Activist Investing: Unlocking Value in Japan, Korea, and Beyond with Joe Bauernfreund

The AVI Investment Philosophy

• 💡 AVI's core philosophy is that stock markets are not always efficient, particularly in neglected, overlooked, or under-researched areas.
• 🎯 They focus on buying quality businesses trading below the value of their assets or operations, often driven by mispricing due to inefficient price discovery.
• 🔑 A crucial element is active engagement as a shareholder to address and remedy mispricing, either through shareholder activism or softer engagement.

Japan's Governance Revolution

• 🚀 Japan's market has transformed significantly due to the introduction of the corporate governance and stewardship codes.
• 📈 Companies are now more focused on their share price and capital efficiency, actively buying back shares, investing in businesses, and returning capital to shareholders.
• 🤝 Management teams are more receptive to shareholder engagement and constructive ideas for unlocking value, a stark contrast to previous decades.
• 🏢 The presence of private equity has also increased, creating a dynamic where activist shareholders and PE firms can drive change and compress discounts.

Opportunities in South Korea

• 🇰🇷 South Korea is emerging as a market with significant opportunities, similar to Japan's past potential, but now with a catalyst for change.
• 🏛️ The new government is implementing laws and regulations to promote stock market ownership, limit controlling shareholder power, and address company undervaluation.
• 💰 Initiatives include tax incentives for dividends and restrictions on accumulating treasury shares, signaling a shift towards shareholder interests.
• 📈 The goal of reaching Kospi 5000 indicates a strong governmental push for market growth and improved valuations.

Global Strategy and US Market

• 🌍 AVI Global Trust is benchmark-agnostic, allowing investment in compelling undervaluations globally, with less allocation to the US due to its efficiency.
• 🇺🇸 While historically avoiding the US, more opportunities are emerging among smaller companies and investment companies trading at discounts.
• 📰 News Corporation is highlighted as a significant US holding, where the value of its REA Group stake and Dow Jones business is significantly higher than its market price, with management signaling a strategic review.

Investment Trusts and Private Equity

• 🏦 Private equity trusts became attractive due to widening discounts (40-50%) as interest rates rose, offering opportunities to buy NAV at a significant discount.
• 🤝 AVI engages in shareholder engagement and activism within these trusts, advocating for capital allocation, share buybacks, and shareholder-friendly actions.
• 📈 The UK investment trust sector is undergoing a shift, with a need for larger, relevant funds to attract institutional investors, though smaller trusts might appeal to retail investors.
• 💬 The sector needs to better attract retail investors by adapting communication strategies and highlighting the unique value proposition of investment trusts.

Navigating Market Worries

• 📉 While the portfolio is fully invested in equities, it is cheaper than many market segments, offering some resilience.
• ⚠️ The portfolio would be affected by a collapse in expensive tech stocks, but the wide existing discounts (around 37-38%) provide a buffer, suggesting a quicker bounce-back potential.
• 📊 The current wide discounts and reasonable underlying valuations make the portfolio more defensive than if it were trading at narrow discounts.