AVI Global reflects on interim period to end-March

AVI Global’s (AGT) NAV and shares declined by 24.7% and 24.3% (both in total return terms) over the six-month period to 31 March 2020. AVI targets companies whose shares stand at a discount to their estimated underlying NAV. These can include investment holding companies, investment trusts and other companies.

In her outlook statement, chair, Susan Noble, noted: “Having experienced a very sharp and painful sell off in late February and March, the company’s NAV has staged a strong recovery in the last few weeks and up to the time of writing. The outlook is, to say the least, uncertain and there is much debate about the sustainability of the recent rally in equity markets, which appear to be looking forward to the point where lockdowns are eased around the world and economic activity returns to more normal levels. This is, however, far from certain as governments continue to try to balance economic damage with the risk of the infection rate overwhelming health care facilities, with varying success. With all of this in mind we can only predict with certainty that equity markets are likely to be unpredictable.”

Review by manager Joe Bauernfreund

“The first quarter of 2020 saw stock markets sell off sharply in response to the spread of covid-19 around the globe, with investors worrying about the impact of the virus on global economic growth. Sectors with exposure to travel and leisure were most badly affected, being impacted by international travel bans and lockdowns. The portfolio has limited exposure to these sectors, primarily through Swire Pacific ‘B’ (Cathay Pacific, 11% of Swire’s NAV) and Symphony International (Minor International, 34%). The pandemic was compounded by a breakdown of relations between the members of the so-called OPEC+ group of nations, with oil consequently falling over 60% to $23 per barrel. In response to the outbreak, governments and central banks around the world announced major monetary and fiscal action to palliate the damage, sparking a rally towards the end of the quarter; nonetheless, markets ended the period steeply down.

During this period of heightened volatility, the company’s NAV suffered from the twin effects of underlying NAV declines and discount widening, with the portfolio discount widening from 33% at the end of September to as wide as 45% during March, exceeding the levels seen during the financial crisis (37%) and the Eurozone crisis (38%). Holdings such as EXOR, Oakley Capital Investments, Pershing Square Holdings and Jardine Strategic (although not the largest detractors in the portfolio, on which more in the next section) saw some very stark discount widening. These companies own fundamentally good-quality businesses that became significantly cheaper. This indiscriminate selling reflects illiquidity and mass panic as investors rush to safe havens. It is worth mentioning that, despite the heightened illiquidity that market crashes can bring about, the company’s portfolio remains sufficiently liquid such that it could, within a short period of time, satisfy all of its obligations, if ever needed.

This dramatic widening of discounts is to be expected at times of crisis and acted as a significant headwind to the company’s performance over the interim period. However, when the conjuncture passes and investors begin to see the potential for earnings recovery, we believe that the discount widening will reverse and become a tailwind as we have seen on such occasions in the past.”

The top-five contributors and detractors to performance were as follows:

“As I write these concluding remarks from my stay-at-home office, the economic outlook continues to look deeply uncertain. The impact from quarantines and lockdowns is unknown, but likely to have a highly negative impact on both the supply and demand sides of the economy.

However, it is important to not lose sight of the fact that we are long-term investors who seek to invest in high-quality companies that we believe will thrive in the long run. Many of the family-controlled holding companies that we own have survived for over a century, a period encompassing wars, pestilence, revolutions, and crises. Today, these companies have sound balance sheets and high-quality assets that should survive the coronavirus pandemic and prosper in the future.

The pace and severity of the March sell-off was breath-taking, exceeding even the depths of the global financial crisis. One would need to look back over thirty years to find declines of similar magnitude in such a short space of time. The company’s portfolio was doubly penalised by widening discounts and falling NAVs. The subsequent rally in April reversed this effect somewhat, with rising NAVs boosted by tightening discounts. However, discount levels remain very wide, which is understandable against a backdrop of heightened economic uncertainty. Nonetheless, we believe that the wider portfolio discount represents a deferred store of outperformance which will be released when as the current economic uncertainty begins to lift and investors become confident once more in the prospect of economic growth.”

AGT: AVI Global reflects on interim period to end-March