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AVI Global poised to deploy gearing to take advantage of wide discounts

221108 agt

AVI Global has published results for the 12 months ended 30 September 2022. Markets were weak over the period and the trust’s benchmark, the MSCI All Country World Index excluding the United States (in sterling) fell by 9.6%. The trust held up better than that, however, generating a return on NAV of -7.3%. Unfortunately, a general widening of discounts also affected the trust and shareholders ended up with a return of -10.8%. This was in spite of buybacks totalling 19.1m shares.

Revenue earnings per share recovered from last year’s levels and the maintained dividend of 3.3p per share was almost fully covered by earnings of 3.24p (up from 2.74p for the previous year).

Locking in low rates

On 7 July 2022, taking advantage of low interest rates, the trust issued JPY8bn (£49m) of fixed rate debt at an annual interest rate of 1.38% and with a life of ten years.

New chairman

Graham Kitchen, a non-executive director of the trust since January 2019, will become chairman following the AGM on 20 December 2022. Graham succeeds Susan Noble, who has been a non-executive director since 2012 and chairman since December 2017, and who will retire at the AGM. Graham has over 25 years’ experience as an investment manager at Invesco, Threadneedle and, until March 2018, Janus Henderson, where he was global head of equities.

Extracts from the manager’s report

Discounts have widened, acting as a headwind to performance. The weighted average discount to NAV of our portfolio stands at 38% today, versus 29% a year ago.

In a challenging macro environment, it is notable that a number of the largest positive contributors – namely Fondul Proprietatea and DTS – are positions where we have engaged as active owners. We believe such engagement, and other types of idiosyncratic opportunities that can generate absolute returns regardless of the performance of broader markets, is an increasingly relevant part of our arsenal, particularly during periods that are less hospitable for equities en masse.

As readers will know by now, our portfolios are constructed from the bottom up, based on fundamentals and the prospects for NAV growth and discount narrowing, as opposed to some over-arching economic theory or concern for index constituent weights. We see little merit in trying to time markets and wholly subscribe to the adage that it is time in the market, not timing the market, that matters. As such, we typically aim to stay more or less 100% invested at all times.

As an Investment Trust however, we have the capacity to use gearing. We explained in the interim report how, as markets rose in calendar 2021, we maintained our sell discipline and exited positions where discounts and valuations had become less compelling, selling Kinnevik on a large premium and exiting Investor AB on a tight discount. Come the end of February 2022, we were not employing any of the available gearing and by the summer we were in a net cash position of 7%, having exited Fondul Proprietatea.

Over the last few months we have cautiously redeployed capital such that we are now approximately fully invested once again, but with our gearing still available to deploy. We have taken advantage of write-downs in valuations to build positions in two new European holding companies (Schibsted and D’Ieteren), and a new North American Holding Company (Cannae Holdings).

We continue to find highly attractive valuations in Japan, where there is room for us to add value through engagement, and have also taken a basket-like approach to investing in a group of closed-end funds offering exposure to private equity and venture capital trading at abnormally wide discounts, even after incorporating the impact of public market movements onto private company valuations.

In times of market stress it is easy to be melodramatic. This feels particularly relevant, as the now former UK government’s recent budget proved to be anything but “mini”. Volatility in Sterling and the UK Gilt markets has been extreme. There has been much financial press focus on pension funds’ Liability Driven Investing strategies – attesting to the fact that potential pain points across the financial system only become apparent in times of stress.

As a global fund we will always be correlated with broader markets. With that said, our experience shows that discount widening and panic provide opportunities. Valuations – both within the portfolio and our wider universe – are increasingly attractive. Through our own activism, engagement and corporate events, there is scope for unlocking value, independent of the broader market. We believe that this will play an increasingly important role in our returns in an uncertain world. With the opportunity to deploy gearing in due course, we remain confident in our ability to take advantage of this and drive attractive long-term returns.

[Normally, in periods of markedly widening discounts, we might expect to be explaining why AVI Global had underperformed its benchmark. This year’s relatively good returns are great news therefore. Now, in times of market stress, is when funds such as AVI Global can swoop in and pick up bargains, creatung the opportunity for future outperformance.]

AGT : AVI Global poised to deploy gearing to take advantage of wide discounts

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