Aberdeen Japan 19 August 2020
Disclaimer
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by abrdn Japan. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Aberdeen Japan Investment Trust (AJIT) aims to generate long-term capital growth through investment in a concentrated portfolio of Japanese equities.
Managed by the Aberdeen Standard Japan equities team, the investment process places a strong emphasis on seeking high-quality companies with strong management and good or improving corporate governance. The team also seek to hold positions in companies with strong balance sheets, and whose earnings are resilient to fluctuations in the global and domestic Japanese economies. We discuss this process and recent trust activity under Portfolio.
This focus on seeking to identify high-quality and resilient businesses has proven beneficial in recent months given the highly uncertain macroeconomic framework businesses are currently operating in, as we discuss in the Performance section.
In 2019, AJIT introduced a new dividend policy which will see the trust offer a notably increased dividend in the future compared to what it has historically produced. This has led to the financial year (FY) 2020 dividend rising to 15p per share from 5.4p in FY 2019, paid from a mixture of revenue returns, revenue reserves and capital reserves, which amounts to a c. 2.5% yield.
Despite the improvement in relative returns seen in recent years and the significantly increased dividend policy, AJIT continues to trade on a wider discount than the rest of the sector. Having traded at an average discount of wider than 10% for the 90 days prior to the previous financial year end, the board was compelled to offer shareholders a continuation vote at a recent EGM. The vote subsequently passed in favour of continuation, as we discuss under Discount.
The improvement in AJIT’s performance has been welcome, and it was also reassuring to see the relative resilience in a downturn we anticipated from the emphasis on quality has played out in 2020’s challenging market and economic environment. Whilst markets have recovered, the economic outlook remains very uncertain; liquidity pressures have been eased for now, but solvency risks globally certainly remain. In this context, and in the absence of an improbably rapid economic recovery, the continued focus on quality seems to us likely to remain in favour with the market in the nearer term. Looking further out, the managers have highlighted their expectation that many of AJIT’s holdings can benefit from a general trend of corporate consolidation. We would agree that the Japanese market is one of the few developed markets globally where a sustained trend towards consolidation might reasonably be expected, and AJIT would seem well positioned in this regard.
The move to boost the dividend is welcome for income investors, and in returning some of the large capital reserves to shareholders AJIT’s board and managers seem to be ‘eating their own cooking’ in regards to their general push for improved corporate governance in Japanese companies.
| bull | bear |
| Thematic trends towards corporate consolidation seems to remain favourable | Could trail in the short term if we see a rapid economic recovery |
| Dividend yield of c. 2.5%, supported by the board returning revenue reserves and capital to shareholders | Despite falling in recent years, OCF remains relatively high compared to the sector average |
| Discount remains wide on an absolute and relative basis | Gearing can exacerbate downside in a generalised market sell-off |
Fund History
