The AVI Global Trust (LSE: AGT) offers investors access to three opportunities at once. The first is family-controlled holding companies. Shares of companies with high ownership by founding families outperform. A recent report by fund managers Pictet found that those with family ownership above 30% outperformed the global market by 46% between 2007 and 2019.
The direct link between ownership and management acts as a powerful incentive to focus on long-term value accretion rather than the short-term dash for glory favoured by all too many hired-hand chief executives.
A new bull market
Then there is Japan. Charles Gave, chairman of Gavekal, the investment research group, points out that “a new bull market in non-financial Japanese equities began sometime between 2012 and 2016, and it probably has a lot further to run. The profits of Japanese companies are in a structural uptrend, Japanese companies have positive cash flow and the amount of cash on their books is close to the market capitalisation of the entire Topix index.”
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Thirdly, note that despite an average discount to net asset value (NAV) of 6% among investment trusts, several still trade on wide discounts despite strong performance records, usually because they don’t fit neatly into conventional investment categories. Eventually, performance should trump the doubts and the discounts then disappear, boosting returns for those prepared to buy early.
AGT spreads its bets between all three areas: 38% of net assets is invested in family-controlled holding companies, 39% in closed-end funds and 33% in Japan, with the 10% overinvestment financed by borrowings. The connection between the three is value; the family-controlled companies trade at large discounts to the sum of their parts, the closed-end funds trade at discounts and the Japanese companies have significant surplus assets. So enthused is Joe Bauernfreund, manager of AGT, about the last that last year he launched a £120m investment trust, AVI Japan Opportunity (AJOT), focused on smaller companies.
In the Japanese small-cap portfolio, “50% of the market value is accounted for by surplus net cash, rising to 94% if listed securities are included”, says Bauernfreund. “This [leaves] the underlying businesses trading on less than three times earnings. These are high-quality businesses with growing earnings and a return on equity of 18%, double that of Japanese smaller companies in general.”
Finding undervalued assets
Both in Japan and generally, Bauernfreund’s strategy is “patient, constructive, behind-the-scenes engagement in companies with undervalued assets”. This does not preclude going public, as AGT did with Fujitec, circulating research detailing “operational and strategic inefficiencies as well as a cumbersome balance sheet and corporate governance issues”. Fujitec was one of the leading contributors to performance in June.
The closed-end holdings include Pershing Square, on a discount of over 30% despite returning 32% in the first half, and private-equity group Oakley Capital. It is on a 37% discount to conservatively valued assets despite plenty of net cash and a return of 4% in the first half.
In the family-controlled section of the portfolio are Investor, the holding company of the Wallenberg family; Christian Dior, controlled by LVMH’s boss Bernard Arnault; Exor, controlled by the Agnelli family; and Godrej Industries, the holding company for three listed Indian firms of which the consumer products one is “the jewel in the crown”. AGT trades at an 11% discount to NAV, which should narrow as the investee businesses perform and their discounts diminish. This makes AGT an excellent counterbalance to the growth-orientated trusts that dominate the performance tables.
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