AVI Global posts returns double those of benchmark – for the year ended 30 September 2021, AVI Global Trust delivered a return on NAV of 36.2%, just about double the 18.8% return generated by its MSCI All Country World ex US Index benchmark. Shareholders benefited from a narrowing of the discount from 9.3% to 6.7% and therefore saw a return of 40.3% or 2.1x that of the benchmark. The discount narrowing was aided by the repurchase of 3,438,405 shares at a cost of £32.6m.
Revenue per share improved dramatically, from 9.36p to 13.68p. The dividend is being maintained at 16.5p. The chairman says “The board’s current intention remains to maintain the dividend at current levels. We have now been operating for over 18 months in an unprecedented environment and therefore our dividend policy remains under careful and regular review.”
The company’s expense ratio (based on the company’s own running costs) fell from 0.89% to 0.83%, helped by the NAV growth. If the running costs of externally managed underlying investments are included, the ongoing charges ratio was 2.10% down from 2.31%.
Share split
The board is proposing to split the shares on a five-for-one basis. The share price is over £10 and the board thinks the split will help improve liquidity in the shares.
[As AVI’s tussle with Third Point Investors rumbles on, it is pleasing to see that it is working in AVI Global shareholders’ favour. The holding in Third Point Investors was the largest single contributor to AVI Global’s outperformance.]
Extracts from the manager’s report
“Deconstructing the returns, it is worthwhile to note that the strong NAV returns were driven by both NAV growth and, to a lesser extent, portfolio discount tightening (from 35% to 29%). The discount to NAV at which AGT’s share price trades also tightened (from 9.3% to 6.7%), resulting in share price total returns of +40.3%. Our investment income was also up +35% on the prior year.”
“AGT’s portfolio has limited exposure to China. We sold our SoftBank position (exposed to Alibaba) by July 2021 as a result of our investment thesis having played out. The Prosus and Naspers (exposed to Tencent) positions had also been reduced over the course of the year in order to free up cash. At the time of writing, we have fully exited the Prosus/Naspers positions. While headline valuations appear attractive following a sharp sell-off in Chinese equities, a cautious stance is warranted here given the difficulty of predicting the future regulatory direction.
In Japan, where 29% of the portfolio is invested, stock markets did not participate to a great extent in the recovery rally until the summer, when the vaccine rollout began to gather steam. While speaking of Japan, it is worth mentioning that corporate activity appears to be picking up. Our investee companies are responding positively to engagement, and there is a pronounced improvement in managers’ and directors’ focus on corporate governance and shareholder returns. This bodes well for the Japanese stocks that AGT owns, which have a large portion of cash and securities on the balance sheet, and which have historically displayed poor governance practices and neglected shareholders. On a reporting note, we will no longer be aggregating the Japanese cash-rich operating companies into a “Japan Special Situations” basket. There has been no change to the strategy or our view on its prospects; rather, the increasing concentration in fewer positions meant that aggregating the stocks into a basket was no longer a useful way of reporting. From here, we will talk about the performance of each stock individually.
As the financial year closes, inflation remains the predominant fear playing in investors’ minds. While not sanguine about inflation and its potentially destabilising effects, I am confident that many of the companies in AGT’s portfolio have very strong business models, giving them significant resilience in the face of inflation. On a look-through basis, examples of companies which should prove resilient in the face of inflation might include LVMH, KKR, Aker BP, Universal Music, Apollo Global, Hidroelectrica and Ferrari.
Third Point Investors Limited (TPOU) was our largest contributor over the financial year, adding 314 basis points (bps) to AGT’s NAV on the back of a +71% share price gain. Strong NAV performance (+54%) was compounded by a narrowing discount (from 23% to 14%), the latter due in large part we believe to the campaign launched by ourselves and three other shareholders to properly address the fund’s structural discount.
Oakley Capital Investments turned in a very strong performance over AGT’s financial year, generating a NAV total return of +27% which, together with a tightening of the discount from 29% to 20%, resulted in share price total returns of +41%.
KKR has been an important contributor to AGT’s returns since its introduction to the portfolio in the first half of 2020. Over AGT’s 2021 financial year, the company’s share price increased by +79%. This added 280bps to AGT’s NAV over the period and brought returns over our holding period to +148% which equates to an IRR of +92% (all figures in total return in USD).
We initiated a position in Christian Dior (CDI) – the holding company through which Bernard Arnault controls European luxury goods conglomerate LVMH – in March 2020. As a single-asset holding company, CDI had typically traded at a tight discount to NAV; however, the COVID-19 market volatility saw the discount widen to 20-25%. We took advantage of this, and we were able to build a position in one of the highest-quality companies in our universe at a dislocated discount. Both parts of the thesis have played out, with NAV growth of +57% boosted by a narrowing of the discount from 24% to 13%, resulting in an +81% return over the period.
EXOR was a meaningful contributor to returns during the period. The shares returned +58% over the period, as strong NAV growth was complemented by a narrowing of the discount from 43% to 39%.
Sony was the fourth largest contributor to returns over the period, adding 209bps to performance with a share price return of +56%. Sony, despite its perception as a shrinking electronics conglomerate, owns a collection of world-class businesses, with the four crown jewels of Gaming, Music, Semiconductors and Pictures accounting for 75% of Sony’s NAV.
For a second consecutive financial year, Pershing Square Holdings (PSH) was among our top contributors. While PSH’s relative outperformance was not as spectacular as that achieved a year ago on the back of its inspired hedge against the impacts of COVID-19 on financial markets, a +30% NAV return for the year to 30 September 2021 represents a very good outcome in absolute terms despite only matching that of the S&P 500 index. A modest reduction in PSH’s discount provided a tailwind to returns with the share price up by +33%.
Fondul Proprietatea (FP) is a Bucharest- and London-listed closed-ended fund originally set up to provide restitution to Romanian citizens whose property was seized by the Romanian Communist government. Today, FP provides exposure to some of Romania’s most attractive utility and infrastructure assets, and has a policy of distributing all excess cash and realisation proceeds to shareholders via dividends and buybacks. FP has been part of AGT’s portfolio since 2015 and continues to be a steady source of returns, this year contributing 201bps to AGT’s NAV on the back of a share price total return of +51% which benefitted from the compounding effect of an increasing NAV (up +28%) and a tightening discount (from 18% to 4%).
Aker was a significant contributor to your Company’s returns this year, with returns driven by exceptional NAV growth of +124%. The shares failed to keep pace with the NAV (returning +80%) and as such the discount widened from 9% to 28%. We took advantage of this and added to the position by approximately one-third over the period.
The takeover offer from Jardine Matheson, for the 15% of Jardine Strategic that it did not already own, was a foregone conclusion and the takeover completed on the 15th of April 2021. This takeover offer led to Jardine Strategic contributing 168bps to NAV for the year, boosting performance from strong NAV growth at the beginning of the calendar year.
Nintendo was the single-largest detractor from returns for the period, detracting 81bps from performance with a total return of -16% since initial investment. AGT initiated its position in Nintendo in February 2021. The investment thesis was predicated on the high quality of its unique intellectual property (e.g. Super Mario, Pokémon), as well as the digital transformation of its business reminiscent of Sony during the PlayStation 4 cycle.
Pershing Square Tontine Holdings (PSTH; Pershing Square’s US-listed SPAC), was the second-largest detractor over the period with its -12% share price decline deducting 70bps from AGT’s NAV. We invested in PSTH in June 2021 following its announcement of a deal to acquire a 10% stake in Universal Music Group (UMG), a then-unlisted company that we knew well from previous research on its then-majority owner Vivendi. The decline in PSTH’s share price that accompanied the announcement of the deal was, we believe, driven by retail investors who had hoped for a more “exciting” target. We were happy to take advantage of this sell-off to acquire an indirect position in a high-quality business with attractive secular growth prospects at what we believed to be a compelling valuation.
However, subsequent to our purchase of PSTH, it was announced that the UMG transaction had been blocked by US regulators who had objected to the deal structure. As a result, the UMG purchase agreement was re-assigned from PSTH to London-listed Pershing Square Holdings (PSH). This meant that we still gained exposure to UMG via our long-standing position in PSH, albeit in a less concentrated fashion than would have been achieved had the original deal terms stood. UMG’s share price performance since listing has confirmed our view that Pershing Square’s acquisition price was highly advantaged, with the shares up by +24% on a cost basis (which includes legal costs). Nevertheless, PSTH’s shares understandably declined on the news of the broken deal.
Although PSTH trading below its cash balance offers an attractive risk-adjusted return given the free optionality, we are not short of other alternative homes (both in new and existing investments) for the capital that offer higher prospective absolute returns. Initially, we replaced our direct exposure to PSTH with a total return swap with a well-known investment bank at a modest cost of financing to free up capital (only 30% margin was required). We then took the decision subsequent to the financial year-end to exit the position entirely to fully release the capital.”
AGT : AVI Global posts returns double those of benchmark