AVI Japan Opportunity Trust: Activists targeting small-cap Japan

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AVI Japan Opportunity Trust: Activists targeting small-cap Japan

The AVI Japan Opportunity Trust is a relatively new and unique investment trust that invests in a concentrated portfolio of cash-rich and over-capitalised small-cap Japanese equities.

Many Japanese small-cap stocks are significantly undervalued and offer huge potential wherever the interests of management and shareholders can be more strongly aligned.

The £100m AVI Japan Opportunity Trust (LON:AJOT) is looking to capitalise on Japanese corporate governance reform and takes an activist approach to its investments, encouraging the management and boards to unlock the value tied up in their companies.

Its lead manager is Joe Bauernfreund of Asset Value Investors, who also runs the AVI Global Trust (LON:AGT), a £1bn activist fund that recently changed its name from the British Empire Trust, and which currently has a 19% allocation to Japan.

Extraordinarily cheap

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Bauernfreund says that AJOT holds ‘a portfolio of some of the extraordinarily cheap smaller companies in Japan at a time when an improving corporate governance regime is forcing change’. Having stakes in these businesses gives the fund the right to make shareholder resolutions at annual general meetings, something that is becoming more common.

It is much easier to take this sort of activist approach via a closed-ended investment trust, as shareholder resolutions in Japan must be made by investors who have held shares for at least six months. AJOT will push the companies in their portfolio to use the excess cash on their balance sheets for dividends, share buybacks or M&A.

During the 2019 AGM season, a record 54 companies with March year-ends received shareholder proposals. This was 12 more than the previous year and there are other positive signs of changing attitudes with businesses becoming more aware of the interests of shareholders.

The new fund that floated on the stock exchange last October has built up a concentrated portfolio of cash-rich and over-capitalised small-cap Japanese equities. At the end of June it had a total of 28 holdings, the majority of which had a market value in the range of £250m to £500m or less. These companies typically have no debt, large amounts of excess cash and generate consistent free cash flow.

The response has been broadly positive

Bauernfreund and his team work with their portfolio companies to improve corporate value. Since the launch of the fund, they have sent 21 letters to 14 different holdings and either called or met with the various companies 62 times. They say that the response has been broadly positive, and many of the businesses have implemented policies in line with their suggestions.

AVI Japan Opportunity Trust has modest net gearing of eight percent and the shares are trading on a small 2.5% premium to net asset value. The board is committed to buying back shares whenever the discount exceeds five percent, which should help to protect investors.

The investment trust analysts at Winterflood Securities agree that the Japanese small-cap market is inefficient, and they believe that an activist investment approach will generate strong relative returns. They say that Bauernfreund and the rest of the team at AVI have considerable skills and experience in activist investment through their long-term involvement in running the AVI Global Trust.

One other point to be aware of is the Yen-denominated nature of the investment. If global trade war tensions escalate or the pound weakens any further because of concerns over Brexit, the safe haven status of the underlying currency should help to boost the overall value when measured in sterling.   

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