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How to Find—and Force—Value From Tokyo to Seoul · Merryn Talks Money

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Speaker 1: Bloomberg Audio Studios, podcasts, Radio News. Welcome to Marin Talks Money.
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Speaker 1: The podcast somos people who know the markets, explain the market.
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Speaker 1: Some Merin, Some's that Web. This week we are talking
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Speaker 1: about activist investing, why it's seeing a resurgence and what
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Speaker 1: that means for the investment landscape and possibly for your portfolio.
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Speaker 1: I'm speaking with Joe Bowen, front CEO and CIO at
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Speaker 1: Asset Value Investors and the manager of AVII Global Trust
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Speaker 1: as well as AVII Japan Opportunity Trust. AVII Asset Value
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Speaker 1: Investors is a UK based active investor open to private investors.
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Speaker 1: That means the group targets quality companies training at discounts,
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Speaker 1: often family controlled holding companies, and trust to unlock their
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Speaker 1: value through active engagement. So we talked to Joe about
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Speaker 1: the strategy behind AVII Global Trust, how is strategy worked,
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Speaker 1: and what mistakes he's made along the way, as whether
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Speaker 1: as the opportunity see nurs he's abroad in both Japan
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Speaker 1: and in career. Joe, Welcome to Merin Talks Money.
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Speaker 2: Thanks for having me. It's good to be here, all right.
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Speaker 1: I know you've got quite a lot of fans among
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Speaker 1: our audience, But you may also have some listeners with
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Speaker 1: us today who don't know much about you and what
1:19
Speaker 1: you do. So I wonder if you could just set
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Speaker 1: us up by telling us about how you inverse and why.
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Speaker 2: The starting point for everything we do at AVII is
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Speaker 2: the idea that stock markets aren't always efficient. We're all
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Speaker 2: told that stock markets are efficient, and I think that's
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Speaker 2: only really true about certain parts of it. Typically the
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Speaker 2: largest liquid, most well researched and covered names, Yeah, they're
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Speaker 2: quite efficient. But there are always parts of the stock
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Speaker 2: market that are neglected, overlooked, under researched, and that gives
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Speaker 2: rise to inefficiencies. And that's generally the parts of the
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Speaker 2: stock market that we are interested. Top of that, we
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Speaker 2: particularly like the idea about being able to buy into
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Speaker 2: good quality businesses that are trading below the value of
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Speaker 2: their assets or their businesses. The two are actually linked.
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Speaker 2: The discount arises simply because the fact that price discovery
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Speaker 2: isn't working. That philosophy or process permeates everything we do.
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Speaker 2: And then I think the third angle of our approach
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Speaker 2: is it's great to buy something that when it's cheap.
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Speaker 2: It's great to buy good business that you think is
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Speaker 2: going to go up in value. But hope is not
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Speaker 2: a strategy. And the third element of our approach really
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Speaker 2: is working as an engaged shareholder to try and address
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Speaker 2: and remedy that mispricing, that undervaluation. So in some cases
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Speaker 2: it could be shoulder activism. In some cases it's a
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Speaker 2: softer shareholder engagement process, but it's always about trying to
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Speaker 2: do something to unlock value.
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Speaker 1: Okay, So here's the difference. If I doctor, any fund
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Speaker 1: manager I talk to, it is going to say roughly
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Speaker 1: what you have said. It may be in a slightly
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Speaker 1: different way. They're all going to say that they are
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Speaker 1: finding value where other people are not, that anything they
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Speaker 1: buy is going to be mispriced by the rest of
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Speaker 1: the market. That if you call your self growth, you
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Speaker 1: call these value, whatever you call yourself. When you are
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Speaker 1: an active vestor and you buy a share, you believe
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Speaker 1: you have seen something that the rest of the market
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Speaker 1: has not seen. But the difference here between what you
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Speaker 1: are saying and other people say is that you are
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Speaker 1: attempting yourself to create the catalyst to bring out the value.
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Speaker 2: There's another angle as well, and that is that, yeah,
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Speaker 2: of course, every analyst, every fund manager has got a model,
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Speaker 2: and they're going to have a target price or a
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Speaker 2: target valuation. What's interesting about many of the companies that
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Speaker 2: we invest in is that they own assets and businesses
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Speaker 2: that could be liquidated today for a pound, and they're
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Speaker 2: trading at sixty seventy pence. These aren't blue sky evaluations.
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Speaker 2: These are actual liquidation values. And I guess the most
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Speaker 2: extreme example of that is what we see in Japan,
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Speaker 2: and have seen in Japan for many years, and that
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Speaker 2: is many companies in Japan holding huge amounts of Spain
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Speaker 2: plus net cash on their balance sheets, and in the
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Speaker 2: most extreme cases, the value of that cash and sometimes
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Speaker 2: other listed securities is well above the market cap of
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Speaker 2: the company.
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Speaker 1: And that was an extraordinary thing. I mean, you'd started
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Speaker 1: your Japan only strategy. There are two trusts here, just
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Speaker 1: for those who don't know, the AVII Global and then
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Speaker 1: another AVII trust that specializes in Japan. You started that
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Speaker 1: about seven years ago, and even before you had started that,
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Speaker 1: I had been writing for years about exactly that kind
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Speaker 1: of value. And there it was. There's cash. It's just
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Speaker 1: sitting there. These companies, some of them with more cash
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Speaker 1: on the balance sheet than their market capitalization. But nonetheless
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Speaker 1: a year after year, the market simply ignored that, and
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Speaker 1: then something changed.
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Speaker 2: That's right, for many years, the mantra in Japan was
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Speaker 2: we need to have cash for a rainy day. And
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Speaker 2: in fact, when you spoke to companies in Japan, it
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Speaker 2: became clear that that they were told employees were told
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Speaker 2: that if a shareholder asks for the money back, you
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Speaker 2: tell them it doesn't belong to them, it belongs to
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Speaker 2: the company. A very subtle but important difference. But all
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Speaker 2: of it changed around ten years ago with the introduction
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Speaker 2: under the late Prime Minister Abbey of the Corporate Governance
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Speaker 2: Code and the Stewardship Code, which really attempted to change
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Speaker 2: the psychology of businesses of companies in Japan and promote
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Speaker 2: the interests of shareholders which for so long had been
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Speaker 2: really knocked back. And companies had been run primarily for employees,
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Speaker 2: society pensioners, but not for shareholders. And that really has
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Speaker 2: changed in the last decade. Taken a long time, but
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Speaker 2: we're seeing companies focused a lot more on their share price.
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Speaker 2: They are more conscious of capital efficiency, not blindly accumulating
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Speaker 2: cash and doing nothing with it, but buying back shares,
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Speaker 2: investing in their business, returning it in other ways to shareholders.
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Speaker 2: We see many companies in Japan they bothered today about
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Speaker 2: their share price. They want to know what they can
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Speaker 2: do to achieve a higher share price. And if a
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Speaker 2: shareholder comes and has a constructive answer to that dilemma,
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Speaker 2: then unlike many years ago, they want to hear you know,
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Speaker 2: in the past they didn't want to speak to us.
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Speaker 2: Now they do.
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Speaker 1: And are you still finding lots of opportunities in Japan?
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Speaker 1: I mean, it's been a good run, right and your
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Speaker 1: performance has been extremely good in Japan, So are you
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Speaker 1: looking around now and going there? Well, you know that
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Speaker 1: was great, but maybe it's time to move on.
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Speaker 2: Yeah, we are seeing many, many opportunities today. The opportunity
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Speaker 2: set has evolved. Clearly, the extreme valuations we identified seven
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Speaker 2: eight years ago of moderated to an extent. But what
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Speaker 2: has changed is the catalyst. So seven or eight years
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Speaker 2: ago you had to work really hard to get companies
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Speaker 2: to talk to you, to listen to you, to try
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Speaker 2: and do some of the things that we were suggesting.
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Speaker 2: Today they are much more willing and the door is
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Speaker 2: much more open than it was seven or eight years ago.
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Speaker 2: So in that sense, there's still discounted valuations and the
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Speaker 2: catalyst is much more likely to arrive. And the other
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Speaker 2: change that's happened over the last seven or eight years
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Speaker 2: is the presence of private equity in Japan. So Japan
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Speaker 2: has notoriously been a market in which hostile takeover activity
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Speaker 2: hasn't worked, where companies are desperate to stay listed to
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Speaker 2: not be taken over by vultures, particularly foreign vulture private
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Speaker 2: acuity funds. But the presence of private ecity has been
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Speaker 2: growing over the last seven years, both a domestic sector
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Speaker 2: and also the global sector. And whilst we've been making
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Speaker 2: the lives of the listed companies a little bit more
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Speaker 2: challenging by being an activist shareholder, on the other side
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Speaker 2: of the table, private ectita has been the nice guy,
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Speaker 2: has been playing golf, taking them to restaurants and trying
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Speaker 2: to tell them that life as a private company could
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Speaker 2: be good for them, could be good for employees, could
7:42
Speaker 2: be good for society. And so we're seeing a big
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Speaker 2: pickup and the double effect I suppose of more activist shareholders,
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Speaker 2: more willing management teams, and the threat of change of
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Speaker 2: corporate control is really driving leading to a big increase
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Speaker 2: in change of corporate control market and that's really helping
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Speaker 2: compress the discounts.
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Speaker 1: So when I was last in Japan about a year ago,
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Speaker 1: and I was talking to a lot of people about
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Speaker 1: private equity, and quite a lot of the private equity
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Speaker 1: players were finding it to be a very different market
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Speaker 1: to the one they were used to and much more
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Speaker 1: difficult to operate in.
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Speaker 2: Much more difficult to operate in. Yeah, Anecdotally, what I've
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Speaker 2: seen is there's still a resistance to hostile takeover activity.
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Speaker 2: But what's helped has been, in a sense, the evolution
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Speaker 2: of activist shareholders on registers. So you now found when
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Speaker 2: you look at our portfolio, for example, there's a handful
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Speaker 2: of situations where thirty to forty percent of the shares
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Speaker 2: are held by two or three different activist shareholders, and
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Speaker 2: that's quite an interesting development from private acty perspective. It
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Speaker 2: means that rather than approach a company not having any shares,
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Speaker 2: not having any support on the register, you could now
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Speaker 2: approach a company with thirty to forty percent support and
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Speaker 2: you could say this is what we want to do,
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Speaker 2: and then it almost becomes a fetter complain. Not always,
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Speaker 2: but it makes life very difficult for management if such
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Speaker 2: a large proportion of their register, want to see some
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Speaker 2: kind of change of corporate control.
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Speaker 1: Interesting and one of you most recently bought in Japan.
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Speaker 2: We've been buying Mitsubisia Logistics, which is a very large
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Speaker 2: logistics company, very very interesting evaluation in the sense that
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Speaker 2: not only is a very profitable operating business, not only
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Speaker 2: does it own its warehouses distribution centers on its balance sheet,
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Speaker 2: but it also owns a large chunk of investment property
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Speaker 2: assets as well, and the combined value of those real
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Speaker 2: estate assets is about twice the current share price, so
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Speaker 2: trading at a very substantial discount. Private equity has been
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Speaker 2: very active within the logistics space. Mitsibecial Logistics trades well
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Speaker 2: below book value, and there's a lot of pressure on
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Speaker 2: companies in Japan to achieve at a minimum one times.
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Speaker 2: One of its close peers has attracted interest from a
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Speaker 2: value activist investor and has seen its shares re rate
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Speaker 2: in response to that to well north of one one
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Speaker 2: and a half times in fact, and so this pressure
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Speaker 2: building on management of that company to address their undervaluation.
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Speaker 2: We are intensely engaging with a company. It's all private
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Speaker 2: and constructive at this stage, and we think we know
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Speaker 2: which direction we're traveling it.
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Speaker 1: I know you're very bottom up, but in Japan, do
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Speaker 1: you worry it all about the political environment or indeed
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Speaker 1: the fiscal environment.
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Speaker 2: We think about it, but as you say, from our perspective,
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Speaker 2: it's much more about individual companies the idiosyncratic source of
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Speaker 2: return that we can generate, which will be positive really
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Speaker 2: regardless of what's going on with the political or fiscal situation.
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Speaker 2: Of course, no company operates in a vacuum. They exist
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Speaker 2: in Japan, they're selling into Japan in many cases. But
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Speaker 2: the businesses that we tend to invest in have got
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Speaker 2: good market positions. They're very profitable, they've got very strong
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Speaker 2: balance sheets, and they're trading extremely cheaply. And notwithstanding those
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Speaker 2: other risks and other factors, there is a very substantial
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Speaker 2: upside from a series of self help measures that we
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Speaker 2: encourage companies to take.
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Speaker 1: Right, should we go a bit more global? When we
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Speaker 1: look at your global portfolio, one of the things that
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Speaker 1: you tend to focus on is more in the way
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Speaker 1: of closed end funds. So in the UK investment, trust
11:23
Speaker 1: holding companies, etc. When I look at the portfolio, which
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Speaker 1: is quite small, but what is it in the global fund?
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Speaker 1: About forty forty holdings. It's quite concentrated.
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Speaker 2: Yeah, probably twenty core names.
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Speaker 1: Really, twenty core names, twenty five core names. If you
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Speaker 1: look at it geographically, you've got much less in the
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Speaker 1: US than pretty much any global trust I look at
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Speaker 1: you've got more in Europe, more in Japan, more in
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Speaker 1: the UK than most and very little emerging markets, etc.
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Speaker 1: So should we just look briefly at wires that you
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Speaker 1: hold so little in the US relative for the index
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Speaker 1: and relative to other global funds. I know relativity is
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Speaker 1: not your thing at all, but nonetheless I think it
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Speaker 1: would be interesting for listeners to hear a little more
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Speaker 1: about that.
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Speaker 2: Well, you know, AVII Global is a benchmark agnostic trust,
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Speaker 2: and we take that claim seriously. So many others would
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Speaker 2: say benchmark agnostic, but when you look at them, they
12:17
Speaker 2: seem to have very similar allocations to the US than
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Speaker 2: the benchmark. The other factor is that we are bottom
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Speaker 2: up and we can invest where we see the most
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Speaker 2: compelling undervaluations and the most attractive upside. In recent years,
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Speaker 2: that has really led us away from the US and
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Speaker 2: to other places. When you think about it, the starting
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Speaker 2: point I said was always that markets are inefficient. Well,
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Speaker 2: when you think about the US market, it is the
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Speaker 2: most popular, largest market in the world. It's the most
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Speaker 2: well researched market. And the kind of companies that we're
12:52
Speaker 2: looking for good quality businesses on discounted valuations. So in
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Speaker 2: the US, buying a dollar of assets for fifty to
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Speaker 2: sixty cents, they're not that common. The price discovery mechanism,
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Speaker 2: the cell side research, the prior ecity arbitrage, taking taking
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Speaker 2: advantage of mispriced opportunities. That has worked to a great extent,
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Speaker 2: whereas other markets really don't have those factors working in
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Speaker 2: their favor, and so we're able to find more value.
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Speaker 1: So does that make the US a very efficient market
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Speaker 1: or a hideously over price market.
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Speaker 2: It's probably got a little bit of both. But interestingly,
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Speaker 2: we are seeing more opportunities in the US have been
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Speaker 2: the last couple of years. It's not in the popular places.
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Speaker 2: It's not amongst the high growth tech companies. It tends
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Speaker 2: to be amongst smaller companies, companies that have the kind
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Speaker 2: of characteristics that you said, we favor investment companies owning
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Speaker 2: a variety of different businesses, trading at a discount to
13:47
Speaker 2: some of the parts. But the one thing that works
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Speaker 2: in favor of the US market is that even in
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Speaker 2: those situations, management is much more focused on the share price.
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Speaker 2: So the other extreme Japan management have been focused on
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Speaker 2: the share price. They don't care, they don't own shares.
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Speaker 2: In the US, what you find is management very savvy,
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Speaker 2: financially savvy, and if they can see a discount, they
14:09
Speaker 2: will exploit it for their shaholders benefit and hopefully for
14:12
Speaker 2: theirs as well.
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Speaker 1: Can you give us an example of the kind of
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Speaker 1: thing you've been finding in the US recently? You say
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Speaker 1: you're finding more value there now.
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Speaker 2: The largest holding is a US listed company which is
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Speaker 2: News Corporation. Assets more global, I would say, but news
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Speaker 2: Corp is interesting. It's controlled by the rupert Murdock and
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Speaker 2: his family. It has two key assets within the holding company.
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Speaker 2: The first is an Australian listed business called Aria Group,
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Speaker 2: of which News Corp owned around sixty percent. It's a
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Speaker 2: very successful business, is the equivalent of what we have
14:44
Speaker 2: in the UK, Right Move, and that's got a very
14:47
Speaker 2: dominant market share, very profitable and as I say, a
14:51
Speaker 2: very successful investment for the group. So we know what
14:54
Speaker 2: the value of that is. It trades on the stock
14:55
Speaker 2: market and so we can extract that from the market
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Speaker 2: price of news corporate, look at what the implied value
15:01
Speaker 2: of the other assets are, and there is really only
15:03
Speaker 2: one key asset to think about here, and that is
15:06
Speaker 2: the one hundred percent ownership of the Dow Jones Group. The
15:08
Speaker 2: Dow Jones Group owns the Wall Street Journal, obviously a
15:12
Speaker 2: well known business and not only a successful newspaper but
15:15
Speaker 2: also a very successful online online business. But along with
15:19
Speaker 2: the Wall Street Journal, they also own a business called Opus,
15:22
Speaker 2: which is a data provider primarily for the commodities business
15:27
Speaker 2: or trading and commodities business, not too dissimilar to what
15:30
Speaker 2: Bloomberg does say for equities and bonds, but more focused
15:33
Speaker 2: on the commodities business. Now, the implied value, when you
15:37
Speaker 2: strip out the market price of Ria Group, of the
15:39
Speaker 2: Dow Jones business is around four times earnings. For maybe
15:43
Speaker 2: five times earnings. It's certainly worth a lot more than
15:46
Speaker 2: that if you look at its closest listed pier. The
15:48
Speaker 2: closer listed peer to the Wall Street Journal is The
15:51
Speaker 2: New York Times, which trades at somewhere around fifteen to
15:54
Speaker 2: seventeen times earnings, so a massive gap. Now, clearly there
15:59
Speaker 2: are question marks about the family ownership there. The alignment
16:02
Speaker 2: of interest, the importance in their mind of minority shareholders.
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Speaker 2: But I think we focus on what evidence there is
16:09
Speaker 2: out there in the public domain. And what's really been
16:11
Speaker 2: interesting about news Corp is the recent comments coming out
16:16
Speaker 2: from the CEO who's not a member of the family,
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Speaker 2: talking about the undervaluation, talking about the discount, talking about
16:22
Speaker 2: the strategic review that's ongoing at the board to think
16:25
Speaker 2: about how to address that undervaluation, talking about no sacred cows,
16:30
Speaker 2: no holds barred strategic review, and probably the dispute that's
16:34
Speaker 2: been going on in the family has held some of
16:36
Speaker 2: that restructuring back, and hopefully another that's behind we can
16:39
Speaker 2: look forward to perhaps some restructuring. But notwithstanding that, and
16:43
Speaker 2: this is really key of what we're looking for across
16:45
Speaker 2: our portfolio. You've got two very good quality businesses within
16:49
Speaker 2: News Corps that are growing in value, that are growing
16:52
Speaker 2: in profitability year and year out. So the nav side
16:54
Speaker 2: of things is growing. The discount is wide, it's forty
16:57
Speaker 2: five percent, it's extremely wide, and we think the discount
17:02
Speaker 2: will be addressed. We can't determine when that is going
17:04
Speaker 2: to be addressed. But the key whilst we're waiting at
17:06
Speaker 2: least is to have that pound of value increasing rather
17:09
Speaker 2: than be stuck in a value trap where you own
17:12
Speaker 2: a pound of assets that's going south and it becomes
17:15
Speaker 2: a race against time to monetize that discount.
17:18
Speaker 1: Yeah, but this is an example this kind of investment.
17:20
Speaker 1: This is a company where you as a firm can't
17:23
Speaker 1: really create the catalyst yourself.
17:24
Speaker 2: Correct.
17:25
Speaker 1: You have to stand back and wait for it to happen.
17:28
Speaker 2: Yeah, And in those kinds of situations, what we're looking
17:30
Speaker 2: for is the belief that something is going to happen.
17:35
Speaker 2: And it's more than just a belief that something is
17:37
Speaker 2: going to happen because it's the right thing to do.
17:39
Speaker 2: It's looking for those explicit indicators from management that they
17:43
Speaker 2: are doing a strategic review, that they're bothered about the discount,
17:46
Speaker 2: that actually something is going to happen, because otherwise you're
17:49
Speaker 2: just left with hope and that's not good enough. And
17:51
Speaker 2: the exciting thing from about our opportunity set today is
17:55
Speaker 2: that there are so many companies trading on wide discounts
17:58
Speaker 2: where there is something happened and we don't know exactly
18:01
Speaker 2: the timing in all situations, but we know that something
18:03
Speaker 2: is happening, which is a big turnaround from I don't know,
18:07
Speaker 2: fifteen years ago when there was a lot of value
18:09
Speaker 2: on offer, but it wasn't clear, it wasn't apparent what
18:12
Speaker 2: was going to happen to unlock that.
18:14
Speaker 1: ANUA can we talk speaking of unlocking value about the
18:34
Speaker 1: private equity exposure in the portfolio. So that's an area
18:37
Speaker 1: where there's lots of private equity investment trust in the
18:39
Speaker 1: UK trading on slightly lower or higher lower discounts than
18:43
Speaker 1: they were previously, but nonetheless there's a lot about and
18:45
Speaker 1: you hold quite a lot in the portfolio that has
18:47
Speaker 1: private ect exposure.
18:49
Speaker 2: Right. Yeah, we became more interested i would say in
18:52
Speaker 2: the private equity trusts probably two or three years ago,
18:55
Speaker 2: at a time when interest rates started going up. You
18:58
Speaker 2: started seeing prices come down and you started seeing discounts widen.
19:04
Speaker 2: And what was interesting to us at a point in
19:06
Speaker 2: time was discounts were in some cases forty to fifty
19:10
Speaker 2: percent and there was obviously a debate about what the
19:14
Speaker 2: navs were, but we could see when looking at the
19:17
Speaker 2: secondaries market. So the secondari's market provides good pricing evidence
19:22
Speaker 2: of what investors are buying. In some cases some of
19:26
Speaker 2: those very same underlying funds that the private ectitory funds
19:31
Speaker 2: themselves own, and they were trading probably at five to
19:34
Speaker 2: ten percent discounts to reported navs. So in our minds
19:39
Speaker 2: we could see quite a dislocation between how the market
19:42
Speaker 2: was pricing the private ectory funds themselves and what was
19:45
Speaker 2: really going on by in some cases and quite sophisticated investors.
19:49
Speaker 2: So that gave us some confidence that the navs weren't
19:53
Speaker 2: as unrealistic as perhaps some investors had feared. And then
19:57
Speaker 2: for us, the question is, we're not asked allocating. We're
20:00
Speaker 2: not just picking up stakes in listed privatectory funds for
20:04
Speaker 2: the sake of it. We want to add some value
20:06
Speaker 2: for our shareholders, and typically the value we add to
20:09
Speaker 2: our shareholders whenever we invest in other investment trusts is
20:14
Speaker 2: some form of shoulder engagement, some form of sholder activism,
20:17
Speaker 2: and that typically arises when we can be a large
20:20
Speaker 2: dominant shareholder, if not the largest, then let us say
20:23
Speaker 2: a top three shareholder. And so what we've seen, and
20:27
Speaker 2: I think we've played our part in this is a
20:30
Speaker 2: sector that's now more aware of capital allocations. You're seeing
20:35
Speaker 2: more and more private active funds doing share buybacks. We
20:38
Speaker 2: are pressing companies to take advantage of those discounts by
20:43
Speaker 2: rather than make new investments by their own portfolios on
20:46
Speaker 2: very steep discount which is a positive risk free return
20:50
Speaker 2: that's hard to beat elsewhere. And we're still seeing a
20:54
Speaker 2: number of attractive opportunities.
20:56
Speaker 1: Okay, then private equity business as a whole, the sector
20:59
Speaker 1: seems to be in some degree of trouble. Exits increasingly difficult,
21:04
Speaker 1: IPO markets self jammed up, so when you look at
21:06
Speaker 1: the sector as a whole, you might think that's not
21:08
Speaker 1: really somewhere I want to be, but you're happy with
21:11
Speaker 1: it because you're buying on those big discounts.
21:13
Speaker 2: We're happy buying either trusts that own relative concentrated portfolios
21:18
Speaker 2: of businesses that we can analyze and comfortable with the
21:21
Speaker 2: evaluations of those businesses, So something like Oakley Capital, for example,
21:25
Speaker 2: fairly transparent portfolio and excellent track record and attractive valuation
21:31
Speaker 2: as well, or some of the more diversified listed private
21:34
Speaker 2: ecity funds where the discounts are very wide, and it's
21:39
Speaker 2: really up to us to engage with the boards to
21:42
Speaker 2: do more to take advantage of those wide discounts by
21:47
Speaker 2: buying back shares, but be more shareholder friendly, more focused
21:51
Speaker 2: on the share price and take action in that.
21:54
Speaker 1: And how do the boards of those investment trusts enjoy
21:56
Speaker 1: that interaction with you?
22:00
Speaker 2: Obviously it's mixed, you know. I think for us, though,
22:02
Speaker 2: the starting point is we never want to be an
22:04
Speaker 2: aggressive bully. It always works best to be polite, to
22:09
Speaker 2: be constructive, and that is helped by the fact that
22:15
Speaker 2: we typically like the portfolio as we own. We typically
22:18
Speaker 2: like underlying businesses. And it's not a case of a
22:22
Speaker 2: pound of assets that's going south very quickly, which would
22:24
Speaker 2: make us which would force us really to be aggressive.
22:27
Speaker 2: It's more we can be patient. We just want to
22:29
Speaker 2: see companies start to do more of the right thing. Okay,
22:33
Speaker 2: clearly the investment trust space generally has suffered an exodus
22:38
Speaker 2: of shareholders. It's why we see so many discounts, as
22:41
Speaker 2: in some cases there's a lack of buyers, you could say.
22:44
Speaker 2: But what's interesting is that more investors, more shareholders alongside
22:48
Speaker 2: us are becoming engaged as well. They've found their voice
22:52
Speaker 2: and they're recognizing that their remit to their own stakeholders
22:55
Speaker 2: is to be proactive, not just to be accepting of
22:59
Speaker 2: wide discount and one of the things we do is
23:03
Speaker 2: get together with our shareholders, write joint letters to boards.
23:07
Speaker 2: It just makes obviously life a little bit more challenging
23:09
Speaker 2: for the boards, but it makes it a more constructive dialogue.
23:12
Speaker 2: It was never this bad in the UK, but in Japan,
23:15
Speaker 2: for example, whenever you had a go your criticize management,
23:19
Speaker 2: they'd always say you're the only shareholder is not happy.
23:21
Speaker 2: All my other shareholders tell me they love me. Doing
23:23
Speaker 2: things together with our sholders can be very powerful.
23:26
Speaker 1: Let's stick with the trust for a minute, because a
23:28
Speaker 1: lot of our listeners are investment trust investors. What happens
23:30
Speaker 1: to the investment trust sector as a whole in the UK.
23:33
Speaker 1: Does it just shrink right back until we have a
23:35
Speaker 1: much smaller sector focus mainly on a liquid asset or
23:38
Speaker 1: is there another route for it?
23:40
Speaker 2: No? I think I'm more positive than that. I think
23:42
Speaker 2: it plays a very important role and we're going through
23:46
Speaker 2: a shift clearly. In order to be relevant, funds have
23:51
Speaker 2: to be of a certain size, and probably the days
23:54
Speaker 2: of the very small trusts trading on very wide discounts
23:59
Speaker 2: that they might find their days numbered.
24:01
Speaker 1: Can I just pick up on that. We've been saying
24:03
Speaker 1: this for ages, haven't we that to be relevant in
24:05
Speaker 1: investment trust now has to be much bigger than it
24:07
Speaker 1: used to be. And we used to say what has
24:08
Speaker 1: to be four hundred million pounds be relevant, Then that
24:10
Speaker 1: has to be be close to a billion to be relevant, etcetera, etcetera.
24:13
Speaker 1: But that assumes that the audience for investment trust is
24:16
Speaker 1: quite institutional. If you assume that there's a shift underway
24:18
Speaker 1: in this sector, and in fact the market for investment
24:21
Speaker 1: trust is much more the ordinary man in the street,
24:23
Speaker 1: the retail investor, then it doesn't have to be a
24:25
Speaker 1: particular size. You can be one hundred million pounds and
24:28
Speaker 1: still be very attractive for the retail investor. You only
24:30
Speaker 1: have to be big if you have large wealth managers
24:33
Speaker 1: wanting to be invested in you, which increasingly doesn't seem
24:36
Speaker 1: to be the case anyway.
24:39
Speaker 2: Yes, that's true, But the question then becomes, how does
24:42
Speaker 2: the sector as a whole attract that person on the street,
24:46
Speaker 2: that retail investor. Sorry, TikTok, yeah, exactly exactly. The younger
24:53
Speaker 2: generation of investor today, one has to reach them in
24:57
Speaker 2: different ways to the ways of even ten years ago,
25:00
Speaker 2: even five years ago. They are in many ways confused
25:04
Speaker 2: about investment trusts. Because they're more comfortable with the open
25:09
Speaker 2: ended world where something is worth a pound and you
25:12
Speaker 2: buy for a pound and then you sell it for
25:13
Speaker 2: a pound. This whole idea that it's worth a pound
25:15
Speaker 2: and I can buy it for ninety p, but when
25:17
Speaker 2: I want to sell it, it's atp. That's just weird
25:20
Speaker 2: fun though it is great fun. But the problem is
25:23
Speaker 2: that the investors who like it and find it fun
25:26
Speaker 2: and the one who you know, the ones who don't
25:29
Speaker 2: care whether something is fifty million or five hundred million,
25:32
Speaker 2: they're getting old and then they're taking their money out
25:35
Speaker 2: of the sector or it's disappearing in other ways. So
25:40
Speaker 2: you do have to attract the retail investor. The retail
25:42
Speaker 2: investor is key, and the sector as a whole has
25:45
Speaker 2: to do more to appeal to those retail investors. The
25:48
Speaker 2: wealth managers, yeah, the problem is being relevant to the
25:51
Speaker 2: wealth managers, but even there we're seeing some shifts. So
25:55
Speaker 2: the consolidation in their wealth management sector has meant that
25:58
Speaker 2: most trusts aren't relevant. Running fifty billion or one hundred billion,
26:02
Speaker 2: even a billion pound trust is not going to solve
26:04
Speaker 2: your problem of how to allocate to global equities. Say,
26:08
Speaker 2: but the whole centralization that's going on there, and again
26:11
Speaker 2: the whole focus on open ended funds within those wealth
26:14
Speaker 2: managers has meant that many individual wealth managers are leaving.
26:17
Speaker 2: They're going to more boutique type firms exactly to take
26:20
Speaker 2: advantage of the kind of situations that you say.
26:23
Speaker 1: That's some good news. Thank you for that. Let's move
26:26
Speaker 1: on to another bit of good news, which is your
26:28
Speaker 1: shift towards career. And you've recently been on a trip
26:30
Speaker 1: and I'm wondering if you're looking at Korea now and
26:32
Speaker 1: seeing the same kind of opportunities that you might have
26:34
Speaker 1: seen in Japan a few years back.
26:36
Speaker 2: Yeah, we're very excited about Korea. It's a market we've
26:39
Speaker 2: been looking at for a few years. It's looked very
26:43
Speaker 2: cheap for a very long time, but like Japan ten
26:46
Speaker 2: years ago, it lacked a catalyst. Nothing ever changed except
26:49
Speaker 2: that the price has got cheaper. And we've now actually
26:52
Speaker 2: put around eight percent of the global trust into Korean names.
26:55
Speaker 2: We own seven or eight different businesses there. And the
26:59
Speaker 2: reason why we've done that is because the new government
27:01
Speaker 2: in Korea has brought into place a number of laws
27:06
Speaker 2: and regulations and intends to do more in order to
27:10
Speaker 2: promote stock market ownership in order to limit the power
27:17
Speaker 2: of controlling shareholders, which has been a big negative of
27:19
Speaker 2: the market and has weighed on share prices, and to
27:23
Speaker 2: address undervaluation of companies on the stock market as well. Interestingly,
27:28
Speaker 2: the new president came in on a platform of costly
27:32
Speaker 2: five thousand, aiming to get the cost by to double
27:35
Speaker 2: from the point when he came into power within five years,
27:38
Speaker 2: which is remarkable. And they're pursuing a carrot and stick
27:42
Speaker 2: approach to regulation, So there'll be some things like tax
27:46
Speaker 2: incentives to pay out dividends. That's a carrot. The stick
27:49
Speaker 2: would be forcing companies to cancel share cancel treasury shares
27:53
Speaker 2: as opposed to letting them blindly accumulate.
27:55
Speaker 1: Okay, will there be a dedicated Korean trust from you,
27:58
Speaker 1: given that seems to be this signal.
28:00
Speaker 2: No plans as yet, But you're not the first person
28:02
Speaker 2: to ask about that.
28:04
Speaker 1: You can't say that. It makes me feel small when
28:06
Speaker 1: you say I'm not the first person to ask the question.
28:09
Speaker 2: Well, we haven't spoken for a while, so otherwise I
28:11
Speaker 2: would have told.
28:11
Speaker 1: You, okay, fair enough, tell us about some of the
28:14
Speaker 1: specific companies that you've been picking up in.
28:16
Speaker 2: Correct, yeah, Well, we own one company called a More Pacific,
28:20
Speaker 2: which is a holding company controlled by a family and
28:23
Speaker 2: its main asset. So there's a More Pacific Holdings and
28:25
Speaker 2: there's a More Pacific Corporation which is the main asset,
28:28
Speaker 2: which is a leading cosmetics a business in career and
28:31
Speaker 2: Korean cosmetics and skincare generally, I'm told is extremely popular.
28:36
Speaker 1: Oh, it is, Joe, It is extremely popular. It is
28:39
Speaker 1: extremely popular. A lot of our listeners, I know, they
28:41
Speaker 1: all have brilliant Again, they'll be using Korean products.
28:44
Speaker 2: They will, so again, the operating business is listed, so
28:48
Speaker 2: the holding company trades at about a forty percent discount
28:50
Speaker 2: to the value of it's operating business which it controls.
28:54
Speaker 2: And this is typical in Korea. There's a lot of
28:56
Speaker 2: family controlled holding businesses. Obviously, the large Samsung and and
29:00
Speaker 2: sk the large Chabels are well known. This is perhaps
29:03
Speaker 2: a less well known company. But the idea of family
29:06
Speaker 2: ownership and yeah, the issue in Korea is that in
29:11
Speaker 2: many cases, families see these businesses even though they're listed
29:15
Speaker 2: as their own personal fiefdoms, and they don't care about
29:17
Speaker 2: minority shareholders. And a lot of the regulation that's coming
29:20
Speaker 2: in is designed to address that, so encouraging something like
29:24
Speaker 2: a more opecific to pay more dividends, to reduce cash
29:28
Speaker 2: on the balance sheet, to cancel treasury shares, and just
29:31
Speaker 2: to promote the interest of minority shareholders. There's a law
29:34
Speaker 2: that's been passed in Career recently that restricts the votes
29:39
Speaker 2: of any shareholder to three percent when it comes to
29:42
Speaker 2: voting for independent, independent directors and independent auditors on the board.
29:47
Speaker 2: So that is a direct response to the perception that
29:51
Speaker 2: large family controlled companies are only run for the families
29:53
Speaker 2: and not minority shelders. So it doesn't address everything, but
29:56
Speaker 2: it's a very clear signal and a clear step in
29:58
Speaker 2: the right direction.
30:00
Speaker 1: And what about your activist tendencies, how do you engage
30:03
Speaker 1: with Korean companies?
30:05
Speaker 2: Well, the activism element of it is key as well,
30:09
Speaker 2: utilizing the support of the new laws and new regulations
30:12
Speaker 2: that are coming into place. It empowers those conversations and
30:16
Speaker 2: makes them direct and much more realistic. The reason we
30:21
Speaker 2: see a lot of parallels to Japan is that change
30:23
Speaker 2: takes time. Companies don't change overnight, Families don't change their
30:27
Speaker 2: attitudes immediately. There are some things that they will have
30:30
Speaker 2: to change if the law tells them to, but other
30:33
Speaker 2: things they'll have to be persuaded that it's the right
30:36
Speaker 2: thing to do. Yeah, So dialogue with these companies is
30:39
Speaker 2: very much on the agenda. We are very early days
30:42
Speaker 2: in that respect, but we've met a number of different
30:45
Speaker 2: companies and the dialogue starts good.
30:49
Speaker 1: All right, let's talk about an economy and whether regulation
30:53
Speaker 1: is going or normally goes only in the other direction.
30:56
Speaker 1: The UK, where you do have again a slightly higher
30:59
Speaker 1: exposure then most global funds. You're ten eleven percent at
31:03
Speaker 1: the moment. Where's the value here?
31:06
Speaker 2: Well, again, it's very much a bottom up case for us.
31:10
Speaker 2: We've had some investments in the property listed property sector
31:16
Speaker 2: property fund sector where we've seen and continue to see
31:19
Speaker 2: some consolidation and pressure on companies to either merge, take
31:26
Speaker 2: over others or liquidate assets in return cash to shaholders.
31:30
Speaker 2: We have a stake in a family backed UK business,
31:34
Speaker 2: the retailer Phrases, which has obviously a well known retail operation,
31:39
Speaker 2: but also substantial asset backing in the form of a
31:43
Speaker 2: growing real estate portfolio, and stakes in other businesses. And
31:47
Speaker 2: we have a stake in Entain, the online gambling company
31:51
Speaker 2: which is listed in the UK.
31:53
Speaker 1: And do you have concerns. I know I asked you
31:55
Speaker 1: this about Japan, but I do have to ask you
31:57
Speaker 1: about the UK as well as political the first Goal andenvironment, inflation,
32:02
Speaker 1: all these things don't seem to create a great environment
32:07
Speaker 1: for corporate improvement. Do you worry about that? Warry your concerns?
32:11
Speaker 2: Yeah, I live in the UK, so I'm desperately worried
32:13
Speaker 2: about it, and yeah, it's a big worry. What's interesting
32:16
Speaker 2: about the UK market, though, is that despite the big
32:20
Speaker 2: picture concerns, in some cases quite negative headwinds, there is
32:24
Speaker 2: still a very active market for corporate control. You're seeing
32:29
Speaker 2: private equity getting quite involved trying to take advantage of situations,
32:33
Speaker 2: and that that's quite positive. That's what we haven't seen
32:37
Speaker 2: in other parts of the world necessarily, and that gives
32:41
Speaker 2: one confidence that if you can buy good quality assets
32:44
Speaker 2: on a discount, then maybe something will happen to address that.
32:47
Speaker 2: So that's the one positive I would say.
32:49
Speaker 1: Okay, I'm afraid that's quite a vague positive around in
32:55
Speaker 1: the around. So we've talked a lot about the positive
32:59
Speaker 1: feelings you have things that might work. Where it's all working,
33:01
Speaker 1: You've had wonderful performance when you look at your portfolio
33:04
Speaker 1: in the round, What is it that you're nervous about?
33:07
Speaker 1: What worries you if there were, for example, if it
33:09
Speaker 1: were to transpire that there is, for example, a bubble
33:12
Speaker 1: in AI in the US and perhaps more globally, and
33:15
Speaker 1: that were to collapse, for example, what would happen to
33:17
Speaker 1: your portfolio? How defensive is this portfolio? Eminem It's not
33:21
Speaker 1: jammed with gold, but how defensive is it? For a
33:24
Speaker 1: and investor at the moment too, is worried as I
33:26
Speaker 1: think all our listeners are right now very worried about
33:29
Speaker 1: all the things that they see around them. They're worried
33:31
Speaker 1: about geopolitics, They're worried about their US exposure, they're worried
33:34
Speaker 1: about AI overexposure, they're worried about valuations. There's a long
33:38
Speaker 1: list out there.
33:38
Speaker 2: Yeah, it's a good question, and I think the point
33:41
Speaker 2: is that we are an equity portfolio, and we are
33:46
Speaker 2: fully invested in equities. We would argue that our equities
33:50
Speaker 2: are much cheaper than certain parts of the market. But
33:54
Speaker 2: I think it would be naive to assume that the
33:57
Speaker 2: very expensive tech companies, for example, would correct and our
34:01
Speaker 2: portfolio would be unaffected by that. So clearly there's an
34:05
Speaker 2: element of better market exposure, and we would probably suffer
34:10
Speaker 2: some declines in that eventuality as well. Whether they'd be
34:13
Speaker 2: greater or not or less is really hard to say.
34:17
Speaker 2: The things that give me some confidence are the fact
34:19
Speaker 2: that when you look at our portfolio and we measure
34:23
Speaker 2: the discount on each of our companies, and so we
34:26
Speaker 2: have a picture of what the weighted average discount on
34:28
Speaker 2: our portfolio is now compared to what it is over time,
34:32
Speaker 2: and where it's at at the moment is around thirty
34:34
Speaker 2: seven to thirty eight percent. But to put that into
34:36
Speaker 2: some historical context, it's rarely pierced that forty percent level,
34:41
Speaker 2: and it's been as narrow as ten percent, and for
34:45
Speaker 2: a few weeks during the COVID cell off it for
34:47
Speaker 2: a few days rather it touched forty five. But if
34:50
Speaker 2: you look back at the financial crisis and the euro crisis,
34:53
Speaker 2: it rarely went below beyond the forty percent level. And
34:56
Speaker 2: what that says is that discounts already pretty wide and
35:00
Speaker 2: coupled with underlying valuations that I think are reasonable and
35:04
Speaker 2: not stretched at all. What I think could happen is
35:07
Speaker 2: you might see in the eventuality of a big market correction. Yes,
35:11
Speaker 2: discounts could widen temporarily in our share prices could fall,
35:16
Speaker 2: but they're more likely to bounce back pretty quickly because
35:19
Speaker 2: they are already at extreme undervaluations. And the reason why
35:23
Speaker 2: it never really goes beyond forty percent is that those
35:25
Speaker 2: kind of levels you start seeing quite attractive entry points
35:28
Speaker 2: and people start taking advantage of that. So I think
35:31
Speaker 2: if our portfolio was trading on a ten percent weighted
35:34
Speaker 2: average discount, I'd be much more worried.
35:36
Speaker 1: Good, very reassuring. One thing that a lot of our
35:38
Speaker 1: listeners do hold a lot of, and it's not in
35:40
Speaker 1: this portfolio, though, is gold? I know, not necessarily your remit,
35:44
Speaker 1: But how do you feel about the gold factor at
35:45
Speaker 1: the moment? It's been a wonderful runner. Hopefully all our
35:48
Speaker 1: listeners are doing extremely well out of that, which is
35:50
Speaker 1: a bad thing. By the way, you don't want gold
35:52
Speaker 1: to go up. It tells you terrible things. But nonetheless,
35:55
Speaker 1: should they worry about that now it's gone too far
35:57
Speaker 1: to buy more mining companies? Maybe they're just wap into silver.
36:00
Speaker 1: I don't know, what do you think.
36:02
Speaker 2: You know more about it than I do? It looks
36:03
Speaker 2: like gold mining companies that are cheap.
36:05
Speaker 1: Would you buy them though, I.
36:07
Speaker 2: Wouldn't buy them for AVI Global?
36:08
Speaker 3: Nough?
36:10
Speaker 1: Would you buy some bitcoin for AVI Global?
36:13
Speaker 2: Oh, definitely not. But it's a sore point in my household.
36:17
Speaker 2: Why Oh, because I've been long warning everybody in my
36:20
Speaker 2: family not to touch it and it's going to crash.
36:23
Speaker 2: And a couple of members did buy a little bit
36:25
Speaker 2: of bitcoin some years ago and they're laughing. Well, they're
36:28
Speaker 2: not because they didn't buy enough, because enough exactly.
36:32
Speaker 1: I mean, I'm always smug on this podcast because I
36:34
Speaker 1: have some bitcoin and John doesn't have any bitcoin. But
36:37
Speaker 1: what I very rarely admit is just how little bitcoin
36:40
Speaker 1: I have. Again, I'm smug about it, but it's tiny.
36:42
Speaker 1: But at least it's something at something happened. Whatever happens next. Joe,
36:46
Speaker 1: is there anything we've missed, anything that you must tell
36:48
Speaker 1: us that I have not asked you? Please show up?
36:51
Speaker 1: My inadequacies is an interviewed by appointing out.
36:53
Speaker 2: Oh it's very common, Really good.
36:57
Speaker 1: Joe, Thank you so much for being with us today.
36:59
Speaker 1: Acusually appreciate it. That was fascinating.
37:01
Speaker 2: Thanks a lot.
37:02
Speaker 3: Keep well, thanks for listening to this week's Maren Talk
37:08
Speaker 3: to Money. If you like us show, rate, review, and
37:10
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37:13
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37:16
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37:19
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37:22
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37:25
Speaker 1: This episode was hosted by Me Maren Somerset Web. It
37:28
Speaker 1: was produced by Someersadi and Moses Anderm. Sound designed by
37:31
Speaker 1: Blake Maple's and Aaron kaspers Plaital thanks to Joe bound
37:35
Speaker 1: Front