An overlooked Japanese investment trust to invest in

Luxury Shopping Streets with Neon Signs, Ginza Avenues Lined with Shops of Expensive Brands in the Heart of Tokyo, Japan

(Image credit: Marco Ferrarin)

published 28 October 2024

“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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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.

Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.

After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.