Expand your Horizons: Discover Idiosyncratic Investing

00:00:00:00 – 00:00:46:05

Hello, I’m Andrew Van Sickle, Editor-in-chief of MoneyWeek magazine, and I’m your host for this webinar entitled, “Expand your horizons: discover idiosyncratic investing” with AVI Global Trust. Now we’re broadcasting to you live from the London Stock Exchange today, but before we get going, some housekeeping. You can submit questions throughout the webinar by simply clicking on the speech bubble located at the top left-hand corner of your screen, and we’ll answer as many as we can at the end of the session.

00:00:46:07 – 00:01:15:07

If you have any technical difficulties, please refer to the FAQ button, which is just below the video screen, or report the issue to our technical crew, and we’ll be happy to assist you.

So, on with the main event. For the next half hour, we will be taking a look at a rather unusual fund. It is actually one of the six investment trusts in the MoneyWeek Investment Trust portfolio, which is our attempt to capture the world’s most compelling investment themes through global and mostly value-orientated trusts.

00:01:15:09 – 00:01:41:15

AVI Global joined the portfolio, which is basically our attempt to put our money where our mouth is, early last year. Now, its strategy, which is to find and unlock value in areas the market tends to overlook, is applied to three key sectors that we’ve always found very interesting. Japan is one of them. Investment Trusts, or other forms of closed-end funds, are the second, and large family-controlled companies or conglomerates are a third area of interest.

00:01:41:17 – 00:02:08:12

Now I’m joined today by Joe Bauernfreund, who’s the CEO and Chief Investment Officer of the Trust, Tom Treanor, the Fund Manager and Head of Research, and Wilfrid Craigie, Senior Investment Analyst. Welcome to you all and thank you very much for joining us. Now. Let’s just kick off Joe with an introduction to the fund and how you see its investment philosophy and what the concept of idiosyncratic investing means to you.

00:02:08:14 – 00:02:32:23

Joe Bauernfreund

Well, good morning, Andrew. Thank you very much for having us, and thank you to all the audience for joining us today. AVI Global Trust is a London-listed investment trust with about £1.2 billion of assets, and the investment philosophy is built around the idea that, despite what we may be taught or what we may read, stock markets – and certainly parts of the stock market – are not efficient,

00:02:33:00 – 00:03:09:17

and that inefficiency arises because there are types of companies or markets that are neglected and overlooked by other investors, and those are the kind of investments that appeal to us, that really interest us. So when you look at our portfolio, it will look different from other global investment trusts or global funds. So although we are investing globally, we’re trying to find the most interesting, undervalued investments, those that have been overlooked by other investors and those that are trading at a very wide discount to what we see to be their true value.

00:03:09:19 – 00:03:39:07

And along with that, we’re thinking about what we can do in order to generate those returns to close the gap. So idiosyncratic investing is about focusing on things that are perhaps different, working to generate those returns, and allowing those returns to come through and generate returns for our investors despite what the market may do.

Andrew

Yes, I think one of the areas that, of course, is very much neglected and very much undervalued, and we’ve liked it for ages, is Japan.

00:03:39:12 – 00:03:59:06

And so our readers would want to know, do you think the long deflation is basically over now? Are we through it, and how is the corporate governance reform programme going, because we always see that as one of the main catalysts for change. Do you want to give us a quick insight into that?

Joe

Well, the two parts of the question deflation and corporate governance perform are linked in a way.

00:03:59:08 – 00:04:35:15

So the late Prime Minister Abe introduced Abenomics – the three arrows, and those were focused on targeting areas of the economy and getting the animal spirits fired up in Japan in order to reverse the decades of deflation. The first two arrows dealt with monetary and fiscal policy, and the third arrow dealt with structural reforms. And as part of that, there were a host of corporate governance measures introduced into the economy that were designed to get companies to focus on shareholder returns and get shareholders to pressurise companies to do more for those shareholder returns.

00:04:35:17 – 00:04:58:03

And that’s really come to the fore over the last seven or eight years, the period of time we’ve been really excited about the opportunities in Japan, and it’s very encouraging to see that over the last couple of years, deflation has come to an end in Japan. We’ve started to see inflation come through, and in particular wage inflation, which is key to reversing those decades of deflation.

00:04:58:05 – 00:05:20:00

And as far as corporate governance reforms go, we’ve seen a real shift in behaviour by companies in their attitudes towards shareholders over the last six or seven years, whereas back then, management didn’t care about the share price. Today, they really want to engage with us. They want to understand why their share price is low and what they can do in order to get the share price up.

00:05:20:02 – 00:05:38:09

So I think that the future is looking increasingly promising for Japan.

Andrew

Just before we move on. Do you think the small caps are particularly interesting at this stage? One keeps hearing that, you know, their relative valuation is very much in the bargain basement compared to large caps. Is that broadly your assessment?

Joe

Very, very much so.

00:05:38:09 – 00:06:01:17

When you look at Japan as a market as a whole, large-cap companies, many of them don’t screen particularly cheaply. When you look at the small-cap universe, there’s still lots of companies where we see anomalously cheap valuations, the ability to buy really good companies, at very low valuations that you simply can’t find elsewhere in the world.

00:06:01:19 – 00:06:24:09

And, on top of that, small cap is a part of the market that continues to be neglected and overlooked by research analysts, by other investors, and so it’s a real place to find bargains.

Andrew

Thank you very much for that. I’m going to move on to you now, Tom. The other main area that you often look at, closed-end fund investment trusts.

00:06:24:14 – 00:06:44:14

Our readers are very big on Investment Trusts because we are, and they wanted to know, really, what’s behind the big discounts in the sector at present, and what do you do? AGT – what does AGT do to unlock the value?

Tom Treanor

I think to answer, we’re really going to have to go back to 2009, the very low interest rates that were brought in, in the wake of the GFC.

00:06:44:16 – 00:07:14:24

And what that led to was a boom in issuance of alternative income-focused closed-end funds on the market here. So asset class ranging from renewable energy, infrastructure, peer to peer lending, other forms of credit, etc. Now interest rates started to rise in mid to late 2022 onwards, that made the yields in those vehicles much less attractive than they had been previously, and also raised some doubts about the credibility of the reported NAVs for those companies.

00:07:15:01 – 00:07:36:09

And that in part, I think explains the wide discounts that were seen.

I think in some ways, though, that’s a natural part of the cycle, that you have a boom in issuance, you have the feast, then the famine follows after that as well. And I think this time round, there are some more secular factors that also contribute towards discounts.

00:07:36:11 – 00:08:00:03

We have consolidation of wealth managers with the natural buyers for the investment trusts. Obviously, the larger the wealth manager is, the higher their minimum ticket size for a closed-end fund. I recall just going back maybe five, six years ago, the minimum size was seen as £200M. There’s many now who say £500M or perhaps a billion, for the very large wealth management groups.

00:08:00:05 – 00:08:24:12

And when you combine that with the more cyclical factors and the issues around cost disclosure as well, it’s really created the perfect storm for the trust sector, and goes a long way to explaining why discounts are at these record wide levels. Now, what can we as investment closed funds do about that? We typically have very large stakes in the closing funds we’re actually in,

00:08:24:14 – 00:08:43:24

so we’ll typically be the largest, or perhaps a top three or four shareholder in the company, and that really gives us a seat at the table to engage with boards and management about things like allocation of capital, share buybacks and in some cases, questioning whether the trust should carry on in its current form.

Andrew

Thanks very much.

00:08:44:00 – 00:08:53:11

We have a video now which is about the Hipgnosis Songs Fund, and that illustrates AVI’s approach in a bit more detail.

AVI VIDEO

00:08:53:13 – 00:09:20:10

Tom Treanor

In terms of what attracted investors to the Hipgnosis Songs Fund, we can really trace it back to the very low interest rates that came into place in the wake of the GFC back in 2008. So very low interest rates led to demand for alternative income sources, and that in turn led to lots of listed investment funds coming to market in asset classes as diverse as shipping, infrastructure, renewables, and ultimately music royalties.

00:09:20:12 – 00:09:46:01

And we saw Hipgnosis Songs Fund come to market in 2018. Music royalties were particularly in demand, given their very low correlation to equities and credit, and with streaming really having transformed the economics of industry, meaning that one-off lumpy payments were now much more predictable, recurring revenue streams.

00:09:44:15 – 00:10:17:14

In terms of how we identified issues with Songs’ management, you’ve really got to trace, I suppose, back to why we first invested in Hipgnosis Songs Fund in the first place back in 2020. So a couple of years before that we had done research into a French holding company, which at the time owned what was a private investment in UMG, the world’s largest record label. And it’s really through that we became aware of the attraction of the music industry, the growth projections, the visibility, the very high margins. And we really saw Song as a pure play way to get exposure to that market.

00:10:17:16 – 00:10:44:13

We thought it likely that Song would be taken out by a large company once at a cheap scale. We were aware the manager had the right of first refusal to acquire the portfolio, but given the lack of private funds the manager had, that wasn’t really a problem for us, until that is Blackstone bought a majority stake in the manager, and given their deep pockets, that option became a more meaningful impediment to the value being realised than it was previously for us.

00:10:44:15 – 00:11:10:14

We were also concerned about inconsistencies in reported figures, vague answers to the questions we put to management and a general lack of transparency. The calls from industry experts only added to our concerns and raised real red flags around the robustness of the manager’s acquisition process. In response to those concerns, we sold the vast majority of our stake back in late 2021, early 2022, before the share price started falling precipitously

00:11:10:14 – 00:11:38:01

from there. We then re-entered the investment at a much lower share price and in a much more material size back in late 2023 ahead of a vote on the company’s future. Our strategy there really was to engage with the board, engage with other shareholders and try and secure changes to the board that would ensure new directors came in, who would, for the first time, properly represent shareholders’ best interests. Shareholder activism,

00:11:38:07 – 00:12:00:09

as I just described there, was absolutely instrumental in securing a good outcome for shareholders. In the short term, we saw incumbent directors voted off the board. We had two new replacements come onto the board who were much better suited to fight for shareholders’ interests, and in the longer term, we saw a bidding war erupt for the company’s assets under the stewardship of new directors

00:12:00:11 – 00:12:22:04

that led to a very good price with the cheapest shareholders, particularly those that bought in late in 2023 as we did for the bulk of our investment.

Song’s really a great example of what shareholder activism can achieve, and it also shows, secondarily to that, the importance of having the right people on the board and that there are shareholders that can actually play themselves in achieving that.

00:12:22:05 – 00:12:49:10

When we look at actual returns we achieved on the investment, we got a near 40% total return, 73% IRR – both figures achieved in a short space of time and that far surpassed those available from a benchmark index. Song is in many ways a classic AVI activist engagement. We came across a company that had lost its way, a manager not delivering for shareholders, a board failing to oversee properly the manager,

00:12:49:12 – 00:13:09:00

and we left that company and its shareholders in a far better place than when we found them.

Andrew

Thank you. Thank you very much, Tom most interesting. You did very well hopping in and out there. We’re always struck at MoneyWeek by how many fads and trends started in the low-interest or in the zero-interest era, when people were just desperate for returns.

00:13:09:02 – 00:13:32:03

It’s always interesting to see the story from the insider’s perspective.

Let’s move on now to the family-controlled holding companies, part of the portfolio. Wilfred, when you invest in these, I mean, these can be very complicated. I mean, families and Christmas dinners are complicated. Families trying to run companies – it must get really tricky. How can you be sure that it’s going to be okay, that you’re not sitting on a value trap?

00:13:32:05 – 00:13:50:09

Wilfrid Craigie

Thanks. That’s a really good question and one we think about a lot. And there were, there are, really two elements to this. One, we’re trying to buy durable businesses for the growing of value. So as many so-called value investors say they want to buy a pound of assets for 70 pence, we want to buy a pound of assets for 70 pence,

00:13:50:13 – 00:14:09:22

where that pound can grow to be £1.10, £1.20, £1.50. And what’s so important about that distinction is that means time’s our friend. So we don’t get stuck in something where the value is eroding, but rather, we can be patient and wait for the event or the catalyst to play out. So that is really how we avoid value traps, in one sense.

00:14:09:24 – 00:14:26:19

But as well as that, we have a real focus on proper catalysts, things are going to make the market wake up and revalue companies. So as we’ll come on to I think an example in due course with Schibsted, it was a company undergoing a strategic review where management and the board were going to take concrete steps to unlock value.

00:14:26:24 – 00:14:49:19

And it’s these really transformational events that make other investors wake up, and it forces the market to recognise value. So combination of durable growing businesses and hard catalysts are kind of at the centre of our approach.

Andrew

For an interesting example of that combination, let’s take a look at the Schibsted video

00:14:49:21 – 00:15:12:11

As asset value investors we’re looking for three main things: we’re looking for high quality businesses that are growing in value; we’re looking for discounted valuations; and we’re looking for catalysts to narrow that discount. We recently exited an investment in Schibsted, which encapsulates all parts of this in abundance. So Schibsted’s history dates back to the 1830s and the founding of a publishing business.

00:15:12:13 – 00:15:37:00

By the time we were looking at Schibsted, the value lied in classified ads businesses that had been bought and built since the turn of the millennium. Classified ads businesses are great businesses. The number one player normally demands very high level of market share, as high as 70% or even higher. This leads to significant pricing power as the business becomes the de facto way in which agents or auto dealers sell in their industry.

00:15:37:02 – 00:15:55:10

This translates to high levels of margin and strong cash generation. What interested us about Schibsted is that this was really not capturing Schibsted’s valuation. Schibsted had a conglomerate group structure whereby the stake in Adevinta masked the underlying value. The stake in Adevinta accounted for about 70% of Schibsted’s market cap.

00:15:55:12 – 00:16:18:00

So when you subtract this out, you’re paying a very low implied price for Schibsted’s other assets, about six times EBITDA. This is a very low valuation compared to peers that traded in the high teens, and M&A in the sector that had occurred at more than 20 times. So we’ve got a high quality business trading at a cheap valuation. What really interested us was the third element, the potential catalyst.

00:16:18:02 – 00:16:42:18

We felt the management were under increased pressure to unlock value and do something to fix this discount. So there were two main options that could occur: either they could spin off Adevinta’s shareholders, as in specie distribution, or we knew there was lots of private equity interest in the sector. Indeed, there was this latter option that occurred with Permira and Blackstone agreeing to take Adevinta private at 115 NOK per share.

00:16:42:20 – 00:17:04:03

This saw Schibsted crystallise a large portion of their market cap in cash whilst also retaining a stake in Adevinta. The excess cash could be returned to shareholders through buybacks and special dividends. But more importantly, it also simplified the equity story. Shortly after this, Schibsted announced another transformational transaction with the sale of their legacy news media business.

00:17:04:05 – 00:17:28:09

This was important as it removed a capital-consumptive problem child from the group structure and further simplified the equity story. This helped investors better appreciate and understand the inherent value of Schibsted’s unlisted Nordic assets. This supported re-rating in the stock multiple from about six times EBITDA to more than 20 times. We benefit from this narrowing of the discount, earning significant returns.

00:17:28:11 – 00:17:46:23

The Schibsted investment encapsulates everything we are trying to do at AVI. You have high quality assets and a clear and distinct catalyst to drive rerating in the shares. This has been at the heart of what AVI has been doing for the last 40 years and we believe this has stood the test of time and will remain a powerful force going forward.

00:17:47:00 – 00:18:06:22

Andrew

Thanks very much Wilfrid. It’s interesting to see how long it takes for a story which is definitely promising and compelling to actually reach the public. Let’s zoom out again a little bit and talk about the current activity in the portfolio of the trust and what performance has been like recently. This one’s open to you all, perhaps I’ll start with Joe for the quick overview.

00:18:06:24 – 00:18:29:21

Joe

The long-term performance of the trust remains very good, ahead of its benchmark, the World Index. In particular, over the last two, two and a half years, in an environment in which we’ve been

shifting in terms of monetary policy to rising interest rates, and which has been a volatile period of stock markets. It’s been a period of strong performance for the trust.

00:18:29:23 – 00:19:03:00

It’s been a market where fundamental stock picking, shareholder activism, working hard to generate returns has been the way to generate those positive returns. And it really speaks to our approach. So it’s been a good environment for us.

Andrew

This has been noteworthy, I think, hasn’t it, that value is back in fashion in a way, because important things that value investors keep in mind are now coming into play. More broadly, given that we’ve had quite nasty market slides in the last year or two, certainly starting in 2022

00:19:03:00 – 00:19:31:12

and there was that spasm in August, wasn’t there with the carry trade? What is your overall approach to volatility?

Joe

In one sense, we like volatility. It gives us the opportunity to buy the companies that we like at cheaper prices. So it can be scary to come into the office and see a company that we’ve got a lot of conviction in, and believe in, to see its share price down by a large amount.

00:19:31:14 – 00:20:08:18

But we try and keep an eye on the long term and retain confidence in our investment approach and the research that went into that idea, and we’re constantly reevaluating and checking the investment thesis to make sure that it still holds. And that’s a dialogue that goes on across the team on a continual basis. And if we can reasonably conclude throughout this period of volatility that, in a way we are right and the market is wrong, then there’s a great opportunity for us to buy more of the companies that we like – doubling down.

00:20:08:22 – 00:20:29:16

Andrew

Okay, thank you very much. Now, why don’t we take a look at some of the questions that you’ve submitted, starting off with China, which is very much in the news. This is open to anyone. Given the low valuations in China, do you see opportunities in Chinese equities, or do the risks outweigh the potential rewards?

00:20:29:18 – 00:20:58:09

Who would like to go that one?

Tom

So I think it’s undeniable that, given how in moribund Chinese markets have been for a long period of time now, that the valuations are at least superficially compelling. Very low PE ratios on what seem to be some quite high-quality companies. The problem we have investing certainly directly in mainland China, comes down to governance and alignment of interests.

00:20:58:11 – 00:21:30:05

So our mandate certainly includes Asia. We have in the past owned Hong Kong holding companies, conglomerates, property companies out there as well. But we’re particularly careful in Asia about instances for lack of alignment between shareholders, rather between the family controlling shareholders and the minority shareholders. So we just think, generally speaking, that the hurdle to overcome on that governance aspect is very, very high to invest directly in China.

Andrew

Drilling down into that a little,

00:21:30:05 – 00:21:47:23

we always thought that, you know, China has a great story. Has a great secular story. It seems the last two or three years of the politics become very difficult. In one way it’s almost like Russia now, where, in theory, they could just take away everything overnight. There is that danger, isn’t there? I mean, wonder, they always say you should dance

00:21:47:23 – 00:22:09:22

while the music’s going on. But there is that so one does have to keep in the back of one’s mind, I suppose now with China, that there is that danger of an authoritarian regime just clamping down whenever.

Tom

Absolutely yes. And I think when you’re in a regime where the rule of law is uncertain at best, you have to have a very high degree of conviction to invest in that market.

00:22:09:22 – 00:22:31:02

And we haven’t been able to gain that conviction.

Andrew

So you have no Chinese holdings at present?

Joe

No none at present. When you think back about how we exploit volatility and take advantage and think the market is wrong. Well, if you wake up in China and your stock price is down because the government have grabbed a portion of your profits, well then the market is not wrong,

00:22:31:02 – 00:22:50:21

you are wrong, and therefore we won’t be able to add to it, and that’s really what we’re looking for.

Andrew

So the psychology is just wrong, essentially. Okay, let’s move on. Given AGT’s contrarian approach to somebody, how do you identify undervalued assets in today’s market where many sectors seem overvalued?

00:22:50:23 – 00:23:18:11

Certainly true that there’s certainly in America, everything looks very, very expensive, but I guess you don’t do much fishing there.

Joe

Well, we do look in America, we look everywhere, but I guess the starting point for us is that we don’t have to own everything. We don’t allocate to particular sectors or particular markets. We’re looking for quite a small number of special situations, opportunities where we can see a pathway to very strong returns.

00:23:18:13 – 00:23:41:24

And if we miss something, that’s fine for us. So when you look at our portfolio, it’s very concentrated. The top 10 make up well over 50% of the NAV of the portfolio. And in addition, what I would say is that human psychology is such that there will always be companies or areas of the market that are overlooked, that are missed,

00:23:42:01 – 00:24:01:02

and that’s where we are looking. And naturally, where everybody is looking won’t be the places that we’ll find the kind of situations that excite us.

Andrew

It takes effort to research. I was also thinking about if you’ve got investment trusts that your family control, they have their finger various pies, don’t they? So you don’t need to have an enormous portfolio,

00:24:01:02 – 00:24:22:21

you can have a reasonably concentrated one and still have diversification and access.

Tom

That’s right. I think just, just to add to Joe’s comments there, really, I think that if you look at overvaluation in markets and concentration, then it’s absolutely true that the SMP 500 these days has seven stocks that make up about a third of it in total.

00:24:22:23 – 00:24:46:07

It’s an extraordinary level of concentration and risk to be perfectly honest, there as well. But we don’t need to own things that are large cap. We don’t need to own things that are in a benchmark as well. So the pool we’re fishing in certainly has lots of opportunities for us, even though the large, well-known names may be trading at very high multiples.

Wifrid

Some parts of the market may seem overvalued or reaching new highs,

00:24:46:09 – 00:25:08:11

but if you look at our portfolio weighted average discount, today that stands at about 35%. Historically, in times of market crisis, it reached about 40%, and in the long term, the average is in the 20s, so we see very wide discounts, despite what you say about markets in general. So our parts of the world are undervalued and really quite promising.

00:25:08:13 – 00:25:29:11

Andrew

Here’s a slightly more topical one, how do you feel about REA Group abandoning its pursuit of Rightmove?

Wilfrid

So as a way of background, we have a position in News Corp. News Corp owns 60 odd percent of REA Group. That stake in REA, which is the Australian equivalent of Rightmove, which has recently, recently bid for Rightmove and then walked away from that deal,

00:25:29:19 – 00:25:48:20

accounts for about 70% of News Corp’s market cap. And that’s what we think is fascinating, because if you subtract that from News Corps’s market cap and look at what you’re implicitly paying for News Corp’s other assets, the largest of which is Dow Jones, it’s a really low value. It’s about three or four times EBITDA, whereas Dow Jones, closest peers,

00:25:48:20 – 00:26:08:14

The New York Times, trades more like 17 or 18 times. So that’s what fascinates us. But what’s important is, you’ve got a high-quality business trading at a cheap valuation, but you need something to unlock that. And really, at the heart of that is REA Group. So, it’s our contention that value can be unlocked through News Corp spinning off REA Group.

00:26:08:16 – 00:26:31:12

So really, REA Group’s decision to abandon the Rightmove transaction is probably a net positive as that can bring forward the timeline for News Corp to take actions to unlock value. So we feel really quite positive about it. It looked like a potentially attractive transaction at the right price, but management have shown good financial discipline to walk away at the right time, so we feel quite positive going forward.

00:26:31:14 – 00:27:01:16

Andrew

Thank you. Let’s move on. We have one here that says: what is AGT sell strategy when it comes to both cutting losses and general portfolio management? How do you decide when and what to sell to maximise profits and refresh the portfolio?

Joe

Well, there are a couple of elements to the question. Firstly, when we evaluate investment opportunities, we’ve got a target in price – target in terms of discount – in mind when you think about it.

00:27:01:16 – 00:27:25:12

So if you have a liquidation of investment trust such as Hipgnosis, getting our money back at zero discount, we would definitely sell at that. When we’re looking at holding companies, we’re looking at what the catalysts for returning value are, what’s the likelihood of getting the discount down to a low point, and when it reaches that point, that generally triggers a sell.

00:27:25:12 – 00:27:50:08

And certainly when the market gets carried away and things end up trading on big premiums, we will definitely sell that, because history has shown us that premiums don’t persist for very long. Premiums become discounts very quickly. The other aspect of the sell discipline is when things don’t go so well, and we have to think about cutting our losses…

Andrew

Are there any guidelines about particular areas, particular numbers, or do you just play it by ear?

00:27:50:11 – 00:28:11:07

Joe

It’s not so much about particular numbers, it’s more about reevaluating our original thesis and analysing where it went wrong. And the two parts of our thesis are generally built around the quality of the business, so the valuation of that business. And then there’s the discount. If we’re wrong about the value of the business, then the discount’s not as wide as we thought it would be,

00:28:11:07 – 00:28:33:01

and we’ve made a mistake, and we have to sell. If we’re right about the value of the business, and the discount gets wider and wider and wider, then that’s possibly an opportunity to add, rather than to sell, and that’s where we really reinforce our conviction.

Andrew

Cutting loss is one of the most difficult parts of investing.

00:28:34:03 – 00:29:02:06

Many investors are increasingly concerned about sustainable investing. How does AGT incorporate ESG factors into its investment strategy, if at all?

Joe

Well, ESG is important to us, and when we built our approach to ESG investing, we made a commitment to ensure that we weren’t just signing up to organisations and putting certificates on our website to say that we believe in ESG.

00:29:02:06 – 00:29:26:05

We wanted to make it relevant to our approach. We’ve invested in an ESG analyst who sits as part of the investment team, and we’ve built a proprietary database that allows us to monitor and engage with companies over time as we analyse them on a variety of different metrics spanning the E, the S and the G.

00:29:26:07 – 00:29:43:15

Andrew

There’s some evidence, I think, of a backlash, certainly in the States and given all the fuss about BlackRock. As far as we can tell, it may be a case of the ESG bubble hissing a bit of air. I remember talking to one analyst who said, the problem with ESG, it’s gone the way of SRI in the 90s, where it wasn’t really fully defined.

00:29:43:17 – 00:30:03:24

Do you think there’s a likelihood of the whole thing just being ditched because it’s no longer fashionable, or is it something that will definitely stay around?

Tom

I think it will stay around. I mean, you know, the widespread adoption or the ESG as Joe, as Joe says, doesn’t really mean a great deal if it’s just empty, as they say, greenwashing, indeed.

00:30:04:04 – 00:30:24:19

So we, at AVI, have long been focused on, certainly the G part of the ESG, and a core part of what we do is engaging the board to manage a very active way to improve the governance of the companies in the belief that will lead to a higher share price long term. Do you think that that isn’t going to go away?

00:30:24:21 – 00:30:43:20

Wilfrid

I don’t think progress is linear, and I think probably more debate will be had, as we’ve seen around after Ukraine war, around arms, but then also around the cost of living and energy. So I think the debate kind of with all the excitement around ESG three or four or five years ago, I think we’re now at a stage where the debate is developing a bit more become a bit more nuanced.

00:30:43:22 – 00:30:58:23

Andrew

I think it will have to be more nuanced, because there’s no, you know, standard definition. Let’s just pop back to something a bit more big picture. There’s a question here about, how does AGT assess the risk of geopolitical instability, especially in regions like Asia or Europe, where you have significant investments?

00:30:58:24 – 00:31:19:18

I think it’s both trying to get at your general approach, but it’s probably also wanting to know, where do you see any particular danger of instability from here, like Ukraine, etc.

Joe

I guess the first thing to say is that our approach is very much a bottom-up approach. We’re looking at companies rather than looking at countries or regions.

00:31:19:20 – 00:31:49:21

Having said that, companies obviously don’t exist in isolation, and they are part of countries and part of regions, but we’re starting really at the bottom, rather than at the top. So to the extent that a company’s profits might be might be affected by what is going on around it, that’s irrelevant to us, but to say we don’t invest in Ukraine or Central Europe as a starting point, that’s not really the approach.

00:31:49:23 – 00:32:06:18

But if we found a very cheap company in Ukraine, then very much so, what’s going on around it would be part of our fundamental analysis, and would play into what we thought that appropriate discount might be.

Wilfrid

Yeah, sometimes that can add opportunity too. So for instance, as Joe says, we’re focused on the bottom up.

00:32:06:18 – 00:32:23:19

We have an investment in the French holding company called Bollaré, where they’ve got six billion of net cash on the balance sheet. Our expectation is for them to simplify the structure, but around the time of the French elections, at the start of the summer, whereas political instability, French markets sold off heavily,  Bollaré’s economic exposure really isn’t France.

00:32:23:19 – 00:32:44:22

It seemed like a case of throwing the baby out with the bathwater, we were able to take advantage of that position. So sometimes it creates opportunity too.

Joe

And we see companies such as Exor listed in Italy. Exor is the company behind Fiat Chrysler, but Ferrari as well.

00:32:44:22 – 00:33:06:19

The bulk of its profits are global. When you think about Ferrari or Chrysler’s mostly from the US, but the fact that it’s listed, was listed in Italy and now listed in Euronext, that really played into the discount that it trades at. In today’s markets where you’ve got a lot of passive investors buying indices,

00:33:08:04 – 00:33:30:00

some of that money just misses what really is a global company, just because it won’t buy a Euronext listed company.

Tom

We certainly see that on the investment trust sector as well. So a lot of them are constituents – the FTSE 250 index has been a bigger version to the UK, particularly since its Brexit, you’ve had huge outflows from UK tracker funds,

00:33:30:02 – 00:33:49:17

and that’s really hit in a disproportionate way, the UK Investment Trust sector.

Andrew

Do you get the impression that the tide is turning on that now? There was a decent flotation of Raspberry Pi not too long ago, do you think, and I think whatever one’s political flavour, there has been a perception of more stability, as opposed to constant drama.

00:33:49:19 – 00:34:06:14

Do you think that people are taking a slightly more benign view of the UK now?

Tom

I think so. I think that we see a lot of election turmoil in Europe, certainly.

Andrew

It’s all relative isn’t it? We look fantastic compared to some!

Tom

There’s a very contentious election over in US you may have heard about as well.

00:34:06:16 – 00:34:38:00

So I think the fact we’ve got a government in power, with a very large majority that will be there for next four to five years or so, certainly takes away some of the uncertainty that we saw previously. The UK market is being talked about for a long time, how cheap the market is, and I think there’s a general sense that if the UK buyers, or group of buyers, won’t reroute the market, then PE will come and buy up these companies and spot the redirect themselves.

Andrew

We keep telling readers if you don’t buy it the PE guys will.

00:34:38:00 – 00:35:04:15

Tom

Absolutely. 

Wilfrid

That’s indicative of the same feature. REA trades in a much richer multiple than Rightmove, so they try to take advantage of that. But I think people are waking up to that. UK became so cheap and so unloved at a certain point, it can start to turn.

Andrew

I mean, a few months ago, we were all wondering what the catalyst might be for change. But I think a catalyst is sometimes not so easy to pinpoint, and sometimes it’s a cumulative impact of all sorts of things. And it strikes us, and this is perhaps one of those cases where all sorts of things are hopefully coming together.

00:35:04:15 – 00:35:40:09

Alrighty, let’s see what else we have here. How do you feel about Entain currently.

Wilfrid

So we initiated position in Entain last year, at the end of last year. I’d say it’s been a relatively painful investment for maybe the first six, seven months of its existence, where the operational challenges the business faced, first in the UK, but then also for its US, joint venture, BetMGM, the fundamentals really deteriorated more than we expected, and we ended up averaging down quite a few times. And that was a painful experience.

00:35:40:11 – 00:36:03:04

But they published Q1, half year, results in August. Since then, the shares have risen about 50% and what’s really interesting there is to show that the tide has turned operationally in the UK, and even more latterly, there are interesting signs of improvements in the US. So with the fundamentals, kind of back on track, the outlooks look increasingly bright, and with improved fundamentals, we can then look at ways to unlock value,

00:36:03:06 – 00:36:29:20

with the big idea being that they own this 50% of a JV, that’s extremely valuable, but that’s currently getting no valuation in its current market cap. So I think increasingly optimistic about Entain with it having been a relatively painful investment earlier in the year.

Andrew

So the teething trouble hopefully over. This is a slightly more technical one. It says you tend to run the funds on a fully invested basis, i.e. little or no cash in reserve.

00:36:29:22 – 00:36:48:10

You’ve stated in the past that pullbacks frequently provide the opportunity to invest in high quality companies on attractive terms. If you’re not timing the market, where do the funds come from that enable you to take advantage of a setback?

Joe

Yeah, that’s a very good question, and it’s fair to say that at times of market step back, we never have enough cash

00:36:48:12 – 00:37:13:12

to take advantage of those opportunities…

Andrew

Because you’re long term, you wouldn’t just sell something to…

Joe

So one would hope that during setbacks, there may be areas of the portfolio, given the portfolio is quite diversified, that are perhaps less affected, things that are trading closer to fully to full valuation and have the liquidity that we can take advantage of and reposition the portfolio

00:37:13:23 – 00:37:39:00

at times of volatility. The other, the other aspect of this, of course, is that as an investment trust, we have the ability and the advantage to use gearing. AVI Global has got a fair amount of long-term gearing in place that allows us to be more than fully invested, in a sense, and it’s rare for us to be fully invested and fully drawn down on all our gearing.

00:37:39:05 – 00:37:57:24

So at times of volatility, it’s difficult, but we have the ability, and we have shown over the last year or so that we’re committed to that, to drawing down our gearing and utilising that to take advantage of opportunities.

Andrew

Let’s do one here. What is your outlook on global corporate governance reform, particularly in markets like Japan?

00:37:57:24 – 00:38:17:17

I’ve looked at Japan. Do you think there’s a catalyst in other markets where it’s particularly striking that corporate governance is getting better? One always hears a lot about South Korea, for instance. I don’t know if that’s an area you guys watch.

Tom

So South Korea is an area we’ve taken a lot of interest in, and there are some who say that it’s where Japan was 10 years ago or so.

00:38:18:03 – 00:38:45:19

I think in truth, it’s too early to tell, quite frankly. We have spent a lot of time looking at the companies over there, looking at the government reforms over there, speaking with industry experts over there as well. And the upshot is, as I say, there are some promising signs. They really need to see much more tangible, actual reforms take place before we can really allocate it in meaningful way to South Korea.

00:38:45:21 – 00:39:13:08

Andrew

Are there signs beyond South Korea and that whole region of corporate governments changing for the better as well, beyond Japan?

Tom

We’ve seen a change for the worst in Hong Kong and China. I wouldn’t say there’s any areas really where there’s been a particular improvement, other than Japan and potentially South Korea as well.

Andrew

We sort of always like to look at Southeast Asia, but things don’t seem to change very much. How do you mitigate the risks associated with these companies, particularly in terms of governance and decision-making process?

00:39:13:08 – 00:39:38:16

I just wanted to dig into a little bit more detail about how you guys approach this beyond the example we saw.

Wilfrid

The consensus is quite sceptical, and this part of opportunity. People are sceptical about investing alongside families in controlled companies. But we take the other view, and we think if you can align your capital with long term orientated shareholders who, importantly, have looked after and created wealth minority shareholders, then that’s a very good thing.

00:39:38:16 – 00:39:55:15

These companies can think in generations, not quarters. But as I said, we’re not in control. So you have to look at what the companies have done in the past. You’ve got to go on their track record.

And there are certainly families out there and family control holding companies who have abused shareholders, and those are the ones to be avoided,

00:39:55:17 – 00:40:17:14

but there’s a strong collection and those that we seek out where they really create wealth for all shareholders and we like that alignment of interest. But it’s a case of studying their history, studying their actions.

Andrew

In the study of the history, are there any patterns that spring to mind with families? Because they always joke that the second generation is going to screw it up completely, or the third generation might have… any patterns manifested themselves in your research?

00:40:17:14 – 00:40:43:01

Wilfrid

But if you look in Europe now, in many cases, we’re into the fifth, sixth and even seventh generation. And really by that stage, I think what’s crucial is you have professional management teams. So whilst the family, if you take the example of the Wallenbergs in Sweden who own and control Investor AB, they provide an ethos and a culture, but you have professional management teams who are running the company on a day to day and really taking charge of the show.

00:40:43:03 – 00:41:11:12

So I think that that’s the crucial evolution over the last 30 years or so.

Joe

Something like Investor AB in Sweden trades at a tiny discount, having been at various points in time over the last 25 years at 40%. It shows how the market rewards good corporate governance, good quality portfolio and a genuine, powerful alignment of interest between the controlling shareholders and minority shareholders.

00:41:11:14 – 00:41:36:01

Andrew

Once it cottons on to it. Right, there’s one more question, which I think is more general, but could allow you to restate a few basic principles. It’s your strategy is all about unlocking value in complex, undervalued businesses. Can you explain how you identify these opportunities and what kind of research goes into selecting them? So essentially, when you sit down and you’re starting to look for things when you have to, because you’ll usually have something, how do you start?

00:41:36:03 – 00:41:59:23

Wilfrid

So we focused on the same niche areas of the market since 1945 okay, so that means we’ve built up kind of institutional knowledge of those types of company. So we track any recent discounts in our proprietary database called the hub. And so we’re looking for, looking for deviations in those discounts. And that’s where we peak our interest. We want to buy companies when they’re trading on much wider than average discounts.

00:42:00:00 – 00:42:19:20

And then we’ll dig into that, not all discounts, inefficiencies – sometimes the market’s right. So it’s our idea to then really try and understand why the discount exists. What are the prospects for NAV growth? What are the prospects for discount narrowing, and they will be really the key elements of our research.

Andrew

Okay, great. I think that’s all we’ve got time for today.

00:42:20:04 – 00:42:36:18

Sorry if we didn’t get round to your question, but we’ll try and get a response back to you in the next few days. I think there are three takeaways really from this discussion and from the nature of the fund. Firstly, investing requires a strong stomach. There are often very unpleasant surprises in markets, as we’ve seen regularly in the last few years and this year.

00:42:36:18 – 00:42:57:22

And that’s where you need to remember not to panic and sell out. We’re programmed by evolution to run away from mammoths, but stay put and keep in mind the old dictum, don’t just do something, stand there. Secondly, making the effort to seek out areas and sectors off the average investors radar really helps. Activism also takes initiative and thorough research.

00:42:57:24 – 00:44:12:24

Thirdly, but most importantly, buy low. In the end, if you’re a long-term investor, the crucial thing is your starting valuation: the lower that is, the better you will do.

Thank you very much, you three. That was really interesting. Thank you very much for watching, and we’ll see you next time.

Thank you. Goodbye.