“Markets are not efficient,” says Joe Bauernfreund, manager of the £1.3 billion AVI Global Trust (LSE: AGT), “as many companies are overlooked by investors.” This leads to a portfolio that is very different from a conventional global fund, but with comparable returns. If market leadership changes, AGT could move into pole position. It invests in “overlooked companies trading at wide discounts to intrinsic value”. These fall into three categories: family-controlled holding companies (41% of the portfolio), closed-end funds trading on wide discounts to net asset value (NAV, 30%) and Japanese, mostly smaller, companies (23%). “People are sceptical about investing in family-controlled companies, but we take the opposite view,” says Bauernfreund.
Families can think longer-term than hired management and provide a strong culture. For example, News Corporation’s 60% holding in Australian property group REA accounts for 70% of its valuation, leaving the rest of News Corporation just four times cash flow compared with 17 times for The Washington Post. Schibsted, a 200-year-old Norwegian publishing business, spun off its international classifieds business Adevinta in 2019, after which the valuation of the rest of Schibsted increased from six times operating cash flow to 20 times.
AGT seeks to unlock discounts at investment trusts by buying sizeable stakes and engaging with management. The share price of Hipgnosis, which owned and managed a large portfolio of songs, collapsed as a result of governance and accounting problems. AGT bought into the company, then helped vote directors off the board and install new ones who sold the company to private equity after a bidding war.
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Potential in private equity
Oakley Capital, a private equity trust, is held because, despite a highly successful performance record, its shares still trade on a 28% discount to a very conservatively stated NAV. Chrysalis (4.5% of the portfolio) trades on a 36% discount, but is a much more troubled private equity trust whose fortunes AGT believes are on the turn. In Japan, “large caps are not particularly cheap, but smaller companies are anomalously so”. AGT invests alongside the £200 million AVI Japan Opportunity Trust, encouraging management to realise shareholder value.
The attitudes of management to corporate governance and shareholder value have steadily improved since the reforms of former prime minister Shinzo Abe 12 years ago, but Japan is still “a great place to find bargains”. The largest Japanese holding (5% of assets) is in SoftBank, although it is hardly a small firm. “We can afford to be patient,” says Bauernfreund’s colleague Tom Treanor. The wait for improvement can be painful, as it was with Entain (bought in late 2023), “but the shares have now recovered and it was our top contributor to performance in August”.
“To avoid value traps, we buy durable businesses growing in value”. The trust is always fully invested, but the managers can supplement this with gearing – borrowings are currently 7% of net assets – which indicates that the team is not short of attractive opportunities. The top 10 holdings make up 50% of the portfolio, led by News Corporation (8%, the Murdoch family vehicle), Oakley Capital (6.7%, private equity) and D’Ieteren (6%, an industrial company based in Belgium). “We don’t have to own everything – just a small number of special situations with a pathway to strong returns,” says Bauernfreund.
The weighted average discount to intrinsic value is 35%, above the long-term average of 25%. This suggests that there is plenty to go for in the shares, which trade at a 10% discount to NAV. With high exposure to Europe and Japan relative to the index, but low to North America (just 21% of net assets) and scant overlap with other global funds in terms of holdings, AGT complements rather than competes with them – hence its inclusion in MoneyWeek’s Investment Trust Portfolio alongside the growth-orientated Scottish Mortgage.
This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
