Aberdeen Japan Investment Trust (AJIT) is a Japanese equity strategy dedicated to investing in what the managers believe are the highest-quality companies in Japan. The team, based predominantly in Tokyo, implement a detailed investment process which exhaustively analyses a company’s overall quality, both in terms of conventional quantitative factors (such as having a high Return on Invested Capital (ROIC)) but also in terms of the quality of management. We outline this further in the Portfolio section.
We believe that one of the important features of AJIT is its allocation to small- and mid-cap companies. A truly all-cap mandate, AJIT has an overweight to small and mid-caps compared to its benchmark, the TOPIX Index. Governance reform also plays a large role in AJIT’s investment process. The team actively engage with many of their holdings to promote policies conducive to better governance and shareholder returns, as we detail in the ESG section.
AJIT has performed remarkably well over 2020 in our view, with a one-year NAV return of 22% outperforming its benchmark’s 9.2% return and its peer group’s 19.8%. Returns have been helped by the strategy of buying high-quality companies, which allowed AJIT to weather the COVID-19 crisis better than the broader Japanese equity market, as shown by AJIT’s lower drawdown during the crash.
AJIT has recently adopted a new dividend policy, whereby it now pays out its dividend through a combination of revenue and capital, leading to a 278% increase in its dividend in the last (2020) financial year. It currently yields 2% on a historical basis. Like much of the Japanese equity peer group, AJIT trades at a discount, currently c. 7.9%.
We view AJIT as offering investors a consistent and reliable approach to Japanese equity investing, thanks to the managers’ clear focus on what they deem to be quality companies. While this quality bias has large overlaps with conventional market definitions, the team’s multifaceted investment approach also highly values a management team with a strong pedigree and a business with inherent competitive advantages.
We believe that this dedicated quality bias comes with advantages and disadvantages. The team’s dedication to quality should give investors confidence in the stability of the portfolio, but there will be periods where quality names come in and out of favour, and periods where AJIT’s performance will primarily be driven by the market cycle. However, this has been to its advantage over 2020, as its strong outperformance has been down to both the superior stock-picking of the team and also increased demand for high-quality companies that should be able to survive the pandemic.
We also believe that AJIT’s allocation to small caps is a distinct advantage. Not only does this improve the value-add of the managers by analysing thinly covered stocks, it also improves the diversification benefit of the trust in a manner dedicated large-cap strategies cannot. Thanks to the new dividend policy, AJIT may now be one of the few ways income-focussed investors can access high-quality Japanese companies without having to sacrifice income.
|Dedicated quality bias with a focus on company management
||Quality factor can fall out of favour, impacting performance
|Small- and mid-cap allocation offers potential sources of alpha and diversification
||The use of gearing can amplify losses
|Recent changes to dividend policy greatly enhance its income potential
||Higher OCF than the sector, due in part to its smaller size