Nippon Active Value Fund to target corporate governance reforms in Japan

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Nippon Active Value Fund to target corporate governance reforms in Japan
Master Investor Magazine

Master Investor Magazine Issue 58

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The Nippon Active Value Fund hopes to raise £200m to invest in a concentrated portfolio of undervalued Japanese equities where the manager can realise value through an activist approach.

Shinzo Abe has recently become Japan’s longest serving Prime Minister and during his tenure has implemented three key policies – ‘the three arrows’ – of monetary easing, fiscal stimulus and structural reforms to inject some life into the moribund economy.

It is still unclear about the effectiveness of the third of these, except for the area of corporate governance, where the impact of the reforms has been visible over the past three years.

Activist approach

The new Nippon Active Value Fund is hoping to raise £200m to invest in a concentrated portfolio of up to 20 holdings in undervalued Japanese equities, with a bias towards the small caps. It will be run by Rising Sun Management, which will aim to realise value through an activist approach by trying to benefit from the increased focus on corporate governance.

Nippon Active Value will target companies where cash constitutes a significant proportion of the market value and where there is no controlling or majority shareholders. It intends to acquire significant minority stakes of between 4.9% and 25% of the share capital.

The new share issue closes on 28 January with the results announced on 31 January. Proceeds are expected to be invested within six months and gearing will not exceed 20% of net assets at the time of drawdown.

Nippon’s investment adviser is Rising Sun, a newly incorporated Cayman entity led by James Rosenwald III, who has over 40 years’ experience investing in Asia. He is co-founder and MD of Dalton Investments, a value focused investment manager with an affiliate office in Tokyo that will provide research services for the new fund. The management fee will be 0.85% per annum of net assets.

The second fund to target this area

This is the second investment trust to follow an activist approach to unlocking value in Japan, with the first being AVI Japan Opportunity (LON:AJOT), which raised £80m in October 2018 and now has a market cap of £134m after additional share placings.

AJOT has a concentrated portfolio of 29 small and mid-cap Japanese equities that the manager considers to be undervalued and where cash, listed securities and/or other realisable assets make up a significant proportion of the market value. It is managed by Asset Value Investors, which also runs the AVI Global Trust (LON:AGT), formerly known as the British Empire Trust.

AVI aims to proactively engage with the management to improve corporate governance, encourage capital distributions to shareholders and basically give them a friendly nudge in the right direction. They have been reasonably successful with almost half of their holdings announcing share buybacks and two stocks that were part-owned by Toshiba being fully acquired at a healthy premium. The fund is currently trading at a small premium to NAV.

After a strong 2019, 2020 could be a lot more pedestrian, but these sorts of idiosyncratic funds have the potential to deliver decent market-beating returns without taking on huge additional risk.

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