AVI Global is a unique investment trust that offers compelling value with the shares trading on a ten percent discount to NAV and the underlying holdings available at an average discount of 37%.
These discounts are much wider than normal, which bodes well for future returns and provides an element of downside protection if the markets get jittery. Recent history suggests that whenever the discount has gone beyond 35% the average subsequent three-year NAV total return has been 36% and this favourable risk/return profile has led the analysts at Numis to recommend it as a trading buy.
AVI Global (LON:AGT) has a concentrated and unusual portfolio that consists of family-controlled holding companies, investment trusts and asset-backed opportunities. It focuses on overlooked and under-researched securities that offer attractive value where there is a potential catalyst to narrow the discount.
Lead manager Joe Bauernfreund and his team actively engage with their holdings in an effort to improve corporate governance and unlock the value. They have been doing this for years, but there has probably never been a better time to try it as far as the investment trusts are concerned, as there are lots of small and illiquid mandates that are coming under pressure to tackle their wide discounts.
The largest position at the end of June was a 17.8% allocation to a basket of 14 cash-rich, Japanese stocks, where the manager is actively trying to promote better shareholder returns. There is real scope to add value here given the Japanese government’s policy of encouraging corporate reform.
There is also a 9.2% weighting in Pershing Square Holdings (LON:PSH), a listed hedge fund run by Bill Ackman. The performance has picked up sharply this year due to a hugely profitable credit hedge, yet despite investing in large, liquid US stocks the shares are available on a 31% discount.
Another interesting stock is the Japanese holding company, SoftBank, which accounts for 7.1% of the portfolio. This has traditionally traded at a 40% to 50% discount to the value of its underlying shareholdings, but the presence of activist investor Elliott Advisors on the share register has forced a change in policy with significant asset sales and share buybacks.
Decent entry point
Since Bauernfreund took over as lead manager in October 2015, AVI has generated a NAV total return of 76.9%, which is well ahead of the 63.8% return from the MSCI AC World ex US benchmark. It has however lagged behind the 95% achieved by the MSCI AC World index due to the strong performance by the US markets, an area where the fund is typically underweight.
Like many other equity mandates, the fund has had a volatile 2020 with the shares hitting a high of 802 pence before collapsing to a low of 494p during the coronavirus crash. They have since made a reasonable recovery and are currently trading at around 700p.
Longer term investors who are comfortable with the risks posed by a possible resurgence of the coronavirus could use this as a decent entry point. When conditions improve the pressure on the underlying holdings to reduce their discounts is likely to lead to a market-beating return.