GVF – a cheap way for low risk non AUD exposure

GVF – I have been a shareholder in GVF since not too long after they floated. After selling some earlier in the year at $1 I just recently bought back in at the same price.

For more background on how this investment manager goes about things take a look at the Useful Web Links category on this blog where there is a link to some of their investor presentations. To summarize they use activist measures and scan the globe for investments and typically therefore have the vast majority of funds in non AUD currencies. Their aim is to also diversify across asset classes and achieve returns with lower volatility so as you can see it is a style not too different to what I have outlined as my approach.

The opportunity presented itself this week to lift my exposure to non AUD currencies in a relatively cheap way via GVF. When I sold some this year the discount to NTA was under 5% and the AUD/USD rate was 69, and I had a large overweight in non AUD investments which is why I sold. Also I suspected the immediate options issue coming up might weigh on the share price a little.

Recently I profited from the AUD/USD declining from 77.40 to 75 however was disappointed to reduce that position such that the move further down from 75 to 72 I have only marginally benefited from. The GVF portfolio would have benefited from the last April 30 NTA figures with the continued decline in the AUD, however for various reasons this has perhaps gone unnoticed. Therefore, in buying GVF recently if feels like I have captured a part of this for free.

At a guess the pre-tax NTA could be around $1.11 and the shares can be bought at $1, which is not a large discount to NTA in the LIC space but probably the widest for this stock. Here are some factors that make me suspect the discount will not go wider.

  • They have recently gone ex a large dividend, that often creates some short term weakness however they intend to pay good dividends going forward so over time investors will gravitate back.
  • Some directors have been selling. Recently it probably crept up on directors that their 1 for 1 options were in the money with a large fully franked dividend approaching around the exercise date. Their weights probably got large in GVF so I see this as some minor rebalancing and the selling will dry up.
  • As discussed above the AUD decline should help the portfolio since the April 30 NTA was reported.
  • Global equity markets have been a tad soft this month probably filtering through to some weakness in the GVF price. Yet if we look at their portfolio now they have a much lower exposure to equities than maybe some realize. Only around 20% equities last month whereas about 50% was in cash or fixed income.
  • Finally, one of GVF’s main games is to buy companies that have poor capital management policies and agitate for change and improvement. For this reason, it would be hypocritical and damaging to their brand for them to let their own shares trade at a wide discount to NTA, after recently raising capital and increasing the size of the fund quite a lot since the float. So if the discount widens now from 10 to 15% I suspect they may announce a share buyback themselves. Note that they already implemented an innovative DRP/buyback plan (refer announcements March 14) that may help the share price during the next dividend. Yet a standard 10% of capital on market share buyback could also come down the track if the discount widens from here.
  •    To make things balanced I will touch on the negative. The negative with GVF is as typical for these style of funds the management fees are expensive. Though with the extensive work they do in their activist approach with target companies, and their solid performance record with low volatility I think they can argue an expensive fee structure is somewhat justified.
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