AVI Global Trust (AGT) endured a “frustrating” year to 30 September with strong gains in South Korea and Japan largely offset by weaker results elsewhere, particularly in holding company Vivendi and investment company Chrysalis.
South Korea, where AGT invests 21% of its assets, generated a 44% return, helped by the 94% gain on Samsung C&T, part of the Samsung conglomerate that spans engineering, construction, fashion and resorts.
Japan, where the trust holds 26%, advanced 17%, aided by ROHM, a semiconductor manufacturer with a valuable stake in Toshiba.
However, these positives were blunted by Vivendi and Chrysalis which together knocked 7.7% off net asset value NAV).
As a result, the £956m activist investment trust reported a 1.7% underlying investment return with the shares slipping 0.5%. That compared to returns of 12.4% and 15.4% in the previous year and trailed well behind the MSCI All Country World index which rose 18.3%.
This is the third year in a row of underperformance which chair Graham Kitchen said had depressed the five-year return to 39.6% versus the benchmark’s 39.6%.
However, he pointed out this had followed an eight-year period of outperformance following the appointment of Joe Bauernfreund as lead portfolio manager in 2015.
Kitchen said the recent market dominance of a small number of artificial intelligence developers and suppliers had been a difficult environment for AGT which buys asset-backed companies trading below their intrinsic value.
Nevertheless, Bauernfreund, chief executive of Asset Value Investors, had added “notable value” with their investments in South Korea and Japan and his team would stick to their “knitting”.
Search for hidden value
Watch AVI Global fund manager Joe Bauernfreund and senior analyst Ross McGarry talk about their value portfolio in this video recorded last month.
Vivendi’s “pariah” valuation
Bauernfreund acknowledged the performance was disappointing given AGT’s 11.4% annual compound return since launch in July 1989, but said Vivendi and Chrysalis remained some of AVI’s “highest potential upside ideas, trading at wide discounts and with considerable pessimism baked into the share prices.”
Vivendi, a French company backed by billionaire Vincent Bollore, suffered as Universal Music Group, in which it has a 10% stake, fell 36% on lingering fears of AI disruption, concern over its management’s focus and the rejection of a bid by Pershing Square fund manager Bill Ackman.
Bauernfreund admitted there was no obvious catalyst to correct the 53% discount on Vivendi’s share price but said such “pariah valuations attached to high-quality businesses are rare” and it would not take much to go right “for us to be handsomely rewarded”. It’s AGT’s eleventh biggest position at 3.8% of assets.
Chrysalis returning capital
His hopes are more solidly based in Chrysalis (CHRY), the growth capital fund that its sixth biggest holding at 4.7% of assets. AVI had successfully pressed the company to start winding down its portfolio. Last year it was one of AGT’s best investments but this year Chrysalis’ investments had lost a quarter of their value with writedowns in insurer Wefox and Starling bank, its largest holding, and a steep share price fall in Swedish lender Klarna contributing to the decline.
With Starling having emerged from “regulatory purdah”, after failings in its controls were exposed, the business was growing again and there was clear upside to the valuation, said Bauernfreund. Chrysalis had made its first return of capital to shareholders in September and “we see scope for highly attractive returns from here,” he added.
AGT’s investment income fell to £25.66m from £35.44m with earnings per share down to 4.62p from 5.07p. However, dividends rose 2.3% or 0.1p to 4.6p – the fourth rise in succession – with the declaration of a 3.1p per share final dividend.
The company bought back and cancelled 5.3% of its shares as it strived to stop their discount getting too wide. The shares ended the year 8.9% below net asset value compared to 6.7% 12 months earlier.
Annual ongoing charges edged up to 0.88% from 0.85%.
Our view
Matthew Read: “While these are disappointing results for AVI Global, the manager’s contrarian, asset-backed approach means it is unlikely to have much exposure to the handful of technology giants that have driven market returns, so some underperformance was to be expected. Perhaps more disappointing were the losses at Vivendi and Chrysalis, but, crucially, the manager remains convinced of the upside in both, pointing to Vivendi’s deeply discounted exposure to Universal Music Group and the potential to unlock value through Chrysalis’s managed wind-down, in which AVI has played an influential role.
“On the plus side, Japanese and South Korean investments have performed strongly, and almost half the portfolio is now invested in these markets, where corporate governance reforms offer further opportunities. Furthermore, with underlying holdings trading at an average 42% discount to estimated asset values – a level previously seen only during periods of severe market stress – there is considerable potential upside.”
