REG - AVI Global Trust PLC - Annual Financial Report
13/11/2024 07:00
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RNS Number : 9792L AVI Global Trust PLC 13 November 2024
AVI GLOBAL TRUST PLC
('AGT' or the 'Company')
LEI: 213800QUODCLWWRVI968
Annual Financial Report for the year ended 30 September 2024
A copy of the Company's Annual Report for the year ended 30 September 2024
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 1932.
Notice of Annual General Meeting
The Annual General Meeting ('AGM') of the Company will be held on 19 December
2024 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 2.55
pence per Ordinary Share which, if approved by shareholders at the forthcoming
AGM, will be payable on 3 January 2025 to shareholders whose names appear on
the register at the close of business on 29 November 2024 (ex-dividend 28
November 2024).
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 47
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, share price
discount to net asset value and the Ongoing Charges Ratio.
Net asset value total return*:
+13.7% (2023: +15.3%)
3 Years +21.5%
10 Years +165.3%
Ongoing Charges ratio*
2024 2023
0.87% 0.86%
Discount*
2024 year end: 9.0% (2023: 10.9%)
2024 high: 12.3% (2023: 12.9%)
2024 low: 6.3% (2023: 7.0%)
OTHER KEY STATISTICS
Net asset value per share:
253.81p (2023: 226.77p)
Number of investments:
40 (2023: 44)
Estimated percentage added to net asset value per share from buybacks*:
+0.4% (2023: 0.6%)
Top 10 investments(±):
57.2% (2023: 60.7%)
* For all Alternative Performance Measures included in this announcement,
please see definitions in the Glossary in the full Annual Report.
(±) Of net assets.
FINANCIAL HIGHLIGHTS
Performance Summary
- Net asset value (NAV) per share total return was +13.7%
- Share price total return of +16.3%
- Final ordinary dividend of 2.55p, and total dividend increased to 3.75p
30 September 30 September
2024 2023
Net asset value per share (total return) for the year(1)* +13.7% +15.3%
Share price total return for the year* +16.3% +14.8%
Comparator Benchmark
MSCI All Country World Index (£ adjusted total return(†)) +19.9% +10.5%
Discount*
Share price discount (difference between share price and net asset value)(2*) 9.0% 10.9%
Share price discount High: 12.3% 12.9%
Share price discount Low: 6.3% 7.0%
Year to Year to
30 September 30 September
2024 2023
Earnings and Dividends
Investment income £26.60m £24.45m
Revenue earnings per share* 4.20p 4.19p
Capital earnings per share* 27.45p 23.83p
Total earnings per share 31.65p 28.02p
Ordinary dividends per share 3.75p 3.50p
Special dividends per share - 0.20p
Ongoing Charges Ratio*
Management, marketing and other expenses 0.87% 0.86%
(as a percentage of average shareholders' funds)
2024 Year's Highs/Lows High Low
Net asset value per share* 264.40p 207.84p
Net asset value per share (debt at fair value)* 267.39p 211.81p
Share price* (mid market) 248.00p 187.80p
Buybacks
During the year, the Company purchased and cancelled 20,112,011 Ordinary
Shares (2023: 29,277,886 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 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 2024 and 30
September 2023 would have been 20.2% and 11.0%, respectively.
* Alternative Performance Measures
For all Alternative Performance Measures included in this announcement, please
see definitions in the Glossary in the full Annual Report.
CHAIRMAN'S STATEMENT
"Against this volatile background, the Company's NAV total return for the year
to 30 September 2024 was a creditable +13.7%."
Overview of the year
The world continues to be unstable, with conflict in the Middle East and
Ukraine. Elsewhere, geopolitical tensions particularly between the United
States and China continue to make news headlines. On a more positive note,
inflation appears to be better in check and we have seen central banks in the
US and Europe begin the process of cutting interest rates, which should be
positive for companies and markets.
Against this volatile background, the Company's NAV total return for the year
to 30 September 2024 (one of our three KPIs) was a creditable +13.7%, which
was above the long-term average annual return and compares with +19.9% for our
comparator benchmark index. Over the last five years the return has been
+65.5%, compared to +63.3% for the current comparator benchmark (shareholders
may recall that we changed the benchmark last year(1)).
Turning to the share price, I said at the half-year stage that having traded
in a range of approximately 180p-200p since the beginning of 2022, the share
price increased steadily following a dip in October 2023 and by the end of
March it was over 230p. It was at a similar level at the end of September, and
the NAV per share was also little changed over the second half of our
accounting year. For the year as a whole, the share price total return was
16.3%, as the discount closed marginally. The effectively flat return over the
second six months does not tell the whole story. The Japanese market, in
particular, was very volatile in early August and AVI were able to take
advantage of this, as they explain in their report. The Board is encouraged to
see that the key driver of returns remains stock selection, demonstrating that
the team at AVI remain consistent in their long-term investment style.
Revenue and dividends
Revenue earnings for the year under review were 4.2 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 2.55 pence per share.
The total dividend for the year will therefore be 3.75 pence per share, which
I am pleased to report is an increase of 7.1% compared with the previous
year's total ordinary dividend of 3.5 pence(2). 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 12 September 2024, we completed an agreement to issue some further Japanese
Yen (JPY) fixed rate unsecured debt. The new debt is JPY5bn, for a term of 15
years and at an annual interest rate of 2.28%. The debt is denominated in JPY
and was equivalent to approximately £25.1m when issued. In recent years the
Company has issued several tranches of fixed rate 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 2024 net gearing, with debt at fair
value, was 7.1%.
AGT previously had a revolving credit facility with Scotiabank but this was
terminated at the end of its contracted life in September 2024.
Investment Policy
We are seeking shareholder approval for revisions to our investment policy,
which was driven by a review of ways in which AGT can implement gearing.
The Directors have reviewed the Company's Investment Policy and are proposing
that shareholders approve a revised policy at this year's AGM. I would like to
stress that there will be no change in the overall strategy that AVI takes in
managing the investment portfolio.
The proposed changes are designed to align the Investment Policy with current
best practice and to clarify the approach to spreading investment risk,
investing in derivatives and to gearing. In particular, the level of gearing
permitted under the Company's Articles of Association and first adopted
several decades ago is much higher than would be considered acceptable in a
modern investment policy. The Directors are therefore proposing a limit on
total gearing of 20% of net assets. The Company has had both short- and
long-term debt for many years and AVI are experienced in managing gearing. In
future, gearing will be permitted via the use of derivatives as well as
conventional debt, but subject to an overall limit of 20% total market
exposure. The proposal to allow gearing via derivatives is intended to provide
additional flexibility in the type of gearing used, particularly bearing in
mind that interest rates have increased in recent years and the use of
derivatives may prove to be more cost effective. Derivatives such as total
return swaps or options provide investment exposure to single stocks or groups
of stocks where, depending on the derivative structure, movement in the value
of the derivative (both up and down) may be higher than the movement in the
related stock prices. Long-term shareholders will be aware that the Company
has invested in total return swaps on a number of occasions in recent years
and the Directors are satisfied that AVI have the necessary experience and
controls to invest in derivatives. We encourage all shareholders to vote in
favour of this resolution at the AGM. Further details are set out on in the
Full Annual Report.
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
very pleased to hear that AGT had again won "Best Report and Accounts" in its
category in the AIC's annual shareholder communications awards in September
2024. We believe that this award reflects our commitment to provide
informative and interesting updates to our shareholders and I would like to
thank our fund management team for their open and proactive approach to
explaining their investment methodology and individual investments in the
portfolio. The Board is pleased to note that our marketing efforts have
resulted in a substantial increase over time in the number of shares owned via
retail investment platforms, and that these platforms make up four of our top
five shareholders.
In common with many investment trusts, our shares continued to trade at a
persistent discount during the year. We 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 something that our Investment
Manager encourages for many of our investee companies.
The discount is one of the three KPIs and the Board takes a very close
interest in this. There is regular interaction between Board and Investment
Manager on the subject, with independent advice from AGT's corporate brokers.
There are periods when we buy back shares on most working days and, during the
year under review, 20.1 million shares were bought back, representing 4.4% 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 net asset
value to the benefit of continuing shareholders, of approximately 0.4%. The
average discount over the year under review was 9.2%, compared with 10.0% for
the preceding year.
In April 2024 we announced that Panmure Liberum had been appointed as the
Company's corporate broker. We have experienced a positive transition to
Panmure Liberum who have introduced a more diverse range of potential
investors in the last few months and we look forward to working closely with
them going forward, particularly in seeking to find new shareholders. I would
also like to thank our previous corporate brokers, Jefferies, for their help
and support over the last several years.
In the 2023 Annual Report I raised the issue of the unintended consequences on
the investment trust industry of recent regulatory pronouncements relating to
Consumer Duty in respect of cost disclosures. In particular, the inclusion of
costs embedded in our underlying investee funds in the overall cost figures
disclosed in relation to your Company was misleading. We were pleased and
relieved to hear that the Financial Conduct Authority had issued a
"forbearance" notice on managers' disclosure of charges in regulated documents
in September 2024, pending a review of the relevant law and regulations.
While, at the time of writing, there is some uncertainty as to how costs will
be disclosed to investors by the investment trust industry going forward, we
have reverted to publishing an Ongoing Charges Ratio which includes all of
AGT's own running costs, which are made up principally of its investment
management fee and of the other costs of running the Company itself. Not all
listed investment companies disclose their gross costs and so it is not
possible to produce a comprehensive summary of the running costs of closed end
funds in AGT's portfolio of investments.
AGT's running costs are one of our KPIs and the Board carefully manages the
Company's costs, seeking to balance a high quality of service with reasonable
costs from our suppliers.
The Board
The Company is pleased to have met the target for at least 40% of individuals
on the Board to be women but does not currently meet the targets for at least
one senior Board position to be held by a woman and at least one individual on
the Board to be from a minority ethnic background. The Directors have
discussed whether to appoint an additional Director in order to comply with
the guidelines on ethnic diversity. The Directors concluded that a Board of
five independent non-executive Directors is appropriate for an investment
trust of the size and complexity of AGT and therefore that it would not be in
shareholders' best interests to incur fees for an additional Director in order
to meet a target. Shareholders' views on best practice will continue to be
taken into full consideration when the Board next recruits a new Director.
Annual General Meeting
I am pleased to be able to invite all shareholders to attend our AGM at 11
Cavendish Square on Thursday 19 December 2024. 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 Link Company Matters Limited, Central Square, 29 Wellington Street,
Leeds, LS1 4DL.
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 time last year I wrote that "The geopolitical and economic environment
are undoubtedly challenging and the world is likely to be unstable for some
time" and those words bear repetition this year. The level of geopolitical
uncertainty could be exacerbated by the result of the US election. The
opportunities that we reported last year have borne fruit in the returns
produced over the year to the end of September 2024 but there is clearly more
value to unlock. Markets are likely to remain volatile but our Investment
Manager reports attractive discounts and an exciting range of prospects. The
Board is confident that we have a well-resourced, skilled and experienced
manager who should continue to produce attractive returns for AGT's
shareholders over the long term.
Graham Kitchen
Chairman
12 November 2024
(((1))) The current comparator benchmark is the MSCI All Country World Index
(£ adjusted net total returns). For periods up to 30 September 2023 it was
the MSCI All Country World ex-US Index (£ adjusted net total returns). Over
the five years to 30 September 2024, the total return of the previous
benchmark was +32.4%.
(2) We also paid a special dividend of 0.2 pence per share last year, to
distribute elements of revenue that the Directors consider to be one-off.
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)
+13.7% +10.2%
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 broad-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 +19.9% on
a total return basis and over ten years it has increased by +11.5% 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*
2024 2023
9.0% 10.9%
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 20.1m 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 9.6%.
Ongoing Charges Ratio* (year ended 30 Sept):
2024 2023
0.87% 0.86%
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 Ongoing Charges Ratio
is the cost of the fees paid to the Investment Manager. This fee is reviewed
annually.
For the year ended 30 September 2024, the Ongoing Charges Ratio was 0.87%, up
very slightly from 0.86% in the year to 30 September 2023. These running costs
in monetary terms amounted to £9.6m in 2024 (2023: £8.7m).
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 Ongoing Charges 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.
* For all Alternative Performance Measures included in this announcement,
please see definitions in the Glossary in the full Annual Report.
TEN LARGEST EQUITY INVESTMENTS
1. D'IETEREN GROUP
Classification: Holding Company
Valuation: £91.8m
% of net assets: 8.3%
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.
2. NEWS CORP
Classification: Holding Company
Valuation: £83.5m
% of net assets: 7.5%
Discount: -46%
The Murdoch family-controlled holding company that was established in current
form in 2013. A 62% listed stake in Australian-listed REA Group accounts for
the bulk of News Corp's market cap and masks an attractive collection of
unlisted assets. In particular Dow Jones, a crown jewel asset that
successfully evolved the Wall Street Journal into a thriving digital consumer
and Professional Information business.
3. OAKLEY CAPITAL INVESTMENTS
Classification: Closed-ended Fund
Valuation: £73.8m
% of net assets: 6.6%
Discount: -30%
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.
4. CHRYSALIS INVESTMENTS
Classification: Closed-ended Fund
Valuation : £66.1m
% of net assets: 6.0%
Discount : -36%
Chrysalis Investments is a London-listed closed-ended fund which invests in
late-stage private companies. Chrysalis' top five companies represent 74% of
its NAV, despite being written down significantly below previous funding
rounds and being either profitable or funded to profitability. Chrysalis'
manager announced a new capital allocation policy in February 2024.
5. PARTNERS GROUP PRIVATE EQUITY
Classification: Closed-ended Fund
Valuation: £61.5m
% of net assets: 5.5%
Discount: -26%
London-listed closed-end fund managed by Swiss private equity manager Partners
Group, which 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.
6. BOLLORE
Classification: Holding Company
Valuation: £57.3m
% of net assets: 5.2%
Discount: -40%
French-listed holding company controlled by the mercurial Vincent Bollore.
Bollore trades at a 40% discount to our estimated NAV, which is principally
comprised of stakes in Universal Music Group, Vivendi, cash and self-ownership
loops. We believe there are multiple potential catalysts on the horizon.
7. CORDIANT DIGITAL INFRASTRUCTURE
Classification: Closed-ended Fund
Valuation: £54.7m
% of net assets: 4.9%
Discount: -27%
Cordiant Digital Infrastructure is a London-listed closed-ended fund which
invests in various infrastructure assets such as data centres, telecom towers,
and fibre-optic asset businesses predominantly in Emerging Europe. We invested
into Cordiant at an unduly wide 40% discount driven by a rising yield
environment and an unfair read-across from problems at its closest peer.
8. ROHTO PHARMACEUTICAL
Classification: Asset-backed Special Situation
Valuation: £54.5m
% of net assets: 4.9%
Discount: -50%
Rohto is a Japan-based manufacturer and marketer of cosmetics products and
functional foods. Despite the company's superior operational efficiencies and
profit margins versus peers, it trades at a heavy discount due to an unclear
equity story, poor shareholder communication and inefficient capital
allocation. AVI believes that constructive engagement with management can help
drive long-term value creation, in turn leading to a re-rating in the shares.
9. FEMSA
Classification: Holding Company
Valuation : £47.2m
% of net assets: 4.2%
Discount : -29%
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. Despite these significant strides, the shares
still trade at a wide discount.
10. RECKITT BENCKISER GROUP
Classification: Holding Company
Valuation : £46.0m
% of net assets: 4.1%
Discount : -38%
Reckitt Benckiser is a UK-listed consumer goods conglomerate which owns a
collection of trusted brands that exhibit meaningful barriers to entry, high
margins, and attractive growth prospects. Already trading at a discounted
valuation, the company was hit by a litigation shock which has pushed the
shares to a decade low multiple and record discount to peers.
INVESTMENT PORTFOLIO
AS AT 30 SEPTEMBER 2024
Company Portfolio classification % of IRR ROI Cost Equity % of
investee (%, £)(1 ) (%, £)(2 ) £'000(3) Exposure net
company( ) £'000(4) assets
D'Ieteren Group Holding Company 1.1% 11.4% 10.7% 84,420 91,750 8.3%
News Corp Holding Company 1.1% 10.7% 10.6% 76,395 83,465 7.5%
Oakley Capital Investments Closed-ended Fund 8.3% 22.2% 129.1% 30,163 73,808 6.6%
Chrysalis Investments Closed-ended Fund 11.9% nm 17.8% 56,140 66,119 6.0%
Partners Group Private Equity Closed-ended Fund 10.0% 10.5% 14.9% 58,183 61,539 5.5%
Bollore Holding Company 0.4% 0.2% 0.2% 57,764 57,285 5.2%
Cordiant Digital Infrastructure Closed-ended Fund 8.3% nm 30.6% 43,156 54,706 4.9%
Rohto Pharmaceutical Asset-backed Special Situation 1.2% nm 12.1% 48,846 54,478 4.9%
FEMSA Holding Company 0.3% 14.9% 40.8% 38,306 47,184 4.2%
Reckitt Benckiser Group Holding Company 0.1% nm 2.4% 45,453 45,990 4.1%
Top ten investments 538,826 636,324 57.2%
Entain Holding Company 0.8% nm -10.1% 46,809 41,312 3.7%
Aker ASA Holding Company 1.4% 15.3% 64.2% 49,864 41,267 3.7%
Apollo Global Management 'A' Holding Company 0.1% 32.5% 111.6% 19,928 40,899 3.7%
Harbourvest Global Private Equity Closed-ended Fund 2.2% nm 7.2% 37,525 39,901 3.6%
Christian Dior Holding Company 0.0% 20.3% 90.6% 21,120 33,712 3.0%
IAC Inc Holding Company 1.0% -19.6% -40.8% 64,482 33,188 3.0%
Toyota Industries Asset-backed Special Situation 0.2% nm -13.5% 35,289 30,160 2.7%
GCP Infrastructure Investments Closed-ended Fund 4.4% nm 22.6% 26,088 29,982 2.7%
Dai Nippon Printing Asset-backed Special Situation 0.4% 23.3% 23.9% 23,832 29,222 2.6%
Nihon Kohden Asset-backed Special Situation 1.5% 8.3% 11.7% 25,796 28,907 2.6%
Top twenty investments 889,559 984,874 88.5%
Irish Residential Properties Asset-backed Special Situation 6.3% nm -9.2% 28,020 25,055 2.3%
EXOR Holding Company 0.1% 11.0% 45.1% 13,574 22,523 2.0%
Third Point Investors Closed-ended Fund 4.1% 4.6% 22.6% 17,263 21,273 1.9%
Frasers Group Holding Company 0.5% nm -2.5% 20,811 20,301 1.8%
Symphony International Holdings Closed-ended Fund 15.7% 3.6% 20.2% 26,636 18,836 1.7%
Abrdn European Logistics Income Closed-ended Fund 6.5% nm 7.6% 15,619 16,272 1.5%
Kyocera Asset-backed Special Situation 0.1% nm -21.3% 18,602 14,534 1.3%
Wacom Asset-backed Special Situation 2.7% -9.8% -23.2% 19,356 13,824 1.2%
SK Kaken Asset-backed Special Situation 1.8% -6.9% -32.4% 19,056 12,130 1.1%
Net Lease Office Properties Holding Company 3.6% nm 1.9% 11,823 12,021 1.1%
Top thirty investments 1,080,319 1,161,643 104.4%
TSI Holdings Asset-backed Special Situation 3.3% 22.4% 27.1% 9,652 11,981 1.1%
Toyo Suisan Kaisha Asset-backed Special Situation 0.2% nm 0.0% 11,531 11,509 1.0%
Konishi Asset-backed Special Situation 2.0% 5.2% 26.5% 8,107 8,985 0.8%
VEF Holding Company 2.3% 2.5% 4.2% 4,525 4,489 0.4%
Seraphim Space Investment Closed-ended Fund 2.6% 9.0% 16.4% 2,950 3,370 0.3%
JPEL Private Equity Closed-ended Fund 18.4% 19.6% 97.4% 1,219 2,180 0.2%
Better Capital (2009) Closed-ended Fund 17.4% 22.0% 41.1% 1,962 903 0.1%
Third Point Investors Private Investments Closed-ended Fund 0.0% - - 563 475 0.0%
Ashmore Global Opportunities - GBP Closed-ended Fund 0.0% 4.0% 8.4% 22 140 0.0%
Equity investments at fair value 1,120,850 1,205,675 108.3%
Fair value and gross market exposure of investments(4) Equity Fair value % of
exposure £'000 Net
£'000 assets
Equity Investments 1,205,675 1,205,675 108.3%
Total return swap long positions
Softbank Asset-backed Special Situation 58,296 (2,877) -0.3%
Group***
58,296 (2,877) -0.3%
Softbank Group total return swap short positions***
Arm Holdings Operating Company (37,666) 606 0.1%
Coupang Operating Company (1,374) (181) 0.0%
Deutsche Telekom Operating Company (1,885) (317) 0.0%
Softbank Corp Operating Company (7,164) (382) 0.0%
T-Mobile Operating Company (5,011) (657) -0.1%
(53,100) (931) 0.0%
5,196 (3,808) -0.3%
Investments and total return swaps 1,210,871 1,201,867 108.0%
Other net current assets less current liabilities 73,229 6.6%
Non-current liabilities (162,371) -14.6%
Net assets 1,112,725 100.0%
(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 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 £58,296,000. If the long positions were closed at 30 September 2024, this
would result in a loss of £2,877,000. 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 £53,100,000. If the short positions were
closed on 30 September 2024, this would result in a loss of £931,000. 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 of total return swap assets of short and long positions
is £606,000.
** The total fair value of total return swap liabilities of long and short
positions is £4,414,000.
*** Softbank Group is held via a long total return swap. Hedges are held
against the position via short total return swaps on five of its listed
underlying holdings: Arm Holdings, Coupang, Deutsche Telekom, Softbank Corp
& T-Mobile (accounting for 86% of Softbank Group's NAV at 30 September
2024). For further explanation on our position in Softbank Group, please refer
to page 33 of the full Annual Report.
INVESTMENT MANAGER'S REPORT
"Our focus remains on the bottom-up fundamentals of a relatively small number
of mispriced situations where we have an
advantage. We continue to believe that stock picking, hard work, activism and
a focus on events are key tenets in navigating our way forward."
Performance Review
"So far, so good" read the introduction to the 2024 annual report by the Bank
of International Settlements, the so-called "central bankers' central bank".
And this appears largely true. Inflation has continued to recede such that we
are now at the point of monetary policy easing; the US and major Western
economies have proved surprisingly resilient; and equity markets have
continued to reach new highs.
That is not to say there is nothing to worry about. There are many good
reasons to believe that inflation may well be more volatile and structurally
higher than it has been in recent decades, and in-turn this increases the
chances of central bank policy mistakes. Economic growth and jobs markets
might yet deteriorate faster than anticipated and, notwithstanding recent
interventions, China's economic malaise poses an increased threat to global
growth and corporate profits. Meanwhile the increased financialisation of
markets and corresponding inherent leverage in the system can lead to bouts of
volatility and instability, as we saw in early August 2024.
Within this context AVI Global Trust's NAV increased by +13.7% on a total
return basis over the 12 months to 30 September 2024. This compares to a
+19.9% return for the MSCI AC World Index, our comparator benchmark.
It has been well documented that index level returns have principally been
driven by a narrow band of US technology companies. Even so, it is stark to
note that the equal weighted version of the MSCI AC World index returned
+10.7% over the period (£).
The Company's performance was driven by stock selection, with outsized
contributions from larger holdings such as KKR, Hipgnosis Songs Fund and
Schibsted, as we have continued to shape the portfolio around a concentrated
handful of situations where activism and events provide real catalysts to
unlock value.
Indeed, we believe that activism and the ability to engage with companies is a
key tool in our arsenal, and central to our ability to generate differentiated
returns and unlock value for all shareholders. The public example of Hipgnosis
Songs Fund - which added +245bps(1) to returns over the period - demonstrates
this. With that said, it is our preference and priority that most engagements
remain private, where dialogue can be most constructive. In both the
London-listed closed-end fund market and amongst Japanese small caps, we find
a large number of lowly valued companies where we think we can add value
through engagement.
As well as this engagement, a focus on events and catalysts remains an
important part of our approach. Schibsted was a prime example of this over the
last financial year and we have redeployed capital into new and existing names
where we believe the prospects for transformational events are underpriced,
such as News Corp (7.5% weight) and Bollore (5.1%).
In recent weeks, we have also added significantly to D'Ieteren which is now
your Company's largest position. D'Ieteren is due to make an extraordinary
return of capital of 74 euros per share - a yield of 39% - later this year. On
a post-distribution basis D'Ieteren is trading at an implied -54% discount to
NAV which we believe to be a highly attractive valuation.
Performance since the interim period has been more challenging as discounts
have generally widened and we have witnessed bouts of volatility across
markets. A number of companies have endured weaker share price performance,
such as Christian Dior and FEMSA, and there has been a lack of commensurately
strong performers from the top of the portfolio to offset this. Lulls in
performance are not unexpected for a concentrated and catalyst-focused
investment strategy, and the underlying asset quality means we can be patient
whilst we wait for events to occur.
Latterly, the portfolio has also suffered from extreme volatility in the
Japanese equity market as the Bank of Japan raised interest rates and
attempted (!) to pave the way for further hikes to come. A strengthening of
the Yen saw shifts in the carry trade, which reverberated through to global
equities, with the TOPIX registering its largest single day decline since
1987. Such moves are devoid of fundamentals and likely fuelled by algorithmic
trading.
In our view, fundamentally very little has changed, and we believe the thesis
of governance reform, corporate activity and activism remains a highly valid
one that is still in a relatively early innings. As such we took advantage of
this volatility, adding approximately 300bps(1) (£33m) to several Japanese
names at prices few would have thought possible just a matter of days earlier.
As we have always said, as uncomfortable as it feels at the time, volatility
is the friend of the long-term investor.
More broadly, both in Japan and other areas of the world, the opportunity set
remains rich, and idea generation across all parts of our universe is high.
Discounts have generally widened and are wide by historical standards, as
indicated by the 35.7% portfolio weighted average discount at the year end.
As ever, we do not pretend to know what is round the corner from a
macroeconomic perspective. Rather, our focus remains on the bottom-up
fundamentals of a relatively small number of mispriced situations where we
have an advantage. We continue to believe that stock picking, hard work,
activism and a focus on events are key tenets in navigating our way forward.
Combined with attractive starting valuations, this gives us confidence in
generating attractive long-term returns.
(1) See Glossary in the full Annual Report.
PORTFOLIO REVIEW
CONTRIBUTORS
KKR & Co
Classification: Holding Company
% of net assets(1): N/A*
Discount: N/A*
% of investee company: N/A*
Total return on position FY24 (local)(2): 40.7%
Total return on position FY24 (GBP): 36.8%
Contribution (GBP)(3): 250bps
ROI since date of initial purchase(4): 216.6%
Although we sold the last of our shares in KKR (an investment initiated in
2020) in May 2024, the investment was our largest contributor over AGT's
financial year.
While earnings growth was stellar over the period (with the company on track
for ~20% compounded annual growth in fee-related earnings per share), the
shares also benefited from multiple expansion as the market reappraised the
business quality and growth prospects, to bring its view more into line with
our own that informed our original thesis.
Our initial thesis was that the listed alternative asset management sector was
systematically undervalued, and that KKR (and Apollo, which we still own) was
itself undervalued relative to peers. At the time of our investment, both the
multiples at which the sector was trading and the volatility of share prices
suggested alternative asset managers were perceived as high beta plays on risk
assets.
It is certainly true that both KKR and Apollo have more on-balance sheet risk
than peers (in the case of KKR, via its investments in its own private equity
funds; for Apollo, via the large balance sheet of its insurance subsidiary
Athene). But our contention was that the market was underestimating the
defensive characteristics of scale-advantaged managers that earn fees on
long-dated committed capital, and the powerful tailwinds for structural growth
across the industry.
KKR and its peers are still often referred to as "private equity managers"
despite having successfully diversified from the foundations on which they
were built. At the time of our first purchase of KKR shares, their private
equity business accounted for 39% of total assets under management, compared
to 72% when they listed in the US in 2010. Even these figures mask the degree
of diversification given that their private equity business is both far less
US-centric than it was then and is now spread across a broader range of
sub-strategies.
Over our four-year holding period, this evolution continued with KKR's credit
business increasing from 35% of AUM to 47% (having been just 23% in 2010).
Much of the recent growth in this segment resulted from KKR's acquisition of a
controlling stake in life insurance business Global Atlantic, made in 2020.
KKR's bet here aped that of Apollo, whose success with Athene Insurance, which
it formed in the wake of the Global Financial Crisis, has been much envied by
its alternative asset management peers. Apollo were the first to see the huge
potential from acquiring books of long-term, sticky, and predictable annuity
liabilities against which they were convinced they could do a better job of
managing assets than their previous traditional insurance company owners.
In early 2024, KKR announced that it was to acquire the 37% of Global Atlantic
that it did not already own. This was taken well by the market. In the words
of KKR co-CEO Scott Nuttall, Global Atlantic has been a 'home-run investment'.
With Global Atlantic's assets more than doubling from the point of acquisition
to today, it is hard to argue otherwise, with KKR's ownership also helping
scale its real estate credit and asset-based finance businesses whose assets
sit well on insurance company balance sheets.
Given the material re-rating in the shares and the intense competition for
capital within our portfolio, we took the decision to reduce and ultimately
exit our stake in KKR in May 2024. Over the life of the investment, initiated
in 2020, returns were exceptional with a 217% total return (versus 59% for the
benchmark) and a 40% IRR (versus 14% for the benchmark).
Hipgnosis Songs Fund
Classification: Closed-ended fund
% of net assets(1): N/A*
Discount: N/A*
% of investee company: N/A*
Total return on position FY24 (local)(2): 38.1%
Total return on position FY24 (GBP): 38.1%
Contribution (GBP)(3): 245bps
ROI since date of initial purchase(4): 24.3%
Hipgnosis Songs Fund ('SONG') was our second largest contributor over the
financial year.
A bidding war was triggered in April 2024 when Concord - a music rights firm
backed by Apollo - announced a binding offer for SONG at a price of
$1.16-$1.18 per share. Blackstone, the majority owner of Hipgnosis Songs
Management (the Manager of SONG), ultimately prevailed with a bid of $1.30 per
share. This represented a premium of +48% to the undisturbed share price.
This marked the end of a highly successful investment for AGT, in which we
played a key role in fighting off the proposed related-party sale of a portion
of SONG's catalogues and also making the case against the company continuing
in its present form. Resolutions proposing each matter were heavily defeated
at shareholder meetings.
With two directors resigning on the eve of the AGM and the then-Chairman
suffering a resounding vote against his re-election, we and other shareholders
engaged with the remaining rump to push for the appointment of two new
directors - Robert Naylor and Francis Keeling - who had just stepped down from
SONG's peer company Round Hill Music Royalty Fund (RHM) following its
acquisition by Concord. Both were appointed with Robert immediately installed
as Chairman.
We were delighted with an outcome that not only generated a very strong return
for AGT's shareholders but demonstrated again both the value of shareholder
activism and the critical importance of having the right people on boards. The
new directors joined the company at a time of crisis and engineered an
excellent outcome for shareholders in a timeframe few would have felt possible
at the time of their appointment.
With no viable future as an ongoing listed vehicle, the key task facing the
new appointees was how best to generate competitive tension in a situation
where, under the terms of the Investment Management Agreement, the Manager had
a call option allowing them to purchase the portfolio in the event of the
termination of their management contract. The investigatory work conducted by
the Board and their advisors, some of the fruits of which were made public,
led to an understandable perception that there existed more than sufficient
grounds to terminate the management agreement "for cause", which would
invalidate the call option. We think it likely that this, alongside other
measures introduced by the newly reconstituted Board, gave Concord the
confidence to make their initial bid and resulted in a higher price ultimately
being achieved for the company than would otherwise have been the case. We
applaud the new directors' fortitude and shrewd handling of a highly complex
situation.
AVI's involvement with SONG began several years ago. Following research on
French holding company Vivendi and its investment in UMG, we could see the
attractions of the music rights asset class. As a pure play on catalogue, SONG
had its attractions, and we established a small position in late-2020 with
part of our thesis being that SONG would likely be a takeover target once it
had achieved scale. That element of the thesis broke down in October 2021 with
the acquisition of a majority stake in the Manager by Blackstone. Given
Blackstone's deep pockets, we felt that the Manager's call option over the
portfolio was much more likely to impede any competitive sales process in the
future.
When combined with growing concerns over transparency, earnings quality, and
governance, we took the decision to exit the position and sold over 70% of our
shareholding in late-2021/early-2022 at modest profits on our purchase price,
before the share price began to decline rapidly along with other alternative
income vehicles deemed to be interest-rate sensitive. We were left with a
residual shareholding that equated to a 0.8% stake in the company.
Our full attention turned back to the company following Concord's bid for RHM
in September 2023, just ahead of SONG's continuation vote and its proposal to
sell a portion of its catalogues to Blackstone in a related party deal. With
the confidence garnered from extensive research and calls with industry
experts that helped underwrite our valuation of the assets, we increased our
stake almost ten-fold over the following six months and generated a return on
our overall investment materially in excess of AGT's benchmark, the MSCI AC
World. We sold out of our entire position in late May 2024 and generated a
+36% total return/+72% IRR on the position acquired in late 2023/early 2024
(vs +14%/+27% respectively for the benchmark). Since we initiated our position
in Hipgnosis in September 2020, AGT generated an IRR/ROI of +21%/+24% on the
position.
Schibsted 'B'
Classification: Holding Company
% of net assets(1): N/A*
Discount: N/A*
% of investee company: N/A*
Total return on position: FY24 (local)(2): 26.2%
Total return on position: FY24 (GBP): 21.8%
Contribution (GBP)(3): 188bps
ROI since date of initial purchase(4): 49.5%
This time last year Schibsted was your Company's largest position (8.8% of
NAV). Over the course of AGT's financial year, Schibsted took significant
steps to unlock value which supported a re-rating in the shares and saw us
exit the investment. Over the course of the year, Schibsted added +188bps to
NAV.
Writing in last year's Annual Report (page 41) we explained that Permira and
Blackstone had entered negotiations to take Adevinta private. In November
2023, this came to fruition with a 115 NOK per share offer. The transaction -
which valued Schibsted's 28% stake at 40bn NOK/79% of Schibsted's
pre-announcement market cap - saw Schibsted crystalise a large portion of its
value (24bn NOK), whilst also retaining an 11% stake in the private entity.
Shortly after, in December 2023, Schibsted delivered a second transformational
transaction, selling its legacy News Media assets to its controlling
shareholder, the Tinius Trust, for 6.3bn NOK. This removed a capital consuming
and terminally challenged asset from the group, transforming Schibsted into a
purer classified marketplace business play.
Taken together, these steps have reduced the group's structural complexity and
shone a light on the highly attractive nature of Schibsted's Nordic
marketplace assets, the quality and value of which had hitherto been
overlooked. As well as this, the transactions allowed for extraordinary
returns of capital with a total of 24bn NOK returned to shareholders via
special dividends (20bn NOK) and an ongoing buyback programme (4bn NOK).
This simplification has supported a re-rating of the shares from a 45%
discount to close to NAV. The implied ex-Adevinta stub rerated from c.6x NTM
EV/EBITDA(1) to >20x.
Whilst we believe that there is still value to be extracted both from
increasing monetisation in line with international peers and improving
margins, as well as from the unlisted stake in Adevinta, this is better
reflected in the valuation, with risks around execution. As such we have
exited the position, allowing us to recycle capital into other mispriced
opportunities.
Over the course of the investment, Schibsted generated a +67% ROI(2) and +47%
IRR(2) which compares favourably to the +31%/22% returns of the MSCI AC World
Index over the same period (all figures in NOK). We believe that these figures
demonstrate the powerful returns that can be driven from "events" and
companies undergoing strategic and structural change. Indeed, Schibsted is
emblematic of what we are trying to achieve.
Apollo Global Management 'A'
Classification: Holding Company
% of net assets(1): 3.7%
Discount: -12%
% of investee company: 0.1%
Total return on position FY24 (local)(2): 29.2%
Total return on position FY24 (GBP): 21.1%
Contribution (GBP)(3): 131bps
ROI since date of initial purchase(4): 111.6%
Following AGT's 2023 financial year in which Apollo was our largest
contributor, the investment was again a strong performer with a share price
total return of 42% over the year to 30 September 2024.
Taking a step back to our original investment case for Apollo, we believed
that 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 97%
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 the last few
years on the back of strong earnings growth and higher multiples. 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 of $19bn in the first half of 2024 up by
27% over the previous half year, building on 2023's total of $35bn which was
itself up 67% on the prior year.
These inflows need to be invested and, as Apollo's CEO Marc Rowan has argued,
the real constraint on growth is not capital (which he contends is
"plentiful") but a lack of safe-yielding high-quality assets. This insight
lies behind Apollo's focus on investment grade private credit and its
investments in platforms which originate investment grade assets (aviation
financing, mid-market lending, mortgages, supply chain finance, etc.) that
find a natural home on Athene's balance sheet, 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", a potential
market measuring in the tens of trillions of dollars. In early-October 2024,
just after AGT's year-end, Apollo held an Investor Day in New York City at
which it laid out some impressive targets to 2029 which includes $275bn in
annual originations (this compares to just under $150bn in the 12 months to 30
June 2024).
Despite the very strong run for the shares, we see considerable scope for
continued further upside for Apollo shares given its undemanding valuation in
the context of its clear pathway to high-teens earnings growth over the next
five years.
Cordiant Digital Infrastructure
Classification: Closed-ended Fund
% of net assets(1): 4.9%
Discount: -27%
% of investee company: 8.3%
Total return on position FY24 (local)(2): 30.6%
Total return on position FY24 (GBP): 30.6%
Contribution (GBP)(3): 128bps
ROI since date of initial purchase(4): 30.6%
Cordiant Digital Infrastructure (CORD) was the fifth largest contributor to
returns over the period. We began building our stake in February 2024 at a
discount to NAV of almost 50% in a classic arbitrage between perception and
reality. The perception was that CORD shared the failings of its only listed
investment trust peer, Digital 9 Infrastructure (DGI9), which had run into
severe problems since its listing just weeks after CORD's own in early-2021.
While the pitch for both investment vehicles was the prospect of attractive
returns from investing in businesses and assets benefitting from the
exponential increase in data traffic, there the similarity ends. The lack of
discipline and investment acumen shown by DGI9's manager in assembling its
portfolio led to forced sales of assets to shore up an overly indebted balance
sheet; in contrast, CORD's portfolio was constructed with far more care,
leaving sufficient room on its balance sheet to fund growth capex needs at its
investee companies. We believed the reality was that there was in fact no
read-across from DGI9's travails to CORD.
Although CORD's portfolio consists of five businesses, its two largest
positions account for almost 90% of its total portfolio value. These two
businesses, Emitel in Poland and CRA in the Czech Republic, were acquired for
undemanding multiples of earnings despite the highly-cash-flow-generative
nature of their assets and a high degree of visibility and predictability from
contracted revenues.
While broadcast businesses tend to trade for relatively low multiples compared
to other digital assets due to concerns over their useful life as streaming
becomes more widely adopted, this is less of a concern in Poland and the Czech
Republic where the sizable rural population makes universal high speed
broadband coverage harder to achieve. There is also considerable scope for
further innovation in broadcast services, such as 5G technology that allows
for the broadcast of terrestrial digital television directly to mobile phones.
In any event, both companies are making impressive progress in using the cash
flows from their core broadcast businesses to diversify into segments such as
data centres and telecoms towers, with over half of CRA's FY24 revenues
derived from non-broadcasting services. A recent trip to Prague confirmed the
scale of this opportunity, visiting several sites with ready-made power and
fibre connections (usually the biggest impediment for new developments)
already converted into data centres. The jewel in the crown is the planned
Zbraslav data centre which, with a 26MW capacity, will be one of the largest
in Central and Eastern Europe. With data centres and telecoms towers
commanding multiples in excess of 20x, there is scope for future multiple
arbitrage from potential spin-offs of these non-broadcast assets once they
achieve further scale.
While CORD's discount has narrowed materially from our purchase levels to
stand at -27% at the time of writing, we see scope for attractive further
upside here from both discount contraction and NAV growth.
(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.
* The Company no longer had a position in this investment as at 30 September
2024.
DETRACTORS
Symphony International Holdings
Classification: Closed-ended Fund
% of net assets(1): 1.7%
Discount: -57%
% of investee company: 15.7%
Total return on position FY24 (local)(2): -34.9%
Total return on position FY24 (GBP): -40.8%
Contribution (GBP)(3): -125bps
ROI since date of initial purchase(4): 20.2%
Symphony International ('SIHL') was our largest detractor over the period,
resulting from a -35% decline in its (US Dollar denominated) share price. The
share price decrease was almost entirely due to a widening discount which
expanded from 36% to 57%.
To recap, SIHL is a London-listed investment company with a focus on
predominantly unlisted (92% of current NAV) Asian consumer and real estate
businesses. The investment, initiated in 2012, has been weak in absolute and
relative terms with an IRR of less than 4% over our holding period. As the
largest independent shareholder, we have worked to improve corporate
governance at the company and unlock value trapped in the persistently wide
discount at which the shares have traded. This culminated in a 2021 public
campaign to Save Symphony.
In September 2023, the company announced that it would pursue an orderly
realisation of its investments. As such, our ultimate returns from SIHL will
depend on the prices at which it realises its investments and the timeframe
over which these realisations take place, rather than its share price on the
screen at any particular point in time. SIHL's shares trade at a sizeable
bid-offer spread (average of 8% over AGT's 2024 financial year), are
tightly-held and thinly traded, and are heavily impacted in both directions by
relatively small order sizes.
That SIHL's shares trade at such a wide discount despite the company having
adopted a managed wind-up strategy reflects, in our view, scepticism around a
management team that has historically prioritised its own interests over those
of shareholders; uncertainty over the timeframe over which realisations will
take place; and - as is often the case with investment companies with unlisted
assets - wariness over whether the carrying values of assets are an accurate
reflection of realisable values. We understand these concerns.
However, we contend that while the management team continues to add to their
already substantial shareholdings, they have little incentive to maintain or
increase reported valuations to artificially high levels and that an incentive
may in fact exist in the opposite direction. That said, they also have little
incentive to expedite asset sales and returns of capital while they still
believe that there is stock available to purchase to add to the over one-third
of the company held by management and the board.
Noting that the pace of management purchases has slowed recently in the face
of low trading volumes, we may not be far from the point where their attention
turns to unlocking the value in their shareholdings trapped by the huge
discount to NAV.
Aker ASA
Classification: Holding Company
% of net assets(1): 3.7%
Discount: -26%
% of investee company: 1.4%
Total return on position FY24 (local)(2): -11.1%
Total Return on position FY24 (GBP): -17.4%
Contribution (GBP)(3): -111bps
ROI since date of initial purchase(4): 64.2%
For the second consecutive year, Aker was a meaningful detractor from returns
(-111bps). Over the course of the year, on a total return basis, the shares
declined by -13% which was largely a function of a -11% decline in the NAV as
well as a small widening of the discount from 24% to 26%. The Trust's returns
were better than this, as we sold c.17% of our holding some +15% above where
the shares currently trade, however we were punished by a -8% depreciation of
the NOK.
Starting with the NAV, this was almost exclusively a function of a -16%
decline in the share price of Aker BP, which accounts for 55% of Aker's NAV.
Brent crude oil prices are some -25% lower than they were a year ago as demand
(particularly from China) has been lower than anticipated and non-OPEC supply
has exceeded expectations. In turn, latterly, it has been reported that OPEC
are looking to abandon their long-term $100 per barrel price target.
We do not profess to have a crystal ball when it comes to oil prices - nor
attempt to - with the recent escalation of geo-political risk and
corresponding rise in the oil price serving as a reminder of oil's
unpredictability. Rather our investment in Aker has always been founded upon
the attractive valuation of the underlying assets, the controlling
shareholder's track record of creating value through active ownership and the
(at the time of acquisition very wide) discount at which Aker trades. On all
three fronts there is room for optimism.
Aker BP now trades on an 11.2% dividend yield, which is about as cheap as it
has ever been. We believe this to be an attractive valuation for a low-cost
operator with a long-dated production schedule and continue to believe that
oil will play an important and elongated role in the energy transition.
The controlling family continue to show themselves to be thoughtful long-term
owners with a keen eye for how to grow and unlock value. An example of this
from the last year comes from Aker Biomarine (6% of NAV), shares in which have
returned +125% over the last year as the company spun-off its food ingredients
business following a strategic review.
Since AGT first invested in Aker in 2008, we have earned an IRR of +17% (in
NOK). The prospect of continuing to align capital with the controlling family
at such a discount to NAV is an appealing one.
FEMSA
Classification: Holding Company
% of net assets(1): 4.2%
Discount: -29%
% of investee company: 0.3%
Total return on position FY24 (local)(2): -3.5%
Total return on position FY24 (GBP): -9.9%
Contribution (GBP)(3): -69bps
ROI since date of initial purchase(4): 40.8%
Having been the second largest contributor in the 2023 Financial Year(1)
(+258bps), this year FEMSA was the third largest detractor (-69bps). This was
principally a function of a deprecation of the Mexican Peso.
By way of reminder, FEMSA is a Mexican family controlled holding company. We
initiated a position 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.
The business is expertly managed, with strong unit economics, earning high
returns on capital with a long growth runway.
Despite these attractions, FEMSA traded at an unduly low valuation reflecting
its conglomerate group structure, and we believed that the market was
mispricing the potential for management to take steps to unlock value. Over
time this was indeed what occurred, with management conducting a strategic
review that concluded in 2023 with the exiting of Heineken and other non-core
assets via sales totalling over $11bn.
This simplified the group structure, and the equity story propelled the
(ADS(1)) shares to an all-time-high of a little above $140 in February 2024.
Over this time, we exited nearly 30% of our position at an average price of
$118 and as high as $133.
However, since this point, the shares have fallen back to trade at $99 at the
period end, as the discount has widened from the high teens to 29% as we
write. This is reflective of both macro and micro factors. Starting with the
former, Mexican equities have been under pressure since the spring National
Elections and FEMSA - which accounts for c.13% of the MSCI Mexico Index - has
not been immune to this. Moreover, this has been amplified by the depreciation
of the Peso, most notably against Sterling where it has weakened by some -19%
over the last year.
Turning to the micro: Q2 results published in July 2024 fell short of
expectations, with a deceleration in Oxxo's Same Store Sales (SSS) growth to
+4.1% (from +9.7% in Q1), with both traffic and ticket size decelerating (from
+2.2% to -0.6% for traffic and from +7.3% to +4.7% for ticket size). As
management explained "the second quarter was an atypical one… where each
month reflected a unique set of mixed effects generally more negative than
positive".
We concur that this recent disappointment is temporary in nature, reflecting
short-term headwinds and expect that SSS growth will recover in the second
half of the year and into 2025. Turning to the bigger picture, management
indicate that going forward they believe SSS growth can likely exceed the old
rule of thumb of +5% achieved prior to 2019 and we see a long growth runway
for new stores, with current new store openings running at +1,621 over the
last twelve months (+7.3% year on year). Combined, we believe that these
factors will lead to double-digit topline growth in the future, with operating
profit likely to compound in the low-teens.
Despite the significant strides that management have taken to simplify the
group, the attractions and growth prospects remain poorly reflected in the
share price, with FEMSA trading at a 29% discount to NAV and the unlisted
FEMSA Comercio stub trading at an implied 8.7x NTM EBITDA vs. a historic
long-term average of c.13x. We believe this to be a highly attractive
valuation and see the scope for better than-expected capital returns, with
management already having returned 60% of the $3bn billed to be returned to
shareholders by 2026. As such, having reduced the position earlier in the year
at $133 per share, we have been increasing the position recently, at $109.
To date the investment has generated an IRR / ROI of 15% and 41% (in GBP).
Keisei Electric Railway
Classification: Asset-backed Special Situation
% of net assets(1): N/A*
Discount: N/A*
% of investee company: N/A*
Total return on position FY24 (local)(2): -24.2%
Total Return on position FY24 (GBP): -29.5%
Contribution (GBP)(3): -53bps
ROI since date of initial purchase(4): -29.5%
Keisei Electric Railway (Keisei) was a detractor over the period, shaving off
-53bps from AGT's NAV. This was a relatively short and unsuccessful
investment, due to the combination of NAV weakness and discount widening,
leading to a -24% return in JPY. The -9% depreciation of the Yen compounded
matters, and we took the decision to exit the position.
We first initiated a position in the Japanese railway company due to its 21%
stake in the listed theme park operator - Oriental Land (OLC) - which
accounted for 180% of Keisei Electric's market cap pre-tax. However, Japanese
accounting rules dictate that Keisei value OLC on their balance sheet based
solely on a proportionate net income basis, thereby significantly deflating
the book value of Keisei Electric.
OLC offers exposure to Japan's largest theme parks - Tokyo Disneyland and
Tokyo DisneySea - which are also two of the most visited theme parks in the
world (#2 and #4). OLC also owns six high-quality Disney-themed hotels, a
further three hotels through subsidiary Milial Resorts, and the facilities
surrounding the park area - monorail, shopping mall, and theatre.
In the context of wider corporate governance reforms, we felt that Keisei
Electric's stake in OLC would be an obvious target for unwinding, given the
lack of synergies between the two companies and the outsized proportion of
intrinsic value that it represents to Keisei. Given the underlying business
quality of both the railway operations and of OLC, and with a public activist
already on the register, we felt that we could be patient and await any
unlocking of this value.
Following Keisei's AGM, in which the public activist's shareholder proposal to
sell down the OLC stake was rejected and the directors' approval rating
remained completely unchanged, we believed that the management team would no
longer feel pressured to take action over the stake in OLC and correct its
undervaluation. In a competing capital environment, we decided to reallocate
our capital to opportunities with more near-term catalysts and made the
decision to sell our position in Keisei Electric.
Toyota Industries
Classification: Asset-backed Special Situation
% of net assets(1): 2.7%
Discount: -45%
% of investee company: 0.2%
Total return on position FY24 (local)(2): 11.3%
Total Return on position FY24 (GBP): -12.7%
Contribution (GBP)(3): -47bps
ROI since date of initial purchase(4): -13.5%
Toyota Industries was a detractor over the period, reducing NAV by -47bps and
generating a return of -14% in GBP.
By way of reminder, we initiated our position in Toyota Industries in November
2023, with an investment case predicated on the low implied valuation of
Toyota Industries' stub due to the outsized value trapped in its Toyota Group
cross-shareholdings, which accounted for 93% of the company's then market cap.
This is despite the company's dominant market position as the number one
supplier of forklift trucks (30% share) and auto AC compressors (50% share)
globally, and with long-term growth potential in logistics solutions from the
continued expansion of e-commerce.
In particular, we felt that management would be under pressure to correct the
company's lowly valuation and return on equity ratio following the request
made by the Tokyo Stock Exchange for companies trading under 1x Price/Book
value to disclose an improvement plan.
In the period since initiation of our investment, Toyota Motor's Chairman has
received a historically low approval rating of 72% (only 57% if excluding
votes from Toyota Group companies), the wider group has started to unwind
cross-shareholdings, Toyota Industries announced a buyback worth 3% of market
cap (JPY180bn) and commenced buybacks of its own shares from Toyota Motor for
the first time in its history. We believe that this shift in attitude towards
shareholder returns from its historically conservative stance is a real
step-change for Toyota and highlights the pressure that the group is feeling.
The market, however, appears to have lost patience with the Group's slow rate
of change as evidenced by Toyota Industries' shares being down by -2%
year-to-date.
At current prices, Toyota Industries trades at a -45% discount to our
estimated NAV. The Toyota Industries stub trades at a lowly 1.6x forward EBIT
versus forklift peers at 14.0x and consignment auto part peers at 10.3x. At
this valuation, the stub only represents 13% of Toyota's market cap,
suggesting that the market is not pricing in any potential for management to
unlock the value trapped within the structure.
We remain confident in our holding in Toyota Industries and believe that the
continued growth of the company's underlying operations and potential for
unlocking of value across the Toyota Group make for an exciting combination.
(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.
* The Company no longer had a position in this investment as at 30 September
2024.
OUTLOOK
The macroeconomic and geopolitical environment remains confusing, worrying and
interesting in equal measure. Equity markets - as they tend to - have
continued to climb the wall of worry from the October 2023 lows.
Then, as now, the risks feel real and there are plenty of issues to worry
about. Indeed, investors continue to fret over whether we will endure a
so-called soft, hard or even no landing. A lot of ink has been spilt by others
on which of these might occur; however, history shows that market timing is
largely a futile exercise and it must always be remembered that the economy
and the market are not the same thing.
As readers of our reports will not be surprised to hear, our attention, time
and focus remain on the bottom-up fundamentals, which our experience shows are
the key to generating long-term outperformance.
In this regard, there is quite a lot to be excited about. The opportunity set
across the niche and overlooked parts of the equity market in which we fish is
rich. Discounts - as indicated by the 35.1%* portfolio weighted average
discount - are wide by historical standards. And we have positioned the
portfolio to benefit from a number of explicit catalysts and events, including
our own activism. Together we believe that these ingredients set us in good
stead to earn attractive long-term returns.
Joe Bauernfreund
CEO/CIO
Asset Value Investors Limited
12 November 2024
* As at 7 November 2024.
FURTHER INFORMATION
AVI Global Trust Plc's annual report and accounts for the year ended 30
September 2024 (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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