AVI Japan Opportunity

AJOT invests in Japanese small caps, taking advantage of extremely low valuations and using shareholder activism...

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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.

AVI Japan Opportunity

AVI Japan Opportunity (AJOT) invests in Japanese small-cap stocks, aiming to generate high long-term returns by taking advantage of extremely cheap valuations in that part of the market but also using shareholder activism to supercharge returns.

The £78m trust, launched in October 2018, is run by Joe Bauernfreund, also manager of the £900m British Empire Trust. Joe looks for asset-backed companies on low valuations where he can see a catalyst for a re-rating. In small cap Japan he has found what he believes is an outstanding opportunity. On a look-through basis, the companies in the portfolio have 78% of their market cap in cash or transferrable securities and are trading on 3.9 times EV/EBIT, compared to 8.7 times on the MSCI Japan Small Cap and 18.5 times on the S&P 1500 all-cap index.

AJOT is an activist investor and aims to take advantage of the political and regulatory pressure on Japanese companies to increase the efficiency of their balance sheets. One of the “three arrows” of Abenomics is policies for growth, and in part this means a determined push to put idle corporate cash and cross-shareholdings to more productive use and thereby boost shareholder returns.

In their view, AVI is therefore increasingly pushing on an open door. In the first six months of the trust’s life it has seen nine of its 29 portfolio companies make shareholder friendly moves, be that paying or increasing a dividend, buying back shares or other measures. NAV performance has also been solid, with the trust up 0.3% compared to a 1.6% loss for the MSCI Japan Small Cap index, to the end of March. Although it was aided by it not being fully invested during the global market downturn in November and December, most of the outperformance came when it was fully invested, illustrating the success of the stock-picking.

Following the encouraging start, and to take full advantage of the current opportunity, the company drew down £10.4m in borrowings in April 2019, amounting to gearing of 12.5% of NAV.

The trust has been trading on a premium since launch, in part helped by not being fully invested in the Q4 2018 market slump. The trust is now on a 3.2% premium. The board is yet to seek to address this, but the prospectus does allow for further share issuance if the trust is trading above NAV. AJOT will offer a liquidity option after four years and every two years thereafter, meaning that if returns are disappointing investors can redeem at close to NAV.

There is no specific income objective. However, AJOT’s portfolio currently yields 2.1% (at NAV) and, to retain investment trust status, the board will have to pay out 85% of that after costs. Through 100% charging costs to capital, the majority of the portfolio yield will flow through to shareholders as dividends.

Thomas McMahon
Thomas is a senior investment trust analyst and joined Kepler in April 2018. Previously he was senior analyst at FE Invest, where he was responsible for fund selection for a range of model portfolios. He covered all asset classes over time, but has particular experience with emerging markets and fixed income as well as UK smaller companies funds. He has a degree in Philosophy from Warwick University and is a CFA charterholder.

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