TIDMAGT
RNS Number : 0140T
AVI Global Trust PLC
10 November 2023
AVI GLOBAL TRUST PLC
('AGT' or the 'Company')
LEI: 213800QUODCLWWRVI968
Annual Financial Report for the year ended 30 September 2023
A copy of the Company's Annual Report for the year ended 30
September 2023 will shortly be available to view and download from
the Company's website, https://www.aviglobal.co.uk. Neither the
contents of the Company's website nor the contents of any website
accessible from hyperlinks on the Company's website (or any other
website) is incorporated into, or forms part of, this
announcement.
Copies of the Annual Report will be sent to shareholders
shortly. Additional copies may be obtained from the Corporate
Secretary, Link Company Matters Limited, on 0333 300 1950.
Notice of Annual General Meeting
The Annual General Meeting ('AGM') of the Company will be held
on 20 December 2023 at 11.00am at 11 Cavendish Square, London, W1G
0AN. The formal Notice of AGM can be found within the full Annual
Report.
Dividend
The Directors have proposed the payment of a final ordinary
dividend of 2.3 pence per Ordinary Share and a special dividend of
0.2 pence per Ordinary Share which, if approved by shareholders at
the forthcoming AGM, will be payable on 4 January 2024 to
shareholders whose names appear on the register at the close of
business on 1 December 2023 (ex-dividend 30 November 2023).
The following text is copied from the Annual Report and
Accounts:
COMPANY PURPOSE
The Company is an investment trust. Its investment objective is
to achieve capital growth through a focused portfolio of mainly
listed investments, particularly in companies whose shares stand at
a discount to estimated underlying net asset value.
OUR BUSINESS MODEL
Strategy
The Company's strategy is to seek out-of-favour companies whose
assets are misunderstood by the market or under-researched, and
which trade significantly below the estimated value of the
underlying assets. A core part of this strategy is active
engagement with management, in order to provide suggestions that
could help narrow the discount and improve operations, thus
unlocking value for shareholders.
Investment Approach
The Company's assets are managed by Asset Value Investors
Limited (AVI, or the Investment Manager). AVI aims to deliver
superior returns and specialises in finding companies that, for a
number of reasons, may be selling on anomalous valuations.
The Investment Manager has the flexibility to invest around the
world and is not constrained by any fixed geographic or sector
weightings. There is no income target and no more than 10% of the
Company's investments may be in unlisted securities. Over the past
five years, there has been an average of 45 stocks held in the AGT
portfolio.
KEY PERFORMANCE INDICATORS (KPIs)
The Company uses KPIs as an effective measurement of the
development, performance or position of the Company's business, in
order to set and measure performance reliably. These are net asset
value total return, discount to net asset value and the expense
ratio.
NAV TOTAL RETURNS TO 30 SEPTEMBER
2023*
+15.3%
3 Years +45.6
10 Years +149.3%
DISCOUNT *
10.9%
2023 discount
high 12.9%
2023 discount
low 7.0%
EXPENSE RATIO*
2023 2022
0.86% 0.88%
OTHER KEY STATISTICS
NET ASSET VALUE PER SHARE*
226.77p (2022: 199.76p**)
NUMBER OF INVESTMENTS
44 (2022: 46)
TOP TEN INVESTMENTS (+/-)
60.7% (2022: 54.6%)
ESTIMATED PERCENTAGE ADDED TO NET ASSET VALUE PER SHARE FROM
BUYBACKS*
0.6% (2022: 0.4%)
* For definitions, see Glossary in the full Annual Report.
** Net asset value per share with debt at fair value.
(+/-) Of net assets.
FINANCIAL HIGHLIGHTS
Performance Summary
- Net asset value (NAV) per share total return was +15.3%
- Final ordinary dividend of 2.3p, and total dividend increased
to 3.7p, which includes a special dividend of 0.2p
- Share price total return of 14.8%
30 September 30 September
2023 2022
Net asset value per share (total return) for the
year(1) * +15.3% -7.3%
Share price total return for the year* +14.8% -10.8%
Comparator Benchmarks
MSCI All Country World Index (GBP adjusted total
return ) +10.5% -4.2%
MSCI All Country World ex-US Index (GBP adjusted
total return ) +10.1% -9.6%
Discount*
Share Price Discount (difference between share price
and net asset value)(2*) 10.9% 10.4%
Share Price Discount High: 12.9% 14.1%
Share Price Discount Low: 7.0% 4.8%
Year to Year to
30 September 30 September
2023 2022
Earnings and Dividends
Investment income GBP24.45m GBP23.10m
Revenue earnings per share * 4.19p 3.24p
Capital earnings per share* 23.83p (25.30)p
Total earnings per share 28.02p (22.06)p
Ordinary dividends per share 3.50p 3.30p
Special dividends per share 0.20p -
Expense Ratio*
Management, marketing and other expenses
(as a percentage of average shareholders' funds) 0.86% 0.88%
2023 Year's Highs/Lows High Low
Net asset value per share* 225.53p 195.03p
Net asset value per share (debt at fair value)* 227.99p 197.80p
Share price* (mid market) 205.50p 174.60p
Buybacks
During the year, the Company purchased and cancelled 29,277,886
Ordinary Shares (2022: 19,115,057 purchased).
(1) As per guidelines issued by the AIC, performance is
calculated using net asset values per share inclusive of accrued
income and debt marked to fair value.
(2) As per guidelines issued by the AIC, the discount is
calculated using the net asset value per share inclusive of accrued
income and debt marked to fair value.
The Company uses the net version of the two indices, which
accounts for withholding taxes incurred. If the gross version of
the Index had been used, the comparative figures for the years
ending 30 September 2023 and 30 September 2022 would have been
11.0% and 10.7%, respectively.
* Alternative Performance Measures
For all Alternative Performance Measures included in this
Strategic Report, please see definitions in the Glossary in the
full Annual Report.
CHAIRMAN'S STATEMENT
"It is pleasing to report a NAV total return of 15.3%, which was
both a strong absolute return and notably higher than our benchmark
index... We look forward to the future with optimism and continue
to believe that, over the long term, AVI will deliver attractive
returns to AGT's shareholders."
Overview of the year
Having emerged from restrictions intended to minimise the
effects of the Covid-19 pandemic in 2022, the world entered a
period of heightened geopolitical tensions. The two combined led to
higher levels of inflation and, as a result, interest rates not
seen for over a decade, albeit arguably more "normal". Central
bankers continue to try to walk a fine line in attempts to control
inflation while not raising interest rates to a level which stifles
economic growth. As our Investment Manager mentions in their
report, the developed world in particular has been forced to move
on from a period when the cost of capital was kept artificially
low.
I said at the half-year stage that our Investment Manager was
seeing a range of investment opportunities and over the year many
of those opportunities bore fruit. Against a difficult economic and
political background, it is pleasing to report a NAV total
return(1) of 15.3%, which was both a strong absolute return and
notably higher than our benchmark index.
Comparator benchmark index
There is no benchmark index which closely matches our Investment
Manager's approach and investment philosophy. Nevertheless, we are
aware that some (but by no means all) shareholders measure returns
compared with an index. For the past several years our benchmark
has been the MSCI AC World ex-US Index, reflecting the fact that
when we adopted that benchmark AGT had no direct exposure to the
USA and relatively little indirect exposure. Over the last few
years our exposure to the USA, especially considering our
underlying exposure, has increased. How we measure AVI's
performance has been a regular subject for discussion by the Board
and we have now concluded that the MSCI AC World Index (that is,
the version of the index including the USA) is the most appropriate
comparator benchmark.
In making this change, it is important for shareholders to
recognise that we are still unlikely, nor is the investment manager
targeting, to have similar weightings in the Company's portfolio to
those in the index and that this change of benchmark will not
affect in any way the approach to investing or the investments in
the portfolio. I set out below our performance versus the new and
previous comparator benchmarks. We will continue to report
performance against both for historic reference. Having taken the
considered decision to make this benchmark change, we expect this
to remain our benchmark going forward.
Total return (GBP) 1 year 5 years
--------------------------- ------- --------
AVI Global Trust NAV +15.3% +48.7%
MSCI AC World Index +10.5% +41.1%
MSCI AC World ex-US Index +10.1% +21.3%
--------------------------- ------- --------
Revenue and dividend
Revenue earnings for the year under review were 4.19 pence per
share. At the half year stage we paid an interim dividend of 1.2
pence per share, which was the same as last year. The proposed
final dividend is 2.3 pence per share. This year's income includes
elements of revenue that the Directors consider to be one off and
we have therefore decided to pay a special dividend of 0.2 pence
per share. The one off increase in revenue includes refunds of
previously charged taxes and interest on cash. The total ordinary
dividend for the year will therefore be 3.5 pence per share, an
increase of 6% compared with the previous year's total of 3.3 pence
and the total including the special dividend will be 3.7 pence. The
Board recognises that a dividend which is steady and able to rise
over time is attractive to many shareholders but, as we have
consistently said, the portfolio is managed primarily for capital
growth .
Gearing
On 25 July 2023, we completed an agreement to issue Japanese Yen
(JPY) 4.5bn fixed rate unsecured debt, for a term of ten years. The
annual interest rate on the debt is 1.44%. The debt is denominated
in JPY and was equivalent to approximately GBP25m when issued. In
recent years the Company has issued several tranches of debt at
attractive interest rates and our Investment Manager uses gearing
flexibly to take advantage of investment opportunities. As well as
providing funding at an attractive rate of interest, borrowing in
Japanese Yen provides a natural hedge against exposure to the
currency, as the borrowing offsets some of the exposure to JPY in
the portfolio.
As at 30 September 2023 net gearing, with debt at fair value,
was 7.4%.
Share price rating and marketing
AGT has a substantial marketing budget and the Board works
closely with AVI as it seeks to generate demand for the shares.
Each month AVI produces an informative fact sheet which is
available on our website and I encourage you to register on the
site to receive these when they are published. AVI is also active
in the media - both traditional and increasingly social media - as
we seek to promote our investment proposition to a growing investor
base. We were pleased that our team's efforts were rewarded with
the accolade of "Best Report and Accounts" in its category in the
AIC's annual shareholder communications awards in September
2023.
Our shares traded at a persistent discount which, at the end of
September 2023, stood at 10.9%. We continue to use share buybacks
when the discount is unnaturally wide and when the Board believes
that buying back shares is in the best interests of shareholders.
This is also an approach that our Investment Manager encourages for
many of our investee companies. At times when the market was
volatile this has meant buying back shares on most days and, during
the 12 months under review, 29 million shares were bought back,
representing 6% of the shares in issue as at the start of the
period. As well as benefiting shareholders by limiting the discount
at which they could sell shares if they so wish, buying back shares
at a discount also produced an uplift in value to the benefit of
continuing shareholders, by approximately 0.6%.
Despite the impact of our share buybacks and the excellent
investment performance by your Company we are caught by the
unintended consequences on the investment trust industry of recent
regulatory pronouncements relating to Consumer Duty. You will no
doubt have read in the press that a number of online investment
platforms are assessing the cost of investing in companies such as
ours by seeking to include the underlying charges of any funds held
in our portfolio of investments in their assessment of the costs of
investing in your Company. This in our view is a misleading
approach as we believe that the costs included within our
underlying investments are already factored into the assessment of
the fair value of those investments. The performance of the
underlying assets is then fairly reflected in the performance of
your Company which is shown net of costs within the control of your
Board (i.e. the expense ratio which we set out under Key
Performance Indicators below). Your Board and AVI are actively
involved in discussions with the Treasury, the regulators and the
AIC to ensure that investment trusts are considered on an equal
basis to other forms of investments and so that investors are able
to make a fair and balanced decision in deciding on which type of
investment to make. It would also seem completely illogical that
the interpretation of the new Consumer Duty regulations and the
assessment of value should lead to a restriction in investors
ability to invest in some investment trusts.
The Board
My predecessor Susan Noble retired at the Annual General Meeting
in December 2022 and this is my first annual report as Chairman.
The Company thrived under Susan's leadership and the Board would
like to record our thanks to her. We have enjoyed working with her
and wish her well in her future endeavours.
Following Susan's retirement, June Jessop was appointed as a
non-executive Director with effect from 1 January 2023. June was
previously Senior Business Manager at Stewart Investors and a
member of the EMEA Management Committee of First Sentier Investors
(of which Stewart Investors is a sub-brand). June has spent her
entire career in financial services, gaining broad experience in
portfolio management, client relationship, business development
and, latterly, general management roles. She has been an investment
manager for institutions, charities and private clients, including
managing assets of an investment trust and investing in closed-end
funds on behalf of clients. My colleagues and I are delighted to
welcome June to the Board. She brings a wealth of experience in
both managing assets and in the management of investment
businesses. Her skills complement those of the other Board members
and we look forward to working with her.
Annual General Meeting
I am pleased to be able to invite all shareholders to attend our
AGM at 11 Cavendish Square on Wednesday 20 December 2023. We do
recognise that some shareholders may be unable to attend the AGM,
and if you have any questions about the Annual Report, the
investment portfolio or any other matter relevant to the Company,
please write to us either via email at agm@aviglobal.co.uk or by
post to The Company Secretary, AVI Global Trust PLC, 6th Floor, 65
Gresham Street, London, EC2V 7NQ.
If you are unable to attend the AGM, I urge you to submit your
proxy votes in good time for the meeting, following the
instructions enclosed with the proxy form. If you vote against any
of the resolutions, we would be interested to hear from you so that
we can understand the reasons behind any objections.
Outlook
The geopolitical and economic environment are undoubtedly
challenging and the world is likely to be unstable for some time.
This provides excellent investment opportunities and in their
report AVI speak of valuations last seen at the time of the global
financial crisis. While progress is unlikely to be straightforward,
given the resources at our Investment Manager's disposal and the
opportunities that they perceive, we look forward to the future
with optimism and continue to believe that, over the long term, AVI
will deliver attractive returns to AGT's shareholders.
Graham Kitchen
Chairman
9 November 2023
(1) See Glossary in the full Annual Report.
KEY PERFORMANCE INDICATORS
The Company's Board of Directors meets regularly and at each
meeting reviews performance against a number of key measures.
In selecting these measures, the Directors considered the key
objectives and expectations of typical investors in an investment
trust such as the Company.
NAV total return*
1 Year 10 Years (Annualised)
+15.3% +9.6%
The Directors regard the Company's NAV total return as being the
overall measure of value delivered to shareholders over the long
term. Total return reflects both the net asset value growth of the
Company and also dividends paid to shareholders. The Investment
Manager's investment style is such that performance may deviate
materially from that of any broadly-based equity index. The Board
considers the most useful comparator to be the MSCI All Country
World Index. Over the year under review, the benchmark increased by
+10.5% on a total return basis and over ten years it has increased
by +10.6% on an annualised total return basis.
A full description of performance and the investment portfolio
is contained in the Investment Review, parts of which are included
below.
Discount, year-end*
2023 2022
10.9% 10.4%
The Board believes that an important driver of an investment
trust's discount or premium over the long term is investment
performance. However, there can be volatility in the discount or
premium. Therefore, the Board seeks shareholder approval each year
to buy back and issue shares, with a view to limiting the
volatility of the share price discount or premium.
During the year under review, no shares were issued and 29.3m
shares were bought back, adding an estimated 0.6% to net asset
value per share to the benefit of continuing shareholders. The
shares were bought back at a weighted average discount of
10.3%.
Expense ratio* (year ended 30 September)
2023 2022
0.86% 0.88%
The Board continues to be conscious of expenses and aims to
maintain a sensible balance between good service and costs.
In reviewing charges, the Board's Management Engagement
Committee reviews in detail each year the costs incurred and
ongoing commercial arrangements with each of the Company's key
suppliers. The majority of the expense ratio is the cost of the
fees paid to the Investment Manager. This fee is reviewed
annually.
For the year ended 30 September 2023, the expense ratio was
0.86%, down slightly from the previous year. These running costs in
monetary terms amounted to GBP8.7m in 2023 (GBP9.6m 2022).
The Board notes that the UK investment management industry uses
various metrics to analyse the ratios of expenses to assets. In
analysing the Company's performance, the Board considers an Expense
Ratio which compares the Company's own running costs with its
assets. In this analysis the costs of servicing debt and certain
non-recurring costs are excluded. These are accounted for in NAV
total return and so form part of that KPI. Further, in calculating
a KPI the Board does not consider it relevant to consider the
management fees of any investment company which the Company invests
in, as the Company is not a fund of funds and to include management
costs of some investee companies but not of others may create a
perverse incentive for the Investment Manager to favour those
companies which do not have explicit management fees. The Board has
therefore chosen not to quote an Ongoing Charges Ratio per the
AIC's guidance as part of its KPIs but has disclosed an Ongoing
Charges Ratio in the Glossary in the full Annual Report.
* For definitions, see Glossary in the full Annual Report.
TEN LARGEST EQUITY INVESTMENTS
1. SCHIBSTED B
Classification: Holding Company
Valuation: GBP88.6m
% of net assets: 8.6%
Discount: -34%
A Norwegian-listed holding company offering exposure to
high-quality online classified businesses. This is split between
unlisted Nordic assets and a listed stake in Adevinta, a company
that was spun-out from Schibsted to pursue international growth and
consolidation. The market applies an inordinately low implied
valuation on the unlisted assets due to the structure. With
potential for an upcoming corporate event, combined with prospects
for significant improvements in monetisation and margins, we see
considerable upside.
2. OAKLEY CAPITAL INVESTMENTS
Classification: Closed-ended Fund
Valuation: GBP78.7m
% of net assets: 7.6%
Discount: -32%
Oakley Capital Investments (OCI), is a London-listed
closed-ended fund which invests in the private funds run by Oakley
Capital, a UK-based private equity firm. OCI owns a portfolio of
fast-growing businesses in the consumer, education, services, and
technology sectors. Its process focuses on less intermediated
markets and complex deals (e.g. carve-outs), which avoids the
auction process, sourced by a network of entrepreneurs who believe
in the Oakley philosophy. We believe that OCI's significant
discount will narrow from continued NAV outperformance arising from
realised exits, and the continued earnings growth of its
portfolio.
3. KKR & CO
Classification: Holding Company
Valuation: GBP69.7m
% of net assets: 6.8%
Discount: -27%
A US-listed alternative asset manager with c. USD519bn of assets
under management. KKR is one of the largest companies in an
industry with appealing structural characteristics, underpinned by
valuable fee-related earnings.
4. AKER ASA
Classification: Holding Company
Valuation : GBP65.0m
% of net assets: 6.3%
Discount : -24%
Aker is a Norwegian holding company with investments principally
in oil & gas, renewables & green tech, marine-related
activities and industrial software. Its largest asset is Aker BP, a
Norwegian oil company, Aker has a history of active portfolio
management, dealmaking and value creation, with a track record of
strong shareholder returns since Initial Public Offering (IPO) in
2004.
5. FEMSA
Classification: Holding Company
Valuation: GBP64.5m
% of net assets: 6.3%
Discount: -28%
FEMSA is a Mexican family-controlled holding company with roots
dating back to the establishment of Mexico's first brewery in 1890.
The bulk of the value lies in unlisted FEMSA Comercio, which
primarily operates Oxxo-branded convenience stores across Mexico
and Latin America. In 2023 the company completed a strategic
review, simplifying its structure and generating considerable
excess capital. We believe this will lead to a re-rating of the
shares.
6. PRINCESS PRIVATE EQUITY
Classification: Closed-ended Fund
Valuation: GBP64.2m
% of net assets: 6.2%
Discount: -29%
London-listed closed-ended fund managed by Swiss private equity
manager Partners Group. Princess invests in global buyouts on a
co-investment basis alongside Partners' direct investing
programmes. We invested following lethargic returns, concerns over
governance, and suspension of the dividend which forced a sell-off.
We have since proactively engaged with the board on multiple
matters.
7. APOLLO GLOBAL MANAGEMENT
Classification: Holding Company
Valuation: GBP59.7m
% of net assets: 5.8%
Discount: -30%
A value-orientated US-listed alternative asset manager with c.
USD617bn of assets under management. Following its merger with
Athene Insurance, Apollo has ambitious plans to grow its "Fixed
Income Replacement Opportunity" offering within a USD40 trillion
market.
8. PANTHEON INTERNATIONAL
Classification: Closed-ended Fund
Valuation: GBP53.7m
% of net assets: 5.2%
Discount: -38%
Pantheon International is one of the oldest listed private
equity vehicles and has built up a strong NAV performance
track-record over several decades, thanks to its diversified
portfolio of private equity funds owning high-quality companies
with robust earnings growth. In August, the company announced a
revised capital allocation policy, equating to 15% of shares
outstanding, baking in a substantial degree of NAV accretion into
future returns.
9. D'IETEREN GROUP
Classification: Holding Company
Valuation : GBP41.5m
% of net assets: 4.0%
Discount : -41%
A seventh-generation Belgian family-controlled holding company
whose crown jewel asset is a 50% stake in Belron, the global no.1
operator in the Vehicle Glass Repair, Replacement and Recalibration
industry. Belron boasts numerous scale advantages and benefits from
tailwinds. Combined the durable growth prospects for D'Ieteren's
other assets, and the wide discount at which the company trades, we
are excited about prospective returns.
10. CHRISTIAN DIOR
Classification: Holding Company
Valuation : GBP40.3m
% of net assets: 3.9%
Discount : -15%
Christian Dior's sole asset is a 41% stake in LVMH, the luxury
goods conglomerate. We view LVMH as a highly attractive asset, with
diverse exposure across Fashion & Leather, Wine & Spirits,
Perfume & Cosmetics, Watches & Jewellery and Selective
Retail. LVMH's collection of brands is unique and the rich cultural
heritage underlying them is impossible to replicate. These factors
drive strong demand, high pricing power and attractive margins. We
see strong earnings upside from LVMH, as well as potential returns
from the collapse of the holding structure.
All discounts are estimated by AVI as at 30 September 2023,
based on AVI's estimate of each company's net asset value.
INVESTMENT PORTFOLIO
AS AT 30 SEPTEMBER 2023
% of % of
Portfolio investee IRR ROI Cost Fair value net
Company classification company (%, GBP)(1) (%, GBP)(2) GBP'000(3) GBP'000 assets
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Schibsted 'B' Holding Company 2.2% 25.6% 24.8% 71,238 88,593 8.6%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Oakley Capital
Investments Closed-ended Fund 10.0% 23.1% 111.5% 36,560 78,677 7.6%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
KKR & Co Holding Company 0.2% 32.3% 135.1% 30,305 69,725 6.8%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Aker ASA Holding Company 1.7% 16.5% 75.4% 59,967 64,952 6.3%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
FEMSA Holding Company 0.3% 26.9% 68.8% 39,314 64,510 6.3%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Princess Private
Equity Closed-ended Fund 10.0% 29.1% 12.0% 58,183 64,160 6.2%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Apollo Global
Management 'A' Holding Company 0.1% 32.3% 84.2% 33,528 59,712 5.8%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Pantheon
International Closed-ended Fund 3.5% 22.7% 14.0% 47,042 53,743 5.2%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
D'Ieteren Group Holding Company 0.6% 14.7% 12.0% 37,699 41,458 4.0%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Christian Dior Holding Company 0.0% 26.3% 97.1% 22,498 40,272 3.9%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Top ten investments 436,334 625,802 60.7%
--------------------------------------- --------- ------------ ------------ --------------- ----------- --------
Pershing Square
Holdings Closed-ended Fund 0.4% 18.6% 46.6% 25,972 39,968 3.9%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Asset-backed
Special
Nihon Kohden Situation 2.1% 3.4% 2.9% 36,247 36,807 3.7%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
News Corp Holding Company 0.6% 2.8% 1.7% 35,674 36,095 3.5%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
IAC Holding Company 1.0% -31.1% -41.9% 64,482 34,150 3.3%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Godrej
Industries Holding Company 1.8% 2.3% 9.0% 30,288 34,097 3.2%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Hipgnosis Songs
Fund Closed-ended Fund 3.4% -3.3% -2.5% 38,607 33,142 3.2%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Symphony
International
Holdings Closed-ended Fund 15.7% 7.9% 52.0% 26,636 31,807 3.1%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Third Point
Investors Closed-ended Fund 4.1% 6.5% 33.2% 23,728 26,961 2.6%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Asset-backed
Special
Wacom Situation 4.7% -17.6% -30.5% 37,086 24,215 2.3%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
EXOR Holding Company 0.1% 11.0% 42.5% 13,574 20,506 2.0%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Top twenty investments 768,628 943,550 91.5%
--------------------------------------- --------- ------------ ------------ --------------- ----------- --------
Bollore Holding Company 0.1% nm -11.0% 20,087 17,799 1.7%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Molten Ventures Closed-ended Fund 5.0% -39.9% -31.4% 25,430 17,452 1.7%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Asset-backed
Special
DTS Situation 2.0% 8.3% 21.6% 15,795 16,628 1.6%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Asset-backed
Special
Digital Garage Situation 1.8% -10.7% -15.2% 21,871 16,115 1.6%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Asset-backed
Special
Hachijuni Bank Situation 0.5% nm 25.2% 10,114 12,508 1.2%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Asset-backed
Kyoto Financial Special
Group Situation 0.3% nm 17.4% 10,315 11,937 1.2%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Asset-backed
Dai Nippon Special
Printing Situation 0.2% nm 7.9% 10,840 11,646 1.1%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Asset-backed
Special
Konishi Situation 2.3% 4.8% 19.8% 10,522 11,630 1.1%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Asset-backed
Special
Shiga Bank Situation 1.1% nm 8.4% 10,577 11,334 1.1%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Haw Par
Corporation Holding Company 0.8% nm -0.1% 11,360 10,957 1.1%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Top thirty investments 915,539 1,081,556 104.9%
--------------------------------------- --------- ------------ ------------ --------------- ----------- --------
Asset-backed
Special
SK Kaken Situation 1.8% -11.6% -42.8% 19,056 10,303 1.0%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Asset-backed
Special
TSI Holdings Situation 2.5% nm 22.2% 8,182 9,954 1.0%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Asset-backed
Special
Fuji Soft Situation 0.5% nm 4.7% 9,047 9,431 0.9%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Asset-backed
Special
Iyogin Holdings Situation 0.4% nm 28.4% 6,496 8,276 0.8%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Asset-backed
Special
Pasona Group Situation 2.0% 6.9% 21.2% 8,551 7,497 0.7%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Asset-backed
Shin Etsu Special
Polymer Situation 0.8% 1.2% 1.2% 5,111 5,021 0.5%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
VEF Holding Company 2.3% -5.8% -5.2% 4,525 3,989 0.4%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
JPEL Private
Equity Closed-ended Fund 18.4% 19.9% 100.1% 1,554 3,954 0.4%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Seraphim Space
Investment Closed-ended Fund 2.9% -10.0% -8.0% 3,213 2,955 0.3%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Better Capital
(2009) (+/-) Closed-ended Fund 17.4% 22.1% 41.1% 1,962 903 0.0%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Top forty investments 983,236 1,143,839 110.9%
--------------------------------------- --------- ------------ ------------ --------------- ----------- --------
Third Point
Investors
Private
Investments
(+/-) Closed-ended Fund 0.0% nm nm 582 602 0.1%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Ashmore Global
Opportunities
- GBP* Closed-ended Fund 0.0% 4.2% 7.8% 31 318 0.0%
------------------ ------------------- --------- ------------ ------------ --------------- ----------- --------
Equity investments at fair value 983,849 1,144,759 111.0%
--------------------------------------- --------- ------------ ------------ --------------- ----------- --------
Equity exposure % of
Fair value and gross market exposure GBP'000 Fair value net
of investments(4) GBP'000 assets
--------------------------------------- --------- ------------ ------------ --------------- ----------- --------
Equity investments 1,144,759 1,144,759 111.0%
Total return swap
long positions
Brookfield Class A 52,097 (16,067)** -1.6%
SK Square 18,837 (1,437)** -0.1%
--------------------------------------- --------- ------------ ------------ --------------- ----------- --------
70,934 (17,504) -1.7%
-------------------------------------- --------- ------------ ------------ --------------- ----------- --------
Total return
swap short
positions
Brookfield Infrastructure Partners
Units (3,744) 714* 0.1%
Brookfield Asset Management Class
A (24,501) 168* 0.0%
Brookfield Renewable Partners
Units (4,077) 1,292* 0.1%
SK Hynix Inc (14,664) (3,369)** -0.3%
--------------------------------------- --------- ------------ ------------ --------------- ----------- --------
(46,986) (1,195) -0.1%
-------------------------------------- --------- ------------ ------------ --------------- ----------- --------
Investments and total return
swaps 1,168,707 1,126,060 109.2%
Other net current assets less current
liabilities 46,507 4.5%
Non-current liabilities (141,549) -13.7%
--------------------------------------- --------- ------------ ------------ --------------- ----------- --------
Net assets 1,031,018 100.0%
--------------------------------------- --------- ------------ ------------ --------------- ----------- --------
(1) Internal Rate of Return. Calculated from inception of AGT's
investment. Refer to Glossary in full Annual Report. Where it is
not possible to report a meaningful figure for the IRR, due to the
investment having been held less than 12 months, this is indicated
as "nm".
(2) Return on investment. Calculated from inception of AGT's
investment. Refer to Glossary in full Annual Report.
(3) Cost. Refer to Glossary in the full Annual Report.
(4) The fair value column of the total return swaps is
determined based on the difference between the notional transaction
price and market value of the underlying shares in the contracts
(in effect the unrealised gains/(losses) on the exposed long and
short total return swap positions). The equity exposure is the cost
of purchasing the securities held through long total return swap
positions directly in the market and at the Balance Sheet date
would be a cost of GBP70,934,000. If the long positions were closed
at 30 September 2023, this would result in a loss of GBP17,504,000.
The notional price of selling the securities to which exposure was
gained through the short total return swaps at the Balance Sheet
date would be GBP46,986,000. If the short positions were closed on
30 September 2023, this would result in a loss of GBP1,195,000. In
the case of long and short total return swaps it is the market
value of the underlying shares to which the portfolio is exposed
via the contract.
(+/-) Level 3 investment (see note 15 in the full Annual
Report).
* The total fair value liability of short and long positions is
GBP2,174,000.
** The total fair value asset of short and long positions is
GBP20,873,00.
INVESTMENT MANAGER'S REVIEW
Performance Review
"In this market we believe that hard work, a focus on
idiosyncratic catalysts to unlock value, together with our own
activism, are key tools to drive returns."
"I know it's complicated."- Christine Lagarde, President of the
European Central Bank.
Alan Greenspan, the former Chairman of the Federal Reserve, used
to talk of "Fedspeak" and the art of "purposeful obfuscation".
However, in this case Ms Lagarde's approach to communication is
much simpler and echoes what many investors have been feeling over
the last year: it is complicated!
Inflation remains stubbornly higher than desired and central
banks have been steadfast in their attempts to quell it, lifting
interest rates to levels few assumed probable only eighteen months
ago. For the time being, a recession remains the dog that hasn't
barked (yet!), although there have been some signs of weakening
activity over the summer, most notably in Europe. In the last few
weeks we have seen a sharp rise in bond yields, particularly in the
US, where markets have started to price in a "higher for longer"
outlook. The ramifications of this are likely large and have not
necessarily been felt yet.
All told this is a challenging environment for equities.
However, those taking a cursory glance at the returns of the major
US indices would be forgiven for having missed this, as
(capitalisation weighted) markets have been led higher by a narrow
band of technology companies deemed to be AI-beneficiaries.
Under the surface there has been more turmoil and the going has
been much tougher. Such an environment suits our style of investing
and, over the last 12 months, we have found an increasingly rich
and varied opportunity set. In this market we believe that hard
work, a focus on idiosyncratic catalysts to unlock value, together
with our own activism, are key tools to drive returns. Reflective
of all this, during the year we meaningfully deployed your
company's gearing for the first time since late 2021.
Within this context AVI Global Trust's NAV increased by
+15.3%(1) on a total return basis*. This compares to a +10.1%
return for the MSCI AC World ex-US index and a +10.5%(1) return for
the broader MSCI AC World Index (now our comparator benchmark).
It is worth highlighting the strong recovery in relative
performance since the interim report in March, outperforming the
two indices by +9.6% and 5.5% respectively. Of course, our aim is
not to optimise performance over six-month periods, nor do we
expect to be judged over single financial years. Still, such
performance is pleasing to see and validation for holding course
when the numbers didn't look so pretty. Deviation from the
benchmark is a feature not a bug of concentrated high conviction
portfolios, and a prerequisite for success.
Performance has been driven by stock selection - something we
believe is coming back to the fore. Our high conviction larger
weight holdings, such as Apollo, KKR, FEMSA and Schibsted, have on
average performed better. The latter two are good examples of the
types of idiosyncratic "events" to which we are attracted -
management teams and boards are undertaking strategic and
structural changes to unlock value.
We are also excited about opportunities where we can add value
as an engaged and active shareholder. This is particularly true in
the London-listed closed-ended fund market, where discounts are
historically wide and commentary about the continuing relevance of
the sector is rife. This provides a fertile hunting ground and we
have built new positions in Pantheon International and Princess
Private Equity over the last year, whilst also meaningfully adding
to what was a small tail position in Hipgnosis Songs Fund.
Despite broader enthusiasm from other investors, our performance
in Japan has been a relative weak spot over the last 12 months.
Wacom and Digital Garage have been notably poor performers, and a
number of our other holdings have failed to keep up with a strong
market where capital has principally flowed to larger cap names.
Disappointing local price returns have been exacerbated by
continued Yen weakness. It is our expectation that Japan's
divergent monetary policy will not persist indefinitely. As and
when this occurs the Yen will be a further tailwind behind our
backs. More generally we continue to be excited about the rich
opportunity set we find in overcapitalised Japanese small caps, and
the role we can play in unlocking and creating value.
Looking ahead and borrowing a quote from the CEO of a US
automaker on a recent earnings call, the macro environment remains
"opaque at best". Bond markets have increasingly started to reflect
"higher for longer" rates and we appear to be in a new epoch of
non-zero interest rates and a price for risk. Tail risk remains
that the infamous "long and variable" monetary policy lags bite
unexpectedly, with the UK Liability Driven Investment (LDI)-crisis
and US banking crisis having highlighted how systemic problems can
suddenly emerge as liquidity conditions tighten.
Readers should know by now that our approach to investing is
focused on bottom-up stock picking. We are highly sceptical of the
quality of our macro insights and their utility in guiding
investment decisions. As such we remain focused on the
fundamentals. Discounts - as indicated by our 35% portfolio
weighted average discount - are at wide levels historically
associated with times of panic and market stress. Such starting
valuations provide a strong bedrock and give comfort in an
uncertain world.
Overall, we continue to believe that we are in a challenging
market environment in which hard work, stock selection and
engagement will be differentiating factors. In this vein, we are
cautiously optimistic about the prospects for the
concentrated-yet-diverse portfolio of high-quality-yet-lowly-valued
companies we have assembled, and the potential for attractive
long-term returns from the areas of the equity market on which we
concentrate.
([1]) See Glossary in the full Annual Report. All performance
figures in GBP.
* For definitions, see Glossary in the full Annual Report.
PORTFOLIO REVIEW
CONTRIBUTORS
Apollo Global Management
Classification: Holding Company
% of net assets(1) : 5.8%
Discount: -30%
% of investee company: 0.1%
Total return on position FY23 (local)(2) : 94.4%
Total return on position FY23 (GBP): 78.5%
Contribution (GBP)(3) : 275bps
ROI since date of initial purchase(4) : 84.2%
US-listed alternative asset manager Apollo (APO) was our top
contributor over the financial year, adding +275bps to NAV as its
share price almost doubled (up +98% total return in USD vs +21% for
the S&P 500). This was despite the company being swept up in
the banking sell-off in March 2023 on misguided concerns that
failed to recognise important differences between bank deposits and
the annuity liabilities of Athene (Apollo's wholly-owned life
insurance arm). We took advantage of the market confusion to add to
the position near the lows reached in March.
Taking a step back to our original investment case for Apollo,
we believed the business was poorly understood by the market when
we first initiated a position back in April 2021 ahead of its
announced merger with sister company Athene Insurance. AGT
shareholders with long memories may recall that we had a very
profitable investment in Athene from 2012 to 2017 when it was a
private investment held by a listed Apollo-managed vehicle called
AP Alternative Assets.
Life insurance businesses are understandably often lowly rated
by the market. But the reasons why they are so - unpredictable
liabilities with tail risks (e.g. long-term care) and hard-to-hedge
liabilities such as Variable Annuities - simply do not apply to
Athene which has a highly focused business model predominantly
centred on fixed annuities. As such, Athene can be looked at as
effectively a spread-lending business, earning a spread between the
rates paid on annuities and the yields earned on its investments.
Its fixed income portfolio (95% of total assets) is 96%
investment-grade, with Athene seeking to earn a return premium from
complexity and illiquidity rather than from taking duration or
additional credit risk, and its return-on-equity has averaged 16%
over the last four years (in line with its target of
mid-to-high-teens).
Life insurance businesses are also correctly perceived as being
capital intensive, and this was a source of some disquiet when the
Apollo/Athene merger was announced. But capital intensity is not a
bad thing if one is earning high returns on that capital; and, as
we understood at the time, a material proportion of Athene's growth
was likely to be funded by third-party "sidecar" vehicles.
The market seems to increasingly have come round to our more
positive view on Apollo as evidenced by the strong share price
performance over 2023 on the back of earnings upgrades. Higher
rates have led to very strong demand for annuities (unsurprisingly,
people prefer to earn higher rather than lower rates on their
investments even if only in nominal terms) with retail inflows on
track to surpass 2022's record of $20bn. At 30 June 2023, Athene
had already had $15bn of inflows for the year.
To some extent, each of the listed alternative asset managers
has made a different bet: Blackstone on real estate; Ares on
subordinated debt; Brookfield on infrastructure, etc. Apollo have
focused on investment grade private credit, a market that can be
measured in the tens of trillions. It is becoming increasingly
understood that Athene is integral to this push. As a life
insurance business seeking to earn a return over and above that
paid out on its annuities and other liabilities, Athene needs safe
(investment grade) credit and - given its long-dated sticky
liabilities - can invest in private assets to earn an illiquidity
premium.
This is where Apollo's investments in origination platforms come
into play. These are attractive investments in their own right that
sit within the 5% of Athene's balance sheet allocated to
alternative investments. In the business of originating investment
grade assets (aviation financing, mid-market lending, mortgages,
supply chain finance, etc.) they find a natural home on Athene's
balance sheet and those of third-party insurance companies and
other institutions who draw comfort in the alignment of interest
from investing alongside Athene. In addition to one-off syndication
fees, Apollo is increasingly earning ongoing management fees from
many of these third parties establishing separately managed
accounts.
Athene is at the heart of this flywheel and provides Apollo a
huge advantage over peers in what CEO Marc Rowan has termed the
"Fixed Income Replacement Opportunity", with the potential market
for investment grade private credit estimated at as much as $40
trillion. Regulatory moves to increase capital requirements of the
US banking sector are expected to accelerate this, with JPMorgan
CEO Jamie Dimon suggesting that Apollo executives would be "dancing
in the streets" due to the measures.
Trading on just 11x 2024 expected earnings, we see considerable
scope for continued further upside for Apollo shares with the
company on track to hit its $1 trillion AUM target by 2026.
FEMSA
Classification: Holding Company
% of net assets(1) : 6.3%
Discount: -28%
% of investee company: 0.3%
Total return on position FY23 (local)(2) : 76.9%
Total return on position FY23 (GBP): 61.9%
Contribution (GBP)(3) : 258bps
ROI since date of initial purchase(4) : 68.8%
FEMSA added +258bps to returns during a period in which the
company completed its strategic review and took structural steps to
unlock value and reduce the wide discount at which the company
trades. In this context, the shares returned +78% as a +50%
increase in the NAV was boosted by a narrowing of the discount from
39% to 28%.
As readers may remember, we initiated a position in FEMSA in
2021, with an investment case predicated on the highly attractive
nature of FEMSA Comercio - which operates Oxxo-branded convenience
stores, and other small-format retail stores, across Mexico and
Latin America - and the unduly low valuation the market was
awarding the business. In 2022 management announced a
"comprehensive strategic review" of the group structure with a
focus on reducing the sum-of-the-parts discount.
In February 2023, FEMSA concluded its strategic review -
announcing plans to simplify the group structure, monetise non-core
assets and re-focus on its core business. Most importantly, the
company announced plans to exit its stake in Heineken, which prior
to the announcement was worth some $7.8bn, or c.28% of FEMSA's
market cap. Following two accelerated book builds in February and
May, FEMSA has now fully exited Heineken (bar EUR500m of shares
underlying an exchangeable bond). In addition, FEMSA announced the
sale of Jetro Restaurant Depot (JRD) for $1.4bn and in August it
was announced that Envoy Solutions would merge with BradyIFS, as a
first step in FEMSA exiting the business, with a $1.7bn cash inflow
and a 37% stake in the combined entity.
Despite strong performance we believe the shares remain cheaply
priced, with the underlying intrinsic value/NAV having compounded
at a high rate. This speaks to the attraction of finding
investments that exhibit both special situation-type catalysts and
high-quality growth. It is this latter point which is particularly
important to us - asset quality and the prospect for NAV growth are
key to our style of investing. In this vein we believe that Oxxo
has one of the most robust retail models we have come across, with
a long growth runway, strong unit economics and high returns on
capital. New store openings are now running above 1,000 on a
trailing 12-month basis once again, and we believe the company can
reach c.30,000 units in Mexico by the end of the decade (from just
shy of 22,000 currently), with strong prospects for further
potential growth in Brazil.
At current prices, FEMSA trades at a 28% discount to our
estimated NAV and with the stub* at an inordinately wide discount
to closest-peer, Walmex (8.7 x vs. 11.9x). Pro-forma of the JRD and
Envoy Solutions transactions, we estimate that FEMSA is now in a
modest net cash position vs. management's target of 2.0x net
debt/EBITDA. This implies the company has "excess" capital of
c.$7bn equating to c.18 % of its market cap. Investors, not
entirely without reason, are cautious over how this will be
deployed, and we have been encouraging management to use the
proceeds for share buybacks.
* The stub represents the value of the remaining unlisted assets
in a company after subtracting the total value of listed assets and
net debt from its market cap
Schibsted B
Classification: Holding Company
% of net assets(1) : 8.6%
Discount: -34%
% of investee company: 2.2%
Total return on position: FY23 (local)(2) : 43.9%
Total return on position: FY23 (GBP): 34.9%
Contribution (GBP)(3) : 233bps
ROI since date of initial purchase(4) : 24.8%
In the summer of 2022 we initiated a new position in Schibsted,
the Norwegian holding company. Today Schibsted is AGT's largest
position and was one of the strongest contributors to your
Company's performance, adding +233bps to returns. Over the course
of the year the shares increased +63%, as a +35% increase in the
NAV was boosted by a narrowing of the discount from 45% to 34%.
Whilst the origins of the company date back to a publishing
business in the 1830s, from the turn of the millennium, Schibsted
have built and bought a collection of online classified advertising
businesses, which today account for the bulk of the value. This is
spread across Schibsted's unlisted Nordic assets (52% NAV), and a
stake in Adevinta (49% NAV) which they listed in 2019 as a vehicle
to house their international classified ads businesses and pursue
sector consolidation (which it has done via the acquisition of
eBay's classified ads business for $9.2bn in 2020).
Such businesses exhibit "winner-takes-most" dynamics, with
strong network effects whereby listing inventory and user traffic
mutually reinforce one another. The dominant #1 player in a
category becomes the reference point for individuals or businesses
looking to buy and sell in that vertical. This integral position
translates into high levels of pricing power and excellent
financial profiles, with healthy organic growth rates, EBITDA
margins of 40-60% and high free cash flow conversion.
Attune to these attractions we had monitored Schibsted from afar
for a number of years. However, it took a more than 60% decline in
the share price from the summer of 2021 to June 2022 to pique our
interest. Both Schibsted and Adevinta had been caught in a perfect
storm of earnings downgrades and multiple compression. On top of
this, at the Schibsted holding company level investors had
increasingly questioned capital allocation and the group
structure.
As such, we were able to build a position in the B shares at a
c.45% discount to our estimated NAV and with the stub assets
trading at an anomalously low implied c.6x forward EV/EBITDA. It
was, and is, clear in our view that resolving the ownership stake
in Adevinta (which accounts for two-thirds of Schibsted's market
cap) is key to unlocking the trapped value, with either an
in-specie distribution or sale of Adevinta suitable outcomes to
both re-rate the stub and help realise a fair value for the
Adevinta stake.
In September 2023 it was confirmed that Blackrock and Permira
have made a non-binding proposal to take Adevinta private. This
will see Schibsted crystalise a large portion of its value, whilst
also retaining a stake in the private company. Of course, the devil
will be in the detail, with the pertinent questions being around
price and the size of the stake that Schibsted will maintain.
The deal will allow Schibsted to garner a control premium
(albeit an unknown one) and remove some of the friction of an
in-specie distribution. Most importantly, it will go some way to
simplifying the group structure, shining a light on the
undervaluation of the stub assets.
On the other hand, this raises the risk of capital
(mis)allocation - something we will continue to discuss with
Schibsted management. We are also frank about the low value the
market will likely ascribe to Schibsted's remaining unlisted stake
in Adevinta. Indeed, it is our contention that the ideal scenario
would be for Schibsted to wholly exit Adevinta - either via this
transaction, or, failing that, through an in-specie distribution.
However, we acknowledge that the return on the retained position
has the potential to be highly attractive, with significant low
hanging fruit from non-core asset sales (OLX Brazil plus Italy and
maybe Spain); improving monetisation rates at Mobile and Leboncoin,
which currently under-earn relative to global peers and the
economic utility they provide; and improving margins with tighter
cost control (particularly at HQ which runs to tune of EUR250m
p.a.).
Schibsted remains cheaply valued at a 34% discount to NAV and
with the stub trading at 6.7x NTM EBITDA. Further news on Adevinta
will be the key catalyst to drive both NAV growth and discount
narrowing. We remain excited about prospective returns and continue
to engage with the company and other stakeholders to ensure that a
satisfactory outcome is achieved. It is important that any
transaction fixes the undervaluation of both Adevinta and Schibsted
shares.
KKR & Co
Classification: Holding Company
% of net assets(1) : 6.8%
Discount: -27%
% of investee company: 0.2%
Total return on position FY23 (local)(2) : 44.5%
Total return on position FY23 (GBP): 32.2%
Contribution (GBP)(3) : 177bps
ROI since date of initial purchase(4) : 135.1%
KKR was amongst our largest contributors for the year, adding
+177bps to returns on the back of a share price that ended the
period +45% higher (total return in USD) vs +21% for the S&P
500 Index. The investment was one of our largest detractors in
AGT's previous financial year, and a top contributor in the year
before that. Less long-windedly, KKR's share price is volatile.
Share price performance suggests investors view alternative
asset managers as high beta plays on risk assets. Our contention is
that this ignores the defensive characteristics of scale-advantaged
managers, and the structural growth trends the industry
exhibits.
The current assets under management (AUM) that alternative asset
managers have is for the most part long-term, or even permanent,
and so the risk of redemptions is very limited. In the case of KKR,
over half of its AUM is either perpetual capital or long-dated
strategic investor partnerships (separately managed accounts in
which capital is recycled following exits); just 9% of AUM is from
vehicles with a life of less than eight years at inception.
This gives rise to a high level of visibility on future
earnings. We note that KKR's fee-related earnings per share for
H1-2023 grew +7%, with the non-cyclical management fees component
increasing by +16%.
Secular trends towards greater institutional allocations to
alternatives, particularly in private credit and infrastructure,
are a forceful tailwind for the industry. Against that backdrop, we
expect the largest players such as KKR to take a disproportionate
share of that growth as LPs look to consolidate their number of LP
relationships. While there is certainly some indigestion across LPs
after record fund-raising years, KKR is in the enviable position of
having already raised the latest iteration of its flagship
funds.
Blackstone's success in raising capital from private wealth
channels has materially raised the total addressable market for the
alternative asset managers. While KKR's presence in this space is
still relatively nascent, they have invested heavily in
distribution and expect 30-50% of new KKR capital to be sourced
from private wealth channels over the next several years. The size
of the market is so vast that even a small up-tick in allocations
to alternatives could have seismic results, with an expected
increase from 1% in 2020 to 5% in 2025 translating to an additional
$9 trillion of inflows. We expect there to be only a few winners in
this space, consisting of the largest managers with the most
recognised brands.
Despite these tailwinds, KKR trades on less than 20x fee-related
earnings. Note this multiple is calculated only accounting for
accrued carried interest, so giving no credit for additional carry
earned on existing funds and on future funds. This compares very
favourably to peers, and to other financials companies of similar
quality (i.e. growth and margin characteristics). With Blackstone
having become the first alternative asset manager to enter the
S&P 500, we believe it is a matter of time before KKR and
Apollo are also selected for inclusion. This could lead to as much
as 20% of their free float being bought by index-tracker and
"index-aware" investment vehicles.
EXOR
Classification: Holding Company
% of net assets (1) : 2.0%
Discount: -43%
% of investee company: 0.1%
Total return on position FY23 (local) (2) : 20.7%
Total return on position FY23 (GBP): 19.8%
Contribution (GBP) (3) : 147bps
ROI since date of initial purchase(4) : 42.5%
EXOR was a meaningful contributor to returns. Over the last year
EXOR shares have marched +28% higher, driven exclusively by NAV
growth, with the discount broadly unchanged at 43%.
In last year's Annual Report, we described a situation of strong
performance at Ferrari being offset by "hard to justify" weakness
at Stellantis. This year both contributed strongly, with share
price total returns of +47% and +62%, respectively.
Performance at Stellantis is particularly pleasing, with the
industrial and financial logic of the merger shining through.
Longer-term readers of our letters may remember that the extreme
undervaluation of FCA (as it then was) and the scope for value
creation through industry consolidation were key attractions that
initially led us to invest in EXOR in 2016. For Stellantis' 2022
results the company reported a 13.0% operating margin and achieved
EUR7.1bn of net cash synergies - exceeding the EUR5bn merger target
more than two years ahead of plan. The consensus view amongst
investors is that the auto industry faces a period of deflation,
with increased supply leading to higher dealer inventory and
in-turn weaker pricing - which will dilute margins / earnings from
unsustainably high post-pandemic levels. We have long held the view
that it is in a more challenging environment that Stellantis'
structural margin improvements and Carlos Tavares' obsessive focus
on cost will shine through. With the shares trading at just 3.5x PE
the market does not seem to be pricing this in.
During the year EXOR built a 15% stake in Philips, the (rather
beleaguered) Dutch healthcare-focused conglomerate. Philips shares
trade c.60% below their April 2021 high following a disastrous
product recall, an FDA consent decree and unknown potential legal
claims relating to concerns that sound abatement foam within its
devices could disintegrate and cause health problems. We believe
the investment meets the key criteria EXOR were looking for:
reducing the cyclicality of EXOR's NAV exposure; gaining influence
without paying a control premium, with potential further capital
allocation opportunities if the company were to raise equity; and
significant self-help opportunities that EXOR can push to support
from the board - from improving governance, to improving
operational procedures and longer term questions about unlocking
value from the Personal Health (toothbrushes / shavers) business
that has limited synergies with the rest of the group.
Despite its strong NAV performance, EXOR's discount remains wide
at 43%. In recognition of this fact the company recently launched a
EUR1bn (5% market cap) buyback program, EUR750m of which will be
structured as a Dutch tender offer. We will not be taking part,
having already reduced the position materially earlier in the year
to free up capital for new ideas. Indeed, notwithstanding the
reduction in our position, we believe the outlook for NAV growth
and discount narrowing to be attractive.
(1) For definitions, see Glossary in the full Annual Report.
(2) Weighted returns adjusted for buys and sells over the
year.
(3) Figure is an estimate by the managers and sum of
contributions will not equal quoted total return over the financial
year.
(4) Figure quoted in GBP terms. Refer to Glossary in the full
Annual Report for further details.
DETRACTORS
Brookfield
(Long Brookfield Corp/Short Listed Underlyings)
Classification: Holding Company
% of net assets(1) : 5.1%*
Discount: -48%
% of investee company: nm
Total return on position FY23 (local)(2) : nm
Total return on position FY23 (GBP): nm
Contribution (GBP)(3) : -103bps
ROI since date of initial purchase(4) : -13.0%
Brookfield Corporation was our largest detractor over the
financial year, reducing NAV by 103bps. Note that this figure is
the aggregated net impact from the long position in Brookfield
Corporation and the short positions in index and underlying
holdings established as hedges.
To recap, AGT acquired a position in what was then called
Brookfield Asset Management in December 2022 ahead of the spin-off
of a 25% stake in its asset management business. What was
Brookfield Asset Management has been renamed Brookfield Corporation
(BN); the spun-off asset management business has taken on the name
of its parent company (BAM).
Our research highlighted that BAM (as it was) was trading at a
dislocated valuation and that either (i) the asset management
business was being valued on too cheap a multiple or (ii) the
discount on the other assets was too wide. Share price moves
subsequent to the spin-off proved the latter to be the case, and we
sold our stake in the spun-off asset-management business to acquire
more of the more attractively-valued Brookfield Corporation.
We have taken out short positions in most of the listed
underlying holdings (Brookfield Asset Management, Brookfield
Renewable Partners, and Brookfield Infrastructure Partners),
accounting for 54% of NAV at the time of writing. In doing so, our
exposure is limited to the underlying unlisted assets and will mean
that a higher proportion of our prospective returns will come from
discount moves than would otherwise be the case.
The main unlisted assets to which we are exposed are Brookfield
Corporation's real estate holdings which account for 36% of NAV at
the current reported valuation. There is considerable scepticism
around this valuation given the headwinds facing office properties
due to work-from-home trends and regulatory-driven upgrades to
environmental standards. Indeed, much of the company's properties
are in office and retail. We understand these concerns but we
contend that, with a materially negative value implied on the real
estate by Brookfield Corporation's share price, the shares are
attractively valued. To illustrate this, the equity value for the
real estate could be cut by 75% and the discount to NAV on which
Brookfield Corporation trades would still be almost 30%.
Management have several levers to pull to address the
undervaluation. These include further spin-offs of the remaining
75% stake in Brookfield Asset Management and more aggressive share
buybacks.
*T he weight shown reflects the long exposure calculated from
the shares underlying the swaps.
Wacom
Classification: Asset-backed Special Situation
% of net assets(1) : 2.3%
Discount: -38%
% of investee company: 4.7%
Total return on position FY23 (local)(2) : -13.7%
Total return on position FY23 (GBP): -23.3%
Contribution (GBP)(3) : -78bps
ROI since date of initial purchase(4) : -30.5%
Wacom was your Company's second largest detractor in 2023,
reducing returns by -78 bps. Wacom is a Japan-listed company which
holds c.60% global market share in the niche market of tablets and
pens for professional use, designed to emulate the feel of pen and
paper while drawing on a screen. AGT has invested in Wacom since
August 2021 and has experienced a total return of -30.4% over this
period.
Weak consumer sentiment and inflation in the North American and
European regions, as well as semiconductor-related logistics
disruptions, created significant headwinds for the consumer
electronics industry. Wacom's flagship LCD graphic tablets were
particularly affected by the economic downturn due to their
relatively long replacement cycle of approximately five years,
which has been prolonged further due to the deterioration of
consumer sentiment.
In May 2023, Wacom's management disclosed a recovery plan to
respond to this situation, announcing eight measures, including
improving cashflow by significantly reducing inventories and
increasing unit prices by up to 30%.
Dissatisfied with Wacom's performance, AVI has been
strengthening its engagement with members of the Board, engaging on
average at least once a month. Following these dialogues, the
company announced a new share buyback, totalling up to JPY20bn to
date. Out of the total buyback budget, approximately JPY14bn has
not yet been implemented, equivalent to 15.1% of the company's
market capitalisation. These buybacks are expected to be undertaken
by the end of March 2025.
While peer forward EV/EBIT multiples average 16x, Wacom's
EV/EBIT multiple based on company targets for the financial year
ending March 2025 is 11x and just 8x for the following year. There
has been no significant change in the company's global positioning
through the Covid-19 period, and the company plans to launch a
series of new products, including the Wacom One series, from early
autumn 2023, indicating that it is implementing measures to
stimulate consumer demand.
Overall, we expect the digitisation of the global design market
to continue, and remain confident that Wacom, in its position as
market leader, will be at the forefront of innovation in this
segment.
Third Point Investors
Classification: Closed-ended Fund
% of net assets(1) : 2.6%
Discount: -20%
% of investee company: 4.1%
Total return on position FY23 (local)(2) : -1.1%
Total Return on position FY23 (GBP): -9.5%
Contribution (GBP)(3) : -68bps
ROI since date of initial purchase(4) : 33.2%
Third Point Investors (TPOU) was, for the second consecutive
year, one of the largest detractors from overall returns. Weak NAV
performance (-2%) compounded with a widening discount (-17% to
-20%) to produce a -6% decline in share price, far behind the
returns of the S&P 500 (+21%) and the MSCI AC World Index
(+21%). Returns for AGT in Sterling were depressed further by GBP
strength vs the US Dollar.
Low double-digit positive returns from the credit book were
insufficient to offset weak returns from the equity exposure where
the Manager underperformed on both long and short exposures.
TPOU's short- and long-term performance track record is now
deeply uninspiring with the vehicle having outperformed the S&P
500 in just four out of seventeen calendar years and far behind the
index over all time periods to 30 September 2023. Over ten years,
an annualised NAV total return of +4.4% falls well short of the
+11.9% from the S&P 500 and the +8.3% from the MSCI World.
While NAV volatility has generally been lower than equity indices,
we do not believe that offers any great appeal for potential buyers
of what has almost always been a majority equity-exposed
strategy.
Shareholders may recall that AGT also owned a direct position in
the Third Point Offshore Master Fund that underlies TPOU. This was
acquired as a result of our participation in an exchange facility
offered to TPOU shareholders in early 2022 that allowed qualifying
shareholders to exchange a portion of their TPOU shareholding for
shares in the Master Fund at a 2% discount to NAV. This saw 43% of
our position exchanged for shares in the Master Fund, and we have
since redeemed this holding at the maximum permissible rate and
exited entirely in June 2023.
For our remaining position in TPOU, we draw some solace from the
tender offer for 25% of the company's shares scheduled for Q2 2024.
This is triggered if the average discount for the six months to the
end of March 2024 exceeds 10%. Given that the current discount is
21%, we do not see any plausible scenario in which this tender
offer will not be triggered. We plan to participate in full.
We expect the tender offer to be over-subscribed, leaving the
fund not only 25% smaller in terms of net assets, but with the
market aware of a large overhang of selling pressure. With no
further exit opportunity until March 2027 and with an increased
exposure to private investments, we would be surprised if the
discount did not widen materially post-tender.
In this scenario, it is entirely appropriate that the share
buyback programme should continue given the high return on
investment from share repurchases, but we are mindful that this
will have a further deleterious impact on already woeful liquidity.
We expect to see the company then limp on until the next
discount-contingent tender offer (at a tighter threshold of 7.5%)
scheduled for March 2027 which, barring a remarkable turnaround in
performance and sentiment, is also highly likely to be triggered.
With no further exit opportunities scheduled thereafter, the
discount is likely to widen yet further.
We believe there is a strong case for intervention from the
Board to steer the company away from what seems to be an inevitable
course.
Aker ASA
Classification: Holding Company
% of net assets(1) : 6.3%
Discount: -24%
% of investee company: 1.7%
Total return on position FY23 (local)(2) : -2.3%
Total Return on position FY23 (GBP): -7.8%
Contribution (GBP)(3) : -61bps
ROI since date of initial purchase(4) : 75.4%
Aker was also a detractor from returns over the last year. On a
total return basis shares and NAV declined -2.7% and -3.4%
respectively with the discount moving slightly narrower to 24%.
From AGT's perspective this was exacerbated by a -700bps
depreciation of the NOK versus Sterling.
The rather modest year-over-year change in Aker's share price
and NAV masks greater volatility in oil prices and related
equities. From a November 2022 peak oil prices fell some -24% to a
spring trough, only to rally +36% through to the end of September
2023. Shares in Aker BP (62% of NAV) were similarly volatile but
ended down by -3% on a total return basis.
We continue to believe that oil will play an important and
elongated role in our energy mix in the coming decades. In this
context we believe the prospects for well-managed, low-cost
operators with long production growth schedules such as Aker BP to
be attractive. This led us to more than double our position in Aker
since the start of 2020.
Although there is grave uncertainty in the near-term, as
evidenced by the steep decline in oil prices shortly after the end
of the financial year, demand for oil will grow resiliently over
the coming decade. A confluence of capital destruction, ESG
policies, and the demise of Shale have firmly put the power with
OPEC+, which has shown considerable appetite for flexing its
muscles over the last twelve months. With limited spare production
capacity and a much-depleted US Strategic Petroleum Reserve, OPEC's
dominance will be a feature of the coming years.
We expect such an environment to be characterised by generally
higher, albeit likely quite volatile, oil prices. Aker BP will
benefit from this, as they embark on a significant production
growth plan. In turn these cash flows can be returned to Aker
through dividends (with Aker BP's dividend growing +10%
year-over-year) and invested in higher growth/higher terminal value
businesses. Over the last year, Aker have experienced some road
bumps in this regard, with shares in Aker Horizons, the renewables
holding company established in 2020, declining by some two-thirds
(and now accounting for just 3% of NAV). This speaks to the
operational complexity of solving the climate crisis and the
capital required to get there - something which becomes more
relevant when risk free rates are no longer zero.
IAC
Classification: Holding Company
% of net assets(1) : 3.3%
Discount: -37%
% of investee company: 1.0%
Total return on position FY23 (local)(2) : -26.3%
Total Return on position FY23 (GBP): -17.4%
Contribution (GBP)(3) : -55bps
ROI since date of initial purchase(4) : -41.9%
Having been the most significant detractor from returns last
year, IAC - the North American holding company controlled by Barry
Diller - was also a detractor from returns this year. Over the
course of the year the shares declined -9%, as a -15% decline in
the NAV was partially sheltered by a narrowing of the discount from
41% to 37%.
In last year's Annual Report we wrote: "So what's gone wrong?
The short answer is lots". This year fewer things have gone wrong,
and there are green shoots of improvement, but nothing has gone
right as such, and investors remain highly sceptical about the
extent to which key assets Angi (12% of NAV) and Dotdash Meredith
(10%) can drive both top and bottom-line growth.
In IAC CEO Joey Levin's quarterly letter at the start of the
year, he talked of a "back to basics" strategy. This has clearly
been evidenced at Angi, the home services marketplace. Since
becoming CEO of Angi a little under a year ago, Levin has steadied
the ship. Measures to reduce the cost structure have been
implemented. There have been meaningful reductions in sales team
headcount, and over the first half of 2023 capex has been cut by
nearly two-thirds. He has started to simplify the product offering
and ambition, turning losses from Services from -$13m in the second
quarter of 2022 to profits of +$2m this year, as they exit
un-economic offerings. Arguably this is the "easy" bit and the next
stage of showing the business can successfully drive top-line
growth is the hard bit - with the jury very much still out as to
whether this is possible. That said, the "easy" bit is not to be
sniffed at - after all the company churned through three CEOs in
five years who couldn't do it! With earnings starting to ramp up,
we believe this creates a base from which value can be grown and
extracted. At the current $1.1bn enterprise value - which equates
to 0.7x trailing sales and 8x next year EBITDA - we believe the
business could be of interest to financial buyers given the
attractive cash generative nature of the core Ads & Leads
business and room for cost cutting from non-core areas. This would
be an attractive outcome for IAC shareholders, giving the company
significant capital to allocate. Alternatively, although sceptical,
we remain open minded to Joey Levin continuing to drive fundamental
improvements, re-igniting growth and margins - something to which
the market doesn't appear to be assigning a high probability.
Turning to Dotdash Meredith (10% of NAV) - the digital media
company that was established in 2021 when IAC's Dotdash acquired
the storied media brands of the Meredith Corporation - there are
also signs of improvement. Whilst 2022 had always been billed as a
transition year, a deterioration in ad markets, compounded by a
much slower and more complex than anticipated integration, meant
the first twelve months of ownership were ones to forget. In 2023
the integration issues are now behind them, with the focus now
solely on navigating a challenging macro environment. In aggregate,
management describe the ad market as being in a state of "stable
weakness", albeit with significant variation by category. We remain
somewhat cautious on the heavy lifting that the second half of the
year will have to do for Dotdash Meredith to reach management
guidance of $250-300m adjusted EBITDA but, given the high
incremental margins the business earns, are excited about the
prospects for meaningful recovery in earnings and growth over the
medium term - validating the acquisition.
Whilst at 37% the discount is narrower than it was a year ago,
it remains wide both in absolute terms and relative to history. As
the "anti-conglomerate conglomerate" with a history of spinning
assets to shareholders, which acts as a pull to par, we believe the
fair discount is much closer to zero. Combined with the prospects
for improved earnings growth, prospective returns appear
attractive. Management seem to agree, having bought back 3.7% of
shares outstanding between February and May 2023. With net cash
equalling c.18% of market cap, we believe there should be more of
this.
OUTLOOK
In last year's outlook we wrote "after a year of unprecedented
fiscal and monetary stimulus in 2021, developed economies are now
waking up to the consequences: entrenched inflation, or a potential
recession to combat it". In many ways this still applies -
inflation and recession continue to dominate investor thinking. The
macroeconomic environment has been and remains, decidedly tricky,
with a multitude of headwinds and risks.
Now, just as then, we remain focused on the bottom-up. In this
regard it is an environment we relish. Discounts, as evidenced by
the 37% portfolio weighted average discount*, have widened
considerably to levels comparable to those observed in the global
financial crisis and the Eurozone crisis. Importantly, we are
seeing attractive opportunities in all parts of the equity market
in which we fish. This is an idea rich environment that is
conducive to our style of investing.
We believe that stock picking, active engagement, and a focus on
investments with explicit catalysts stand us in good stead to drive
healthy absolute and relative returns. So, whilst the near term is
uncertain, we are increasingly enthused about long-term prospective
returns.
Joe Bauernfreund
Chief Executive Officer
Asset Value Investors Limited
9 November 2023
* Discount as at 31 October 2023.
FURTHER INFORMATION
AVI Global Trust Plc's annual report and accounts for the year
ended 30 September 2023 (which includes the notice of meeting for
the Company's AGM) will be available today on
https://www.aviglobal.co.uk .
It will also be submitted shortly in full unedited text to the
Financial Conduct Authority's National Storage Mechanism and will
be available for inspection at
data.fca.org.uk/#/nsm/nationalstoragemechanism in accordance with
DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure
Guidance and Transparency Rules.
ENDS
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END
FR FFFIFLSLAIIV
(END) Dow Jones Newswires
November 10, 2023 02:00 ET (07:00 GMT)
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