AVI Japan Opportunity 29 June 2022
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.
To achieve capital growth through activism investing in a focussed portfolio of high-quality, overcapitalised small-cap Japanese equities.
AVI Japan Opportunity
Asset Value Investors Limited
Association of Investment Companies (AIC) Sector
Japanese Smaller Companies
12 Month Yield
Dividend Distribution Frequency
Latest Market Capitalisation
Latest Net Gearing (Cum Fair)
Latest Ongoing Charge Ex Perf Fee
(Discount)/ Premium (Cum Fair)
Daily Closing Price
Despite its focus on high-quality Japanese small caps, AVI Japan Opportunity (AJOT) is primarily a strategy looking to unlock shareholder value through active engagement, with its market-cap exposure a reflection of where the best opportunities are for positive engagement outcomes. Importantly, however, each of AJOT’s holdings has the ability to stand on its own feet, with the high-quality business models of the holdings granting the prospect of positive returns even in the absence of the team’s engagement campaigns.
Headed up by CEO Joe Bauernfreund, the AJOT team have capitalised on the sell-off in Japanese equities by making opportune purchases at depressed valuations, allowing them to increase the overall quality of AJOT’s portfolio. We describe the AJOT team’s process, and give examples of recent successful engagements, in the Portfolio section.
AJOT’s idiosyncratic return profile has led it to generate impressive returns since its inception in October 2018, easily outperforming both its benchmark, the MSCI Japan Small Cap Index, and its wider peer group. AJOT’s 12-month performance is also impressive, with the trust returning -2.8%, again substantially outperforming its benchmark and magnitudes ahead of its peers’ substantial negative returns. This performance has also been matched by sector-leading risk–return statistics, as we highlight under Performance. AJOT trades at a narrow Discount of 0.3%, and while this is wider than its historical level, it is still far narrower than its peer group’s average discount due to stringent discount control policies.
We believe that the recent markets show evidence of the benefits of AJOT’s idiosyncratic return profile. While the diversification benefits of uncorrelated returns are apparent, we believe it is during periods of clear market uncertainty that AJOT shines. The ability for the team to be ‘masters of their own destiny’ and be able to partially control the fortunes of their investments via the use of active engagement means that they can still offer upside potential even in the midst of a wider market downturn.
We believe that given the current bear market we are witnessing – one in which all styles of Japanese equities, both growth and value, are being sold off – AJOT’s attractions are clear. Not only is the trust still able to generate positive returns, but it has done so without necessitating an overweight exposure to the few sectors which are doing well, such as defensive or energy stocks. This therefore further enhances AJOT’s diversification benefits.
AJOT is also an example of the advantages of the investment trust structure, which relieves the team of the burdensome task of providing daily liquidity. By removing the need to do this, the structure gives them the time horizon required to execute their engagement campaigns. Given this, we believe that AJOT is a genuinely unique investment opportunity that investors will seldom be able to find elsewhere. Given the nature of how AJOT generates its alpha, we believe that it is not only a good option for ESG-conscious investors, but also for investors who want to benefit from the diversification benefits that Japanese equity exposure brings but who are not entirely confident in the Japanese economy.
- Idiosyncratic return profile has generated strong returns in the face of market drawdowns
- Investment process addresses the most onerous demands of ESG investing
- Comparatively low valuations can reduce interest rate sensitivity
- Can underperform during a growth stock rally
- Engagement campaigns can take a long time to realise their potential returns
- Highly concentrated portfolio can increase single-stock risk