AVI Japan Opportunity 26 November 2021
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 investing in a focussed portfolio of high-quality, overcapitalised small-cap Japanese equities.
AVI Japan Opportunity
Asset Value Investors
Joe Bauernfreund; Tom Treanor;
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
AVI Japan Opportunity Trust (AJOT) offers investors a highly active approach to Japanese investing. This is not only due to the highly concentrated portfolio of high-quality Japanese equities the trust owns, but also through the large amount of active engagement campaigns the team run. Currently, 85% of AJOT’s portfolio is undergoing some form of deep engagement by the team. A key strategy of the managers is to work with companies on creating shareholder value and correcting undervaluations by addressing poor corporate governance, encouraging better utilisation of cash (e.g. shareholder returns, M&A, capital expenditure), improving shareholder communications and working on corporate strategy including a takeover event. Given the team’s focus on finding companies which trade on intrinsic discounts, AJOT often has value characteristics. Yet as we describe in the Portfolio section, AJOT is still exposed to high-quality companies benefitting from structural growth trends within Japan.
Since its inception in October 2018, AJOT has handily outperformed its benchmark, the MSCI Japan Small Cap Index. However, it has lagged its peer group average due to the peer group’s heavy growth bias, which was helpful after the immediate impact of the pandemic. Yet over the last 12 months AJOT’s active, idiosyncratic approach to investing has borne fruit, and it is the second best-performing trust in its peer group over the period, as we outline in more detail in the Performance section.
AJOT continues to trade on a premium (currently 1.8%) and, as we point out in the Discount section, it is one of the few Japanese equity trusts to do so due to best-in-class discount protections.
AJOT’s team, in our view, implement an onerous investment process which requires deep expertise and skill. They aim to proactively create and unlock shareholder value of their investments through active engagement. Not only does this mean AJOT’s investment process is a clear differentiator (and source of potential alpha) from many of its Japanese fund peers but, in conjunction with its highly concentrated portfolio, it makes it a strong source of diversification for many investors, even if they have a pre-existing Japanese equity allocation.
While AJOT’s concentrated bottom-up process means stock-specific factors will likely dominate its returns, we still believe that the current market environment is a positive one for its relative returns. Not only have many of the tailwinds behind the dominance of growth investing dissipated (these had at times meant that AJOT lagged peers), but Japan’s new prime minister most likely means a continuation of the status quo in Japan. This means that Japan’s long programme of corporate governance reforms – first initiated in 2014 under Shinzo Abe’s leadership – will continue unabated, thereby presenting plenty of opportunities for the AJOT team to exploit.
Besides its attractive diversification characteristics and strong performance over the last 12 months, we also believe that AJOT is a good option for ESG-conscious investors looking to gain exposure to Japan. Activist approaches like AJOT’s will be pivotal in righting many companies’ poor ESG practices, making AJOT an important driver for better ESG practices. AJOT also demonstrates the limitations of ESG scores, as its own ‘low’ score is a structural by-product of targeting companies with poor governance.
|Idiosyncratic source of alpha with strong diversification potential
||Can underperform during periods of growth-stock momentum
|Attractive ESG credentials given the role of active engagement
||Higher OCF than peer group average
|Strong recovery in underlying earnings post-pandemic
||Highly concentrated portfolio can increase single-stock risk