Monthly Update

RNS Number : 3578B

AVI Global Trust PLC

10 February 2022

 

AVI GLOBAL TRUST PLC

Monthly Update

AVI Global Trust plc (the "Company") presents its Update, reporting performance figures for the month ended 31 January 2022.

This Monthly Newsletter is available on the Company's website at:

https://www.aviglobal.co.uk/content/uploads/2022/02/AGT-JAN-2022.pdf

Performance Total Return

This investment management report relates to performance figures to 31 January 2022.

	Month	Fiscal Yr* to date	Calendar Yr to date
AGT NAV1	-5.2%	1.0%	-5.2%
MSCI ACWI Ex US2	-2.8%	-1.4%	-2.8%
MSCI ACWI1	-4.0%	1.9%	-4.0%

1 Source: Morningstar. All NAV figures are cum-fair values.

2 From 1st October 2013 the lead benchmark was changed to the MSCI ACWI ex US (£) Index. The investment management fee was changed to 0.7% of net assets and the performance related fee eliminated.

* AVI Global Trust financial year commences on the 1stOctober.  All figures published before the fiscal results announcement are AVI estimates and subject to change.

Manager's Comment

AVI Global Trust (AGT's) NAV declined -5.4% in January. Fondul Proprietatea, IAC and Nintendo were the greatest contributors to returns, but this was more than offset by a long tail of detractors, the most significant of which were Pershing Square Holdings, Third Point Investors, and Sony.

In the case of Sony this was stock-specific, and we expand on this below. More generally though, returns reflected the wider environment and what has been a tricky start to the year for equities. The broad based MSCI ACWI declined -4.6% in January, whilst the tech-heavy Nasdaq fell -8.6%.

The era of ever decreasing interest rates and of ever more quantitative easing appears to be behind us. Inflation is no longer perceived to be a transitory phenomenon by central bankers, and the political pressure to deal with it has put paid to the idea of only very modest interest rate rises in the coming year. Combined with supply chain issues that are putting pressure on corporate profits, this has not been a welcoming backdrop for equities.

As bottom-up fundamental investors we are cognisant of the futility of trying to time markets or predict the future. Rather we remain focused on what we can control: the portfolio. The risk-off environment has seen the portfolio weighted average discount widen from 25.6% to 28.6% so far in 2022. Having reduced gearing in the autumn, we have the firepower to add to new and existing positions as and when opportunities present themselves.

Fondul Proprietatea:

Fondul Proprietatea ("FP") was the greatest contributor to returns in January as the shares rose +5%.

AGT has held a stake in FP since late-2014 over which time the investment has generated an IRR in excess of +20%. We have played an engaged role, last year nominating a new director to the Board, and recently working with the Board and other shareholders to negotiate a new IMA that better incentivises management to make portfolio sales and that should ensure the retention of key members of the investment team.

Following the sale of half of FP's remaining stake in listed OMV Petrom in January, 65% of the company's NAV is now represented by its 20% stake in Hidroelectrica. Hidroelectrica, which we expect to be listed by the end of the year, is a unique asset and will be the only listed pure-play hydroelectric power company in the world. With it firmly ticking both the ESG and dividend yield boxes, there is reportedly a long queue of pension funds and other institutions keen to buy shares on the listing. In a way this is not new - the prospect of a Hidroelectrica monetisation has been the tantalising prize on the horizon for many years, only for issue after issue to get in the way.

Thankfully, the stars now seem to be largely aligned. Following the failure of the PNL party to over-turn a ban on privatisations implemented by the previous government, Franklin Templeton - the investment manager - have decided to go down the route of listing their 20% stake rather than pursuing an IPO of the entire company. The government have expressed their support for this approach. There are still some issues to be ironed out - namely the Romanian government's apparent susceptibility to lobbying for a solely Romanian listing as opposed to a dual listing in London - but an incentivised Franklin Templeton are engaging with Ministers on the issue.

We note the high valuation multiple at which closest peer Verbund trades. While we believe that Hidroelectrica warrants some form of country discount to reflect its more uncertain regulatory backdrop, its superior EBITDA margins, better quality assets, and higher FCF conversion should see it achieve an attractive IPO price and provide further material upside for FP's shareholders.

Sony:

Like the kiss of death, on the 17th of January the Financial Times The Big Read column detailed how Sony had evolved into an entertainment powerhouse. The following day shares in Sony fell some -13%, as Microsoft's proposed $75bn acquisition of Activision Blizzard upended the gaming industry.

Following the Bethesda acquisition in 2021, the move was a further and larger step in Microsoft's strategy of acquiring studios, rolling up their IP, and limiting the release of future titles solely on the Xbox through its subscription service - Xbox Game Pass Ultimate. Completion of the deal is far from a foregone conclusion, with only recently the US Justice Department and Federal Trade Commission announcing a joint inquiry into how to better detect and prevent anti-competitive deals.

That said, working on the assumption that the deal does go ahead, Activision licensing fees currently accounts for c.8% of Sony's operating profits, some of which seem at risk over the medium term. In a broader sense, exactly how this alters the competitive landscape will be seen in the years to come, and will also depend on how Sony responds, with Sony having announced the acquisition of games developer Bungie for $3.6bn at the start of February (although clearly, negotiations were likely on-going well before the Microsoft deal was announced).

Sony's management have shown themselves to be astute operators, having built an unmatched combination of media content assets and consumer hardware technology, as well as semiconductor design and manufacturing know-how. We believe such a combination will prosper in the years ahead.

Investor AB:

During the period we exited our investment in Investor AB, as the discount narrowed to low double digit levels versus a long-term average closer to 25%. Across the A and B shares we had held the position for over twenty years, having (re) built a position in Investor A during 2001.

Over the life of the investment AGT has earned a GBP IRR of +14.3% from its investment in Investor AB, compared to +7.1% for the MSCI ACWI ex-US and +8.7% for the MSCI AC World.

Re-reading the 2001 British Empire annual report it explains that at the turn of the century Investor had been under activist pressure from Martin Ebner of BZ group. At the time there was a perception that Investor management had to become more dynamic and improve performance. Reading this more than 20 years later it is striking to think how Investor has evolved: Investor today has a very clear governance model and focus on creating best in class companies through a subtle combination of decentralisation and accountability. Moreover, Investor have proved themselves to be active owners, splitting Atlas Copco, selling ABB's power grids business, splitting Electrolux and listing EQT - all within the last four years.

The Wallenberg family have shown themselves to be excellent stewards of capital. There will likely be times in the future where we can invest alongside them once again, with higher prospective returns from the discount - which has narrowed - and the NAV - where underlying valuations have risen.

Contributors / Detractors (in GBP)

Largest Contributors	1-month contribution bps	% of NAV
Fondul Proprietatea	22	5.1
IAC/InterActiveCorp	21	4.9
Nintendo	17	3.4
Fujitec	14	2.2
Symphony International Holdings	12	2.3

Largest Detractors	1-month contribution bps	% of NAV
Pershing Square Holdings	-73	8.3
Third Point Investors	-71	5.5
Sony Group	-68	5.6
EXOR	-50	6.9
Aker ASA	-47	5.3

Link Company Matters Limited

Corporate Secretary

10 February 2022

LEI: 213800QUODCLWWRVI968

The content of the Company's web-pages and the content of any website or pages which may be accessed through hyperlinks on the Company's web-pages, other than the content of the Newsletter referred to above, is neither incorporated into nor forms part of the above announcement.

 

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