Value Investing

Avenir Value Fund June 2016 Investor Letter

Avenir Capital is based in Sydney, Australia. The hedge fund is a value-oriented, global public market investment fund returning annualised gross returns of 17% over the past five years. Below is Avenir Value Fund investor letter for the month ended June 30, 2016.

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Dear Partner:

The Avenir Value Fund (the “Fund”) increased 6.6%, net of fees and expenses, in the June 2016 quarter compared to the S&P 500 which increased 2.5% and the ASX All Ordinaries which increased 3.9% for the quarter. For the 12 months to 30 June 2016, the Fund returned -1.4% compared to the S&P 500 which returned 4.0%, the ASX All Ords which returned 0.6% and the MSCI World Total Return index which returned 0.4%.

Avenir Value Fund – Let’s get Brexit out of the way

It is hard to recall the last time a ‘crises’ came and went so quickly and had so many people say so much in so little time about something about which they knew so little. We are not going to add to the long list of Brexperts saying so much, none of whom actually saw it coming just a few weeks ago. We do not know what the long term effects of Brexit will be on the UK or Europe or, more broadly, the world. After markets recovered quickly from the initial shock, causing a “V” shaped move in asset prices over a number of days, there are now signs that fears over some of the potential longer-term consequences are dawning on people, for example, UK commercial property investors who have seen redemptions frozen by 7 (by our last count) property funds1. On the other hand, European officials and national politicians appear to be adopting a more conciliatory tone than in the early days and Theresa May, the newly appointed UK prime minister, appears to be both pragmatic and inclusive both of which will be valuable as the UK negotiates its exit.

All we will say is that it is just another reminder that nothing is certain and volatility is just a natural part of investing and should not cause the long-term investor undue distress if they avoid leverage and follow a sensible investment program of buying real businesses when they are available for less than they are worth.e have said in the past, we welcome short-term volatility and emotional, reactive decision making from other participants in the market as it allows dispassionate and economically rational investors (which we strive to be) an opportunity to put money to work in sound businesses at very attractive prices.


Investors globally are in some-what of a quandary at the moment. Global growth is sluggish and people continue to treat what growth there is with suspicion. Potential recessions appear around every corner before retreating just as quickly. This state of play seems to have been going on for a long time now and central banks have dealt with it through 8-years of immense monetary accommodation which has driven interest rates to record lows. The U.S. 10-year Treasury Note yield hit 1.36% on the 8th of July, the lowest in history. While low, 1.36% is, at least, still positive. Government bond rates are now negative in many countries such as Germany, Switzerland and Japan. Bank of America Merrill Lynch estimate there is now $13 trillion globally of negative-yielding debt compared to barely none in mid-2014.

Low rates have had a profound effect on peoples investing behaviour forcing them to allocate more capital to certain asset classes than they would if rates were higher. A recent Wall Street Journal article2 highlights this point very clearly. US Pension funds typically target 7-8% as their expected long term return. In 1995, they could achieve 7.5% per annum by investing in nothing but investment grade bonds. In 2005, they could have made their 7.5% with a portfolio of 52% investment grade bonds, 40%, mainly, U.S. equity and a sprinkling of private equity and real estate. In 2015, those same funds would have to shrink the bond portion of their portfolio down to 12% with private equity and real estate making up 25% of the pool and the rest as U.S. and global equity.

Avenir Value Fund

It is this dynamic that has meant that while there appears to be a general lack of enthusiasm amongst investors, the main U.S. equity indices are currently hitting all-time highs. A lack of options for investors has driven the ‘safe haven’ U.S equity market higher.

All-time highs for the U.S. market, however, should not make us feel good. Often, we read words to the effect of “equities remain reasonably priced compared to cash and bonds”. Those five words at the end, “compared to cash and bonds”, make a big difference when added to the statement “equities are reasonably priced”. People can be lulled into thinking large dividend paying stocks or companies with predictable near-term and therefore ‘quality’ earnings are ‘safe’ despite prices rising to levels that even a rudimentary, dispassionate analysis would suggest are anything but safe.

The other effect at play here is the rise in indexing or passive investing strategies. Indexing means that something that is working will work more as more money in the index chases it. Netflix, for example, has more money seeking to invest in it every day as its price rises irrespective of the underlying performance and prospects of the company. As more money is placed into index funds, that money has to be put to work in those companies that make up the index. This can lead to upward price pressure for a period as that is how the law of demand and supply works.

Exxon provides a startling example of the distorting effect index investing can have on security prices as outlined recently by Horizon Kinetics3. One would assume that the equity value of Exxon, the largest oil company in the world, would be impacted by the price of oil which has seen a precipitous decline over recent years from a peak of $120 in April 2011. Exxon felt that pain with earnings falling from a peak of $9.70 per share in 2012 to $3.85 per share in 2015, a fall of 60%.

However, the share price of Exxon, as at 30 June 2016, was $93, higher than the share price at the beginning of 2012 when it stood at $85 per share when oil was at its peak. One plausible explanation is that Exxon is contained in a plethora of ETF4 strategies including energy, dividend paying, value, large cap, quality dividend, low beta, S&P 500 ex-healthcare, defensive, covered call, etc. Horizon Kinetics note it is even a 2.04% weight in the Global X S&P 500 Catholic Values ETF. A multitude of massive asset allocators are forced to buy Exxon irrespective of the price of oil. Large and liquid companies such as Exxon and many others are “required as raw material for the industrial-scale investing…”5 as practised by the rapidly growing ETF industry. The growth of index investing and the ETF industry’s lack of reliance on fundamentals cannot end well for those invested in those indices, most of whom have very little understanding of what makes up the index they own.

So, we have a world