After losing confidence in RIT Capital Partners, we added AVI Global Trust (LSE: AGT) to the MoneyWeek investment-trust portfolio in March. As we noted at the time, AVI ticks several MoneyWeek boxes: it has a value remit with a global portfolio and a large allocation to Japanese equities.
The trust focuses on three main areas for investment: investment trusts on a discount to net asset value; family-controlled holding companies; and Japanese stocks. It aims to “identify valuation anomalies” and “exploit these inefficiencies that exist in markets”, says Joe Bauernfreund, the trust’s investment manager and chief executive of Asset Value Investors (AVI), the management company.
The current market is the sort of environment where this approach “thrives”, he says. “Careful stock selection” pays off when uncertainty prevails, although he is keen to point out that AVI Global never buys something just because it looks cheap. The trust is looking to buy at a discount, but because “there’s no point hoping for the best”, investments need to have either a specific catalyst that’ll unlock value for investors or value creation going on.
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“Catalysts are important, but the quality of the business is also important,” says Bauernfreund. A firm will only make it into AGT’s portfolio if it is “building underlying value” and the trust can buy “£1 when we think it will be worth £2 in two years”.
Acting fast
Research is a vital part of the process. AGT keeps detailed models on 415 companies, managing a portfolio of between 40 and 50 holdings. When adding a new holding, “you have to go in with your eyes open”, says Bauernfreund. So it will buy a 2% position to start, and the allocation can go up to 10% for its top holdings. The largest holding is listed private-equity fund Oakley Capital Investments at 7.9%.
When it finds a great opportunity, AGT will act quickly to take advantage, helped by its continual research process. Earlier this year, the trust built a position in Spectrum Brands Holdings after the US Department of Justice (DoJ) attempted to block the sale of its locks business to Assa Abloy. Bauernfreund and his team believed the market was “mispricing the probability of the deal passing”, and they were right on the money.
In early May, the DoJ relented, the stock jumped and AGT sold out. It generated a 13% return on investment in a few short months on the holding during a period when the MSCI All Countries World index (its benchmark) rose 4%.
Backing Japan
Critics might say that AGT has underperformed the MSCI All Countries World index over the past decade, but this is an unfair comparison. The benchmark has an allocation of 62% to the US and 6% to Japan, compared with AGT’s 29% and 21% allocation to North American and Japanese equities. A more accurate benchmark could be the MSCI All Countries World index-ex US. On that basis, the trust has returned 119.4% compared with 78.1% for the index.
AGT’s high weighting to Japanese equities is one of the reasons why we like it. The outlook for the country’s equity market today is brighter than it has been for many years as Japanese companies are “actually doing something about shareholders”, says Bauernfreund. There’s been a “generational change” among domestic investors and managers, who’ve seen how the equity market has created wealth in the West. Many are influenced by the likes of Warren Buffett, whose holding company, Berkshire Hathaway, has accumulated a Japanese equity portfolio worth an estimated $15bn since 2020.
The new generation of managers is now changing to appease the new generation of investors. That’s important: for the first time, “Japanese investors are now saying the same thing” as international investors. Still, Bauernfreund is careful to point out “long-term in Japan is a lot longer than what we think it is” here in the West, meaning these corporate changes will take years to play out. However, with the process already underway, he’s confident Japan’s awaking isn’t just a short-term bounce.
Valued at a discount
It’s important to reiterate that AGT isn’t a pure-play Japanese fund. It offers exposure to a range of other undervalued equities as well as Japan. That’s important, because while Japan looks to be making a comeback, we’ve been here before and past rallies have ended in disappointment.
Like most investment trusts, AGT is trading at a discount to the net value of its assets. At the beginning of July, the discount was -9.1%. When you consider the fact that most of its underlying investments are also trading at a discount to their own assets, then there’s a significant double discount on offer here. For example, one of its top-five holdings is the fund Pershing Square, which in turn is trading at a 33% discount to net asset value.
The trust has £153m of debt overall, and net gearing of 4.7%. A chunk of this is yen debt designed to offset some of the risk from currency exposure (the rest is in euros and sterling, at an interest rate fixed between 2.9% and 4.2% until 2037). Berkshire has used a similar approach, although Bauernfreund is keen to note that AGT had the idea first.
With an average annual return of around 11% since 1985, and a dividend yield of 1.8%, AGT is a great way to add international diversification to a portfolio through a basket of deeply undervalued global equities. Meanwhile, for those investors who’re looking for a pure-play Japanese trust, AVI Global also manages the AVI Japan Opportunity Trust (LSE: AJOT), which offers investors exposure to a focused portfolio of around 25 stocks.
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