Value focus sees AVI Global returns drop at last minute

AVI Global (AGT ) ‘came unstuck’ in the final month of its financial year, unwinding the good work done by top holding Chrysalis (CHRY ) and push into South Korea.

Joe Bauernfreund, chief executive of Asset Value Investors and manager of its £1.2bn flagship investment trust, expressed his frustration at the fund’s last-minute downturn in full-year results to the end of September.

Returns were just ahead of the MSCI All Country World index in August but ‘came unstuck in the final month’, he said.

This left the trust with a net asset value (NAV) total return of 12.4% over the year, and a share price return of 15.4% − both short of the 16.8% delivered by the index.

The lag was largely due to what the fund does not own; namely large, highly valued artificial intelligence (AI) and Magnificent Seven stocks. It instead focuses on undervalued and ignored stocks where its active engagement style can bring about change and drive share prices higher.

Bauernfreund said this strategy means the portfolio will suffer bouts of underperformance, stressing this was ‘not a bug’ but a ‘prerequisite’ for delivering a differentiated portfolio and long-term returns.

Underscoring the approach is the long-term outperformance, with the trust ranking second best in its peer group over five years at a NAV total return of 86%.

However, he did admit that a retreat from the US market − specifically the Magnificent Seven − and a broadening out of returns has ‘yet to come to pass’.

Snubbing mega-caps was not the only drag on performance, with Bauernfreund flagging the ‘dire’ 48% fall in the share price of top 10 holding Gerresheimer, a German specialty glass and plastic manufacturer.

He started building a position in late 2024 on the basis that it was a ‘leading player in the oligopolistic pharmaceutical primary packaging market’ but trading at a heavily discounted valuation.

There were encouraging reports of interest by private equity and ‘numerous paths to unlock value’.

‘While the investment thesis was simple, our experience has been anything but,’ Bauernfreund said.

Gerresheimer announced three profit warnings in nine months and it became apparent that ‘internal controls and tracking of the business performance were poor’.

Despite a management reshuffle and plans to sell some divisions, progress was derailed by the German regulator announcing an investigation into the group’s finances.

While the investigation pertains to a small part of the group, Bauernfreund said investors have ‘not unreasonably run for the hills’, but believes there ‘remains much to like’ in the core business and remains engaged with the management.

Top holding and fellow investment company Chrysalis was a key contributor to returns over the year, with the shares up nearly 30% over the period, as the NAV grew 17% and the share price discount tightened from 36% to 29%.

Bauernfreund has built up his holding in the portfolio of unquoted tech ‘unicorns’ since January 2024, and at 8.3% of AGT it is now the largest holding.

Over the past year, he has been encouraged by Chrysalis’ plan to buy back £100m of shares, and the ‘multiple credible prospects for liquidity events’ following two exits in quick succession.

Chrysalis’ holding in neo-bank Starling – which is 44% of NAV – was a particular draw for Bauernfreund, who said it is ‘a perfect case study’ in software-as-a-service.

AGT calculates Chrysalis’ Starling position to be worth £3.3bn, or 3.2 times trailing book value versus 1 times for the UK’s incumbent banks.

‘Although this is a premium multiple, we believe that Starling’s exceptional unit economics and growth potential more than justify it,’ he said.

The opportunities in undervalued companies remain ‘highly compelling’ and the ‘competition for capital for new and existing ideas remains intense’.

One area he is particularly excited by is South Korea following a strong push into the region that now makes up 8% of NAV.

Bauernfreund is attracted by Korea’s ‘Value Up’ strategy of corporate and shareholder reform, which has echoes of the successful plan initiated in Japan.

Although he has been recycling capital into South Korea, using the cash generated by successful exits of Apollo Global Management, Mexican conglomerate Femsa, and Reckitt Benckiser, he warned that ‘our lesson from Japan is that there will likely be many false dawns and disappointments along the way’.

‘The potential prize however is great, and we believe that nimble, focused, bottom-up fundamental investors, with experience of actively engaging with companies are best positioned to capture this,’ he said.