AVI Global Trust – Thriving under pressure?

12 months ended	Share price total return (%)	NAV total return (%)	MSCI ACWI total return (%)	MSCI ACWI ex US total return (%)
31/05/2020	(9.5)	(9.7)	7.5	(1.6)
31/05/2021	53.0	48.2	23.6	24.4
31/05/2022	(0.2)	3.4	4.8	(2.5)
31/05/2023	0.1	0.6	2.7	1.4
31/05/2024	31.4	27.2	20.3	13.6

Source: Morningstar, Marten & Co

Market Backdrop – High quality companies at a discount

More information is available at aviglobal.co.uk

The manager highlights that AVI Global Trust (AGT) has carved out an increasingly successful niche targeting high-quality companies whose shares are trading at a discount to their intrinsic value. Over the last 10 years this strategy has generated an annualised NAV total return of almost 10%.

The manager notes that the foundations of the trust are built on fundamental, bottom-up analysis to identify investments which are generally held over the long term, with, placing little stock in short-term market sentiment and what it suggests is often-misplaced economic forecasting.

AVI says that the company’s global remit provides it with complete flexibility to construct a portfolio of high-conviction investments, both geographically and across investments styles. It adds that the lack of restrictions has meant the fund has been able to mostly avoid poorly-performing sectors of the market, such as the UK, in favour of opportunities elsewhere, including Europe, Japan, and Latin America where it has identified a range of idiosyncratic factors that continue to drive fundamental performance.

Returns come despite US underweight exposure

Interestingly, the manager notes that for much of the last decade, it has also maintained relatively limited exposure to North American markets, which, it says, have tended to trade more on momentum than the fundamental, bottom-up, analysis it favours. It could be said that this underweight makes the performance of the AGT portfolio all the more impressive given the degree to which the dominance of the US has contributed to global market benchmark growth.

More recently, however, the manager says it has begun to identify an increasing number of opportunities across the US, particularly among global conglomerates where it has noticed a changing attitude towards corporate actions, such as spin-offs, to add value. Since our first note in 2021, AGT’s allocation has steadily increased to around 26%.

The manager notes AGT has successfully navigated the headwinds of an easy-money economy

The manager notes that the performance of AGT over the past decade has been achieved during a period of anaemic growth, falling interest rates, and suppressed volatility. Dubbed the ‘financial repression’ years, it says this era of ‘easy’ money juiced the returns of speculative assets and momentum trading, which was more or less the antithesis of the AGT strategy.

Uncorrelated returns

With this in mind, in recent years the manager notes that it has looked to drive the beta of the portfolio even further away from that of broader market indices. The manager notes that in many cases, the shift has been a natural one as it says sentiment has swung from one extreme to another over the past 18 months, highlighting the fallibility of attempting to time markets.

It feels that the outlook is no more certain than it was 18 months ago, evidenced by the recent pivot in interest rate pricing in the US, with policy makers now arguing over whether current financial conditions are too loose, although interest rate cuts are still the most likely outcome.

Focus on active engagement

The AGT managers see no utility in gaming these debates, committing instead to more tangible factors within the company’s control to drive performance. This includes active engagement by the AGT team with boards and managers, such as its involvement in the sale of Hipgnosis, which we discuss in more detail on page 9.

Portfolio

The manager notes that signs of the increasing array of opportunities available were evident in the company’s 2023 financial performance. The NAV total return was +15.3%, for the 12 months to 30 September 2023. This was higher than comparative benchmark returns (the MSCI All Country World Index was up +10.5% and the and the MSCI All Country World Index ex-US +10.1%). The share price total return was +14.8%.

The manager highlights that performance was driven by stock selection, with several of the company’s large, high-conviction holdings outperforming over this period including Apollo, KKR, FEMSA and Schibsted. It says the latter two are good examples of the types of idiosyncratic “events” to which it is attracted, with the companies undertaking strategic and structural changes to unlock value.

It says this momentum has continued to build and so far this year, AGT has generated a total return of 10.68%.

Greater focus on event-driven returns

The manager believes this performance is reflective of what it describes as some of the most attractive investment landscapes it has seen in many years, which it says has led to the deployment of gearing for the first time since 2021. To take advantage of these conditions, the manager says it has also been busy optimising existing portfolio positions, selling some holdings to fund investments where it sees greater scope for attractive, event-driven returns over shorter timeframes. This included the complete exit of Pershing Square Holdings in January 2024 a company which they have held since 2017 (generating an IRR of +21%).

AGT has also seen a number of strong contributions to its NAV growth so far this year, most notably from the Hipgnosis Songs Fund. We discuss this performance and the additional portfolio activity in more detail on page 5.

Asset allocation

The manager says that AGT’s asset allocation is driven by its stock selection decisions. Since we last published, using data from October 2023, the main shift in AGT’s geographical position has been an increase in the UK, from 3% to 11% (with the build-up of holdings in Frasers, Entain, and some UK-focused REITs) and a fall in Asia ex Japan exposure (excluding Japan) which has dropped from 11% to 5%, driven in part by the sale of SK Square and others.

In terms of its portfolio exposure (Figure 2) the major shift has been a steadily increasing position in the property sector, particularly within UK commercial property where the manager notes that NAVs have been written down and discounts are wide. It says that this is a reflection of the increasing range of opportunities now available, driven by growing economic uncertainty, and also the benefits of the company’s unconstrained investment approach.

Gearing was 11.2% at end April 2024

As noted above, AGT has been increasing its gearing, which was 11.2% at the end of April 2024, up from 4.2% when we last published. This is the highest level since the onset of the COVID-19 epidemic. The managers note that this increase is not driven by improving market sentiment but instead reflects the increasingly attractive discount opportunities that are available. It also says that AGT should receive a sizeable cash inflow from the takeover of Hipgnosis.

Portfolio activity

As noted above, the manager highlights that it has been active recently. In the six-month period to 30 April 2024, the company has fully exited holdings in Pershing Square and Godrej Industries, and has made substantial reductions in Apollo Global, FEMSA, KKR, and Schibsted B.

Alongside the increased gearing, it says the proceeds were used to fund new positions in GCP Infrastructure, Entain, and Chrysalis Investments, and additions to Bollore, News Corp, and Hipgnosis Songs Fund.

It says the main motivation for these trades was to increase the portfolio’s exposure to idiosyncratic catalysts and away from generic market risk.

New positions

Chrysalis Investments

Chrysalis Investments (CHRY) is a globally-focused closed-end fund which invests in later-stage private companies with long-term growth potential. The manager notes that the company has had an increasingly challenging time over the last few years as markets have taken a more cautious view on growth assets and companies generating negative cash flows that require additional funding for growth. Recognising this, the manager says that CHRY has made considerable effort to increase the resilience of its portfolio, the vast majority of which is now profitable or funded through to profitability.

In October 2023, CHRY announced a new capital allocation policy that, provided it has sufficient cash on hand to support the portfolio, will prioritise £100m of distributions to shareholders. A rumoured sale of its position in Graphcore could be help to kickstart this process.

Despite this, the manager says that CHRY has continued to trade at a discount of almost 50% on what AGT believe is a conservative NAV. The manager believes there is a significant opportunity for the shares to re-rate given that positions – such as Starling and Klarna – may not be too far from a liquidity event.

Entain

Entain (ENT) is a London-listed sports betting and gambling company with investments across a range of markets including the UK, Europe, and the US. The manager notes that the company’s shares have collapsed in recent years as operational changes, including the departure of three CEO’s, have coincided with regulatory changes in the UK that have posed a significant headwind to growth. As such, based on AGT’s NAV estimate, the company now trades on a 37% discount.

Prior to the recent turmoil, the manager says that ENT had successfully executed an aggressive acquisition strategy giving it an attractive collection of leading brands, including BWIN (2016) in Europe, Ladbrokes Coral (2018) in the UK and BetMGM, a joint venture with MGM Resorts focused on online betting in the US.

MGM tried to buy Entain in 2021 but was rebuffed. The AVI team feels that, after a period of consolidation in Entain’s share price, there is considerable potential upside in the stock. AGT has noted that with a swarm of activists on Entain’s shareholder register, it does not believe the current valuation discount to the sum of its parts will persist indefinitely.

GCP Infrastructure

GCP is a London-listed, closed-end fund investing predominantly in UK infrastructure debt. The manager notes that the company has borne the brunt of the interest rate driven sell-off and selling pressure related to the cost disclosure issues affecting UK-listed investment companies.

GCP currently trades on a discount of 27%, which has remained around this level for over a year. Despite the negative headline performance, AGT notes that the company has continued to execute well, delivering a positive NAV total return while introducing a successful capital recycling programme. It says that this has led to a material reduction in leverage, most recently following the sale of its interest in loan notes secured against Blackcraig Wind Farm, and the authorisation of a £15m buyback programme. The manager of AGT sees these structural changes as an increasingly attractive catalyst that should begin to realise the underlying value of GCP’s assets.

Top 10 holdings

AGT’s portfolio remains relatively concentrated, which the manager says reflects its high conviction levels. Its top 10 holdings account for 54.5% of the portfolio.

Since we last published, Brookfield Corporation, Apollo, and KKR have dropped out of the list to be replaced by News Corp, Bollore, and D’Ieteren.

Looking at the three new entrants to the list:

News Corp

News Corp is a US-listed holding company controlled by the Murdoch family. It owns what the AGT manager describes as a collection of attractive assets, these include a stake in REA Group (Australia’s leading online real estate portal), Harper Collins (a large, publishing business) and Dow Jones, which – in addition to the Wall Street Journal – holds a pricing database covering areas such as oil contracts and shipping rates.

AGT believes many of these assets are misunderstood and therefore misvalued, highlighted by a wide discount to AGT’s assessment of its NAV. Importantly, it says this is also the view held by the News Corp management, who are aware of the sum-of-the-parts discount and have become increasingly vocal about unlocking this value. AGT says this was a key catalyst, with the manager significantly increasing its investment following comments from the CEO regarding “a revolution, not evolution”, which the manager believes is about as clear a signal as can be about the potential break-up of the current structure.

Bollore

Bollore is described by the manager as one of the last of a dying breed of complex European holding companies. Controlled by Vincent Bollore, it holds what the manager believes is significant value tied up in a self-ownership loop structure of attractive assets including Vivendi and Universal Music Group. The manager added to its position earlier in the year, following what it says was the identification of a number of potential catalysts for the stock. It says the most notable of these was an announcement that Vivendi – in which Bollore owns just shy of a 30% stake – will be broken up into four different businesses in an effort to reduce the sum-of-the-parts discount at which it trades. The AGT manager notes that this has occurred when Bollore has a substantial net cash balance for the first time in many years. It believes this could pave the way for further shareholder-friendly manoeuvres in addition to buybacks and or tender offers.

D’Ieteren

D’Ieteren is a Belgian family-controlled holding company which owns a 50% stake (worth around 63% of its NAV) in Belron, described by the manager as the global no.1 operator in vehicle glass repair and replacements. It says that its initial position was an opportunist play on an oversensitive market reaction to D’Ieteren’s earnings back in 2022, which saw it underperform the MSCI Europe index by 17%. Since then, the manager has been steadily adding to the company during periods of weakness, most recently in January and February 2024. The manager notes that D’Ieteren’s March earnings resulted in the company’s shares jumping 16%.

The manager outlines the structural upside which exists for D’Ieteren, most notably via its holding in Belron and the proliferation of advanced repair jobs which favour the company’s scale. However, it says the fundamental investment case remains a valuation story, with the company still trading on a substantial discount of over 30%. To realise this value, the manager believes some form of corporate event is probable in the coming years given the presence of private equity co-ownership at Belron, who are highly incentivised to increase the equity value. It says that any suggestion of this should act as a catalyst for D’Ieteren shares.

Other portfolio developments

The manager notes that the major recent development for AGT was the announcement of an offer by a Blackstone-backed entity to purchase Hipgnosis Songs Fund.

Hipgnosis Songs Fund

AGT highlights that It has been a roller coaster year for the Hipgnosis Songs Fund (SONG). It says that the company has been plagued by concerns around valuations, asset sales, and management disputes, which has caused shares to collapse by over 50%. This occurred prior to a bidding war for the portfolio which sparked a sharp rebound. The manager notes that the background to these events is long and complex, and is covered in detail across our website, previous notes, and recent commentary from AGT. The outcome, it says, was a significant realisation for AGT, with the manager adding that it provides perhaps one of the best examples of the value that can be added through the company’s investment strategy.

In total, AGT generated a total return of almost 30% following a series of investments which were ramped up towards the end of 2023 with the manager highlighting that it saw an opportunity to influence the outcome of the developing turmoil. The manager says it played a key role in fighting off a proposed related-party sale of a portion of SONG’s catalogues and also made the case against the company continuing in its present form.

The manager continues that a new board led efforts to find a way out of the company’s problems and these interventions culminated in a bidding war, delivering good value for AGT and SONG’s wider shareholder base. At the end of April 2024, the company was AGT’s largest position following the rebound in its shares. However, for all practical purposes, the manager says it can be considered as a cash equivalent with the existing bid (which is at a 49% premium to the close price prior to the commencement of the offer period) seen as highly likely to prevail.

Performance

AGT continues to generate total returns ahead of both major benchmarks while outperforming peer group averages. AGT’s returns relative to the MSCI ACWI were achieved despite an underweight exposure to the US, which has continued to dominate global markets and now makes up over 70% of that index.

The manager notes that the bulk of AGT’s returns have been generated from stock-specific factors which are uncorrelated to broader market performance. It says that with the macroeconomic outlook remaining uncertain, these attributes are likely to become more attractive as valuations and benchmark returns revert to historical norms.

Peer group

Up-to-date information on AGT and its peers is available on our website

AGT is a constituent of the AIC’s Global sector. For the purposes of this note, AGT is compared with the other members of this sector which invest predominantly in listed equities.

The company’s discount has narrowed relative to this peer group since we last published. Its yield is about middle of the pack, although none of these trusts invests with the primary intention of generating a high yield. AGT’s ongoing charges ratio is at the higher end of this peer group.

In NAV performance terms, AGT ranks towards the top of the sector over most time periods.

Premium/discount

Over the 12 months ended 31 May 2024, AGT’s discount moved within a range of 12.3% to 6.3% and averaged 9.8%. As of publishing, the company’s discount was 7.4%.

The manager notes that a range of factors have contributed to discounts across the entire investment trust sector, including issues with cost disclosures which you can read about here. Despite this, it says AGT remains one of the best-performing global investment companies over the last few years, and the managers believe that the outlook for the trust is continuing to improve.

The company continues to manage its discount via share buybacks during periods when it is deemed that the discount is unnaturally wide and when the board believes that buying back shares is in the best interests of shareholders. The manager notes that this has been the case over the last 12 months, as Figure 16 shows, although the rate has slowed as the discount has steadily narrowed.

Fund profile

Holding companies, closed-end funds, and asset-backed special situations

AGT aims to achieve capital growth through a focused portfolio of investments, particularly in companies whose shares stand at a discount to estimated underlying net asset value. The aim is to invest in quality assets held through unconventional structures that tend to attract discounts; these types of companies include family-controlled holding companies, closed-end funds, and asset-backed special situations such as asset-rich Japanese operating companies.

New benchmark

The company compares itself to the MSCI All Country World Total Return Index, expressed in sterling terms, for performance measurement purposes. In previous years, it had used a World ex US benchmark on the grounds that the trust had a structural underweight exposure to the US, primarily because there are fewer opportunities to invest in family-controlled holding companies there. For this note, we have included comparisons to both indices. In subsequent notes we will just use the new benchmark.

It is worth noting that the performance benchmark has no influence over portfolio construction and that AGT’s active share is always likely to be close to 100%.

AGT’s AIFM is Asset Value Investors (AVI). AVI was established in 1985, when the trust’s current approach to investment was adopted. At that time, AGT had assets of just £6m and was known as the British Empire Securities and General Trust, later shortened to British Empire Trust. The trust adopted its current name on 24 May 2019.

Hear about the fund

Previous publications

Readers interested in further information about AGT may wish to read our previous notes listed below. You can read them by clicking on the links in Figure 17 or by visiting our website.

Title	Note type	Date
Double discount on quality-focused portfolio	Initiation	25 January 2021
Focused high conviction portfolio	Update	5 August 2021
Bargain hunting	Annual overview	20 May 2022
Doubly blessed	Update	8 March 2023
An historic opportunity	Annual overview	21 November 2023

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