AVI Japan Opportunity 12 January 2024
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by AVI Japan Opportunity. 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.
When AVI Japan Opportunity (AJOT) launched in 2018, it was the first strategy of its kind, and the Japanese corporate governance story was poorly understood in the UK. Now, all Japanese equity fund managers cite the remarkable corporate governance reforms underway in the country as a key reason to invest, while other managers have launched funds to pursue similar strategies—none are comparable to the differentiated approach AVI take.
This is due to the investment success achieved by AVI in taking an activist strategy in Japan, leading to the handsome returns discussed in the Performance section. It is also due to the continued momentum behind the reforms all but eliminating scepticism as to whether this is simply just another false dawn. Momentum behind both factors has continued through 2023, and yet AJOT continues to have a remarkably cheap Portfolio with clear avenues for unlocking that value.
AJOT has a highly concentrated portfolio, and the investment team, which has significantly expanded over the years, is focussed on detailed, complex engagement with companies chosen being materially undervalued, with excess balance sheet assets and with a high-quality business. AJOT focusses exclusively on the small cap end of the market and is now the only trust taking an activist approach in this space. Small caps lagged for much of 2023 as foreign investors preferred the more liquid large caps, but despite that AJOT delivered strong relative and absolute performance, highlighting the appealing idiosyncratic nature of returns.
The trust has typically traded on a premium and issued new shares, including in 2023.
AJOT had a good year in 2023. Japan has been in favour with global investors and AJOT has significantly outperformed the small-cap market. AJOT has also outperformed in a growth-driven market (2019) and a value-driven market (2021), as well as doing better than the sector in 2022 if not the index. We think this speaks to the fact that AJOT’s strategy is focussed on stock specifics, with the magnitude of returns on offer if cash-rich balance sheets are put to work meaning that the trust can deliver high returns not dependent on the direction of the markets or the dominant style. The consistent track record also highlights how meaningful the corporate reforms have been: in our view, this is a genuine cultural revolution underway, akin to something like the Thatcherite reforms in the 1980s, which have the potential to completely change how Japan is viewed by overseas investors.
In our view, gaining access to AJOT’s highly differentiated strategy at a Discount to NAV is an attractive opportunity. The trust has tended to trade at or above par, which we attribute to the uniqueness of its proposition and the long runway ahead of its strategy. We note that Nippon Active Value Fund (NAVF), which takes a similar approach, has absorbed the assets of two trusts and as a result of this expansion in total assets has shifted its focus further up the market cap spectrum. This leaves AJOT, which has been following this strategy for over two years longer than NAVF, as once more the only activist fund fishing in the small-cap pool with a huge number of undiscovered, deeply discounted companies to pick from.
- Highly differentiated strategy with clear path to adding alpha
- Strategy has been proven to work with many individual companies since launch
- A reversion of cheap valuation of yen and global investors’ historical ambivalence to Japan may drive the market higher
- High concentration brings potential for underperformance as well as outperformance
- Japan and the yen are economically sensitive so market could be volatile
- Intensive engagement strategy requires a lot of work which could spread the team thinly