October 13, 2025 • 37 mins
Activist investing is back. On this week's episode of Merryn Talks Money, Merryn Somerset Webb speaks with Joe Bauernfreund, chief executive of Asset Value Investors, about buying quality companies at deep discounts—and actively forcing a catalyst.
The conversation spans Japan’s ongoing governance-driven rerating, South Korea’s push to be the new Japan and moneymaking special situations from Mitsubishi Logistics to News Corp. They also unpack why AVI tilts away from the US, how private-equity trusts and buybacks can unlock value and what the future might be for the UK’s ailing investment trust industry.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, Radio News. Welcome to Marin Talks Money.
The podcast somos people who know the markets, explain the market.
Some Merin, Some's that Web. This week we are talking
(00:25):
about activist investing, why it's seeing a resurgence and what
that means for the investment landscape and possibly for your portfolio.
I'm speaking with Joe Bowen, front CEO and CIO at
Asset Value Investors and the manager of AVII Global Trust
as well as AVII Japan Opportunity Trust. AVII Asset Value
Investors is a UK based active investor open to private investors.
(00:47):
That means the group targets quality companies training at discounts,
often family controlled holding companies, and trust to unlock their
value through active engagement. So we talked to Joe about
the strategy behind AVII Global Trust, how is strategy worked,
and what mistakes he's made along the way, as whether
as the opportunity see nurs he's abroad in both Japan
and in career. Joe, Welcome to Merin Talks Money.
Speaker 2 (01:09):
Thanks for having me. It's good to be here, all right.
Speaker 1 (01:12):
I know you've got quite a lot of fans among
our audience, But you may also have some listeners with
us today who don't know much about you and what
you do. So I wonder if you could just set
us up by telling us about how you inverse and why.
Speaker 2 (01:26):
The starting point for everything we do at AVII is
the idea that stock markets aren't always efficient. We're all
told that stock markets are efficient, and I think that's
only really true about certain parts of it. Typically the
largest liquid, most well researched and covered names, Yeah, they're
quite efficient. But there are always parts of the stock
(01:49):
market that are neglected, overlooked, under researched, and that gives
rise to inefficiencies. And that's generally the parts of the
stock market that we are interested. Top of that, we
particularly like the idea about being able to buy into
good quality businesses that are trading below the value of
their assets or their businesses. The two are actually linked.
(02:11):
The discount arises simply because the fact that price discovery
isn't working. That philosophy or process permeates everything we do.
And then I think the third angle of our approach
is it's great to buy something that when it's cheap.
It's great to buy good business that you think is
going to go up in value. But hope is not
a strategy. And the third element of our approach really
(02:33):
is working as an engaged shareholder to try and address
and remedy that mispricing, that undervaluation. So in some cases
it could be shoulder activism. In some cases it's a
softer shareholder engagement process, but it's always about trying to
do something to unlock value.
Speaker 1 (02:54):
Okay, So here's the difference. If I doctor, any fund
manager I talk to, it is going to say roughly
what you have said. It may be in a slightly
different way. They're all going to say that they are
finding value where other people are not, that anything they
buy is going to be mispriced by the rest of
the market. That if you call your self growth, you
call these value, whatever you call yourself. When you are
an active vestor and you buy a share, you believe
(03:14):
you have seen something that the rest of the market
has not seen. But the difference here between what you
are saying and other people say is that you are
attempting yourself to create the catalyst to bring out the value.
Speaker 2 (03:26):
There's another angle as well, and that is that, yeah,
of course, every analyst, every fund manager has got a model,
and they're going to have a target price or a
target valuation. What's interesting about many of the companies that
we invest in is that they own assets and businesses
that could be liquidated today for a pound, and they're
trading at sixty seventy pence. These aren't blue sky evaluations.
(03:48):
These are actual liquidation values. And I guess the most
extreme example of that is what we see in Japan,
and have seen in Japan for many years, and that
is many companies in Japan holding huge amounts of Spain
plus net cash on their balance sheets, and in the
most extreme cases, the value of that cash and sometimes
other listed securities is well above the market cap of
(04:09):
the company.
Speaker 1 (04:10):
And that was an extraordinary thing. I mean, you'd started
your Japan only strategy. There are two trusts here, just
for those who don't know, the AVII Global and then
another AVII trust that specializes in Japan. You started that
about seven years ago, and even before you had started that,
I had been writing for years about exactly that kind
of value. And there it was. There's cash. It's just
(04:30):
sitting there. These companies, some of them with more cash
on the balance sheet than their market capitalization. But nonetheless
a year after year, the market simply ignored that, and
then something changed.
Speaker 2 (04:42):
That's right, for many years, the mantra in Japan was
we need to have cash for a rainy day. And
in fact, when you spoke to companies in Japan, it
became clear that that they were told employees were told
that if a shareholder asks for the money back, you
tell them it doesn't belong to them, it belongs to
(05:02):
the company. A very subtle but important difference. But all
of it changed around ten years ago with the introduction
under the late Prime Minister Abbey of the Corporate Governance
Code and the Stewardship Code, which really attempted to change
the psychology of businesses of companies in Japan and promote
the interests of shareholders which for so long had been
(05:24):
really knocked back. And companies had been run primarily for employees,
society pensioners, but not for shareholders. And that really has
changed in the last decade. Taken a long time, but
we're seeing companies focused a lot more on their share price.
They are more conscious of capital efficiency, not blindly accumulating
(05:44):
cash and doing nothing with it, but buying back shares,
investing in their business, returning it in other ways to shareholders.
We see many companies in Japan they bothered today about
their share price. They want to know what they can
do to achieve a higher share price. And if a
shareholder comes and has a constructive answer to that dilemma,
then unlike many years ago, they want to hear you know,
(06:07):
in the past they didn't want to speak to us.
Now they do.
Speaker 1 (06:10):
And are you still finding lots of opportunities in Japan?
I mean, it's been a good run, right and your
performance has been extremely good in Japan, So are you
looking around now and going there? Well, you know that
was great, but maybe it's time to move on.
Speaker 2 (06:22):
Yeah, we are seeing many, many opportunities today. The opportunity
set has evolved. Clearly, the extreme valuations we identified seven
eight years ago of moderated to an extent. But what
has changed is the catalyst. So seven or eight years
ago you had to work really hard to get companies
to talk to you, to listen to you, to try
and do some of the things that we were suggesting.
(06:42):
Today they are much more willing and the door is
much more open than it was seven or eight years ago.
So in that sense, there's still discounted valuations and the
catalyst is much more likely to arrive. And the other
change that's happened over the last seven or eight years
is the presence of private equity in Japan. So Japan
has notoriously been a market in which hostile takeover activity
(07:04):
hasn't worked, where companies are desperate to stay listed to
not be taken over by vultures, particularly foreign vulture private
acuity funds. But the presence of private ecity has been
growing over the last seven years, both a domestic sector
and also the global sector. And whilst we've been making
(07:25):
the lives of the listed companies a little bit more
challenging by being an activist shareholder, on the other side
of the table, private ectita has been the nice guy,
has been playing golf, taking them to restaurants and trying
to tell them that life as a private company could
be good for them, could be good for employees, could
be good for society. And so we're seeing a big
pickup and the double effect I suppose of more activist shareholders,
(07:49):
more willing management teams, and the threat of change of
corporate control is really driving leading to a big increase
in change of corporate control market and that's really helping
compress the discounts.
Speaker 1 (08:05):
So when I was last in Japan about a year ago,
and I was talking to a lot of people about
private equity, and quite a lot of the private equity
players were finding it to be a very different market
to the one they were used to and much more
difficult to operate in.
Speaker 2 (08:16):
Much more difficult to operate in. Yeah, Anecdotally, what I've
seen is there's still a resistance to hostile takeover activity.
But what's helped has been, in a sense, the evolution
of activist shareholders on registers. So you now found when
you look at our portfolio, for example, there's a handful
of situations where thirty to forty percent of the shares
(08:38):
are held by two or three different activist shareholders, and
that's quite an interesting development from private acty perspective. It
means that rather than approach a company not having any shares,
not having any support on the register, you could now
approach a company with thirty to forty percent support and
you could say this is what we want to do,
and then it almost becomes a fetter complain. Not always,
(09:00):
but it makes life very difficult for management if such
a large proportion of their register, want to see some
kind of change of corporate control.
Speaker 1 (09:10):
Interesting and one of you most recently bought in Japan.
Speaker 2 (09:13):
We've been buying Mitsubisia Logistics, which is a very large
logistics company, very very interesting evaluation in the sense that
not only is a very profitable operating business, not only
does it own its warehouses distribution centers on its balance sheet,
but it also owns a large chunk of investment property
(09:34):
assets as well, and the combined value of those real
estate assets is about twice the current share price, so
trading at a very substantial discount. Private equity has been
very active within the logistics space. Mitsibecial Logistics trades well
below book value, and there's a lot of pressure on
companies in Japan to achieve at a minimum one times.
(09:55):
One of its close peers has attracted interest from a
value activist investor and has seen its shares re rate
in response to that to well north of one one
and a half times in fact, and so this pressure
building on management of that company to address their undervaluation.
We are intensely engaging with a company. It's all private
and constructive at this stage, and we think we know
(10:18):
which direction we're traveling it.
Speaker 1 (10:20):
I know you're very bottom up, but in Japan, do
you worry it all about the political environment or indeed
the fiscal environment.
Speaker 2 (10:27):
We think about it, but as you say, from our perspective,
it's much more about individual companies the idiosyncratic source of
return that we can generate, which will be positive really
regardless of what's going on with the political or fiscal situation.
Of course, no company operates in a vacuum. They exist
in Japan, they're selling into Japan in many cases. But
(10:49):
the businesses that we tend to invest in have got
good market positions. They're very profitable, they've got very strong
balance sheets, and they're trading extremely cheaply. And notwithstanding those
other risks and other factors, there is a very substantial
upside from a series of self help measures that we
(11:09):
encourage companies to take.
Speaker 1 (11:11):
Right, should we go a bit more global? When we
look at your global portfolio, one of the things that
you tend to focus on is more in the way
of closed end funds. So in the UK investment, trust
holding companies, etc. When I look at the portfolio, which
is quite small, but what is it in the global fund?
About forty forty holdings. It's quite concentrated.
Speaker 2 (11:33):
Yeah, probably twenty core names.
Speaker 1 (11:34):
Really, twenty core names, twenty five core names. If you
look at it geographically, you've got much less in the
US than pretty much any global trust I look at
you've got more in Europe, more in Japan, more in
the UK than most and very little emerging markets, etc.
So should we just look briefly at wires that you
(11:56):
hold so little in the US relative for the index
and relative to other global funds. I know relativity is
not your thing at all, but nonetheless I think it
would be interesting for listeners to hear a little more
about that.
Speaker 2 (12:07):
Well, you know, AVII Global is a benchmark agnostic trust,
and we take that claim seriously. So many others would
say benchmark agnostic, but when you look at them, they
seem to have very similar allocations to the US than
the benchmark. The other factor is that we are bottom
up and we can invest where we see the most
compelling undervaluations and the most attractive upside. In recent years,
(12:30):
that has really led us away from the US and
to other places. When you think about it, the starting
point I said was always that markets are inefficient. Well,
when you think about the US market, it is the
most popular, largest market in the world. It's the most
well researched market. And the kind of companies that we're
(12:52):
looking for good quality businesses on discounted valuations. So in
the US, buying a dollar of assets for fifty to
sixty cents, they're not that common. The price discovery mechanism,
the cell side research, the prior ecity arbitrage, taking taking
advantage of mispriced opportunities. That has worked to a great extent,
(13:13):
whereas other markets really don't have those factors working in
their favor, and so we're able to find more value.
Speaker 1 (13:20):
So does that make the US a very efficient market
or a hideously over price market.
Speaker 2 (13:24):
It's probably got a little bit of both. But interestingly,
we are seeing more opportunities in the US have been
the last couple of years. It's not in the popular places.
It's not amongst the high growth tech companies. It tends
to be amongst smaller companies, companies that have the kind
of characteristics that you said, we favor investment companies owning
a variety of different businesses, trading at a discount to
(13:47):
some of the parts. But the one thing that works
in favor of the US market is that even in
those situations, management is much more focused on the share price.
So the other extreme Japan management have been focused on
the share price. They don't care, they don't own shares.
In the US, what you find is management very savvy,
financially savvy, and if they can see a discount, they
(14:09):
will exploit it for their shaholders benefit and hopefully for
theirs as well.
Speaker 1 (14:13):
Can you give us an example of the kind of
thing you've been finding in the US recently? You say
you're finding more value there now.
Speaker 2 (14:19):
The largest holding is a US listed company which is
News Corporation. Assets more global, I would say, but news
Corp is interesting. It's controlled by the rupert Murdock and
his family. It has two key assets within the holding company.
The first is an Australian listed business called Aria Group,
of which News Corp owned around sixty percent. It's a
(14:41):
very successful business, is the equivalent of what we have
in the UK, Right Move, and that's got a very
dominant market share, very profitable and as I say, a
very successful investment for the group. So we know what
the value of that is. It trades on the stock
market and so we can extract that from the market
price of news corporate, look at what the implied value
(15:01):
of the other assets are, and there is really only
one key asset to think about here, and that is
the one hundred percent ownership of the Dow Jones Group. The
Dow Jones Group owns the Wall Street Journal, obviously a
well known business and not only a successful newspaper but
also a very successful online online business. But along with
the Wall Street Journal, they also own a business called Opus,
(15:22):
which is a data provider primarily for the commodities business
or trading and commodities business, not too dissimilar to what
Bloomberg does say for equities and bonds, but more focused
on the commodities business. Now, the implied value, when you
strip out the market price of Ria Group, of the
Dow Jones business is around four times earnings. For maybe
(15:43):
five times earnings. It's certainly worth a lot more than
that if you look at its closest listed pier. The
closer listed peer to the Wall Street Journal is The
New York Times, which trades at somewhere around fifteen to
seventeen times earnings, so a massive gap. Now, clearly there
are question marks about the family ownership there. The alignment
of interest, the importance in their mind of minority shareholders.
(16:06):
But I think we focus on what evidence there is
out there in the public domain. And what's really been
interesting about news Corp is the recent comments coming out
from the CEO who's not a member of the family,
talking about the undervaluation, talking about the discount, talking about
the strategic review that's ongoing at the board to think
about how to address that undervaluation, talking about no sacred cows,
(16:30):
no holds barred strategic review, and probably the dispute that's
been going on in the family has held some of
that restructuring back, and hopefully another that's behind we can
look forward to perhaps some restructuring. But notwithstanding that, and
this is really key of what we're looking for across
our portfolio. You've got two very good quality businesses within
News Corps that are growing in value, that are growing
(16:52):
in profitability year and year out. So the nav side
of things is growing. The discount is wide, it's forty
five percent, it's extremely wide, and we think the discount
will be addressed. We can't determine when that is going
to be addressed. But the key whilst we're waiting at
least is to have that pound of value increasing rather
than be stuck in a value trap where you own
(17:12):
a pound of assets that's going south and it becomes
a race against time to monetize that discount.
Speaker 1 (17:18):
Yeah, but this is an example this kind of investment.
This is a company where you as a firm can't
really create the catalyst yourself.
Speaker 2 (17:24):
Correct.
Speaker 1 (17:25):
You have to stand back and wait for it to happen.
Speaker 2 (17:28):
Yeah, And in those kinds of situations, what we're looking
for is the belief that something is going to happen.
And it's more than just a belief that something is
going to happen because it's the right thing to do.
It's looking for those explicit indicators from management that they
are doing a strategic review, that they're bothered about the discount,
that actually something is going to happen, because otherwise you're
(17:49):
just left with hope and that's not good enough. And
the exciting thing from about our opportunity set today is
that there are so many companies trading on wide discounts
where there is something happened and we don't know exactly
the timing in all situations, but we know that something
is happening, which is a big turnaround from I don't know,
fifteen years ago when there was a lot of value
(18:09):
on offer, but it wasn't clear, it wasn't apparent what
was going to happen to unlock that.
Speaker 1 (18:14):
ANUA can we talk speaking of unlocking value about the
(18:34):
private equity exposure in the portfolio. So that's an area
where there's lots of private equity investment trust in the
UK trading on slightly lower or higher lower discounts than
they were previously, but nonetheless there's a lot about and
you hold quite a lot in the portfolio that has
private ect exposure.
Speaker 2 (18:49):
Right. Yeah, we became more interested i would say in
the private equity trusts probably two or three years ago,
at a time when interest rates started going up. You
started seeing prices come down and you started seeing discounts widen.
And what was interesting to us at a point in
time was discounts were in some cases forty to fifty
(19:10):
percent and there was obviously a debate about what the
navs were, but we could see when looking at the
secondaries market. So the secondari's market provides good pricing evidence
of what investors are buying. In some cases some of
those very same underlying funds that the private ectitory funds
(19:31):
themselves own, and they were trading probably at five to
ten percent discounts to reported navs. So in our minds
we could see quite a dislocation between how the market
was pricing the private ectory funds themselves and what was
really going on by in some cases and quite sophisticated investors.
So that gave us some confidence that the navs weren't
(19:53):
as unrealistic as perhaps some investors had feared. And then
for us, the question is, we're not asked allocating. We're
not just picking up stakes in listed privatectory funds for
the sake of it. We want to add some value
for our shareholders, and typically the value we add to
our shareholders whenever we invest in other investment trusts is
(20:14):
some form of shoulder engagement, some form of sholder activism,
and that typically arises when we can be a large
dominant shareholder, if not the largest, then let us say
a top three shareholder. And so what we've seen, and
I think we've played our part in this is a
sector that's now more aware of capital allocations. You're seeing
(20:35):
more and more private active funds doing share buybacks. We
are pressing companies to take advantage of those discounts by
rather than make new investments by their own portfolios on
very steep discount which is a positive risk free return
that's hard to beat elsewhere. And we're still seeing a
number of attractive opportunities.
Speaker 1 (20:56):
Okay, then private equity business as a whole, the sector
seems to be in some degree of trouble. Exits increasingly difficult,
IPO markets self jammed up, so when you look at
the sector as a whole, you might think that's not
really somewhere I want to be, but you're happy with
it because you're buying on those big discounts.
Speaker 2 (21:13):
We're happy buying either trusts that own relative concentrated portfolios
of businesses that we can analyze and comfortable with the
evaluations of those businesses, So something like Oakley Capital, for example,
fairly transparent portfolio and excellent track record and attractive valuation
as well, or some of the more diversified listed private
(21:34):
ecity funds where the discounts are very wide, and it's
really up to us to engage with the boards to
do more to take advantage of those wide discounts by
buying back shares, but be more shareholder friendly, more focused
on the share price and take action in that.
Speaker 1 (21:54):
And how do the boards of those investment trusts enjoy
that interaction with you?
Speaker 2 (22:00):
Obviously it's mixed, you know. I think for us, though,
the starting point is we never want to be an
aggressive bully. It always works best to be polite, to
be constructive, and that is helped by the fact that
we typically like the portfolio as we own. We typically
like underlying businesses. And it's not a case of a
(22:22):
pound of assets that's going south very quickly, which would
make us which would force us really to be aggressive.
It's more we can be patient. We just want to
see companies start to do more of the right thing. Okay,
clearly the investment trust space generally has suffered an exodus
of shareholders. It's why we see so many discounts, as
in some cases there's a lack of buyers, you could say.
(22:44):
But what's interesting is that more investors, more shareholders alongside
us are becoming engaged as well. They've found their voice
and they're recognizing that their remit to their own stakeholders
is to be proactive, not just to be accepting of
wide discount and one of the things we do is
get together with our shareholders, write joint letters to boards.
(23:07):
It just makes obviously life a little bit more challenging
for the boards, but it makes it a more constructive dialogue.
It was never this bad in the UK, but in Japan,
for example, whenever you had a go your criticize management,
they'd always say you're the only shareholder is not happy.
All my other shareholders tell me they love me. Doing
things together with our sholders can be very powerful.
Speaker 1 (23:26):
Let's stick with the trust for a minute, because a
lot of our listeners are investment trust investors. What happens
to the investment trust sector as a whole in the UK.
Does it just shrink right back until we have a
much smaller sector focus mainly on a liquid asset or
is there another route for it?
Speaker 2 (23:40):
No? I think I'm more positive than that. I think
it plays a very important role and we're going through
a shift clearly. In order to be relevant, funds have
to be of a certain size, and probably the days
of the very small trusts trading on very wide discounts
that they might find their days numbered.
Speaker 1 (24:01):
Can I just pick up on that. We've been saying
this for ages, haven't we that to be relevant in
investment trust now has to be much bigger than it
used to be. And we used to say what has
to be four hundred million pounds be relevant, Then that
has to be be close to a billion to be relevant, etcetera, etcetera.
But that assumes that the audience for investment trust is
quite institutional. If you assume that there's a shift underway
in this sector, and in fact the market for investment
trust is much more the ordinary man in the street,
(24:23):
the retail investor, then it doesn't have to be a
particular size. You can be one hundred million pounds and
still be very attractive for the retail investor. You only
have to be big if you have large wealth managers
wanting to be invested in you, which increasingly doesn't seem
to be the case anyway.
Speaker 2 (24:39):
Yes, that's true, But the question then becomes, how does
the sector as a whole attract that person on the street,
that retail investor. Sorry, TikTok, yeah, exactly exactly. The younger
generation of investor today, one has to reach them in
different ways to the ways of even ten years ago,
(25:00):
even five years ago. They are in many ways confused
about investment trusts. Because they're more comfortable with the open
ended world where something is worth a pound and you
buy for a pound and then you sell it for
a pound. This whole idea that it's worth a pound
and I can buy it for ninety p, but when
I want to sell it, it's atp. That's just weird
(25:20):
fun though it is great fun. But the problem is
that the investors who like it and find it fun
and the one who you know, the ones who don't
care whether something is fifty million or five hundred million,
they're getting old and then they're taking their money out
of the sector or it's disappearing in other ways. So
you do have to attract the retail investor. The retail
(25:42):
investor is key, and the sector as a whole has
to do more to appeal to those retail investors. The
wealth managers, yeah, the problem is being relevant to the
wealth managers, but even there we're seeing some shifts. So
the consolidation in their wealth management sector has meant that
most trusts aren't relevant. Running fifty billion or one hundred billion,
even a billion pound trust is not going to solve
(26:04):
your problem of how to allocate to global equities. Say,
but the whole centralization that's going on there, and again
the whole focus on open ended funds within those wealth
managers has meant that many individual wealth managers are leaving.
They're going to more boutique type firms exactly to take
advantage of the kind of situations that you say.
Speaker 1 (26:23):
That's some good news. Thank you for that. Let's move
on to another bit of good news, which is your
shift towards career. And you've recently been on a trip
and I'm wondering if you're looking at Korea now and
seeing the same kind of opportunities that you might have
seen in Japan a few years back.
Speaker 2 (26:36):
Yeah, we're very excited about Korea. It's a market we've
been looking at for a few years. It's looked very
cheap for a very long time, but like Japan ten
years ago, it lacked a catalyst. Nothing ever changed except
that the price has got cheaper. And we've now actually
put around eight percent of the global trust into Korean names.
We own seven or eight different businesses there. And the
(26:59):
reason why we've done that is because the new government
in Korea has brought into place a number of laws
and regulations and intends to do more in order to
promote stock market ownership in order to limit the power
of controlling shareholders, which has been a big negative of
(27:19):
the market and has weighed on share prices, and to
address undervaluation of companies on the stock market as well. Interestingly,
the new president came in on a platform of costly
five thousand, aiming to get the cost by to double
from the point when he came into power within five years,
which is remarkable. And they're pursuing a carrot and stick
(27:42):
approach to regulation, So there'll be some things like tax
incentives to pay out dividends. That's a carrot. The stick
would be forcing companies to cancel share cancel treasury shares
as opposed to letting them blindly accumulate.
Speaker 1 (27:55):
Okay, will there be a dedicated Korean trust from you,
given that seems to be this signal.
Speaker 2 (28:00):
No plans as yet, But you're not the first person
to ask about that.
Speaker 1 (28:04):
You can't say that. It makes me feel small when
you say I'm not the first person to ask the question.
Speaker 2 (28:09):
Well, we haven't spoken for a while, so otherwise I
would have told.
Speaker 1 (28:11):
You, okay, fair enough, tell us about some of the
specific companies that you've been picking up in.
Speaker 2 (28:16):
Correct, yeah, Well, we own one company called a More Pacific,
which is a holding company controlled by a family and
its main asset. So there's a More Pacific Holdings and
there's a More Pacific Corporation which is the main asset,
which is a leading cosmetics a business in career and
Korean cosmetics and skincare generally, I'm told is extremely popular.
Speaker 1 (28:36):
Oh, it is, Joe, It is extremely popular. It is
extremely popular. A lot of our listeners, I know, they
all have brilliant Again, they'll be using Korean products.
Speaker 2 (28:44):
They will, so again, the operating business is listed, so
the holding company trades at about a forty percent discount
to the value of it's operating business which it controls.
And this is typical in Korea. There's a lot of
family controlled holding businesses. Obviously, the large Samsung and and
sk the large Chabels are well known. This is perhaps
a less well known company. But the idea of family
(29:06):
ownership and yeah, the issue in Korea is that in
many cases, families see these businesses even though they're listed
as their own personal fiefdoms, and they don't care about
minority shareholders. And a lot of the regulation that's coming
in is designed to address that, so encouraging something like
a more opecific to pay more dividends, to reduce cash
(29:28):
on the balance sheet, to cancel treasury shares, and just
to promote the interest of minority shareholders. There's a law
that's been passed in Career recently that restricts the votes
of any shareholder to three percent when it comes to
voting for independent, independent directors and independent auditors on the board.
So that is a direct response to the perception that
(29:51):
large family controlled companies are only run for the families
and not minority shelders. So it doesn't address everything, but
it's a very clear signal and a clear step in
the right direction.
Speaker 1 (30:00):
And what about your activist tendencies, how do you engage
with Korean companies?
Speaker 2 (30:05):
Well, the activism element of it is key as well,
utilizing the support of the new laws and new regulations
that are coming into place. It empowers those conversations and
makes them direct and much more realistic. The reason we
see a lot of parallels to Japan is that change
takes time. Companies don't change overnight, Families don't change their
(30:27):
attitudes immediately. There are some things that they will have
to change if the law tells them to, but other
things they'll have to be persuaded that it's the right
thing to do. Yeah, So dialogue with these companies is
very much on the agenda. We are very early days
in that respect, but we've met a number of different
companies and the dialogue starts good.
Speaker 1 (30:49):
All right, let's talk about an economy and whether regulation
is going or normally goes only in the other direction.
The UK, where you do have again a slightly higher
exposure then most global funds. You're ten eleven percent at
the moment. Where's the value here?
Speaker 2 (31:06):
Well, again, it's very much a bottom up case for us.
We've had some investments in the property listed property sector
property fund sector where we've seen and continue to see
some consolidation and pressure on companies to either merge, take
over others or liquidate assets in return cash to shaholders.
(31:30):
We have a stake in a family backed UK business,
the retailer Phrases, which has obviously a well known retail operation,
but also substantial asset backing in the form of a
growing real estate portfolio, and stakes in other businesses. And
we have a stake in Entain, the online gambling company
(31:51):
which is listed in the UK.
Speaker 1 (31:53):
And do you have concerns. I know I asked you
this about Japan, but I do have to ask you
about the UK as well as political the first Goal andenvironment, inflation,
all these things don't seem to create a great environment
for corporate improvement. Do you worry about that? Warry your concerns?
Speaker 2 (32:11):
Yeah, I live in the UK, so I'm desperately worried
about it, and yeah, it's a big worry. What's interesting
about the UK market, though, is that despite the big
picture concerns, in some cases quite negative headwinds, there is
still a very active market for corporate control. You're seeing
private equity getting quite involved trying to take advantage of situations,
(32:33):
and that that's quite positive. That's what we haven't seen
in other parts of the world necessarily, and that gives
one confidence that if you can buy good quality assets
on a discount, then maybe something will happen to address that.
So that's the one positive I would say.
Speaker 1 (32:49):
Okay, I'm afraid that's quite a vague positive around in
the around. So we've talked a lot about the positive
feelings you have things that might work. Where it's all working,
You've had wonderful performance when you look at your portfolio
in the round, What is it that you're nervous about?
What worries you if there were, for example, if it
were to transpire that there is, for example, a bubble
(33:12):
in AI in the US and perhaps more globally, and
that were to collapse, for example, what would happen to
your portfolio? How defensive is this portfolio? Eminem It's not
jammed with gold, but how defensive is it? For a
and investor at the moment too, is worried as I
think all our listeners are right now very worried about
all the things that they see around them. They're worried
about geopolitics, They're worried about their US exposure, they're worried
(33:34):
about AI overexposure, they're worried about valuations. There's a long
list out there.
Speaker 2 (33:38):
Yeah, it's a good question, and I think the point
is that we are an equity portfolio, and we are
fully invested in equities. We would argue that our equities
are much cheaper than certain parts of the market. But
I think it would be naive to assume that the
very expensive tech companies, for example, would correct and our
(34:01):
portfolio would be unaffected by that. So clearly there's an
element of better market exposure, and we would probably suffer
some declines in that eventuality as well. Whether they'd be
greater or not or less is really hard to say.
The things that give me some confidence are the fact
that when you look at our portfolio and we measure
(34:23):
the discount on each of our companies, and so we
have a picture of what the weighted average discount on
our portfolio is now compared to what it is over time,
and where it's at at the moment is around thirty
seven to thirty eight percent. But to put that into
some historical context, it's rarely pierced that forty percent level,
and it's been as narrow as ten percent, and for
(34:45):
a few weeks during the COVID cell off it for
a few days rather it touched forty five. But if
you look back at the financial crisis and the euro crisis,
it rarely went below beyond the forty percent level. And
what that says is that discounts already pretty wide and
coupled with underlying valuations that I think are reasonable and
not stretched at all. What I think could happen is
(35:07):
you might see in the eventuality of a big market correction. Yes,
discounts could widen temporarily in our share prices could fall,
but they're more likely to bounce back pretty quickly because
they are already at extreme undervaluations. And the reason why
it never really goes beyond forty percent is that those
kind of levels you start seeing quite attractive entry points
(35:28):
and people start taking advantage of that. So I think
if our portfolio was trading on a ten percent weighted
average discount, I'd be much more worried.
Speaker 1 (35:36):
Good, very reassuring. One thing that a lot of our
listeners do hold a lot of, and it's not in
this portfolio, though, is gold? I know, not necessarily your remit,
But how do you feel about the gold factor at
the moment? It's been a wonderful runner. Hopefully all our
listeners are doing extremely well out of that, which is
a bad thing. By the way, you don't want gold
to go up. It tells you terrible things. But nonetheless,
should they worry about that now it's gone too far
(35:57):
to buy more mining companies? Maybe they're just wap into silver.
I don't know, what do you think.
Speaker 2 (36:02):
You know more about it than I do? It looks
like gold mining companies that are cheap.
Speaker 1 (36:05):
Would you buy them though, I.
Speaker 2 (36:07):
Wouldn't buy them for AVI Global?
Speaker 3 (36:08):
Nough?
Speaker 1 (36:10):
Would you buy some bitcoin for AVI Global?
Speaker 2 (36:13):
Oh, definitely not. But it's a sore point in my household.
Why Oh, because I've been long warning everybody in my
family not to touch it and it's going to crash.
And a couple of members did buy a little bit
of bitcoin some years ago and they're laughing. Well, they're
not because they didn't buy enough, because enough exactly.
Speaker 1 (36:32):
I mean, I'm always smug on this podcast because I
have some bitcoin and John doesn't have any bitcoin. But
what I very rarely admit is just how little bitcoin
I have. Again, I'm smug about it, but it's tiny.
But at least it's something at something happened. Whatever happens next. Joe,
is there anything we've missed, anything that you must tell
us that I have not asked you? Please show up?
My inadequacies is an interviewed by appointing out.
Speaker 2 (36:53):
Oh it's very common, Really good.
Speaker 1 (36:57):
Joe, Thank you so much for being with us today.
Acusually appreciate it. That was fascinating.
Speaker 2 (37:01):
Thanks a lot.
Speaker 3 (37:02):
Keep well, thanks for listening to this week's Maren Talk
to Money. If you like us show, rate, review, and
subscribe wherever you listen to podcasts. I keep sending your
questions and comments to Merrin Money at Bloomberg dot net.
Speaker 1 (37:16):
We read them and we are genuinely interested in them.
You can also follow me and John on Twitter or x.
I'm at Marinus w and John is John Underscore step X.
This episode was hosted by Me Maren Somerset Web. It
was produced by Someersadi and Moses Anderm. Sound designed by
Blake Maple's and Aaron kaspers Plaital thanks to Joe bound
Front
Bloomberg Audio Studios, podcasts, Radio News. Welcome to Marin Talks Money.
The podcast somos people who know the markets, explain the market.
Some Merin, Some's that Web. This week we are talking
(00:25):
about activist investing, why it's seeing a resurgence and what
that means for the investment landscape and possibly for your portfolio.
I'm speaking with Joe Bowen, front CEO and CIO at
Asset Value Investors and the manager of AVII Global Trust
as well as AVII Japan Opportunity Trust. AVII Asset Value
Investors is a UK based active investor open to private investors.
(00:47):
That means the group targets quality companies training at discounts,
often family controlled holding companies, and trust to unlock their
value through active engagement. So we talked to Joe about
the strategy behind AVII Global Trust, how is strategy worked,
and what mistakes he's made along the way, as whether
as the opportunity see nurs he's abroad in both Japan
and in career. Joe, Welcome to Merin Talks Money.
Speaker 2 (01:09):
Thanks for having me. It's good to be here, all right.
Speaker 1 (01:12):
I know you've got quite a lot of fans among
our audience, But you may also have some listeners with
us today who don't know much about you and what
you do. So I wonder if you could just set
us up by telling us about how you inverse and why.
Speaker 2 (01:26):
The starting point for everything we do at AVII is
the idea that stock markets aren't always efficient. We're all
told that stock markets are efficient, and I think that's
only really true about certain parts of it. Typically the
largest liquid, most well researched and covered names, Yeah, they're
quite efficient. But there are always parts of the stock
(01:49):
market that are neglected, overlooked, under researched, and that gives
rise to inefficiencies. And that's generally the parts of the
stock market that we are interested. Top of that, we
particularly like the idea about being able to buy into
good quality businesses that are trading below the value of
their assets or their businesses. The two are actually linked.
(02:11):
The discount arises simply because the fact that price discovery
isn't working. That philosophy or process permeates everything we do.
And then I think the third angle of our approach
is it's great to buy something that when it's cheap.
It's great to buy good business that you think is
going to go up in value. But hope is not
a strategy. And the third element of our approach really
(02:33):
is working as an engaged shareholder to try and address
and remedy that mispricing, that undervaluation. So in some cases
it could be shoulder activism. In some cases it's a
softer shareholder engagement process, but it's always about trying to
do something to unlock value.
Speaker 1 (02:54):
Okay, So here's the difference. If I doctor, any fund
manager I talk to, it is going to say roughly
what you have said. It may be in a slightly
different way. They're all going to say that they are
finding value where other people are not, that anything they
buy is going to be mispriced by the rest of
the market. That if you call your self growth, you
call these value, whatever you call yourself. When you are
an active vestor and you buy a share, you believe
(03:14):
you have seen something that the rest of the market
has not seen. But the difference here between what you
are saying and other people say is that you are
attempting yourself to create the catalyst to bring out the value.
Speaker 2 (03:26):
There's another angle as well, and that is that, yeah,
of course, every analyst, every fund manager has got a model,
and they're going to have a target price or a
target valuation. What's interesting about many of the companies that
we invest in is that they own assets and businesses
that could be liquidated today for a pound, and they're
trading at sixty seventy pence. These aren't blue sky evaluations.
(03:48):
These are actual liquidation values. And I guess the most
extreme example of that is what we see in Japan,
and have seen in Japan for many years, and that
is many companies in Japan holding huge amounts of Spain
plus net cash on their balance sheets, and in the
most extreme cases, the value of that cash and sometimes
other listed securities is well above the market cap of
(04:09):
the company.
Speaker 1 (04:10):
And that was an extraordinary thing. I mean, you'd started
your Japan only strategy. There are two trusts here, just
for those who don't know, the AVII Global and then
another AVII trust that specializes in Japan. You started that
about seven years ago, and even before you had started that,
I had been writing for years about exactly that kind
of value. And there it was. There's cash. It's just
(04:30):
sitting there. These companies, some of them with more cash
on the balance sheet than their market capitalization. But nonetheless
a year after year, the market simply ignored that, and
then something changed.
Speaker 2 (04:42):
That's right, for many years, the mantra in Japan was
we need to have cash for a rainy day. And
in fact, when you spoke to companies in Japan, it
became clear that that they were told employees were told
that if a shareholder asks for the money back, you
tell them it doesn't belong to them, it belongs to
(05:02):
the company. A very subtle but important difference. But all
of it changed around ten years ago with the introduction
under the late Prime Minister Abbey of the Corporate Governance
Code and the Stewardship Code, which really attempted to change
the psychology of businesses of companies in Japan and promote
the interests of shareholders which for so long had been
(05:24):
really knocked back. And companies had been run primarily for employees,
society pensioners, but not for shareholders. And that really has
changed in the last decade. Taken a long time, but
we're seeing companies focused a lot more on their share price.
They are more conscious of capital efficiency, not blindly accumulating
(05:44):
cash and doing nothing with it, but buying back shares,
investing in their business, returning it in other ways to shareholders.
We see many companies in Japan they bothered today about
their share price. They want to know what they can
do to achieve a higher share price. And if a
shareholder comes and has a constructive answer to that dilemma,
then unlike many years ago, they want to hear you know,
(06:07):
in the past they didn't want to speak to us.
Now they do.
Speaker 1 (06:10):
And are you still finding lots of opportunities in Japan?
I mean, it's been a good run, right and your
performance has been extremely good in Japan, So are you
looking around now and going there? Well, you know that
was great, but maybe it's time to move on.
Speaker 2 (06:22):
Yeah, we are seeing many, many opportunities today. The opportunity
set has evolved. Clearly, the extreme valuations we identified seven
eight years ago of moderated to an extent. But what
has changed is the catalyst. So seven or eight years
ago you had to work really hard to get companies
to talk to you, to listen to you, to try
and do some of the things that we were suggesting.
(06:42):
Today they are much more willing and the door is
much more open than it was seven or eight years ago.
So in that sense, there's still discounted valuations and the
catalyst is much more likely to arrive. And the other
change that's happened over the last seven or eight years
is the presence of private equity in Japan. So Japan
has notoriously been a market in which hostile takeover activity
(07:04):
hasn't worked, where companies are desperate to stay listed to
not be taken over by vultures, particularly foreign vulture private
acuity funds. But the presence of private ecity has been
growing over the last seven years, both a domestic sector
and also the global sector. And whilst we've been making
(07:25):
the lives of the listed companies a little bit more
challenging by being an activist shareholder, on the other side
of the table, private ectita has been the nice guy,
has been playing golf, taking them to restaurants and trying
to tell them that life as a private company could
be good for them, could be good for employees, could
be good for society. And so we're seeing a big
pickup and the double effect I suppose of more activist shareholders,
(07:49):
more willing management teams, and the threat of change of
corporate control is really driving leading to a big increase
in change of corporate control market and that's really helping
compress the discounts.
Speaker 1 (08:05):
So when I was last in Japan about a year ago,
and I was talking to a lot of people about
private equity, and quite a lot of the private equity
players were finding it to be a very different market
to the one they were used to and much more
difficult to operate in.
Speaker 2 (08:16):
Much more difficult to operate in. Yeah, Anecdotally, what I've
seen is there's still a resistance to hostile takeover activity.
But what's helped has been, in a sense, the evolution
of activist shareholders on registers. So you now found when
you look at our portfolio, for example, there's a handful
of situations where thirty to forty percent of the shares
(08:38):
are held by two or three different activist shareholders, and
that's quite an interesting development from private acty perspective. It
means that rather than approach a company not having any shares,
not having any support on the register, you could now
approach a company with thirty to forty percent support and
you could say this is what we want to do,
and then it almost becomes a fetter complain. Not always,
(09:00):
but it makes life very difficult for management if such
a large proportion of their register, want to see some
kind of change of corporate control.
Speaker 1 (09:10):
Interesting and one of you most recently bought in Japan.
Speaker 2 (09:13):
We've been buying Mitsubisia Logistics, which is a very large
logistics company, very very interesting evaluation in the sense that
not only is a very profitable operating business, not only
does it own its warehouses distribution centers on its balance sheet,
but it also owns a large chunk of investment property
(09:34):
assets as well, and the combined value of those real
estate assets is about twice the current share price, so
trading at a very substantial discount. Private equity has been
very active within the logistics space. Mitsibecial Logistics trades well
below book value, and there's a lot of pressure on
companies in Japan to achieve at a minimum one times.
(09:55):
One of its close peers has attracted interest from a
value activist investor and has seen its shares re rate
in response to that to well north of one one
and a half times in fact, and so this pressure
building on management of that company to address their undervaluation.
We are intensely engaging with a company. It's all private
and constructive at this stage, and we think we know
(10:18):
which direction we're traveling it.
Speaker 1 (10:20):
I know you're very bottom up, but in Japan, do
you worry it all about the political environment or indeed
the fiscal environment.
Speaker 2 (10:27):
We think about it, but as you say, from our perspective,
it's much more about individual companies the idiosyncratic source of
return that we can generate, which will be positive really
regardless of what's going on with the political or fiscal situation.
Of course, no company operates in a vacuum. They exist
in Japan, they're selling into Japan in many cases. But
(10:49):
the businesses that we tend to invest in have got
good market positions. They're very profitable, they've got very strong
balance sheets, and they're trading extremely cheaply. And notwithstanding those
other risks and other factors, there is a very substantial
upside from a series of self help measures that we
(11:09):
encourage companies to take.
Speaker 1 (11:11):
Right, should we go a bit more global? When we
look at your global portfolio, one of the things that
you tend to focus on is more in the way
of closed end funds. So in the UK investment, trust
holding companies, etc. When I look at the portfolio, which
is quite small, but what is it in the global fund?
About forty forty holdings. It's quite concentrated.
Speaker 2 (11:33):
Yeah, probably twenty core names.
Speaker 1 (11:34):
Really, twenty core names, twenty five core names. If you
look at it geographically, you've got much less in the
US than pretty much any global trust I look at
you've got more in Europe, more in Japan, more in
the UK than most and very little emerging markets, etc.
So should we just look briefly at wires that you
(11:56):
hold so little in the US relative for the index
and relative to other global funds. I know relativity is
not your thing at all, but nonetheless I think it
would be interesting for listeners to hear a little more
about that.
Speaker 2 (12:07):
Well, you know, AVII Global is a benchmark agnostic trust,
and we take that claim seriously. So many others would
say benchmark agnostic, but when you look at them, they
seem to have very similar allocations to the US than
the benchmark. The other factor is that we are bottom
up and we can invest where we see the most
compelling undervaluations and the most attractive upside. In recent years,
(12:30):
that has really led us away from the US and
to other places. When you think about it, the starting
point I said was always that markets are inefficient. Well,
when you think about the US market, it is the
most popular, largest market in the world. It's the most
well researched market. And the kind of companies that we're
(12:52):
looking for good quality businesses on discounted valuations. So in
the US, buying a dollar of assets for fifty to
sixty cents, they're not that common. The price discovery mechanism,
the cell side research, the prior ecity arbitrage, taking taking
advantage of mispriced opportunities. That has worked to a great extent,
(13:13):
whereas other markets really don't have those factors working in
their favor, and so we're able to find more value.
Speaker 1 (13:20):
So does that make the US a very efficient market
or a hideously over price market.
Speaker 2 (13:24):
It's probably got a little bit of both. But interestingly,
we are seeing more opportunities in the US have been
the last couple of years. It's not in the popular places.
It's not amongst the high growth tech companies. It tends
to be amongst smaller companies, companies that have the kind
of characteristics that you said, we favor investment companies owning
a variety of different businesses, trading at a discount to
(13:47):
some of the parts. But the one thing that works
in favor of the US market is that even in
those situations, management is much more focused on the share price.
So the other extreme Japan management have been focused on
the share price. They don't care, they don't own shares.
In the US, what you find is management very savvy,
financially savvy, and if they can see a discount, they
(14:09):
will exploit it for their shaholders benefit and hopefully for
theirs as well.
Speaker 1 (14:13):
Can you give us an example of the kind of
thing you've been finding in the US recently? You say
you're finding more value there now.
Speaker 2 (14:19):
The largest holding is a US listed company which is
News Corporation. Assets more global, I would say, but news
Corp is interesting. It's controlled by the rupert Murdock and
his family. It has two key assets within the holding company.
The first is an Australian listed business called Aria Group,
of which News Corp owned around sixty percent. It's a
(14:41):
very successful business, is the equivalent of what we have
in the UK, Right Move, and that's got a very
dominant market share, very profitable and as I say, a
very successful investment for the group. So we know what
the value of that is. It trades on the stock
market and so we can extract that from the market
price of news corporate, look at what the implied value
(15:01):
of the other assets are, and there is really only
one key asset to think about here, and that is
the one hundred percent ownership of the Dow Jones Group. The
Dow Jones Group owns the Wall Street Journal, obviously a
well known business and not only a successful newspaper but
also a very successful online online business. But along with
the Wall Street Journal, they also own a business called Opus,
(15:22):
which is a data provider primarily for the commodities business
or trading and commodities business, not too dissimilar to what
Bloomberg does say for equities and bonds, but more focused
on the commodities business. Now, the implied value, when you
strip out the market price of Ria Group, of the
Dow Jones business is around four times earnings. For maybe
(15:43):
five times earnings. It's certainly worth a lot more than
that if you look at its closest listed pier. The
closer listed peer to the Wall Street Journal is The
New York Times, which trades at somewhere around fifteen to
seventeen times earnings, so a massive gap. Now, clearly there
are question marks about the family ownership there. The alignment
of interest, the importance in their mind of minority shareholders.
(16:06):
But I think we focus on what evidence there is
out there in the public domain. And what's really been
interesting about news Corp is the recent comments coming out
from the CEO who's not a member of the family,
talking about the undervaluation, talking about the discount, talking about
the strategic review that's ongoing at the board to think
about how to address that undervaluation, talking about no sacred cows,
(16:30):
no holds barred strategic review, and probably the dispute that's
been going on in the family has held some of
that restructuring back, and hopefully another that's behind we can
look forward to perhaps some restructuring. But notwithstanding that, and
this is really key of what we're looking for across
our portfolio. You've got two very good quality businesses within
News Corps that are growing in value, that are growing
(16:52):
in profitability year and year out. So the nav side
of things is growing. The discount is wide, it's forty
five percent, it's extremely wide, and we think the discount
will be addressed. We can't determine when that is going
to be addressed. But the key whilst we're waiting at
least is to have that pound of value increasing rather
than be stuck in a value trap where you own
(17:12):
a pound of assets that's going south and it becomes
a race against time to monetize that discount.
Speaker 1 (17:18):
Yeah, but this is an example this kind of investment.
This is a company where you as a firm can't
really create the catalyst yourself.
Speaker 2 (17:24):
Correct.
Speaker 1 (17:25):
You have to stand back and wait for it to happen.
Speaker 2 (17:28):
Yeah, And in those kinds of situations, what we're looking
for is the belief that something is going to happen.
And it's more than just a belief that something is
going to happen because it's the right thing to do.
It's looking for those explicit indicators from management that they
are doing a strategic review, that they're bothered about the discount,
that actually something is going to happen, because otherwise you're
(17:49):
just left with hope and that's not good enough. And
the exciting thing from about our opportunity set today is
that there are so many companies trading on wide discounts
where there is something happened and we don't know exactly
the timing in all situations, but we know that something
is happening, which is a big turnaround from I don't know,
fifteen years ago when there was a lot of value
(18:09):
on offer, but it wasn't clear, it wasn't apparent what
was going to happen to unlock that.
Speaker 1 (18:14):
ANUA can we talk speaking of unlocking value about the
(18:34):
private equity exposure in the portfolio. So that's an area
where there's lots of private equity investment trust in the
UK trading on slightly lower or higher lower discounts than
they were previously, but nonetheless there's a lot about and
you hold quite a lot in the portfolio that has
private ect exposure.
Speaker 2 (18:49):
Right. Yeah, we became more interested i would say in
the private equity trusts probably two or three years ago,
at a time when interest rates started going up. You
started seeing prices come down and you started seeing discounts widen.
And what was interesting to us at a point in
time was discounts were in some cases forty to fifty
(19:10):
percent and there was obviously a debate about what the
navs were, but we could see when looking at the
secondaries market. So the secondari's market provides good pricing evidence
of what investors are buying. In some cases some of
those very same underlying funds that the private ectitory funds
(19:31):
themselves own, and they were trading probably at five to
ten percent discounts to reported navs. So in our minds
we could see quite a dislocation between how the market
was pricing the private ectory funds themselves and what was
really going on by in some cases and quite sophisticated investors.
So that gave us some confidence that the navs weren't
(19:53):
as unrealistic as perhaps some investors had feared. And then
for us, the question is, we're not asked allocating. We're
not just picking up stakes in listed privatectory funds for
the sake of it. We want to add some value
for our shareholders, and typically the value we add to
our shareholders whenever we invest in other investment trusts is
(20:14):
some form of shoulder engagement, some form of sholder activism,
and that typically arises when we can be a large
dominant shareholder, if not the largest, then let us say
a top three shareholder. And so what we've seen, and
I think we've played our part in this is a
sector that's now more aware of capital allocations. You're seeing
(20:35):
more and more private active funds doing share buybacks. We
are pressing companies to take advantage of those discounts by
rather than make new investments by their own portfolios on
very steep discount which is a positive risk free return
that's hard to beat elsewhere. And we're still seeing a
number of attractive opportunities.
Speaker 1 (20:56):
Okay, then private equity business as a whole, the sector
seems to be in some degree of trouble. Exits increasingly difficult,
IPO markets self jammed up, so when you look at
the sector as a whole, you might think that's not
really somewhere I want to be, but you're happy with
it because you're buying on those big discounts.
Speaker 2 (21:13):
We're happy buying either trusts that own relative concentrated portfolios
of businesses that we can analyze and comfortable with the
evaluations of those businesses, So something like Oakley Capital, for example,
fairly transparent portfolio and excellent track record and attractive valuation
as well, or some of the more diversified listed private
(21:34):
ecity funds where the discounts are very wide, and it's
really up to us to engage with the boards to
do more to take advantage of those wide discounts by
buying back shares, but be more shareholder friendly, more focused
on the share price and take action in that.
Speaker 1 (21:54):
And how do the boards of those investment trusts enjoy
that interaction with you?
Speaker 2 (22:00):
Obviously it's mixed, you know. I think for us, though,
the starting point is we never want to be an
aggressive bully. It always works best to be polite, to
be constructive, and that is helped by the fact that
we typically like the portfolio as we own. We typically
like underlying businesses. And it's not a case of a
(22:22):
pound of assets that's going south very quickly, which would
make us which would force us really to be aggressive.
It's more we can be patient. We just want to
see companies start to do more of the right thing. Okay,
clearly the investment trust space generally has suffered an exodus
of shareholders. It's why we see so many discounts, as
in some cases there's a lack of buyers, you could say.
(22:44):
But what's interesting is that more investors, more shareholders alongside
us are becoming engaged as well. They've found their voice
and they're recognizing that their remit to their own stakeholders
is to be proactive, not just to be accepting of
wide discount and one of the things we do is
get together with our shareholders, write joint letters to boards.
(23:07):
It just makes obviously life a little bit more challenging
for the boards, but it makes it a more constructive dialogue.
It was never this bad in the UK, but in Japan,
for example, whenever you had a go your criticize management,
they'd always say you're the only shareholder is not happy.
All my other shareholders tell me they love me. Doing
things together with our sholders can be very powerful.
Speaker 1 (23:26):
Let's stick with the trust for a minute, because a
lot of our listeners are investment trust investors. What happens
to the investment trust sector as a whole in the UK.
Does it just shrink right back until we have a
much smaller sector focus mainly on a liquid asset or
is there another route for it?
Speaker 2 (23:40):
No? I think I'm more positive than that. I think
it plays a very important role and we're going through
a shift clearly. In order to be relevant, funds have
to be of a certain size, and probably the days
of the very small trusts trading on very wide discounts
that they might find their days numbered.
Speaker 1 (24:01):
Can I just pick up on that. We've been saying
this for ages, haven't we that to be relevant in
investment trust now has to be much bigger than it
used to be. And we used to say what has
to be four hundred million pounds be relevant, Then that
has to be be close to a billion to be relevant, etcetera, etcetera.
But that assumes that the audience for investment trust is
quite institutional. If you assume that there's a shift underway
in this sector, and in fact the market for investment
trust is much more the ordinary man in the street,
(24:23):
the retail investor, then it doesn't have to be a
particular size. You can be one hundred million pounds and
still be very attractive for the retail investor. You only
have to be big if you have large wealth managers
wanting to be invested in you, which increasingly doesn't seem
to be the case anyway.
Speaker 2 (24:39):
Yes, that's true, But the question then becomes, how does
the sector as a whole attract that person on the street,
that retail investor. Sorry, TikTok, yeah, exactly exactly. The younger
generation of investor today, one has to reach them in
different ways to the ways of even ten years ago,
(25:00):
even five years ago. They are in many ways confused
about investment trusts. Because they're more comfortable with the open
ended world where something is worth a pound and you
buy for a pound and then you sell it for
a pound. This whole idea that it's worth a pound
and I can buy it for ninety p, but when
I want to sell it, it's atp. That's just weird
(25:20):
fun though it is great fun. But the problem is
that the investors who like it and find it fun
and the one who you know, the ones who don't
care whether something is fifty million or five hundred million,
they're getting old and then they're taking their money out
of the sector or it's disappearing in other ways. So
you do have to attract the retail investor. The retail
(25:42):
investor is key, and the sector as a whole has
to do more to appeal to those retail investors. The
wealth managers, yeah, the problem is being relevant to the
wealth managers, but even there we're seeing some shifts. So
the consolidation in their wealth management sector has meant that
most trusts aren't relevant. Running fifty billion or one hundred billion,
even a billion pound trust is not going to solve
(26:04):
your problem of how to allocate to global equities. Say,
but the whole centralization that's going on there, and again
the whole focus on open ended funds within those wealth
managers has meant that many individual wealth managers are leaving.
They're going to more boutique type firms exactly to take
advantage of the kind of situations that you say.
Speaker 1 (26:23):
That's some good news. Thank you for that. Let's move
on to another bit of good news, which is your
shift towards career. And you've recently been on a trip
and I'm wondering if you're looking at Korea now and
seeing the same kind of opportunities that you might have
seen in Japan a few years back.
Speaker 2 (26:36):
Yeah, we're very excited about Korea. It's a market we've
been looking at for a few years. It's looked very
cheap for a very long time, but like Japan ten
years ago, it lacked a catalyst. Nothing ever changed except
that the price has got cheaper. And we've now actually
put around eight percent of the global trust into Korean names.
We own seven or eight different businesses there. And the
(26:59):
reason why we've done that is because the new government
in Korea has brought into place a number of laws
and regulations and intends to do more in order to
promote stock market ownership in order to limit the power
of controlling shareholders, which has been a big negative of
(27:19):
the market and has weighed on share prices, and to
address undervaluation of companies on the stock market as well. Interestingly,
the new president came in on a platform of costly
five thousand, aiming to get the cost by to double
from the point when he came into power within five years,
which is remarkable. And they're pursuing a carrot and stick
(27:42):
approach to regulation, So there'll be some things like tax
incentives to pay out dividends. That's a carrot. The stick
would be forcing companies to cancel share cancel treasury shares
as opposed to letting them blindly accumulate.
Speaker 1 (27:55):
Okay, will there be a dedicated Korean trust from you,
given that seems to be this signal.
Speaker 2 (28:00):
No plans as yet, But you're not the first person
to ask about that.
Speaker 1 (28:04):
You can't say that. It makes me feel small when
you say I'm not the first person to ask the question.
Speaker 2 (28:09):
Well, we haven't spoken for a while, so otherwise I
would have told.
Speaker 1 (28:11):
You, okay, fair enough, tell us about some of the
specific companies that you've been picking up in.
Speaker 2 (28:16):
Correct, yeah, Well, we own one company called a More Pacific,
which is a holding company controlled by a family and
its main asset. So there's a More Pacific Holdings and
there's a More Pacific Corporation which is the main asset,
which is a leading cosmetics a business in career and
Korean cosmetics and skincare generally, I'm told is extremely popular.
Speaker 1 (28:36):
Oh, it is, Joe, It is extremely popular. It is
extremely popular. A lot of our listeners, I know, they
all have brilliant Again, they'll be using Korean products.
Speaker 2 (28:44):
They will, so again, the operating business is listed, so
the holding company trades at about a forty percent discount
to the value of it's operating business which it controls.
And this is typical in Korea. There's a lot of
family controlled holding businesses. Obviously, the large Samsung and and
sk the large Chabels are well known. This is perhaps
a less well known company. But the idea of family
(29:06):
ownership and yeah, the issue in Korea is that in
many cases, families see these businesses even though they're listed
as their own personal fiefdoms, and they don't care about
minority shareholders. And a lot of the regulation that's coming
in is designed to address that, so encouraging something like
a more opecific to pay more dividends, to reduce cash
(29:28):
on the balance sheet, to cancel treasury shares, and just
to promote the interest of minority shareholders. There's a law
that's been passed in Career recently that restricts the votes
of any shareholder to three percent when it comes to
voting for independent, independent directors and independent auditors on the board.
So that is a direct response to the perception that
(29:51):
large family controlled companies are only run for the families
and not minority shelders. So it doesn't address everything, but
it's a very clear signal and a clear step in
the right direction.
Speaker 1 (30:00):
And what about your activist tendencies, how do you engage
with Korean companies?
Speaker 2 (30:05):
Well, the activism element of it is key as well,
utilizing the support of the new laws and new regulations
that are coming into place. It empowers those conversations and
makes them direct and much more realistic. The reason we
see a lot of parallels to Japan is that change
takes time. Companies don't change overnight, Families don't change their
(30:27):
attitudes immediately. There are some things that they will have
to change if the law tells them to, but other
things they'll have to be persuaded that it's the right
thing to do. Yeah, So dialogue with these companies is
very much on the agenda. We are very early days
in that respect, but we've met a number of different
companies and the dialogue starts good.
Speaker 1 (30:49):
All right, let's talk about an economy and whether regulation
is going or normally goes only in the other direction.
The UK, where you do have again a slightly higher
exposure then most global funds. You're ten eleven percent at
the moment. Where's the value here?
Speaker 2 (31:06):
Well, again, it's very much a bottom up case for us.
We've had some investments in the property listed property sector
property fund sector where we've seen and continue to see
some consolidation and pressure on companies to either merge, take
over others or liquidate assets in return cash to shaholders.
(31:30):
We have a stake in a family backed UK business,
the retailer Phrases, which has obviously a well known retail operation,
but also substantial asset backing in the form of a
growing real estate portfolio, and stakes in other businesses. And
we have a stake in Entain, the online gambling company
(31:51):
which is listed in the UK.
Speaker 1 (31:53):
And do you have concerns. I know I asked you
this about Japan, but I do have to ask you
about the UK as well as political the first Goal andenvironment, inflation,
all these things don't seem to create a great environment
for corporate improvement. Do you worry about that? Warry your concerns?
Speaker 2 (32:11):
Yeah, I live in the UK, so I'm desperately worried
about it, and yeah, it's a big worry. What's interesting
about the UK market, though, is that despite the big
picture concerns, in some cases quite negative headwinds, there is
still a very active market for corporate control. You're seeing
private equity getting quite involved trying to take advantage of situations,
(32:33):
and that that's quite positive. That's what we haven't seen
in other parts of the world necessarily, and that gives
one confidence that if you can buy good quality assets
on a discount, then maybe something will happen to address that.
So that's the one positive I would say.
Speaker 1 (32:49):
Okay, I'm afraid that's quite a vague positive around in
the around. So we've talked a lot about the positive
feelings you have things that might work. Where it's all working,
You've had wonderful performance when you look at your portfolio
in the round, What is it that you're nervous about?
What worries you if there were, for example, if it
were to transpire that there is, for example, a bubble
(33:12):
in AI in the US and perhaps more globally, and
that were to collapse, for example, what would happen to
your portfolio? How defensive is this portfolio? Eminem It's not
jammed with gold, but how defensive is it? For a
and investor at the moment too, is worried as I
think all our listeners are right now very worried about
all the things that they see around them. They're worried
about geopolitics, They're worried about their US exposure, they're worried
(33:34):
about AI overexposure, they're worried about valuations. There's a long
list out there.
Speaker 2 (33:38):
Yeah, it's a good question, and I think the point
is that we are an equity portfolio, and we are
fully invested in equities. We would argue that our equities
are much cheaper than certain parts of the market. But
I think it would be naive to assume that the
very expensive tech companies, for example, would correct and our
(34:01):
portfolio would be unaffected by that. So clearly there's an
element of better market exposure, and we would probably suffer
some declines in that eventuality as well. Whether they'd be
greater or not or less is really hard to say.
The things that give me some confidence are the fact
that when you look at our portfolio and we measure
(34:23):
the discount on each of our companies, and so we
have a picture of what the weighted average discount on
our portfolio is now compared to what it is over time,
and where it's at at the moment is around thirty
seven to thirty eight percent. But to put that into
some historical context, it's rarely pierced that forty percent level,
and it's been as narrow as ten percent, and for
(34:45):
a few weeks during the COVID cell off it for
a few days rather it touched forty five. But if
you look back at the financial crisis and the euro crisis,
it rarely went below beyond the forty percent level. And
what that says is that discounts already pretty wide and
coupled with underlying valuations that I think are reasonable and
not stretched at all. What I think could happen is
(35:07):
you might see in the eventuality of a big market correction. Yes,
discounts could widen temporarily in our share prices could fall,
but they're more likely to bounce back pretty quickly because
they are already at extreme undervaluations. And the reason why
it never really goes beyond forty percent is that those
kind of levels you start seeing quite attractive entry points
(35:28):
and people start taking advantage of that. So I think
if our portfolio was trading on a ten percent weighted
average discount, I'd be much more worried.
Speaker 1 (35:36):
Good, very reassuring. One thing that a lot of our
listeners do hold a lot of, and it's not in
this portfolio, though, is gold? I know, not necessarily your remit,
But how do you feel about the gold factor at
the moment? It's been a wonderful runner. Hopefully all our
listeners are doing extremely well out of that, which is
a bad thing. By the way, you don't want gold
to go up. It tells you terrible things. But nonetheless,
should they worry about that now it's gone too far
(35:57):
to buy more mining companies? Maybe they're just wap into silver.
I don't know, what do you think.
Speaker 2 (36:02):
You know more about it than I do? It looks
like gold mining companies that are cheap.
Speaker 1 (36:05):
Would you buy them though, I.
Speaker 2 (36:07):
Wouldn't buy them for AVI Global?
Speaker 3 (36:08):
Nough?
Speaker 1 (36:10):
Would you buy some bitcoin for AVI Global?
Speaker 2 (36:13):
Oh, definitely not. But it's a sore point in my household.
Why Oh, because I've been long warning everybody in my
family not to touch it and it's going to crash.
And a couple of members did buy a little bit
of bitcoin some years ago and they're laughing. Well, they're
not because they didn't buy enough, because enough exactly.
Speaker 1 (36:32):
I mean, I'm always smug on this podcast because I
have some bitcoin and John doesn't have any bitcoin. But
what I very rarely admit is just how little bitcoin
I have. Again, I'm smug about it, but it's tiny.
But at least it's something at something happened. Whatever happens next. Joe,
is there anything we've missed, anything that you must tell
us that I have not asked you? Please show up?
My inadequacies is an interviewed by appointing out.
Speaker 2 (36:53):
Oh it's very common, Really good.
Speaker 1 (36:57):
Joe, Thank you so much for being with us today.
Acusually appreciate it. That was fascinating.
Speaker 2 (37:01):
Thanks a lot.
Speaker 3 (37:02):
Keep well, thanks for listening to this week's Maren Talk
to Money. If you like us show, rate, review, and
subscribe wherever you listen to podcasts. I keep sending your
questions and comments to Merrin Money at Bloomberg dot net.
Speaker 1 (37:16):
We read them and we are genuinely interested in them.
You can also follow me and John on Twitter or x.
I'm at Marinus w and John is John Underscore step X.
This episode was hosted by Me Maren Somerset Web. It
was produced by Someersadi and Moses Anderm. Sound designed by
Blake Maple's and Aaron kaspers Plaital thanks to Joe bound
Front
Host
Merryn Somerset Webb
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