INVESTMENT MANAGER'S REVIEW

"Sustained periods of panic and market decline create compelling opportunities. We remain nimble and ready to seize them"…

PERFORMANCE REVIEW

We closed last year's Annual Report by saying that "inflation remains the predominant fear playing on investors' minds". Unfortunately, this fear has become a reality.

In December 2021, the Chairman of the Federal Reserve conceded that it was time to "retire" the word "transitory" in relation to inflation. Throughout 2022, rates of inflation have hit elevated levels that few could have imagined.

Central Banks have made it clear they will do "whatever it takes" to rid us of inflation, with an increasing consensus that the "whatever" part includes inducing a recession. The era of ever declining interest rates and central banks having the backs of equity investors appears well and truly behind us.

As we noted in last year's Annual Report, on a look-through basis our portfolio companies are typically characterised by strong competitive positions, pricing power and low levels of gearing. This has stood them in good stead operationally to deal with inflation. However, this has not insulated their share prices, as higher bond yields have fed through to higher discount rates and created considerable volatility.

Moreover, markets don't operate in a vacuum. Rather, they are jolted by events in the real world. Russia's invasion of Ukraine has done just this, accentuating inflationary pressures, and causing an energy crisis that European governments are working hard to resolve. Whether this spills into a full-blown economic crisis remains to be seen.

As is expected in such an environment, discounts have widened, acting as a headwind to performance. The weighted average discount to NAV of our portfolio stands at 38% today, versus 29% a year ago.

Within this context AVI Global Trust's NAV declined by -7.3% on a total return basis*. This compares to a -9.6% decline for the MSCI AC World ex-US index (our comparator benchmark) and a -4.2% return for the broader MSCI AC World Index (all figures in GBP).

In a challenging macro environment, it is notable that a number of the largest positive contributors - namely Fondul Proprietatea and DTS - are positions where we have engaged as active owners. We believe such engagement, and other types of idiosyncratic opportunities that can generate absolute returns regardless of the performance of broader markets, is an increasingly relevant part of our arsenal, particularly during periods that are less hospitable for equities en masse.

As readers will know by now, our portfolios are constructed from the bottom up, based on fundamentals and the prospects for NAV growth and discount narrowing, as opposed to some over-arching economic theory or concern for index constituent weights. We see little merit in trying to time markets and wholly subscribe to the adage that it is time in the market, not timing the market, that matters. As such, we typically aim to stay more or less 100% invested at all times.

As an Investment Trust however, we have the capacity to use gearing. We explained in the interim report how, as markets rose in calendar 2021, we maintained our sell discipline and exited positions where discounts and valuations had become less compelling, selling Kinnevik on a large premium and exiting Investor AB on a tight discount. Come the end of February 2022, we were not employing any of the available gearing and by the summer we were in a net cash position of 7%, having exited Fondul Proprietatea.

Over the last few months we have cautiously redeployed capital such that we are now approximately fully invested once again, but with our gearing still available to deploy. We have taken advantage of write-downs in valuations to build positions in two new European holding companies (Schibsted and D'Ieteren), and a new North American Holding Company (Cannae Holdings).

We continue to find highly attractive valuations in Japan, where there is room for us to add value through engagement, and have also taken a basket-like approach to investing in a group of closed-end funds offering exposure to private equity and venture capital trading at abnormally wide discounts, even after incorporating the impact of public market movements onto private company valuations.

In times of market stress it is easy to be melodramatic. This feels particularly relevant, as the now former UK government's recent budget proved to be anything but "mini". Volatility in Sterling and the UK Gilt markets has been extreme. There has been much financial press focus on pension funds' Liability Driven Investing strategies - attesting to the fact that potential pain points across the financial system only become apparent in times of stress.

As a global fund we will always be correlated with broader markets. With that said, our experience shows that discount widening and panic provide opportunities. Valuations - both within the portfolio and our wider universe - are increasingly attractive. Through our own activism, engagement and corporate events, there is scope for unlocking value, independent of the broader market. We believe that this will play an increasingly important role in our returns in an uncertain world. With the opportunity to deploy gearing in due course, we remain confident in our ability to take advantage of this and drive attractive long-term returns.

* For definitions, see Glossary in the full Annual Report.

PORTFOLIO REVIEW

CONTRIBUTORS

FONDUL PROPRIETATEA (Contribution: +1.02%)

Classification: Closed-ended Fund

% of net assets¹: 0.0%

Discount: -38%

% of investee company: 0.0%

Total return on position FY22 (local)²: 23.1%

Total return on position FY22 (GBP): 22.5%

Contribution (GBP)³: 102bps

ROI since date of initial purchase⁴: 133.0%

We exited from Fondul Proprieteatea (FP), our largest contributor for the financial year, shortly before the period end. 

Over the lifetime of AGT's investment in FP (initiated in 2014) we generated an ROI of +133% which compares to +30% and +56% for the MSCI AC World ex-US and the MSCI AC World respectively, and an IRR of +21% vs +6% and +11% for the indices over the same period.

FP was established to provide restitution to Romanian citizens whose property was expropriated by the former Communist government. As shareholders 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 revised Investment Management Agreement that better incentivises management. FP is a case study in what optimal capital allocation can achieve, with the company's policy of making no new investments and instead returning proceeds from realisations to shareholders (via buybacks, tenders, and dividends) turbo-charging strong underlying NAV growth. Remarkably, the company's shares outstanding more than halved over our holding period.

FP's crown jewel asset, Hidroelectrica, has been a key driver of FP's NAV growth and our expectation had been that the long-awaited IPO of their 20% stake in the company would result in further gains for FP shareholders. But political and regulatory risks are mounting, and uncertainty remains over whether a dual listing of Hidroelectrica (i.e. in London as well as the approved Bucharest listing) will ultimately be permitted by the Romanian government. With the anti-business PSD party well ahead in the polls and elections to be held in 2024, the window for a successful IPO is narrowing. We note that subsequent to our exit, the existing windfall tax on electricity sales over the RON450MW/h threshold has been increased from 80% to 100%, and its expiry date extended from 31 March 2023 to 31 August 2023. FP's share price was not, in our view, sufficiently discounting the risks of such additional measures and, with FP's relative attractiveness versus the rest of our universe reduced by its material outperformance over the last few years, we took the decision to exit our investment. This began with us taking advantage of a tender offer held in late-June that saw us a sell a quarter of our shareholding back to the company at a premium to share price and a low double-digit discount to NAV.

DTS CORP (Contribution: +0.64%)

Asset-backed Special Situation

% of net assets¹: 2.9%

Discount: -22%

% of investee company: 2.7%

Total return on position FY22 (local)²: 38.1%

Total return on position FY22 (GBP): 28.6%

Contribution (GBP)³: 64bps

ROI since date of initial purchase⁴: 34.2%

Despite starting the year with only a 2.0% weight DTS was the second largest contributor with a +38% share price increase over the period, as its EV/EBIT valuation increased from 6.3x to 9.2x. We first invested in DTS in January 2020 as part of our focus on Japanese equities and the potential upside from a structural improvement in corporate governance and a greater focus on shareholder returns.

DTS is an IT systems developer, and our investment was premised on a focus by the Japanese government and corporates to upgrade their IT infrastructure. Japan's IT systems are outdated, inefficient and in much need of improvement. For example, virtually every government office and company in Japan has a fax machine which relates to Japan's reliance on the archaic practice of hanko stamps - a stamp required for over 11,000 procedures to sign off documents. During the coronavirus pandemic workers would have to go into the office to stamp paper documents before either mailing or faxing them - an archaic task.

Compared to the US, Japanese companies rely more heavily on the services of third-party IT providers (65% vs 28%). As we approach 2025, a year that METI (Ministry of Economy, Trade and Industry) has coined the digital cliff, Japanese companies will need to increasingly utilise DTS' services, and with a shortage of IT professionals, it should prove a boon for both sales growth and margin expansion.

As DTS' largest shareholder, owning just under 10% of the shares across our managed funds (of which AGT owns 3.1%), we have been working closely with management and the board behind the scenes. DTS' response to our engagement has been exemplary - they allowed us frequent dialogue with senior board members and, aside from a few minor issues, actioned all our suggestions in a comprehensive mid-term plan announced in May 2022. Since then, DTS' share price has appreciated by +22% vs +2% for MSCI Japan Small Cap, and for the year to end of September is up +38% versus -6% for MSCI Japan Small Cap, in JPY.

The positive share price performance, and significant outperformance vs the market, is we believe, a testament to our efforts and clearly demonstrates the value of AVI's constructive activism - something that we hope will not have gone unnoticed by our other investee companies as well as other investors in the Japanese markets.

DTS' valuation, albeit less compelling than when we initiated the position, is still attractive with the shares trading on an EV/EBIT multiple of 9.2x vs peers on 13.5x. We believe that as the company executes its plan to double EBITDA by 2030 and return up to 30% of its market cap to shareholders, there is still further upside.

SYMPHONY INTERNATIONAL HOLDINGS (Contribution: +0.54%)

Classification: Closed-ended Fund

% of net assets¹: 3.4%

Discount: -48%

% of investee company: 15.7%

Total return on position: FY22 (local)²: 2.1%

Total return on position: FY22 (GBP): 23.2%

Contribution (GBP)³: 54bps

ROI since date of initial purchase⁴: 50.4%

Buoyed by robust NAV performance, even more so in local currencies (+23%) before the translation into its reporting currency of USD (+10%), Symphony International Holdings (SIHL) was our third largest contributor despite the headwind of a widening discount (from 44% to 48%). As with many of our holdings this year, weak Sterling significantly added to the returns experienced by AGT.

Two unlisted holdings were responsible for the majority of SIHL's NAV progression over the year: Indo-Trans Logistics Corporation (ITL) and ASG Hospitals (ASG). 

ITL is Vietnam's largest independent integrated logistics company with a network covering aviation services, freight management, contract and port logistics spread across Vietnam, Cambodia, Laos, Myanmar, and Thailand. ITL's strong operating performance, and a secondary transaction that saw Mitsubishi Logistics Corp acquire a stake in the company, led to SIHL's investment being written up by +60% over the period. The investment, initiated in 2019, is now valued at over 3x cost.

Founded in 2005, ASG runs 46 eye healthcare clinics across India, Africa, and Nepal. Benefitting from both organic growth and M&A, the business recorded EBITDA growth in excess of 20% in the year to 30 June 2022. In August 2022, SIHL sold just over a third of its shareholding as part of a funding round, realising an annualised return of +38% on the investment that was initiated in 2019.

Notwithstanding relatively robust NAV performance this year, SIHL's discount remains at a persistently extreme level and represents the market's verdict on the manner in which the company continues to be managed. That is, we believe, for the benefit of management rather than shareholders. Following a prolonged private engagement with management and the board in an attempt to address these issues, we released a public letter to SIHL shareholders which can be found at https://www.assetvalueinvestors.com/content/uploads/2021/04/Save-Symphony-Letter-Final.pdf

Our view remains that a change to the company's strategy and to its board will be required for shareholders to capture the latent value trapped within the discount to NAV, and we continue to engage with shareholders on this and other matters.

OAKLEY CAPITAL INVESTMENTS (Contribution: +0.36%)

Classification: Closed-ended Fund

% of net assets¹: 6.3%

Discount: -42%

% of investee company: 9.2%

Total return on position FY22 (local)²: 7.2%

Total return on position FY22 (GBP): 7.2%

Contribution (GBP)³: 36bps

ROI since date of initial purchase⁴: 106.6%

Oakley Capital Investments (OCI) was one of the largest contributors in FY22 generating a NAV total return of +45%. The discount widened from -20% to -42% in the broad market sell-off, leading to a share price return of +6%. OCI has now achieved an impressive five-year NAV CAGR of +23%. Encouragingly, the majority of returns have come from EBITDA growth, which has averaged +18% across the portfolio over the last twelve months. Alongside this, OCI has generated further upside from realised multiple expansion due to exiting portfolio holdings at an implied valuation above book value.

Oakley, like all PE managers, are paid fees on committed/invested capital rather than mark-to-market gains and have no incentive to unduly mark up, and we believe Oakley are very much at the conservative end of the peer group when it comes to valuations. We note OCI's portfolio is currently held on a very reasonable 14x EV/EBITDA. In H1 alone, OCI achieved portfolio value growth of +13%; with a quarter of this from realisations. In an environment where questions have been raised over private company valuations, OCI has successfully proved the conservatism of its NAV to the market through exits at premia to carrying values, averaging 60% since 2018, and 67% over 2022.

It was a busy year for OCI, with four new investments, four follow-on investments and one partial exit, as well as bolt-on deals and refinancings. New investments were Vice Golf (leading direct-to-consumer digitally native golf brand), Affinitas Education (a private school group), Phenna Group & CTS Group (two leading platforms in the Testing, Inspection, Certification, and Compliance sector), and vLex (an online legal information subscription platform). With 70% of the portfolio now delivering services digitally, and with 75% having subscription-based or recurring revenues, OCI's portfolio should prove resilient in economic downturns.

The crown jewel of the portfolio is IU Group, Germany's largest private university group. It boasts the largest portfolio of Bachelors and Masters degrees in Europe, offering both digital and in-campus learning across 28 German cities. As of this year, the group has over 100k students enrolled on its 200 courses, growing from just 23 enrolled students during the university's first semester in 2000. IU Group provides high-quality, German state-accredited degrees, recognised by universities and employers globally.

Approximately one third of IU Group's revenues come from its Business to Business (B2B) segment, which involves providing degrees/vocational courses to 10,000 partner companies. These partners can range from major corporations such as VW to small German enterprises. The students sign up to work in an apprentice-style role with a company, earning a small wage while earning a degree. IU Group provides a matching service to link students to businesses offering this scheme, which creates a high barrier to entry as this would be difficult to intermediate. The rest of the company's revenues come from standard university student enrolment.

IU Group is held on a very conservative 14x EV/EBITDA vs recent transactions in the sector closer to 20x. This is despite the business being one of the few education assets of scale globally, being the fastest-growing university on the continent, and having unique sticky B2B revenues as a result of Dual Studies programme in Germany. In our view these attributes mean that IU Group should warrant a premium valuation to its peers. As a business that is growing its top-line, EBITDA, and student cohort 30-50% year on year, and with a three to six-year lifetime for its customers, IU Group is a very exciting asset. The Group is now actively marketing its B2C segment outside of Germany, only increasing the trajectory for future growth and prospective returns.

OCI offers a fast-growing, high-quality portfolio with attractive growth opportunities and recurring revenue businesses, backed by a manager with a distinct deal sourcing strategy, and all available at a discount of 42%. We remain enthusiastic holders of OCI.

INVESTOR AB B (Contribution: +0.27%)

Classification: Holding Company

% of net assets¹: 0.0%

Discount: -16%

% of investee company: 0.0%

Total return on position FY22 (local)²: 12.4%

Total return on position FY22 (GBP):  6.9%

Contribution (GBP)³: 27bps

ROI since date of initial purchase⁴: 84.6%

In January 2022, AGT exited its position in Investor AB as the discount narrowed to low double-digit levels versus a long-term average closer to 25%. Over the course of AGT's financial year the position contributed +27bps to returns.

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 Securities and General Trust (the former name of AVI Global Trust) 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 few 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 had narrowed - and the NAV - where underlying valuations had become less compelling.

¹ For definitions, see Glossary in the full Annual Report.

² Weighted returns adjusted for buys and sells over the year.

³ Figure is an estimate by the managers and sum of contributions will not equal quoted total return over the financial year.

⁴ Figure quoted in GBP terms. Refer to Glossary in the full Annual Report for further details.

DETRACTORS

IAC INC (Contribution:-2.28%)

Classification: Holding Company

% of net assets¹: 2.8%

Discount: -41%

% of investee company: 0.6%

Total return on position FY22 (local)²: -58.0%

Total return on position FY22 (GBP): -49.2%

Contribution (GBP)³: -228bps

ROI since date of initial purchase⁴: -50.2%

IAC - the North American internet-focused holding company controlled by Barry Diller - was the greatest detractor from your company's performance this year, reducing returns by -228bps. Over the last year the shares have declined -57%, as a -46% decline in the NAV has been compounded by a widening of the discount from 25% to 41%.

IAC specialises in building businesses that are trying to transition sectors from offline to online, such as Expedia for travel, and Match for dating. IAC, who describe themselves as the "anti-conglomerate conglomerate", have a track record of spinning these off to shareholders when they reach maturity, having spawned 10 public companies. The company has a track record of immense value creation and the spinning off of assets pulls the discount to par.

We first invested in IAC in December 2020 with a thesis predicated on Vimeo, the video enterprise software business, and made highly attractive absolute and relative returns on a small position. Following the spin-off of Vimeo in May 2021, we have subsequentially started to scale up a position in IAC - whose portfolio today comprises of: 1) Dotdash Meredith, a digital media company formed in 2021 when IAC's Dotdash acquired the illustrious media assets of Meredith Corp; 2) a listed stake in Angi, the homeservices marketplace trying to transition one of the last major offline consumer categories online; 3) a listed stake in MGM Resorts International, whose BetMGM is a leader in the nascent US sports betting and online gaming market; and 4) a collection of smaller unlisted assets, the most promising of which are Care.com, a marketplace for caregivers, and a minority stake in Turo, the peer-to-peer car rental company.

So what's gone wrong? The short answer is lots.

Starting with the NAV. Dotdash Meredith has suffered from dual issues of a slowdown in digital advertising as recessionary fears have loomed, and slower than anticipated integration of the Meredith assets, and accordingly their $450m digital EBITDA target for 2023, has been pushed back by 6-12 months. In our view these issues are, by definition, temporary in nature and the strategic logic and long-term financial profile is still intact. Indeed, intent-driven advertising is becoming increasingly valuable in a world where Apple have upended the cookie-based iOS ad market.

Shares in Angi declined -76% over the last year. Some (although not much) solace is sought from the fact that the drastic share price decline is in keeping with the US and EU internet businesses against which we track Angi. The fact that Angi was trading at a steep discount to peers a year ago has provided no protection as valuations have reset. This has been compounded by operational missteps in the Roofing category, which will impair growth for the rest of the year. The jury is very much out on Angi, but the current $1.6bn enterprise value equates to a mid-single-digit multiple of estimated free cash flow in a "no-growth" scenario. IAC have a "real option" as to whether to persevere with the current strategy or to exercise this option and monetise these cash flows (either through a take private or sale of the business).

Finally, shares in MGM - the casino operator whose BetMGM is a leader in the nascent US sports betting and iGaming market - have declined by -31% over the last year, as investors have grown cautious over the sustainability of margins and demand outlook in light of a slowing US economy. The stub domestic operations trades at 5x EBITDA (assigning zero value to the BetMGM JV). This is a steep discount to the 12-17x EBITDA at which MGM has sold assets in M&A transactions in recent years. Clearly MGM management see value in the shares - having reduced the share count by 20% since the start of 2021, as do IAC, who have increased their stake this year.

This weak NAV performance has been compounded by a widening of the discount. Given IAC's long and successful history of spinning off assets to shareholders, we believe that the fair discount is zero. Combined with the prospects for NAV growth from Angi, MGM and Dotdash, and further optionality around how IAC deploy their $1.2bn (14% of NAV) cash pile, there is much to be excited about. It has been a painful last twelve months, but the ingredients for attractive long-term returns appear to be in place.

SONY GROUP (Contribution: -1.52%)

Classification: Asset-backed Special Situation

% of net assets¹: 2.8%

Discount: -34%

% of investee company: 0.0%

Total return on position FY22 (local)²: -21.3%

Total return on position FY22 (GBP): -27.3%

Contribution (GBP)³: -152bps

ROI since date of initial purchase⁴: 37.5%

Sony was the second largest detractor to returns over the period, deducting 209bps from performance, with a share price return of -25% vs TOPIX -10%.

Despite being the fourth-largest contributor to returns in FY21 (+2.1%), FY22 has been a difficult year for the Japanese listed conglomerate. The aggressive actions from Xbox/Microsoft since the start of 2022 stoked this underperformance, with the competitor announcing its intention to acquire Activision Blizzard for $68.7bn on the 18th January - the largest gaming deal in history. This sent Sony's shares down -13% on the day.

By way of reminder, we first invested into Sony in 2019 with our investment predicated on the opportunity to own Sony's unmatched combination of media content assets and consumer hardware technology which, due to misperceptions about Sony's conglomerate structure, traded at a very reasonable EV/EBIT valuation (11.2x).

In 2022, investors have grown increasingly critical of Sony's individual businesses, voicing particular concerns over what is arguably Sony's crown jewel asset, and the one subjected to most scrutiny, Sony's PlayStation business (33% of NAV). Since the introduction of the Microsoft Game Pass, and the announced acquisition of Activision Blizzard, there has been increasing uncertainty of what the gaming industry could look like in the future. Microsoft has aggressively introduced a Netflix-like subscription model into the industry, shifting away from the £50-70 per individual title, instead requiring consumers to pay c. £11/month for an immediately available catalogue with over 100 blockbuster AAA titles.

As a refresher, Sony's gaming model has been to acquire small, high-quality studios and have them develop new story-driven, single-player IP of very high quality. In stark contrast, Microsoft has taken a content-first approach - buying up large established publishers, and any studios they own, to acquire as much popular IP as possible. They then make these games exclusive to the Xbox Game Pass platform in the hope of acquiring new subscribers to the network. For example, Microsoft acquired Bethesda Softworks in 2021 for $7.5bn, and is now hoping to do the same with Activision Blizzard for $68.7bn

While this aggressive route to capturing market share could be successful, the sustained profitability of Xbox's new model is entirely unproven both within gaming and across other streaming mediums. It is a large bet by Microsoft, who are utilising their financial firepower to disrupt Sony. It remains unclear whether this can be sustained financially long-term, as evidenced by Sony CFO, Hiroki Totoki, who explained during a recent investor Q&A that "putting AAA titles straight onto their subscription service will result in a deterioration in quality due to less funds being available."

How this will ultimately impact Sony remains unclear, but management have been measured in not blindly following Microsoft guns blazing down the streaming path. Sony did introduce an all-new PlayStation Plus subscription service in June, but this offered a back-catalogue of games in the service and no day-one exclusive releases. This ensured that Sony's current model with new game releases can continue on the PS5, while offering players more content for their subscription. A sensible step by management.

Sony's share price has now fallen -40% from its peak and the stub* valuation stands at 10.4x forward EV/EBIT. While it is unclear what the inflationary environment might look like for the Electronics segment, Music accounts for a further 31% of NAV and is expected to see further earnings growth this year. The new iPhone is continuing to use Sony sensors, and the PlayStation continues to outsell the Xbox each week. While the business may not be firing on all cylinders currently, this is a result of the uncertain environment we find ourselves in. Sony remains a unique opportunity to own four high-quality assets with proven synergies between the consumer and entertainment segments. We remain confident in our investment in Sony and feel that it is a company that will continue to excel in its respective industries for years to come.   

*The stub valuation of Sony is the market capitalisation, less the value of all listed assets, the value of Sony Financial, and the net financial position of the business.

EXOR (Contribution: -0.89%)

Classification: Holding Company

% of net assets¹: 7.4%

Discount: -43%

% of investee company: 0.5%

Total return on position FY22 (local)²: -9.6%

Total Return on position FY22 (GBP): -7.7%

Contribution (GBP)³: -89bps

ROI since date of initial purchase⁴: 25.2%

Having been one of the strongest performers last year, this year EXOR was a meaningful detractor from your company's returns. The shares declined -10% over the period, as a -4% decline in the NAV was compounded by a widening of the discount from 39% to 43%.

Starting with the NAV side of the equation, the dynamic which we described in the interim report continues to be the case: strength at Ferrari is being offset by weakness at Stellantis. Over the last year Ferrari shares returned +7%, during a period in which the company reported record results. Importantly, Ferrari continue to report their strongest ever order book intake, with minimal cancellations. Ultimately everything - sales growth, pricing power, margins - flows from this unparalleled brand equity and the competitive advantage it yields. Investors recognise this and award Ferrari a relatively high multiple for such certainty in an uncertain world.

Turning to Stellantis, the shares have declined -20% over the last year, despite consensus forecasts for this year and next year's operating profits having been revised up +42% and +17%, respectively. We are generally sceptical when investors claim that the market is just plain wrong, but the divergence between fundamentals and share price is hard to justify. Investors have grown increasingly cautious over the state of the global economy generally, and the US consumer specifically, whilst there is a broader debate in autos as to whether current record high margins and low dealer incentives will stick when volumes (hitherto restricted by shortages of semiconductor chips) return. Stellantis management, however, contend that the company can generate a 10% operating margin in a "reasonable crisis" and that they would be breakeven even below 50% of volumes. Stellantis now trades at 3x consensus 2023 earnings - just over half that of Ford and GM once adjusting for accounting differences. As one sell side analyst put it in a recent note: "What does the market fear? Clearly the answer is a lot". With such low expectations there appears ample room for surprise on the upside - much to the benefit of EXOR's NAV.

As we discussed in the interim report, in late calendar year 2021 EXOR agreed (for the second time!) to sell their reinsurance business, Partner Re, to Covea. The deal was struck at $9.2bn and completed in July 2022. Just over half of the capital was paid in dollars, which EXOR have not hedged, benefiting their NAV as the dollar has continued to surge against the Euro. This gives the company considerable firepower to make new investments, with €3.8bn of net cash on hand.

Although it has narrowed from the 50% level it touched briefly in the summer of 2022, the widening of EXOR's discount has been a headwind to performance over the last year. Unlike many other holding companies, EXOR's discount has never recovered to pre-COVID levels, having briefly traded on a c.20% discount in early 2020. A return to such a level from the current 43% level would yield a return of +40%.  

KKR AND CO (Contribution: -0.75%)

Classification: Holding Company

% of net assets¹: 5.5%

Discount: -44%

% of investee company: 0.2%

Total return on position FY22 (local)²: -28.3%

Total Return on position FY22 (GBP): -13.7%

Contribution (GBP)³: -75bps

ROI since date of initial purchase⁴: 80.4%

KKR was one of the largest contributors to AGT's returns in the previous financial year 30 September 2021.. This year, it was amongst our greatest detractors. The company's share price fell by -29% and ended the period -48% down from its November 2021 all-time high. By contrast, the S&P 500 Index declined -16% and -22% respectively (all figures in USD).

This suggests that KKR is regarded as a levered play on financial markets. But while KKR does have a large balance sheet of investments in its own funds, and also operates a capital markets business which is subject to cyclicality, similarly weak share price performance from balance sheet-light peers from their November 2021highs (e.g., Blackstone -40%; Carlyle -54%) implies that this view extends across much of the listed alternative asset management (AAMs) sector.

We believe this perception is misplaced. For the most part, the alternative asset manager's assets under management (AUM) are not at risk of redemptions, nor are meaningful proportions of their fees subject to mark-to-market risk i.e., the vast majority of assets are tied up in long-term or perpetual fund structures with management fees charged on committed capital.

In the case of KKR, almost half of its AUM is either perpetual capital or long-dated strategic investor partnerships (separately managed accounts in which capital is recycled following exits); just 10% of AUM is from vehicles with a life of less than eight years at inception.

Second-quarter results have confirmed the resilience and defensive characteristics of scale-advantaged AAMs with KKR's fee-paying AUM growing +20% year-on-year. While its fee-related earnings (FRE)* fell -2%, this was entirely driven by a decline in capital markets fees (to which we assign only a modest multiple in our sum-of-the-parts valuation) with management fees up +36% (and +5% quarter-on-quarter). A combination of shorter gaps between fund raises (due to more rapid deployment) and the "denominator effect" (under which some institutions have become overly-allocated to Alternatives due to the fall in public markets) has resulted in now widespread reports of Limited Partners (LPs) facing indigestion, spurring fears around fundraising prospects.

Importantly, however, KKR - along with its listed peers - benefit in this environment, both from LPs prioritising relationships with larger managers and from their diversification across asset classes given that the "indigestion" referred to above primarily relates to private and growth equity fund raises. KKR is also in the enviable position of having already raised its latest flagship private equity funds over the last couple of years.

Furthermore, just 35% of KKR's AUM is from private equity funds vs double that ten years ago. In recognition of the increased significance of their Real Assets business (Infrastructure and Real Estate), KKR recently hosted an analyst presentation at which they highlighted that 30% of growth in total management fees has come from Real Assets over the last three years, with the segment's AUM three times what it was in 2019. Given that institutional investors are under-allocated to Infrastructure and with continued heightened inflationary concerns, we expect KKR's Real Asset business to be an even more material contributor to future growth on the back of further international expansion and penetration into the still nascent retail market.

Given its resilience and secular growth prospects, the 8x stub fee-related earnings multiple* on which we estimate KKR trades (or 13x if we punitively assign zero value for earnings from carried interest) represents, in our view, one of the most glaring mispricings in our portfolio.

KKR's management are convinced that their balance-sheet heavy strategy is the correct one. And we have a lot of sympathy with their arguments that the balance sheet - aside from being a generator of attractive long-term returns in its own right - helps grow AUM and FRE quicker through the seeding of new funds and through demonstrating a strong alignment to LPs, and provides optionality around M&A during market downturns when issuing equity would be expensive.

However, KKR does trade on a very material discount to balance-sheet light peers, such as Ares and Blackstone. Notwithstanding the above arguments in favour of their balance sheet approach, our discussions with KKR management confirm public statements made on earnings calls that they are laser focused on shareholder value. With KKR employees owning c.30% of the company, we are confident that this valuation disconnect will not be tolerated indefinitely. Indeed, upon their appointment last year KKR's co-CEOs were awarded seven-year share options that could see them receive shares worth up to $1bn if the share price were to hit a target level 3.2x the current share price (with zero value received unless the share price more than doubles from here).

Intriguingly, Brookfield Asset Management, a balance-sheet heavy peer of KKR's, is moving ahead with a spin-off of its asset management business. KKR shareholders and management will be watching how the two parts trade, with any value creation from the split pointing to a source of optionality for KKR.

*FRE, or Fee-Related Earnings, are management fees less any operating expenses.

THIRD POINT INVESTORS LTD (Contribution: -0.71%)

Classification: Closed-ended Fund

% of net assets¹: 3.4%

Discount: -17.0%

% of investee company: 3.9%

Total return on position FY22 (local)²: -20.7%

Total Return on position FY22 (GBP): -11.7%

Contribution (GBP)³: -71bps

ROI since date of initial purchase⁴: 44.4%

Third Point Investors Ltd (TPOU) is a London listed closed-end fund that, via its investment in the unlisted underlying Master Fund, provides exposure to Third Point's event-driven opportunistic strategy which it pursues across listed equity, credit, and venture capital investments. The listed equity portion of the portfolio includes companies such as Disney, SentinelOne, and Colgate-Palmolive. Having been our largest contributor over the previous financial year (to 30 September 2021), TPOU was our fifth-largest detractor this year on the back of a NAV decline of -30% exacerbated by a widening discount (from 15% to 17%) and resulting in a fall in the share price of -32%. Over the same period, the S&P 500 fell -16% and the MSCI World -19%.

USD strength/GBP weakness significantly muted the impact of this poor performance for AGT shareholders with the -32% share price fall in USD translating to an -18% decline in GBP. Two of TPOU's previously highflying positions (Upstart Holdings and SentinelOne) fell back to earth - we estimate that these two stocks were collectively responsible for c.40% of the total NAV decline over the period. We are more comfortable with the portfolio composition and balance today than we have been for some time, with the allocation to credit (one area where we believe the manager has historically demonstrated an ability to add value) at its highest since the aftermath of COVID, and we would hope that this will lead to improved returns from here.

Readers will likely be aware of our public activist campaign in TPOU that began in mid-2021. This came to an end with the appointment of an independent director we had proposed to the board.

During the year, AGT participated in the materially accretive exchange facility offered to TPOU shareholders. This mechanism allowed qualifying shareholders to exchange a portion of their TPOU shareholding for shares in the underlying Master Fund at a 2% discount to NAV (vs the double-digit discount on which TPOU shares were trading at the time), and was introduced during our campaign. We saw 44% of our position exchanged for shares in the Master Fund, 25% of which can then be redeemed every quarter after an initial six-month lock-up. We redeemed the first portion of our Master Fund shares at the first opportunity (the end of the period covered by this Annual Report), and intend to do the same at the next three subsequent quarter-ends.

¹ For definitions, see Glossary in the full Annual Report.

² Weighted returns adjusted for buys and sells over the year.

³ Figure is an estimate by the managers and sum of contributions will not equal quoted total return over the financial year.

⁴ Figure quoted in GBP terms. Refer to Glossary in the full Annual Report for further details.

OUTLOOK

Following the unprecedented pandemic-induced fiscal and monetary stimulus, 2022 has seen developed economies wake up to the consequences: entrenched inflation, and a likely upcoming recession induced by the monetary tightening required to combat it. As such, the attention of market participants has been firmly focused on the comments and actions of central banks with volatile (and falling) markets the result. We try not to get caught up in this, aware of our inability to predict the future macroeconomic landscape, and remain open minded about what might come next. Rather, our experience shows that the key to long-term success is to focus on company fundamentals - earnings resilience, balance sheet strength and valuations. We remain confident in the outlook for our portfolio. The portfolio weighted average discount has moved from 29% to 38% over the last twelve months, and now stands in-line with levels observed during previous periods of market stress. Sustained periods of panic and market decline create compelling opportunities. We remain nimble and ready to seize them, patiently deploying our capital to sow the seeds of a powerful recovery for the portfolio as and when volatility subsides.

Joe Bauernfreund

Chief Executive Officer

Asset Value Investors Limited

7 November 2022

FURTHER INFORMATION

AVI Global Trust Plc's annual report and accounts for the year ended 30 September 2022 (which includes the notice of meeting for the Company's AGM) will be available today on https://www.aviglobal.co.uk.

It will also be submitted shortly in full unedited text to the Financial Conduct Authority's National Storage Mechanism and will be available for inspection at data.fca.org.uk/#/nsm/nationalstoragemechanism in accordance with DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.

ENDS

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.