AVI Global seeks growth by targeting family value

AVI Global Trust (AGT) is perhaps best known for its value investment approach, which sets it apart from the many other global funds which have a growth investment style. An even more distinctive characteristic is its manager’s, Joe Bauernfreund’s, aim to invest the trust in family controlled holding companies. These tend to be listed on European and Asian stock exchanges but are a rarity in the UK.

“We think that [family controlled holding companies] are remarkably attractive ways of getting exposure to broad pools of assets, businesses and high quality assets at remarkably attractive valuations,” explains Mr Bauernfreund. “They make up around 35 per cent of AVI Global Trust’s assets, and are an area of the market which is neglected and over looked. Hence their pricing is inefficient and they can trade at very wide discounts.”

The trust’s holdings in family controlled holding companies include Sweden-listed Kinnevik (SWE: KINV B) which looks to build business that use disruptive technology to address consumer needs.

“Kinnevik has stakes in a number of high growth businesses,” says Mr Bauernfreund. “Its largest asset is a stake in Zalando (GER:ZALX), a European e-commerce retailer [which has] done fantastically well this year. It also has a stake in a US health tech business called Livongo Health (US: LVGO), and a private medical technology company involved in artificial intelligence called Babylon Healthcare, which has been awarded a number of NHS contracts.”

These have helped Kinnevik perform strongly this year.

“Generally our expectation is that at times of market panic, such as during February and March this year, you tend to get a widening in discounts of family controlled holding companies,” says Mr Bauernfreund. “But they also tend to recover quite strongly from that discount widening as markets settle back and investor confidence starts to resume.

"Kinnevik is up 66 per cent year to date, though in the first three months of the year it fell 40 per cent, so more than MSCI AC World Index Ex-US, which fell 44 per cent (in Euros). But since the market lows in March Kinnevik is up 174 per cent whereas that index is up 31 per cent. This was a very strong performance and not every family controlled holding company will have recovered that strongly. Some of Kinnevik’s recovery is down to the underlying nature of its portfolio - Zalando and Livongo really are beneficiaries of lock down. But it is a pattern that has been repeated across many of our holding companies this year - a weak first quarter and a strong recovery since the end of March.”

A disadvantage for other shareholders in a family controlled holding company is that they cannot exert much influence. So Mr Bauernfreund emphasises the importance of picking companies that do not abuse this power.

“As a minority share holder in a family controlled holding company you are not in the driving seat and will play second fiddle to the family’s interests,” he explains. “So you have to be sure that the family’s interests are aligned with those of outside shareholders. Some family groups see a public listing as a piggy bank [from which] to enrich themselves at the expense of minority shareholders - and those are the ones we want to avoid. We don’t want to see remuneration policies that benefit the family at our expense or high administrative expenses. And not all of them have very strong investment track records.

“But there are some who see their responsibilities as dealing not only in their own families’ interests but in the interests of other shareholders, and those are the ones that we like - where there is an alignment of interests. We want to see active management [of the companies’] portfolios, and that they have quality businesses, strong balance sheets, the ability to take advantage of dislocations and a genuine long term perspective.

Also, [because] the family is the dominant shareholder and we are secondary to them, we would only invest in situations where we can have perfect transparency on what they own and their strategy, so we can conduct our own research and not be dependent upon what they say.

"Of the two hundred or so family controlled holding companies that we follow, we’re only invested in between 10 and 20 which we think are the cream of the crop. Many don’t really add value over time, and their discounts are not an opportunity but rather more of a warning sign to stay away.”

Despite careful due diligence and in some cases engagement, Mr Bauernfreund and his team’s investments in family controlled holding companies are not always successful.

“We can’t force the family to do what they don’t want to do so when we’re not happy with the way things are going, probably the best thing to do is to exit,” says Mr Bauernfreund. [For example] earlier this year we sold out of an investment we’d held for a couple of years in France called Wendel (FR:MF). It has exposure to a listed company called Bureau Veritas (FR:BVI), and private companies spread across different sectors around the world. The idea was to monetise those assets through initial public offerings, mergers and acquisitions, or [other types] of transactions. But this hasn’t really materialised over the past couple of years so Wendel has been dwindling on a wide discount. Its net asset value (NAV) growth has been underwhelming, some of its exposure was cyclical and we just felt it was the wrong time to own those businesses [as] there weren’t any catalysts [for improvement] on the horizon. So we took our money off [the table] and reinvested it in more interesting opportunities.”

Some of AVI Global Trust's current holdings are also having a difficult time at the moment but Mr Bauernfreund and his team think that they are worth waiting for. These include Singapore listed Jardine Strategic (SIN: J37) which is controlled by the Keswick family through a cross share holding structure with another listed company called Jardine Matheson (SIN: J36). It has exposure to various sectors, including property, food retail and automobiles.

“Jardine Strategic trades at a very substantial discount of over 45 per cent,” says Mr Bauernfreund. “It’s a work in progress and hasn’t had a particularly good year [because] its exposure is spread across Asian businesses which have suffered over the past 12 to 18 months [due to] the Hong Kong issues and coronavirus. But it has stakes [in well known] companies [including] a controlling stake in Mandarin Oriental (SIN: M04), the hotel business which is currently having a torrid time. It also owns a stake in Hongkong Land (SIN:H78), a commercial land lord which has been suffering [due to] people working from home and the lack of tourists. Jardine Strategic also owns Astra International (INDO:ASII), a conglomerate in Indonesia, which gives it exposure to businesses exposed the global economy and, with that being depressed this year, it has suffered.”

Astra International is involved in areas including automotives, financial services, infrastructure, IT and property.

“Jardine Strategic is invested in assets that remain out of favour and very cheap, but we believe that those values will recover,” continues Mr Bauernfreund. “There’s also the potential for the family to try and take advantage of the very wide discount by simplifying their ownership structure and continuing to buy back shares, which is beneficial to all shareholders. Over the long term, Jardine Strategic has [already] delivered fantastic returns for both the family and outside shareholders, so we think that over the long term [going forward] it will play out very favourably [even if] right now it is invested in parts of the market that aren’t doing particularly well.”

Mr Bauernfreund said in May that Jardine Strategic had $2.1bn (£1.61bn) in cash and Jardine Matheson had over $1bn, enabling the group to take advantage of any opportunities which may present themselves in those difficult markets. Jardine Strategic’s discount had been as narrow as 35 per cent and as wide as 50 per cent over the six months to the end of March, during which period Mr Bauernfreund added to AVI Global Trust’s holding in it at the wider end of the range.

Another problem with having a dominant shareholder in a company is that there are fewer shares in circulation so it can be harder for other investors to buy and sell shares in it. But some family controlled holding companies are very liquid.

“We have the advantage of investing via a closed-end fund, which gives us almost permanent capital so we can afford to take a long term view,” says Mr Bauernfreund. “But our portfolio needs to be balanced to enable us to change direction, and take advantage of situations as and when they arise. So we have some names that are extremely liquid which we could trade in and out of in an afternoon, and some where it could take a week or two to liquidate or build a position.”

Value with a difference

Mr Bauernfreund says that their investments in family controlled holding companies illustrate how they are different to traditional value investors.

“Kinnevik trades on a discount to its NAV and when we increased our holding in it substantially in March it was at nearly 40 per cent,” he explains. “But its underlying assets such as Zalando and Livongo are high growth companies [and] feature in growth investors’ portfolios."

This year he has also initiated a holding in a European listed holding company called Prosus (NET: PRX). This focuses on technology and had a market cap of €132bn (£119.47bn) as of 27 October.

"Its largest holding, making up around 85 per cent of its asset value, is a 30 per cent stake in [Chinese media and services company] Tencent (HK:700) which is not a company that you associate with die hard value investors," says Mr Bauernfreund. "The idea is to own underlying businesses that are high quality and will grow in value over time, but to access them through structures that are neglected and overlooked by other investors, so trade at discounts. We hope to earn returns through the appreciation in the underlying value but also through a narrowing of the discount over time.”

But waiting for this to happen can require patience: AVI Global Trust has underperformed broad global indices such as FTSE World over three and five years, and the average NAV total return for global investment trusts.

“Relative to the other global growth trusts and global indices there is one significant difference - exposure to the US and growth companies,” explains Mr Bauernfreund. “Our [value] style of investing in companies at wide discounts to NAV has been out of favour and most of the companies that fit into our universe aren’t generally found in the US. So relative to a world index or many of the global peers, we have lagged over the past five and 10 years.”

AVI Global Trust only had 19 per cent of its assets in North America at the end of September whereas over half of global equity indices tend to be made up of companies listed in the US. Many global equities funds also have substantial allocations to the US.

But over shorter periods AVI Global Trust has been beating global indices and the average return for global investment trusts.

“Some of the changes that we made during the sell off in February and March have really started to bear fruit, and the performance since March has been quite strong,” says Mr Bauernfreund. “That reflects a shift away from more cyclical names to companies that have more earning power in this difficult economic environment and the potential to grow their earnings. [These include] Christian Dior (FR: CDI), a holding company that owns [French luxury goods group] LVMH. These are businesses that can prosper in this difficult environment. I think those changes, and particularly that we were able to buy those companies at low levels in March and April when they [were on] more attractive valuations, sets us up for a period of strong performance.”

Joe Bauernfreund CV

Joe Bauernfreund is chief executive and chief investment officer of Asset Value Investors. He has been sole manager of AVI Global Trust since October 2015 and is manager of AVI Japan Opportunity Trust (AJOT).

He has worked at Asset Value Investors since July 2002, initially as an investment analyst covering European holding companies. He then covered the company’s entire portfolio and became joint manager of AVI Global Trust.

Before joining Asset Value Investors, Mr Bauernfreund worked at a real estate investment organisation for six years.

He has Masters in Finance from London Business School.<boxout>