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AVI Global TrustAnnouncement

19/04/2023 14:30

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RNS Number : 7974W  AVI Global Trust PLC  19 April 2023

 

AVI GLOBAL TRUST PLC

 

Monthly Update

 

AVI Global Trust plc (the "Company") presents its Update, reporting
performance figures for the month ended 31 March 2023.

 

This Monthly Newsletter is available on the Company's website at:

https://www.assetvalueinvestors.com/agt/content/uploads/2023/04/AGT-March-2023.pdf
(https://www.assetvalueinvestors.com/agt/content/uploads/2023/04/AGT-March-2023.pdf)

 

 

Performance Total Return

 

This investment management report relates to performance figures to 31 March
2023.

 

 Total Return (£)   Month  Calendar Yr  1Y     3Y     5Y     10Y

                           to date
 AGT NAV            -5.1%  0.3%         -3.6%  76.7%  46.2%  119.3%
 MSCI ACWI Ex US    0.3%   4.0%         1.1%   40.1%  28.2%  84.7%
 MSCI ACWI          0.9%   4.4%         -1.4%  54.0%  58.6%  166.6%

( )

 

Manager's Comment

 

AVI Global Trust (AGT)'s NAV declined -5.1% in March.

 

Schibsted was the most significant detractor (-130bps), however Aker, KKR,
Apollo, and Molten Ventures all detracted >48bps. At the other end of the
portfolio, Symphony International, Christian Dior, and Wacom were the top
contributors.

 

The collapse of Silicon Valley Bank and the ensuing market volatility has led
to a general widening of discounts. Combined with disappointing short-term
developments at Schibsted (discussed below), the portfolio weighted average
discount widened from 33.5% to 37.2% over the month, acting as a headwind to
performance. Sterling strength was also a drag, reducing returns by -120bps.

 

Schibsted

 

Schibsted was the most material detractor over the month, reducing returns by
-130bps. The shares declined -15%, driven exclusively by a widening of the
discount from 35% to 45%. This was compounded by a -3% weakening of the NOK
versus GBP.

 

During the month the company held an investor day in Oslo, which we attended.
The day was (almost) entirely focused on Schibsted's unlisted Nordic
Marketplace assets and the shift to a vertical operating model. We came away
impressed with the strategic vision and growth potential.

 

However, this was entirely lost as two separate issues drove the share price
-11% on the day. 1) Management poorly communicated a not-that-surprising and
not-that-material guidance cut for Q1 as results in the New Media division
have deteriorated; 2) A lack of clarity on their stake in Adevinta, where
comments made by the controlling shareholder on the day of the CMD have
dampened expectations of a near-term distribution.

 

Following the setback, Schibsted B shares trade at a 45% discount to NAV, with
the stub trading at an implied 6.6x EV/EBITDA multiple and an implied discount
on the unlisted assets of 69%. This is a fraction of the multiple the market
awards global classified marketplaces, which are rewarded for their pricing
power, organic growth prospects, and wide margins. Some level of discount is
warranted given the conglomerate group structure and the more cyclical nature
of the News Media division; however, the current discount is unduly wide,
reflecting structural not fundamental issues.

 

We believe the status-quo poses risks to long-term value creation and continue
to engage privately with all key stakeholders. We will provide further updates
when we are in a position to do so. We added to the position over the month.

 

Apollo Global

 

Despite AGT's portfolio having minimal exposure to banks (direct exposure of
less than 3% of NAV via our Japanese regional bank basket; additional indirect
exposure of less than 1%), the events of the last month have proved painful
for our NAV.

 

Hardest-hit was top ten holding Apollo Global (APO), the US alternative asset
manager (AAM). At one point during the month, APO's share price had declined
by -23% before recouping some of those losses to finish down -11%. This was
within the context of an average -6% share price return for the AAM peer
group. A non-immaterial portion of this decline can likely be explained by
programmatic sector-wide trades of "Financials" stocks. That said, one can
understand that AAMs with insurance operations where asset/liability matching
is a key risk should be under more scrutiny than peers running a pure-play
asset management business.

 

That some AAMs with no insurance exposure were down more than those with
suggests the selling was somewhat indiscriminate.

 

But a closer look at APO's insurance business is merited.

 

Following its 1-Jan-22 merger with Athene Insurance, APO has by far the
greatest amount of insurance liabilities on its balance sheet of all the AAMs.
While classified as an insurance company, Athene is more usefully analysed as
a spread-lending business. Its most common transaction involves a retail
customer purchasing a deferred annuity for a one-off lump sum paid up front.
In return, Athene promises to make a bullet repayment in eight to ten years'
time that represents a fixed yearly percentage return on the original
investment with some additional potential for capped upside based on equity
market performance. No tax is payable by the customer until the end of the
period, meaning returns compound at a greater rate than they otherwise would.

 

Athene invests the funds received in a portfolio of securities (94% in fixed
income, of which 96% is investment grade) and makes a return on the difference
between the yield it generates on those assets and the return it pays out to
the policyholder. Athene seeks to earn a return premium from complexity and
illiquidity rather than from taking 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).

 

As interest rates rose, SVB suffered massive deposit flight from its
undiversified customer base. This exposed the company's reckless duration
mismatch with its capital base facing erosion from the recognition of
hitherto-unrealised losses on its long duration investments in treasuries and
MBS. Crucially, unlike SVB, Athene's liabilities are well protected from
disintermediation (i.e., policyholders withdrawing to seek higher returns
elsewhere as rates rise). Firstly, 30% of its liabilities (predominantly
institutional products) are entirely non-surrenderable, while a further 52%
are structured with penalties for early withdrawal.

 

That leaves just 18% of Athene's liabilities that could be withdrawn without
any surrender charge. Given Athene's strict liability-matching investment
approach, these liabilities are backed by the shortest duration assets
(floating rate securities). Indeed, the withdrawal of this group of policies
could be a net benefit to Athene given it would release capital which could be
redeployed to support the sale of better-protected products with lower
liquidity needs and lower capital requirements. Analysis of historic consumer
behaviour also confirms the sticky nature of annuities with even the most
troubled institutions experiencing only modest upticks in withdrawals in
2008/09 during the GFC.

 

Given Athene's fortress-like balance sheet, substantial excess capital, and
Apollo's opportunistic/contrarian investment style, we would expect the
company to be a net beneficiary of volatility. We added to Apollo at the March
lows at a share price equating to just 10x our estimate of 2023 earnings.
Later in the month, APO management re-confirmed both their 2023 and their
long-term (2026) targets, with the latter being to double fee-related and
total earnings between 2021 and 2026.

 

Molten Ventures

 

Despite our position in listed VC fund Molten Ventures (GROW) only accounting
for a small part of AGT's NAV, it proved costly over the month with the shares
down -30% on the back of SVB's failure. While there were broad concerns around
the VC ecosystem (mainly that VC companies with cash deposited with SVB may
have been unable to access it), GROW was hit much harder than its listed VC
fund peers. We surmise this was due to SVB being one of the two banks behind
its credit facilities. But GROW had less than £1m (less than 10bps of NAV)
deposited with SVB. And the resolution of SVB's ownership in the US and UK
will mean any portfolio companies with banking relationships with SVB should
be able to access their funds as usual. We added to GROW during the month.

 

Aker

 

Aker detracted -77bps from returns in March. Both the shares and the NAV
declined -9% in local currency terms, with the discount unchanged at 17%. The
impact on AGT's NAV was amplified by the depreciation of the NOK against
Sterling, resulting in a -11% return over the month.

 

The principal cause of weakness was Aker BP (58% of NAV), shares in which
declined -9% over the month as concerns about the health of the global economy
weighed on the oil price. The collapse of Silicon Valley Bank has raised
further questions about the fragility of the financial system, and the likely
tightening of credit and dent to consumer confidence have increased the
probability of a US recession - as indicated by the deepest inversion of the
yield curve since 1981. This led to a material set-back in oil prices and in
the share prices of oil-related equities.

 

The OPEC+ group of oil producing nations have responded with a surprise
production cut at the start of April, helping oil prices recover such that
Brent is +5% month to date at the time of writing. Whilst this has resulted in
ire from the White House, it highlights the extent to which power has shifted
to OPEC+ and Saudi Arabia, who no longer fear losing market share to US Shale,
the role of which as a meaningful swing producer is now seemingly but a
feature of history. This so-called "OPEC-put" should act as a floor for prices
and serves as a reminder of the inelastic nature of non-OPEC supply.

 

All told we believe the thesis of insufficient capital investment and
production growth remains intact, with events of the last year only serving to
highlight the fundamental importance of energy sources, and the significant
and elongated role of hydrocarbons.

 

We believe such an environment is conducive to a period of sustained higher
prices and that 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 on year) and
invested in higher growth / higher terminal value businesses, such as Aker
Horizons, Aker Asset Management, and Cognite. Aker's history is one of
tremendous value creation and business building, and this is something we
expect to continue.

 

 

 

Contributors / Detractors (in GBP)

 

 Largest Contributors             1- month contribution  % Weight

                                  bps
 Symphony International Holdings  37                     3.1
 Christian Dior                   24                     5.6
 Wacom                            24                     3.2
 Nihon Kohden                     21                     3.9
 DTS Corp                         9                      2.5

 

 Largest Detractors   1- month contribution  % Weight

                      bps
 Schibsted ASA "B"    -130                   6.7
 Aker ASA             -77                    6.3
 Apollo Global Mgmt.  -55                    4.2
 KKR                  -54                    5.9
 Molten Ventures      -48                    1.3

 

 

Link Company Matters Limited

Corporate Secretary

 

19 April 2023

 

LEI: 213800QUODCLWWRVI968

 

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