AJOT fund manager discussion |
Thanks for clarifying, Spangle93. |
AVI, the investment manager, also manages another investment trust, AJOT, the AVI Japan Opportunity trust. Bauernfreund is personally active in each.
Consequently, the AGT fund has a number of similar investments, with Japan making up about 20% of AGT |
Looking into this one for the first time. I see a lot of commentary about Japanese small caps, but their biggest holdings are News Corp, D'leteren, Chrysalis Investments etc. Where is the Japan connection ? |
 Above transcripts, with some paragraphs to make it legible.
Chris, the Tokyo Stock Exchange reforms to improve capital efficiency work really well over the past couple of years. Is that a trend that's likely to continue in and through 2025?
Yes, absolutely. The reforms have really been in place for just over a decade now. But the Tokyo Stock Exchange in 2023 renewed focus on them and they've worked very well in terms of driving returns over that two-year period. One of the things we saw last year was share buybacks double on what was already very high levels in 2023. So we're starting to see those real tangent benefits as shareholders. As for what is in 2025 and onwards, we know there are still benefits that come from the measures that have already been announced. The small cap universe has been a bit slower to react to the reforms. That's understandable. They have less resources at hand. We expect more announcements in 2025 and more action from that part of the market. And then of course the announcements that have already been made will continue to drive returns in 2025. These are multi-year buyback, multi-year dividend and investment strategies and we're starting to see the start of those now. We also know the TSE are preparing to release a new round of reforms. They're going to focus on things such as parent-child listings, MBOs as an option for companies and further emphasize the importance of the reforms that have already been announced. We don't know exactly what shape or form these will take but we know to expect it in the first half of 2025.
Even though you are a stock picker, is there a single macro theme that 's dominating your thinking at the moment?
Yes, we like to focus on the fundamentals as much as possible and we think the reform policies will have the biggest impact on setting corporate Japan stock prices over the coming decade. But for most investors and ourselves, the foreign exchange rates and the interest rate cycles in the US and Japan specifically have been very important. The yen has moved from 130 yen against the dollar to 160 yen against the dollar over the last couple of years. That's had a big impact on the market. The large cap exporters in Japan are extremely sensitive to those rates. We've seen a huge amount of interest and inflow into those share prices and as a result, the large cap universe of Japan has run very hard over the last couple of years. Going forward, it's difficult to know exactly where the currency will stabilize. I think it's very clear to those in Japan that the yen is too cheap at the moment and that will probably correct over the long term. But whether we're at the peak in the short term is more difficult to say.
As a stock picker, what's the difference between the company fundamentals and the valuations as you see them when comparing large to small cap companies?
Well, as I say, the large cap universe has done very well over the last couple of years. One aspect of that has been the foreign exchange rate. The other aspect has been the huge inflow in money we've seen as interesting Japanese equities has picked up on the back of reforms. That's natural. It tends to come into the large cap space and then it filters down into the market as the market rally broadens. What we're seeing at the moment though is the valuation discount for small caps is that close to an all-time low. It's at the lows over the last two decades, roughly 40% price to book discount. Our expectation is that normalised is now and with a stable currency or a more stable currency, we expect those benefits to become more tangible for investors.
What about your fund? How is it positioned right now and how might it change given your outlook again for the rest of 2025?
We're overweight small caps strategically. As I say, the discount at the moment is very large and we expect that to narrow and we continue to focus on those names that will benefit the most from the capital redistribution in Japan. Driven by the reform policies. Those are the two key areas of focus for us. For the market as a whole, we expect 2025 to be a relatively good year. In 2024, we saw some softness in the traditional tech names and auto volumes in the back end of 2024. We expect those to improve going forward and that should start to impact the market and stock prices over the coming years. |
Transcript-
Chris, the Tokyo Stock Exchange reforms to improve capital efficiency work really well over the past couple of years. Is that a trend that's likely to continue in and through 2025? Yes, absolutely. The reforms have really been in place for just over a decade now. But the Tokyo Stock Exchange in 2023 renewed focus on them and they've worked very well in terms of driving returns over that two-year period. One of the things we saw last year was share buybacks double on what was already very high levels in 2023. So we're starting to see those real tangent benefits as shareholders. As for what is in 2025 and onwards , we know there are still benefits that come from the measures that have already been announced. The small cap universe has been a bit slower to react to the reforms. That's understandable. They have less resources at hand. We expect more announcements in 2025 and more action from that part of the market. And then of course the announcements that have already been made will continue to drive returns in 2025. These are multi-year buyback, multi-year dividend and investment strategies and we're starting to see the start of those now. We also know the TSE are preparing to release a new round of reforms. They're going to focus on things such as parent-child listings, MBOs as an option for companies and further emphasize the importance of the reforms that have already been announced. We don't know exactly what shape or form these will take but we know to expect it in the first half of 2025. Even though you are a stock picket, is there a single macro theme that 's dominating your thinking at the moment? Yes, we like to focus on the fundamentals as much as possible and we think the reform policies will have the biggest impact on setting corporate Japan stock prices over the coming decade. But for most investors and ourselves, the foreign exchange rates and the interest rate cycles in the US and Japan specifically have been very important. The yen has moved from 130 yen against the dollar to 160 yen against the dollar over the last couple of years. That's had a big impact on the market. The large cap exporters in Japan are extremely sensitive to those rates. We've seen a huge amount of interest and inflow into those share prices and as a result, the large cap universe of Japan has run very hard over the last couple of years. Going forward, it's difficult to know exactly where the currency will stabilize. I think it's very clear to those in Japan that the yen is too cheap at the moment and that will probably correct over the long term. But whether we're at the peak in the short term is more difficult to say. As a stock picker, what's the difference between the company fundamentals and the valuations as you see them when comparing large to small cap companies? Well, as I say, the large cap universe has done very well over the last couple of years. One aspect of that has been the foreign exchange rate. The other aspect has been the huge inflow in money we've seen as interesting Japanese equities has picked up on the back of reforms. That's natural. It tends to come into the large cap space and then it filters down into the market as the market rally broadens. What we're seeing at the moment though is the valuation discount for small caps is that close to an all-time low. It's at the lows over the last two decades, roughly 40% price to book discount. Our expectation is that normalised is now and with a stable currency or a more stable currency, we expect those benefits to become more tangible for investors. What about your fund? How is it positioned right now and how might it change given your outlook again for the rest of 2025? We're overweight small caps strategically. As I say, the discount at the moment is very large and we expect that to narrow and we continue to focus on those names that will benefit the most from the capital redistribution in Japan. Driven by the reform policies. Those are the two key areas of focus for us. For the market as a whole, we expect 2025 to be a relatively good year. In 2024, we saw some softness in the traditional tech names and auto volumes in the back end of 2024. We expect those to improve going forward and that should start to impact the market and stock prices over the coming years. Lovely, Chris. Thank you very much. |
A decent director purchase of 5,000 shares today rather underlines the manager's thoughts on the size of the discount(s) currently. |
Dave
Indeed I believe that they are correct, dis is way too high on their underlying assets. The double discount was very good today, I added a few more this pm after reading the Kepler report this weekend,I got them on 8.25% discount to the trust which is just far too cheap, imho. |
Currently, the trust's double discount, incorporating both the trust's own Discount and those of its underlying holdings, stands at 48%, near its historic extremes. Manager Joe Bauernfreund and his team argue the value and the return potential are even greater in the current portfolio than it was on previous occasions that it was so wide, as they expect more of the discounts to be close to par. |
Latest Kepler research update for AGT |
'As we have learnt over time, the path to progress can be frustratingly slow at times, and it is not always linear with steps back along the way. With that said, as we survey the landscape in 2025, we are as optimistic as we have ever been.'In terms of broad catalysts for equities in Japan, Bauernfreund notes brewing interest among private equity, citing the battle between KKR and Bain for Fuji Soft (9749:TYO) as an example.He adds: 'Importantly, and in many ways connected to this, we are seeing management teams become increasingly active in their attempts to boost and unlock corporate value. As active engaged owners, these are two attractive forces to have moving in the right direction.'There is an interesting snippet on the early knockings of the European earnings season from analysts at Bank of America, who note stocks missing EPS (earnings per share) estimates have faced heavy punishment, with a median one-day underperformance of 2.6%, the sharpest since they started tracking the data 13 years ago, while those beating estimates have recorded outperformance of 1.7%, the second strongest level on record.This paints a picture of a nervous market, of a mind to punish any signs of weakness but also very grateful for signs a business is thriving despite the uncertain backdrop. |
Shares mag extract....This begs the question of what else is holding back Japanese stocks. Since hitting a new all-time high for the first time since the early 1980s last year, the flagship Nikkei 225 index has basically traded sideways, bar a brief period in late July and early August when concern over the yen carry trade saw a frenzied but ultimately brief sell-off.Against this backdrop, the optimism of value-oriented investment trust AVI Global (AGT) and manager Joe Bauernfreund is particularly striking.He observes: 'Over the last eight years, the weight of evidence that Japan is changing has grown. We previously described 2023 as a seminal year in which global investors, spurred on by the efforts of the Tokyo Stock Exchange and its attempts to address the issues of companies trading below book |
JB buying some more stock. |
Interesting video |
An 8% discount doesn't bother me. There should always be a small discount on ITs to reflect the fact that asset manager fees will erode your capital over time.
Besides that, I prefer JB to invest in higher-upside plays than the smallish "profit" from share buybacks. So just enough of a buyback policy to keep the discount from widening works for me... |
Excellent point RM77, yes they should be managing the discount around 0 and a regular NAV -2% redemption might fix the 8% nonsense.
However we wouldn’t be able to accumulate at NAV -8% which would be a shame. |
Would be ironic, an activist investor being targeted by another activist. Big fan of AVI although not sure why it's on a permanent 8% discount - they should do something to sort that out (buybacks or offers to redeem at NAV). |
I just could not resist these on over 8% discount today which just means the whole discount portfolio is enjoying a decent double dis, so I added again.
Joe is a manager who does seem to "stick to his knitting" which has so far shown through on his performance.
With people like SABA lurking around looking for discounts one wonders if they have run their slide rules over AGT yet ? |
@dave
Good spot Dave, thanks for that heads up. |
I see CHRY, one of our holdings, are up 8%. |
Yes. Apart from some holdings I really don't think are clever - Entain and Reckitt come to mind - JB and his team really do know their stuff.
If only I had just invested more of my capital into AVI instead of chasing my own "value opportunities" such as DGI9, Home REIT, etc. lol |
@craig
Thanks for that heads up, yes it was a very interesting piece, JB certainly knows his stuff and his foray into News Corp could be one of his best yet.
Once Rupert passes (or becomes incapable) this looks a wonderful value opportunity, I've been a holder for a couple of years now & always wish I had more of them... |
There's an interesting interview / presentation by Joe Bauernfreund on the QuotedData Youtube channel. It starts at about 27 minutes in.
He provides details of the inherent value in some major holdings such as News Corp. Well worth half an hour of your time... |
Interesting newsletter this month.
Both D'leteren and Vivendi look like promising plays alongside a core investment in AVI itself. |
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