Where Saba Capital is taking things too far

AVI Global’s Joe Bauernfreund discusses his approach to activist investing, as well as addressing what Saba Capital has got right and where it is “probably taking things too far”. He also touches on where value remains after such strong performance from some of the fund’s key markets.

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Dave Baxter, senior fund content specialist at interactive investor: Hello, and welcome back to our Insider Interview series. I’m Dave Baxter, and joining me today is Joe Bauernfreund, investment manager on the AVI Global Trust Ord (LSE:AGT) Investment Trust. Joe, many thanks for joining me.

Joe Bauernfreund, manager on the AVI Global Investment Trust: Thank you for having me.

Dave Baxter: AVI Global has had some pretty strong performance versus its rivals over the last five years. This will, of course, be quite a multifaceted thing, but what’s been driving those returns?

Joe Bauernfreund: Well, as you say, it will be a number of different companies and parts of the portfolio. As you know, our portfolio is very different to a mainstream global portfolio. Some of the areas that have done well for us have been other investment trusts, so private equity and Chrysalis Investments Limited Ord (LSE:CHRY), for example, and Cordiant Digital Infrastructure Ord (LSE:CORD) have all generated really strong returns over the last few years.

We’ve had some strong performances from various family controlled holding companies. Some of them are still in the portfolio, some of them have been exited. Those have benefited from both strong net asset value (NAV) growth as well as discount contraction. In some cases, we bought things on very wide 30%, 40% discounts and sold them close to NAV. Japan has also been a driver, so we’ve had a number of successful investments there that have benefited from the corporate governance reform there and our shareholder activism.

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Dave Baxter: If we look at some of your areas of choice, they’ve had some really big gains in the last year. Japan has continued its multi-year streak of great performance. South Korea has had a huge year for returns, and investment trusts have also made big gains with discounts starting to come in. How are you actually finding value against that backdrop and where are you looking?

Joe Bauernfreund: It’s really quite an exciting environment for us. We like to look at the weighted average discount on our portfolio, and it gives us an indication of just how cheap our portfolio and our universe is.

What’s really interesting to us is that our weighted average discount is back out at around 40%, and that’s really wide. That’s the kind of levels we typically find when markets are crashing and investors are running scared from stock markets, not when markets are reaching new highs.

We’ve got a very benign, if not positive, backdrop, and that really reflects the fact that over the last 15 years, it’s really been all about the US, and investor attention has been focused on high-growth companies in the US, and other markets have done well.

Last year was an important year because for the first time in that time, we saw that there was life outside the US stock market and other markets did well. That’s really good for us. It shows that investors do focus on value. They are prepared to look outside the US.

We saw, as you say, Japan did well, Korea did well and Europe did well. But within those markets, there’s still a huge number of opportunities for us. There’s a lot of competition among my colleagues on the investment team at AVI to get names into the portfolio, and there is absolutely no shortage of ideas.

Dave Baxter: As we’ve discussed, you do take an activist approach, but not everyone’s going to understand what that means. What does that actually involve? What kind of measures are you looking to get taken? And what’s a good example of where that’s actually paid off?

Joe Bauernfreund: Activism is a key feature of what we do, and we see it as an important driver of converting something that we buy on a wide discount into something that’s more reasonably valued.

Activism has to be tailored to the particular situation. For example, in the case of investment trusts, we’ll often find that we will be the largest shareholder on the register. That’s a position we like to be in, and that gives us quite a lot of power and clout in discussions with the board.

But having said that, it’s always our ambition and aim to have a private constructive dialogue. We don’t want to go public. We will, as you know, go public when the situation demands. But that’s never the first approach. It’s always to try and build a constructive dialogue with the boards, with the managers, and try and get them to address some of the problems or the issues that we see.

In the case of family controlled holding companies at the other end of the spectrum, we’re never going to be in the driving seat. The families will always be the dominant shareholder, and so to go public and beat them up, there’s absolutely no point there. When we invest, we go in with our eyes open and we know that we’re only at best ever going to be the second-largest shareholder and we’re not going to have that much of a voice.

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So, in those kinds of situations, we’re not looking to be an activist per se, but we’re looking to the family to be active owners of their businesses, to care about the discount, and to have some ideas as to what they’re going to do in order to address the discount.

That could be strategic reviews to analyse certain assets, to think about how they could monetise them, how they could prove to the market the valuation, or some reorganisations or restructurings, and in some cases, returns of capital.

Dave Baxter: You mentioned the fact that you like to take this private approach as an activist, but you and AVI have been pretty vocal at points. I remember a few years ago we had Hipgnosis Songs in the investment trust space, for example. What is it that might tip you from private into public and more vocal?

Joe Bauernfreund: Having tried the private constructive way, it doesn’t always succeed. So, if we find ourselves in a situation where, for example, the board is pushing against us, going down a different path, and not pursuing the strategy, the policies that we think they ought to be, then we will start putting pressure on them publicly.

Particularly if we can garner the support of other investors, which has been the case in the investment trust space increasingly over the last couple of years. It was the case in Hipgnosis, that there was vocal support from other shareholders, we were not the only one beating up on the board as it were, and we have broader support among the register and that can be quite effective.

Dave Baxter: If I were to mention investment trusts and activism, people would currently probably assume that I’m talking about the US activist, Saba Capital. They’ve been really busy in this space in the last year or so doing lots of different measures and attempts at taking over trusts. What’s your take on the Saba campaign?

Joe Bauernfreund: My take on Saba Capital is that there were discounts and boards weren’t addressing those discounts. So, it’s natural that an investor should come in, or investors, and fill that vacuum, and that is what happened.

They’ve had success in the sense that discounts have narrowed, certainly in mainstream trusts and, increasingly, alternatives as well, where they seem to be taking an interest as well. So, in that regard, it’s positive.

I would say that some of their campaigns, which it seems have been designed to give them control of management contracts and investment trusts, are probably taking things too far and more about their own success rather than the broader industry and other shareholders. I think that’s probably a negative.

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Dave Baxter: AVI Global is not immune from discounts given that it is an investment trust. What’s the discount at the minute, and how does that compare with the five-year average?

Joe Bauernfreund: The discount today is somewhere between 7% and 8%. It has been on a narrowing trajectory. I would guess that over the last five years the average discount has probably been around 9% or 10%. The board do buy back shares regularly at around about 5% or 6% of shares outstanding on an annual basis over the past few years.

Dave Baxter: And our usual question, do you have skin in the game?

Joe Bauernfreund: Very much so. I invest the vast majority of my family’s savings into AVI Global Trust and other funds and products managed by AVI.

Dave Baxter: Joe, many thanks for your time.

Joe Bauernfreund: Thank you.

Dave Baxter: And thank you for watching. Do let us know what you think about this in the comments. If you are a fan of this series, do hit the like button and the subscribe button. Thanks and take care.