 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 and, during
the 12 months under review, 29 million shares were bought back, representing
6% of the shares in issue as at the start of the period. As well as benefiting
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 0.6%.
Despite the impact of our share buybacks and the excellent investment
performance by your Company we are caught by the unintended consequences on
the investment trust industry of recent regulatory pronouncements relating to
Consumer Duty. You will no doubt have read in the press that a number of
online investment platforms are assessing the cost of investing in companies
such as ours by seeking to include the underlying charges of any funds held in
our portfolio of investments in their assessment of the costs of investing in
your Company. This in our view is a misleading approach as we believe that the
costs included within our underlying investments are already factored into the
assessment of the fair value of those investments. The performance of the
underlying assets is then fairly reflected in the performance of your Company
which is shown net of costs within the control of your Board (i.e. the expense
ratio which we set out under Key Performance Indicators below). Your Board and
AVI are actively involved in discussions with the Treasury, the regulators and
the AIC to ensure that investment trusts are considered on an equal basis to
other forms of investments and so that investors are able to make a fair and
balanced decision in deciding on which type of investment to make. It would
also seem completely illogical that the interpretation of the new Consumer
Duty regulations and the assessment of value should lead to a restriction in
investors ability to invest in some investment trusts.
The Board
My predecessor Susan Noble retired at the Annual General Meeting in December
2022 and this is my first annual report as Chairman. The Company thrived under
Susan's leadership and the Board would like to record our thanks to her. We
have enjoyed working with her and wish her well in her future endeavours.
Following Susan's retirement, June Jessop was appointed as a non-executive
Director with effect from 1 January 2023. June was previously Senior Business
Manager at Stewart Investors and a member of the EMEA Management Committee of
First Sentier Investors (of which Stewart Investors is a sub-brand). June has
spent her entire career in financial services, gaining broad experience in
portfolio management, client relationship, business development and, latterly,
general management roles. She has been an investment manager for institutions,
charities and private clients, including managing assets of an investment
trust and investing in closed-end funds on behalf of clients. My colleagues
and I are delighted to welcome June to the Board. She brings a wealth of
experience in both managing assets and in the management of investment
businesses. Her skills complement those of the other Board members and we look
forward to working with her.
Annual General Meeting
I am pleased to be able to invite all shareholders to attend our AGM at 11
Cavendish Square on Wednesday 20 December 2023. 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, 6th Floor, 65 Gresham
Street, London, EC2V 7NQ.
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
The geopolitical and economic environment are undoubtedly challenging and the
world is likely to be unstable for some time. This provides excellent
investment opportunities and in their report AVI speak of valuations last seen
at the time of the global financial crisis. While progress is unlikely to be
straightforward, given the resources at our Investment Manager's disposal and
the opportunities that they perceive, we look forward to the future with
optimism and continue to believe that, over the long term, AVI will deliver
attractive returns to AGT's shareholders.
Graham Kitchen
Chairman
9 November 2023
(1) See Glossary in the full Annual Report.
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*
1 Year 10 Years (Annualised)
+15.3% +9.6%
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 Index. Over the year under review, the benchmark increased by
+10.5% on a total return basis and over ten years it has increased by +10.6%
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, year-end*
2023 2022
10.9% 10.4%
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 shares were issued and 29.3m shares were
bought back, adding an estimated 0.6% 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)
2023 2022
0.86% 0.88%
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 2023, the expense ratio was 0.86%, down
slightly from the previous year. These running costs in monetary terms
amounted to £8.7m in 2023 (£9.6m 2022).
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. SCHIBSTED B
Classification: Holding Company
Valuation: £88.6m
% of net assets: 8.6%
Discount: -34%
A Norwegian-listed holding company offering exposure to high-quality online
classified businesses. This is split between unlisted Nordic assets and a
listed stake in Adevinta, a company that was spun-out from Schibsted to pursue
international growth and consolidation. The market applies an inordinately low
implied valuation on the unlisted assets due to the structure. With potential
for an upcoming corporate event, combined with prospects for significant
improvements in monetisation and margins, we see considerable upside.
2. OAKLEY CAPITAL INVESTMENTS
Classification: Closed-ended Fund
Valuation: £78.7m
% of net assets: 7.6%
Discount: -32%
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, services, 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 portfolio.
3. KKR & CO
Classification: Holding Company
Valuation: £69.7m
% of net assets: 6.8%
Discount: -27%
A US-listed alternative asset manager with c. USD519bn of assets under
management. KKR is one of the largest companies in an industry with appealing
structural characteristics, underpinned by valuable fee-related earnings.
4. AKER ASA
Classification: Holding Company
Valuation : £65.0m
% of net assets: 6.3%
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 asset is Aker BP, a Norwegian oil company, 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.
5. FEMSA
Classification: Holding Company
Valuation: £64.5m
% of net assets: 6.3%
Discount: -28%
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
lies in unlisted FEMSA Comercio, which primarily operates Oxxo-branded
convenience stores across Mexico and Latin America. In 2023 the company
completed a strategic review, simplifying its structure and generating
considerable excess capital. We believe this will lead to a re-rating of the
shares.
6. PRINCESS PRIVATE EQUITY
Classification: Closed-ended Fund
Valuation: £64.2m
% of net assets: 6.2%
Discount: -29%
London-listed closed-ended fund managed by Swiss private equity manager
Partners Group. Princess invests in global buyouts on a co-investment basis
alongside Partners' direct investing programmes. We invested following
lethargic returns, concerns over governance, and suspension of the dividend
which forced a sell-off. We have since proactively engaged with the board on
multiple matters.
7. APOLLO GLOBAL MANAGEMENT
Classification: Holding Company
Valuation: £59.7m
% of net assets: 5.8%
Discount: -30%
A value-orientated US-listed alternative asset manager with c. USD617bn of
assets under management. Following its merger with Athene Insurance, Apollo
has ambitious plans to grow its "Fixed Income Replacement Opportunity"
offering within a USD40 trillion market.
8. PANTHEON INTERNATIONAL
Classification: Closed-ended Fund
Valuation: £53.7m
% of net assets: 5.2%
Discount: -38%
Pantheon International is one of the oldest listed private equity vehicles and
has built up a strong NAV performance track-record over several decades,
thanks to its diversified portfolio of private equity funds owning
high-quality companies with robust earnings growth. In August, the company
announced a revised capital allocation policy, equating to 15% of shares
outstanding, baking in a substantial degree of NAV accretion into future
returns.
9. D'IETEREN GROUP
Classification: Holding Company
Valuation : £41.5m
% of net assets: 4.0%
Discount : -41%
A seventh-generation Belgian family-controlled holding company whose crown
jewel asset is a 50% stake in Belron, the global no.1 operator in the Vehicle
Glass Repair, Replacement and Recalibration industry. Belron boasts numerous
scale advantages and benefits from tailwinds. Combined the durable growth
prospects for D'Ieteren's other assets, and the wide discount at which the
company trades, we are excited about prospective returns.
10. CHRISTIAN DIOR
Classification: Holding Company
Valuation : £40.3m
% of net assets: 3.9%
Discount : -15%
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.
All discounts are estimated by AVI as at 30 September 2023, based on AVI's
estimate of each company's net asset value.
INVESTMENT PORTFOLIO
AS AT 30 SEPTEMBER 2023
Company Portfolio classification % of IRR ROI Cost Fair value % of
investee (%, £)(1) (%, £)(2 ) £'000(3) £'000 net
company( ) assets
Schibsted 'B' Holding Company 2.2% 25.6% 24.8% 71,238 88,593 8.6%
Oakley Capital Investments Closed-ended Fund 10.0% 23.1% 111.5% 36,560 78,677 7.6%
KKR & Co Holding Company 0.2% 32.3% 135.1% 30,305 69,725 6.8%
Aker ASA Holding Company 1.7% 16.5% 75.4% 59,967 64,952 6.3%
FEMSA Holding Company 0.3% 26.9% 68.8% 39,314 64,510 6.3%
Princess Private Equity Closed-ended Fund 10.0% 29.1% 12.0% 58,183 64,160 6.2%
Apollo Global Management 'A' Holding Company 0.1% 32.3% 84.2% 33,528 59,712 5.8%
Pantheon International Closed-ended Fund 3.5% 22.7% 14.0% 47,042 53,743 5.2%
D'Ieteren Group Holding Company 0.6% 14.7% 12.0% 37,699 41,458 4.0%
Christian Dior Holding Company 0.0% 26.3% 97.1% 22,498 40,272 3.9%
Top ten investments 436,334 625,802 60.7%
Pershing Square Holdings Closed-ended Fund 0.4% 18.6% 46.6% 25,972 39,968 3.9%
Nihon Kohden Asset-backed Special Situation 2.1% 3.4% 2.9% 36,247 36,807 3.7%
News Corp Holding Company 0.6% 2.8% 1.7% 35,674 36,095 3.5%
IAC Holding Company 1.0% -31.1% -41.9% 64,482 34,150 3.3%
Godrej Industries Holding Company 1.8% 2.3% 9.0% 30,288 34,097 3.2%
Hipgnosis Songs Fund Closed-ended Fund 3.4% -3.3% -2.5% 38,607 33,142 3.2%
Symphony International Holdings Closed-ended Fund 15.7% 7.9% 52.0% 26,636 31,807 3.1%
Third Point Investors Closed-ended Fund 4.1% 6.5% 33.2% 23,728 26,961 2.6%
Wacom Asset-backed Special Situation 4.7% -17.6% -30.5% 37,086 24,215 2.3%
EXOR Holding Company 0.1% 11.0% 42.5% 13,574 20,506 2.0%
Top twenty investments 768,628 943,550 91.5%
Bollore Holding Company 0.1% nm -11.0% 20,087 17,799 1.7%
Molten Ventures Closed-ended Fund 5.0% -39.9% -31.4% 25,430 17,452 1.7%
DTS Asset-backed Special Situation 2.0% 8.3% 21.6% 15,795 16,628 1.6%
Digital Garage Asset-backed Special Situation 1.8% -10.7% -15.2% 21,871 16,115 1.6%
Hachijuni Bank Asset-backed Special Situation 0.5% nm 25.2% 10,114 12,508 1.2%
Kyoto Financial Group Asset-backed Special Situation 0.3% nm 17.4% 10,315 11,937 1.2%
Dai Nippon Printing Asset-backed Special Situation 0.2% nm 7.9% 10,840 11,646 1.1%
Konishi Asset-backed Special Situation 2.3% 4.8% 19.8% 10,522 11,630 1.1%
Shiga Bank Asset-backed Special Situation 1.1% nm 8.4% 10,577 11,334 1.1%
Haw Par Corporation Holding Company 0.8% nm -0.1% 11,360 10,957 1.1%
Top thirty investments 915,539 1,081,556 104.9%
SK Kaken Asset-backed Special Situation 1.8% -11.6% -42.8% 19,056 10,303 1.0%
TSI Holdings Asset-backed Special Situation 2.5% nm 22.2% 8,182 9,954 1.0%
Fuji Soft Asset-backed Special Situation 0.5% nm 4.7% 9,047 9,431 0.9%
Iyogin Holdings Asset-backed Special Situation 0.4% nm 28.4% 6,496 8,276 0.8%
Pasona Group Asset-backed Special Situation 2.0% 6.9% 21.2% 8,551 7,497 0.7%
Shin Etsu Polymer Asset-backed Special Situation 0.8% 1.2% 1.2% 5,111 5,021 0.5%
VEF Holding Company 2.3% -5.8% -5.2% 4,525 3,989 0.4%
JPEL Private Equity Closed-ended Fund 18.4% 19.9% 100.1% 1,554 3,954 0.4%
Seraphim Space Investment Closed-ended Fund 2.9% -10.0% -8.0% 3,213 2,955 0.3%
Better Capital (2009)(±) Closed-ended Fund 17.4% 22.1% 41.1% 1,962 903 0.0%
Top forty investments 983,236 1,143,839 110.9%
Third Point Investors Private Investments(±) Closed-ended Fund 0.0% nm nm 582 602 0.1%
Ashmore Global Opportunities - GBP* Closed-ended Fund 0.0% 4.2% 7.8% 31 318 0.0%
Equity investments at fair value 983,849 1,144,759 111.0%
Fair value and gross market exposure of investments(4) Equity exposure Fair value % of
£'000 £'000 net
assets
Equity investments 1,144,759 1,144,759 111.0%
Total return swap long positions
Brookfield Class A 52,097 (16,067)** -1.6%
SK Square 18,837 (1,437)** -0.1%
70,934 (17,504) -1.7%
Total return swap short positions
Brookfield Infrastructure Partners Units (3,744) 714* 0.1%
Brookfield Asset Management Class A (24,501) 168* 0.0%
Brookfield Renewable Partners Units (4,077) 1,292* 0.1%
SK Hynix Inc (14,664) (3,369)** -0.3%
(46,986) (1,195) -0.1%
Investments and total return swaps 1,168,707 1,126,060 109.2%
Other net current assets less current liabilities 46,507 4.5%
Non-current liabilities (141,549) -13.7%
Net assets 1,031,018 100.0%
(1) Internal Rate of Return. Calculated from inception of AGT's investment.
Refer to Glossary in full Annual Report. Where it is not possible to report a
meaningful figure for the IRR, due to the investment having been held less
than 12 months, this is indicated as "nm".
(2) Return on investment. Calculated from inception of AGT's investment. Refer
to Glossary in full Annual Report.
(3) Cost. Refer to Glossary in the full Annual Report.
(4) The fair value column of the total return swaps is determined based on the
difference between the notional transaction price and market value of the
underlying shares in the contracts (in effect the unrealised gains/(losses) on
the exposed long and short total return swap positions). The equity exposure
is the cost of purchasing the securities held through long total return swap
positions directly in the market and at the Balance Sheet date would be a cost
of £70,934,000. If the long positions were closed at 30 September 2023, this
would result in a loss of £17,504,000. The notional price of selling the
securities to which exposure was gained through the short total return swaps
at the Balance Sheet date would be £46,986,000. If the short positions were
closed on 30 September 2023, this would result in a loss of £1,195,000. In
the case of long and short total return swaps it is the market value of the
underlying shares to which the portfolio is exposed via the contract.
(±) Level 3 investment (see note 15 in the full Annual Report).
* The total fair value liability of short and long positions is £2,174,000.
** The total fair value asset of short and long positions is £20,873,00.
INVESTMENT MANAGER'S REVIEW
Performance Review
"In this market we believe that hard work, a focus on idiosyncratic catalysts
to unlock value, together with our own activism, are key tools to drive
returns."
"I know it's complicated."- Christine Lagarde, President of the European
Central Bank.
Alan Greenspan, the former Chairman of the Federal Reserve, used to talk of
"Fedspeak" and the art of "purposeful obfuscation". However, in this case Ms
Lagarde's approach to communication is much simpler and echoes what many
investors have been feeling over the last year: it is complicated!
Inflation remains stubbornly higher than desired and central banks have been
steadfast in their attempts to quell it, lifting interest rates to levels few
assumed probable only eighteen months ago. For the time being, a recession
remains the dog that hasn't barked (yet!), although there have been some signs
of weakening activity over the summer, most notably in Europe. In the last few
weeks we have seen a sharp rise in bond yields, particularly in the US, where
markets have started to price in a "higher for longer" outlook. The
ramifications of this are likely large and have not necessarily been felt yet.
All told this is a challenging environment for equities. However, those taking
a cursory glance at the returns of the major US indices would be forgiven for
having missed this, as (capitalisation weighted) markets have been led higher
by a narrow band of technology companies deemed to be AI-beneficiaries.
Under the surface there has been more turmoil and the going has been much
tougher. Such an environment suits our style of investing and, over the last
12 months, we have found an increasingly rich and varied opportunity set. In
this market we believe that hard work, a focus on idiosyncratic catalysts to
unlock value, together with our own activism, are key tools to drive
returns. Reflective of all this, during the year we meaningfully deployed your
company's gearing for the first time since late 2021.
Within this context AVI Global Trust's NAV increased by +15.3%(1) on a total
return basis*. This compares to a +10.1% return for the MSCI AC World ex-US
index and a +10.5%(1) return for the broader MSCI AC World Index (now our
comparator benchmark).
It is worth highlighting the strong recovery in relative performance since the
interim report in March, outperforming the two indices by +9.6% and 5.5%
respectively. Of course, our aim is not to optimise performance over six-month
periods, nor do we expect to be judged over single financial years. Still,
such performance is pleasing to see and validation for holding course when the
numbers didn't look so pretty. Deviation from the benchmark is a feature not a
bug of concentrated high conviction portfolios, and a prerequisite for
success.
Performance has been driven by stock selection - something we believe is
coming back to the fore. Our high conviction larger weight holdings, such as
Apollo, KKR, FEMSA and Schibsted, have on average performed better. The latter
two are good examples of the types of idiosyncratic "events" to which we are
attracted - management teams and boards are undertaking strategic and
structural changes to unlock value.
We are also excited about opportunities where we can add value as an engaged
and active shareholder. This is particularly true in the London-listed
closed-ended fund market, where discounts are historically wide and commentary
about the continuing relevance of the sector is rife. This provides a fertile
hunting ground and we have built new positions in Pantheon International and
Princess Private Equity over the last year, whilst also meaningfully adding to
what was a small tail position in Hipgnosis Songs Fund.
Despite broader enthusiasm from other investors, our performance in Japan has
been a relative weak spot over the last 12 months. Wacom and Digital Garage
have been notably poor performers, and a number of our other holdings have
failed to keep up with a strong market where capital has principally flowed to
larger cap names. Disappointing local price returns have been exacerbated by
continued Yen weakness. It is our expectation that Japan's divergent monetary
policy will not persist indefinitely. As and when this occurs the Yen will be
a further tailwind behind our backs. More generally we continue to be excited
about the rich opportunity set we find in overcapitalised Japanese small caps,
and the role we can play in unlocking and creating value.
Looking ahead and borrowing a quote from the CEO of a US automaker on a recent
earnings call, the macro environment remains "opaque at best". Bond markets
have increasingly started to reflect "higher for longer" rates and we appear
to be in a new epoch of non-zero interest rates and a price for risk. Tail
risk remains that the infamous "long and variable" monetary policy lags bite
unexpectedly, with the UK Liability Driven Investment (LDI)-crisis and US
banking crisis having highlighted how systemic problems can suddenly emerge as
liquidity conditions tighten.
Readers should know by now that our approach to investing is focused on
bottom-up stock picking. We are highly sceptical of the quality of our macro
insights and their utility in guiding investment decisions. As such we remain
focused on the fundamentals. Discounts - as indicated by our 35% portfolio
weighted average discount - are at wide levels historically associated with
times of panic and market stress. Such starting valuations provide a strong
bedrock and give comfort in an uncertain world.
Overall, we continue to believe that we are in a challenging market
environment in which hard work, stock selection and engagement will be
differentiating factors. In this vein, we are cautiously optimistic about the
prospects for the concentrated-yet-diverse portfolio of
high-quality-yet-lowly-valued companies we have assembled, and the potential
for attractive long-term returns from the areas of the equity market on which
we concentrate.
(( 1 )) See Glossary in the full Annual Report. All performance figures in
GBP.
* For definitions, see Glossary in the full Annual Report.
PORTFOLIO REVIEW
CONTRIBUTORS
Apollo Global Management
Classification: Holding Company
% of net assets(1): 5.8%
Discount: -30%
% of investee company: 0.1%
Total return on position FY23 (local)(2): 94.4%
Total return on position FY23 (GBP): 78.5%
Contribution (GBP)(3): 275bps
ROI since date of initial purchase(4): 84.2%
US-listed alternative asset manager Apollo (APO) was our top contributor over
the financial year, adding +275bps to NAV as its share price almost doubled
(up +98% total return in USD vs +21% for the S&P 500). This was despite
the company being swept up in the banking sell-off in March 2023 on misguided
concerns that failed to recognise important differences between bank deposits
and the annuity liabilities of Athene (Apollo's wholly-owned life insurance
arm). We took advantage of the market confusion to add to the position near
the lows reached in March.
Taking a step back to our original investment case for Apollo, we believed the
business was poorly understood by the market when we first initiated a
position back in April 2021 ahead of its announced merger with sister company
Athene Insurance. AGT shareholders with long memories may recall that we had a
very profitable investment in Athene from 2012 to 2017 when it was a private
investment held by a listed Apollo-managed vehicle called AP Alternative
Assets.
Life insurance businesses are understandably often lowly rated by the market.
But the reasons why they are so - unpredictable liabilities with tail risks
(e.g. long-term care) and hard-to-hedge liabilities such as Variable Annuities
- simply do not apply to Athene which has a highly focused business model
predominantly centred on fixed annuities. As such, Athene can be looked at as
effectively a spread-lending business, earning a spread between the rates paid
on annuities and the yields earned on its investments. Its fixed income
portfolio (95% of total assets) is 96% investment-grade, with Athene seeking
to earn a return premium from complexity and illiquidity rather than from
taking duration or additional credit risk, and its return-on-equity has
averaged 16% over the last four years (in line with its target of
mid-to-high-teens).
Life insurance businesses are also correctly perceived as being capital
intensive, and this was a source of some disquiet when the Apollo/Athene
merger was announced. But capital intensity is not a bad thing if one is
earning high returns on that capital; and, as we understood at the time, a
material proportion of Athene's growth was likely to be funded by third-party
"sidecar" vehicles.
The market seems to increasingly have come round to our more positive view on
Apollo as evidenced by the strong share price performance over 2023 on the
back of earnings upgrades. Higher rates have led to very strong demand for
annuities (unsurprisingly, people prefer to earn higher rather than lower
rates on their investments even if only in nominal terms) with retail inflows
on track to surpass 2022's record of $20bn. At 30 June 2023, Athene had
already had $15bn of inflows for the year.
To some extent, each of the listed alternative asset managers has made a
different bet: Blackstone on real estate; Ares on subordinated debt;
Brookfield on infrastructure, etc. Apollo have focused on investment grade
private credit, a market that can be measured in the tens of trillions. It is
becoming increasingly understood that Athene is integral to this push. As a
life insurance business seeking to earn a return over and above that paid out
on its annuities and other liabilities, Athene needs safe (investment grade)
credit and - given its long-dated sticky liabilities - can invest in private
assets to earn an illiquidity premium.
This is where Apollo's investments in origination platforms come into play.
These are attractive investments in their own right that sit within the 5% of
Athene's balance sheet allocated to alternative investments. In the business
of originating investment grade assets (aviation financing, mid-market
lending, mortgages, supply chain finance, etc.) they find a natural home on
Athene's balance sheet and those of third-party insurance companies and other
institutions who draw comfort in the alignment of interest from investing
alongside Athene. In addition to one-off syndication fees, Apollo is
increasingly earning ongoing management fees from many of these third parties
establishing separately managed accounts.
Athene is at the heart of this flywheel and provides Apollo a huge advantage
over peers in what CEO Marc Rowan has termed the "Fixed Income Replacement
Opportunity", with the potential market for investment grade private credit
estimated at as much as $40 trillion. Regulatory moves to increase capital
requirements of the US banking sector are expected to accelerate this, with
JPMorgan CEO Jamie Dimon suggesting that Apollo executives would be "dancing
in the streets" due to the measures.
Trading on just 11x 2024 expected earnings, we see considerable scope for
continued further upside for Apollo shares with the company on track to hit
its $1 trillion AUM target by 2026.
FEMSA
Classification: Holding Company
% of net assets(1): 6.3%
Discount: -28%
% of investee company: 0.3%
Total return on position FY23 (local)(2): 76.9%
Total return on position FY23 (GBP): 61.9%
Contribution (GBP)(3): 258bps
ROI since date of initial purchase(4): 68.8%
FEMSA added +258bps to returns during a period in which the company completed
its strategic review and took structural steps to unlock value and reduce the
wide discount at which the company trades. In this context, the shares
returned +78% as a +50% increase in the NAV was boosted by a narrowing of the
discount from 39% to 28%.
As readers may remember, we initiated a position in FEMSA in 2021, with an
investment case predicated on the highly attractive nature of FEMSA Comercio -
which operates Oxxo-branded convenience stores, and other small-format retail
stores, across Mexico and Latin America - and the unduly low valuation the
market was awarding the business. In 2022 management announced a
"comprehensive strategic review" of the group structure with a focus on
reducing the sum-of-the-parts discount.
In February 2023, FEMSA concluded its strategic review - announcing plans to
simplify the group structure, monetise non-core assets and re-focus on its
core business. Most importantly, the company announced plans to exit its stake
in Heineken, which prior to the announcement was worth some $7.8bn, or c.28%
of FEMSA's market cap. Following two accelerated book builds in February and
May, FEMSA has now fully exited Heineken (bar €500m of shares underlying an
exchangeable bond). In addition, FEMSA announced the sale of Jetro Restaurant
Depot (JRD) for $1.4bn and in August it was announced that Envoy Solutions
would merge with BradyIFS, as a first step in FEMSA exiting the business, with
a $1.7bn cash inflow and a 37% stake in the combined entity.
Despite strong performance we believe the shares remain cheaply priced, with
the underlying intrinsic value/NAV having compounded at a high rate. This
speaks to the attraction of finding investments that exhibit both special
situation-type catalysts and high-quality growth. It is this latter point
which is particularly important to us - asset quality and the prospect for NAV
growth are key to our style of investing. In this vein we believe that Oxxo
has one of the most robust retail models we have come across, with a long
growth runway, strong unit economics and high returns on capital. New store
openings are now running above 1,000 on a trailing 12-month basis once again,
and we believe the company can reach c.30,000 units in Mexico by the end of
the decade (from just shy of 22,000 currently), with strong prospects for
further potential growth in Brazil.
At current prices, FEMSA trades at a 28% discount to our estimated NAV and
with the stub* at an inordinately wide discount to closest-peer, Walmex (8.7 x
vs. 11.9x). Pro-forma of the JRD and Envoy Solutions transactions, we estimate
that FEMSA is now in a modest net cash position vs. management's target of
2.0x net debt/EBITDA. This implies the company has "excess" capital of c.$7bn
equating to c.18 % of its market cap. Investors, not entirely without reason,
are cautious over how this will be deployed, and we have been encouraging
management to use the proceeds for share buybacks.
* The stub represents the value of the remaining unlisted assets in a company
after subtracting the total value of listed assets and net debt from its
market cap
Schibsted B
Classification: Holding Company
% of net assets(1): 8.6%
Discount: -34%
% of investee company: 2.2%
Total return on position: FY23 (local)(2): 43.9%
Total return on position: FY23 (GBP): 34.9%
Contribution (GBP)(3): 233bps
ROI since date of initial purchase(4): 24.8%
In the summer of 2022 we initiated a new position in Schibsted, the Norwegian
holding company. Today Schibsted is AGT's largest position and was one of the
strongest contributors to your Company's performance, adding +233bps to
returns. Over the course of the year the shares increased +63%, as a +35%
increase in the NAV was boosted by a narrowing of the discount from 45% to
34%.
Whilst the origins of the company date back to a publishing business in the
1830s, from the turn of the millennium, Schibsted have built and bought a
collection of online classified advertising businesses, which today account
for the bulk of the value. This is spread across Schibsted's unlisted Nordic
assets (52% NAV), and a stake in Adevinta (49% NAV) which they listed in 2019
as a vehicle to house their international classified ads businesses and pursue
sector consolidation (which it has done via the acquisition of eBay's
classified ads business for $9.2bn in 2020).
Such businesses exhibit "winner-takes-most" dynamics, with strong network
effects whereby listing inventory and user traffic mutually reinforce one
another. The dominant #1 player in a category becomes the reference point for
individuals or businesses looking to buy and sell in that vertical. This
integral position translates into high levels of pricing power and excellent
financial profiles, with healthy organic growth rates, EBITDA margins of
40-60% and high free cash flow conversion.
Attune to these attractions we had monitored Schibsted from afar for a number
of years. However, it took a more than 60% decline in the share price from the
summer of 2021 to June 2022 to pique our interest. Both Schibsted and Adevinta
had been caught in a perfect storm of earnings downgrades and multiple
compression. On top of this, at the Schibsted holding company level investors
had increasingly questioned capital allocation and the group structure.
As such, we were able to build a position in the B shares at a c.45% discount
to our estimated NAV and with the stub assets trading at an anomalously low
implied c.6x forward EV/EBITDA. It was, and is, clear in our view that
resolving the ownership stake in Adevinta (which accounts for ~two-thirds of
Schibsted's market cap) is key to unlocking the trapped value, with either an
in-specie distribution or sale of Adevinta suitable outcomes to both re-rate
the stub and help realise a fair value for the Adevinta stake.
In September 2023 it was confirmed that Blackrock and Permira have made a
non-binding proposal to take Adevinta private. This will see Schibsted
crystalise a large portion of its value, whilst also retaining a stake in the
private company. Of course, the devil will be in the detail, with the
pertinent questions being around price and the size of the stake that
Schibsted will maintain.
The deal will allow Schibsted to garner a control premium (albeit an unknown
one) and remove some of the friction of an in-specie distribution. Most
importantly, it will go some way to simplifying the group structure, shining a
light on the undervaluation of the stub assets.
On the other hand, this raises the risk of capital (mis)allocation - something
we will continue to discuss with Schibsted management. We are also frank about
the low value the market will likely ascribe to Schibsted's remaining unlisted
stake in Adevinta. Indeed, it is our contention that the ideal scenario would
be for Schibsted to wholly exit Adevinta - either via this transaction, or,
failing that, through an in-specie distribution. However, we acknowledge that
the return on the retained position has the potential to be highly attractive,
with significant low hanging fruit from non-core asset sales (OLX Brazil plus
Italy and maybe Spain); improving monetisation rates at Mobile and Leboncoin,
which currently under-earn relative to global peers and the economic utility
they provide; and improving margins with tighter cost control (particularly at
HQ which runs to tune of ~€250m p.a.).
Schibsted remains cheaply valued at a 34% discount to NAV and with the stub
trading at 6.7x NTM EBITDA. Further news on Adevinta will be the key catalyst
to drive both NAV growth and discount narrowing. We remain excited about
prospective returns and continue to engage with the company and other
stakeholders to ensure that a satisfactory outcome is achieved. It is
important that any transaction fixes the undervaluation of both Adevinta and
Schibsted shares.
KKR & Co
Classification: Holding Company
% of net assets(1): 6.8%
Discount: -27%
% of investee company: 0.2%
Total return on position FY23 (local)(2): 44.5%
Total return on position FY23 (GBP): 32.2%
Contribution (GBP)(3): 177bps
ROI since date of initial purchase(4): 135.1%
KKR was amongst our largest contributors for the year, adding +177bps to
returns on the back of a share price that ended the period +45% higher (total
return in USD) vs +21% for the S&P 500 Index. The investment was one of
our largest detractors in AGT's previous financial year, and a top contributor
in the year before that. Less long-windedly, KKR's share price is volatile.
Share price performance suggests investors view alternative asset managers as
high beta plays on risk assets. Our contention is that this ignores the
defensive characteristics of scale-advantaged managers, and the structural
growth trends the industry exhibits.
The current assets under management (AUM) that alternative asset managers have
is for the most part long-term, or even permanent, and so the risk of
redemptions is very limited. In the case of KKR, over 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 9% of AUM is from vehicles with a life of less than eight years at
inception.
This gives rise to a high level of visibility on future earnings. We note that
KKR's fee-related earnings per share for H1-2023 grew +7%, with the
non-cyclical management fees component increasing by +16%.
Secular trends towards greater institutional allocations to alternatives,
particularly in private credit and infrastructure, are a forceful tailwind for
the industry. Against that backdrop, we expect the largest players such as KKR
to take a disproportionate share of that growth as LPs look to consolidate
their number of LP relationships. While there is certainly some indigestion
across LPs after record fund-raising years, KKR is in the enviable position of
having already raised the latest iteration of its flagship funds.
Blackstone's success in raising capital from private wealth channels has
materially raised the total addressable market for the alternative asset
managers. While KKR's presence in this space is still relatively nascent, they
have invested heavily in distribution and expect 30-50% of new KKR capital to
be sourced from private wealth channels over the next several years. The size
of the market is so vast that even a small up-tick in allocations to
alternatives could have seismic results, with an expected increase from 1% in
2020 to 5% in 2025 translating to an additional $9 trillion of inflows. We
expect there to be only a few winners in this space, consisting of the largest
managers with the most recognised brands.
Despite these tailwinds, KKR trades on less than 20x fee-related earnings.
Note this multiple is calculated only accounting for accrued carried interest,
so giving no credit for additional carry earned on existing funds and on
future funds. This compares very favourably to peers, and to other financials
companies of similar quality (i.e. growth and margin characteristics). With
Blackstone having become the first alternative asset manager to enter the
S&P 500, we believe it is a matter of time before KKR and Apollo are also
selected for inclusion. This could lead to as much as 20% of their free float
being bought by index-tracker and "index-aware" investment vehicles.
EXOR
Classification: Holding Company
% of net assets(1): 2.0%
Discount: -43%
% of investee company: 0.1%
Total return on position FY23 (local)(2): 20.7%
Total return on position FY23 (GBP): 19.8%
Contribution (GBP)(3): 147bps
ROI since date of initial purchase(4): 42.5%
EXOR was a meaningful contributor to returns. Over the last year EXOR shares
have marched +28% higher, driven exclusively by NAV growth, with the discount
broadly unchanged at 43%.
In last year's Annual Report, we described a situation of strong performance
at Ferrari being offset by "hard to justify" weakness at Stellantis. This year
both contributed strongly, with share price total returns of +47% and +62%,
respectively.
Performance at Stellantis is particularly pleasing, with the industrial and
financial logic of the merger shining through. Longer-term readers of our
letters may remember that the extreme undervaluation of FCA (as it then was)
and the scope for value creation through industry consolidation were key
attractions that initially led us to invest in EXOR in 2016. For Stellantis'
2022 results the company reported a 13.0% operating margin and achieved
€7.1bn of net cash synergies - exceeding the €5bn merger target more than
two years ahead of plan. The consensus view amongst investors is that the auto
industry faces a period of deflation, with increased supply leading to higher
dealer inventory and in-turn weaker pricing - which will dilute margins /
earnings from unsustainably high post-pandemic levels. We have long held the
view that it is in a more challenging environment that Stellantis' structural
margin improvements and Carlos Tavares' obsessive focus on cost will shine
through. With the shares trading at just 3.5x PE the market does not seem to
be pricing this in.
During the year EXOR built a 15% stake in Philips, the (rather beleaguered)
Dutch healthcare-focused conglomerate. Philips shares trade c.60% below their
April 2021 high following a disastrous product recall, an FDA consent decree
and unknown potential legal claims relating to concerns that sound abatement
foam within its devices could disintegrate and cause health problems. We
believe the investment meets the key criteria EXOR were looking for: reducing
the cyclicality of EXOR's NAV exposure; gaining influence without paying a
control premium, with potential further capital allocation opportunities if
the company were to raise equity; and significant self-help opportunities that
EXOR can push to support from the board - from improving governance, to
improving operational procedures and longer term questions about unlocking
value from the Personal Health (toothbrushes / shavers) business that has
limited synergies with the rest of the group.
Despite its strong NAV performance, EXOR's discount remains wide at 43%. In
recognition of this fact the company recently launched a €1bn (5% market
cap) buyback program, €750m of which will be structured as a Dutch tender
offer. We will not be taking part, having already reduced the position
materially earlier in the year to free up capital for new ideas. Indeed,
notwithstanding the reduction in our position, we believe the outlook for NAV
growth and discount narrowing to be attractive.
(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
Brookfield
(Long Brookfield Corp/Short Listed Underlyings)
Classification: Holding Company
% of net assets(1): 5.1%*
Discount: -48%
% of investee company: nm
Total return on position FY23 (local)(2): nm
Total return on position FY23 (GBP): nm
Contribution (GBP)(3): -103bps
ROI since date of initial purchase(4): -13.0%
Brookfield Corporation was our largest detractor over the financial year,
reducing NAV by 103bps. Note that this figure is the aggregated net impact
from the long position in Brookfield Corporation and the short positions in
index and underlying holdings established as hedges.
To recap, AGT acquired a position in what was then called Brookfield Asset
Management in December 2022 ahead of the spin-off of a 25% stake in its asset
management business. What was Brookfield Asset Management has been renamed
Brookfield Corporation (BN); the spun-off asset management business has taken
on the name of its parent company (BAM).
Our research highlighted that BAM (as it was) was trading at a dislocated
valuation and that either (i) the asset management business was being valued
on too cheap a multiple or (ii) the discount on the other assets was too wide.
Share price moves subsequent to the spin-off proved the latter to be the case,
and we sold our stake in the spun-off asset-management business to acquire
more of the more attractively-valued Brookfield Corporation.
We have taken out short positions in most of the listed underlying holdings
(Brookfield Asset Management, Brookfield Renewable Partners, and Brookfield
Infrastructure Partners), accounting for 54% of NAV at the time of writing. In
doing so, our exposure is limited to the underlying unlisted assets and will
mean that a higher proportion of our prospective returns will come from
discount moves than would otherwise be the case.
The main unlisted assets to which we are exposed are Brookfield Corporation's
real estate holdings which account for 36% of NAV at the current reported
valuation. There is considerable scepticism around this valuation given the
headwinds facing office properties due to work-from-home trends and
regulatory-driven upgrades to environmental standards. Indeed, much of the
company's properties are in office and retail. We understand these concerns
but we contend that, with a materially negative value implied on the real
estate by Brookfield Corporation's share price, the shares are attractively
valued. To illustrate this, the equity value for the real estate could be cut
by 75% and the discount to NAV on which Brookfield Corporation trades would
still be almost 30%.
Management have several levers to pull to address the undervaluation. These
include further spin-offs of the remaining 75% stake in Brookfield Asset
Management and more aggressive share buybacks.
*The weight shown reflects the long exposure calculated from the shares
underlying the swaps.
Wacom
Classification: Asset-backed Special Situation
% of net assets(1): 2.3%
Discount: -38%
% of investee company: 4.7%
Total return on position FY23 (local)(2): -13.7%
Total return on position FY23 (GBP): -23.3%
Contribution (GBP)(3): -78bps
ROI since date of initial purchase(4): -30.5%
Wacom was your Company's second largest detractor in 2023, reducing returns by
-78 bps. Wacom is a Japan-listed company which holds c.60% global market share
in the niche market of tablets and pens for professional use, designed to
emulate the feel of pen and paper while drawing on a screen. AGT has invested
in Wacom since August 2021 and has experienced a total return of -30.4% over
this period.
Weak consumer sentiment and inflation in the North American and European
regions, as well as semiconductor-related logistics disruptions, created
significant headwinds for the consumer electronics industry. Wacom's flagship
LCD graphic tablets were particularly affected by the economic downturn due to
their relatively long replacement cycle of approximately five years, which has
been prolonged further due to the deterioration of consumer sentiment.
In May 2023, Wacom's management disclosed a recovery plan to respond to this
situation, announcing eight measures, including improving cashflow by
significantly reducing inventories and increasing unit prices by up to 30%.
Dissatisfied with Wacom's performance, AVI has been strengthening its
engagement with members of the Board, engaging on average at least once a
month. Following these dialogues, the company announced a new share buyback,
totalling up to JPY20bn to date. Out of the total buyback budget,
approximately JPY14bn has not yet been implemented, equivalent to 15.1% of the
company's market capitalisation. These buybacks are expected to be undertaken
by the end of March 2025.
While peer forward EV/EBIT multiples average 16x, Wacom's EV/EBIT multiple
based on company targets for the financial year ending March 2025 is 11x and
just 8x for the following year. There has been no significant change in the
company's global positioning through the Covid-19 period, and the company
plans to launch a series of new products, including the Wacom One series, from
early autumn 2023, indicating that it is implementing measures to stimulate
consumer demand.
Overall, we expect the digitisation of the global design market to continue,
and remain confident that Wacom, in its position as market leader, will be at
the forefront of innovation in this segment.
Third Point Investors
Classification: Closed-ended Fund
% of net assets(1): 2.6%
Discount: -20%
% of investee company: 4.1%
Total return on position FY23 (local)(2): -1.1%
Total Return on position FY23 (GBP): -9.5%
Contribution (GBP)(3): -68bps
ROI since date of initial purchase(4): 33.2%
Third Point Investors (TPOU) was, for the second consecutive year, one of the
largest detractors from overall returns. Weak NAV performance (-2%) compounded
with a widening discount (-17% to -20%) to produce a -6% decline in share
price, far behind the returns of the S&P 500 (+21%) and the MSCI AC World
Index (+21%). Returns for AGT in Sterling were depressed further by GBP
strength vs the US Dollar.
Low double-digit positive returns from the credit book were insufficient to
offset weak returns from the equity exposure where the Manager underperformed
on both long and short exposures.
TPOU's short- and long-term performance track record is now deeply uninspiring
with the vehicle having outperformed the S&P 500 in just four out of
seventeen calendar years and far behind the index over all time periods to 30
September 2023. Over ten years, an annualised NAV total return of +4.4% falls
well short of the +11.9% from the S&P 500 and the +8.3% from the MSCI
World. While NAV volatility has generally been lower than equity indices, we
do not believe that offers any great appeal for potential buyers of what has
almost always been a majority equity-exposed strategy.
Shareholders may recall that AGT also owned a direct position in the Third
Point Offshore Master Fund that underlies TPOU. This was acquired as a result
of our participation in an exchange facility offered to TPOU shareholders in
early 2022 that allowed qualifying shareholders to exchange a portion of their
TPOU shareholding for shares in the Master Fund at a 2% discount to NAV. This
saw 43% of our position exchanged for shares in the Master Fund, and we have
since redeemed this holding at the maximum permissible rate and exited
entirely in June 2023.
For our remaining position in TPOU, we draw some solace from the tender offer
for 25% of the company's shares scheduled for Q2 2024. This is triggered if
the average discount for the six months to the end of March 2024 exceeds 10%.
Given that the current discount is 21%, we do not see any plausible scenario
in which this tender offer will not be triggered. We plan to participate in
full.
We expect the tender offer to be over-subscribed, leaving the fund not only
25% smaller in terms of net assets, but with the market aware of a large
overhang of selling pressure. With no further exit opportunity until March
2027 and with an increased exposure to private investments, we would be
surprised if the discount did not widen materially post-tender.
In this scenario, it is entirely appropriate that the share buyback programme
should continue given the high return on investment from share repurchases,
but we are mindful that this will have a further deleterious impact on already
woeful liquidity. We expect to see the company then limp on until the next
discount-contingent tender offer (at a tighter threshold of 7.5%) scheduled
for March 2027 which, barring a remarkable turnaround in performance and
sentiment, is also highly likely to be triggered. With no further exit
opportunities scheduled thereafter, the discount is likely to widen yet
further.
We believe there is a strong case for intervention from the Board to steer the
company away from what seems to be an inevitable course.
Aker ASA
Classification: Holding Company
% of net assets(1): 6.3%
Discount: -24%
% of investee company: 1.7%
Total return on position FY23 (local)(2): -2.3%
Total Return on position FY23 (GBP): -7.8%
Contribution (GBP)(3): -61bps
ROI since date of initial purchase(4): 75.4%
Aker was also a detractor from returns over the last year. On a total return
basis shares and NAV declined -2.7% and -3.4% respectively with the discount
moving slightly narrower to 24%. From AGT's perspective this was exacerbated
by a -700bps depreciation of the NOK versus Sterling.
The rather modest year-over-year change in Aker's share price and NAV masks
greater volatility in oil prices and related equities. From a November 2022
peak oil prices fell some -24% to a spring trough, only to rally +36% through
to the end of September 2023. Shares in Aker BP (62% of NAV) were similarly
volatile but ended down by -3% on a total return basis.
We continue to believe that oil will play an important and elongated role in
our energy mix in the coming decades. In this context we believe the prospects
for well-managed, low-cost operators with long production growth schedules
such as Aker BP to be attractive. This led us to more than double our position
in Aker since the start of 2020.
Although there is grave uncertainty in the near-term, as evidenced by the
steep decline in oil prices shortly after the end of the financial year,
demand for oil will grow resiliently over the coming decade. A confluence of
capital destruction, ESG policies, and the demise of Shale have firmly put the
power with OPEC+, which has shown considerable appetite for flexing its
muscles over the last twelve months. With limited spare production capacity
and a much-depleted US Strategic Petroleum Reserve, OPEC's dominance will be a
feature of the coming years.
We expect such an environment to be characterised by generally higher, albeit
likely quite volatile, oil prices. Aker BP will benefit from this, as they
embark on a significant production growth plan. In turn these cash flows can
be returned to Aker through dividends (with Aker BP's dividend growing +10%
year-over-year) and invested in higher growth/higher terminal value
businesses. Over the last year, Aker have experienced some road bumps in this
regard, with shares in Aker Horizons, the renewables holding company
established in 2020, declining by some two-thirds (and now accounting for just
3% of NAV). This speaks to the operational complexity of solving the climate
crisis and the capital required to get there - something which becomes more
relevant when risk free rates are no longer zero.
IAC
Classification: Holding Company
% of net assets(1): 3.3%
Discount: -37%
% of investee company: 1.0%
Total return on position FY23 (local)(2): -26.3%
Total Return on position FY23 (GBP): -17.4%
Contribution (GBP)(3): -55bps
ROI since date of initial purchase(4): -41.9%
Having been the most significant detractor from returns last year, IAC - the
North American holding company controlled by Barry Diller - was also a
detractor from returns this year. Over the course of the year the shares
declined -9%, as a -15% decline in the NAV was partially sheltered by a
narrowing of the discount from 41% to 37%.
In last year's Annual Report we wrote: "So what's gone wrong? The short answer
is lots". This year fewer things have gone wrong, and there are green shoots
of improvement, but nothing has gone right as such, and investors remain
highly sceptical about the extent to which key assets Angi (12% of NAV) and
Dotdash Meredith (10%) can drive both top and bottom-line growth.
In IAC CEO Joey Levin's quarterly letter at the start of the year, he talked
of a "back to basics" strategy. This has clearly been evidenced at Angi, the
home services marketplace. Since becoming CEO of Angi a little under a year
ago, Levin has steadied the ship. Measures to reduce the cost structure have
been implemented. There have been meaningful reductions in sales team
headcount, and over the first half of 2023 capex has been cut by nearly
two-thirds. He has started to simplify the product offering and ambition,
turning losses from Services from -$13m in the second quarter of 2022 to
profits of +$2m this year, as they exit un-economic offerings. Arguably this
is the "easy" bit and the next stage of showing the business can successfully
drive top-line growth is the hard bit - with the jury very much still out as
to whether this is possible. That said, the "easy" bit is not to be sniffed at
- after all the company churned through three CEOs in five years who couldn't
do it! With earnings starting to ramp up, we believe this creates a base from
which value can be grown and extracted. At the current $1.1bn enterprise value
- which equates to 0.7x trailing sales and ~8x next year EBITDA - we believe
the business could be of interest to financial buyers given the attractive
cash generative nature of the core Ads & Leads business and room for cost
cutting from non-core areas. This would be an attractive outcome for IAC
shareholders, giving the company significant capital to allocate.
Alternatively, although sceptical, we remain open minded to Joey Levin
continuing to drive fundamental improvements, re-igniting growth and margins -
something to which the market doesn't appear to be assigning a high
probability.
Turning to Dotdash Meredith (10% of NAV) - the digital media company that was
established in 2021 when IAC's Dotdash acquired the storied media brands of
the Meredith Corporation - there are also signs of improvement. Whilst 2022
had always been billed as a transition year, a deterioration in ad markets,
compounded by a much slower and more complex than anticipated integration,
meant the first twelve months of ownership were ones to forget. In 2023 the
integration issues are now behind them, with the focus now solely on
navigating a challenging macro environment. In aggregate, management describe
the ad market as being in a state of "stable weakness", albeit with
significant variation by category. We remain somewhat cautious on the heavy
lifting that the second half of the year will have to do for Dotdash Meredith
to reach management guidance of $250-300m adjusted EBITDA but, given the high
incremental margins the business earns, are excited about the prospects for
meaningful recovery in earnings and growth over the medium term - validating
the acquisition.
Whilst at 37% the discount is narrower than it was a year ago, it remains wide
both in absolute terms and relative to history. As the "anti-conglomerate
conglomerate" with a history of spinning assets to shareholders, which acts as
a pull to par, we believe the fair discount is much closer to zero. Combined
with the prospects for improved earnings growth, prospective returns appear
attractive. Management seem to agree, having bought back 3.7% of shares
outstanding between February and May 2023. With net cash equalling c.18% of
market cap, we believe there should be more of this.
OUTLOOK
In last year's outlook we wrote "after a year of unprecedented fiscal and
monetary stimulus in 2021, developed economies are now waking up to the
consequences: entrenched inflation, or a potential recession to combat it". In
many ways this still applies - inflation and recession continue to dominate
investor thinking. The macroeconomic environment has been and remains,
decidedly tricky, with a multitude of headwinds and risks.
Now, just as then, we remain focused on the bottom-up. In this regard it is an
environment we relish. Discounts, as evidenced by the 37% portfolio weighted
average discount*, have widened considerably to levels comparable to those
observed in the global financial crisis and the Eurozone crisis. Importantly,
we are seeing attractive opportunities in all parts of the equity market in
which we fish. This is an idea rich environment that is conducive to our style
of investing.
We believe that stock picking, active engagement, and a focus on investments
with explicit catalysts stand us in good stead to drive healthy absolute and
relative returns. So, whilst the near term is uncertain, we are increasingly
enthused about long-term prospective returns.
Joe Bauernfreund
Chief Executive Officer
Asset Value Investors Limited
9 November 2023
*Discount as at 31 October 2023.
FURTHER INFORMATION
AVI Global Trust Plc's annual report and accounts for the year ended 30
September 2023 (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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