Aberdeen Japan Investment Trust (AJIT) aims to generate long-term capital growth through investment in a concentrated portfolio of Japanese equities.
Managed by the Aberdeen Standard Japan equities team, the investment process places a strong emphasis on seeking high-quality companies with strong management and good or improving corporate governance. The team also seek to hold positions in companies with strong balance sheets, and whose earnings are resilient to fluctuations in the global and domestic Japanese economies.
The trust continues to overweight sectors such as healthcare and technology, where the manager believes there are thematic structural underpinnings that can drive growth going forward.
In mid-2019 a new dividend policy was endorsed by shareholders, which will see AJIT offer a notably increased dividend in the future compared to what it has historically produced. On the current share price, the minimum expected total distribution of 15p per share would equate to a yield of c. 2.4% (as of 31/01/2020). We have covered the new policy in more detail in the Dividend section.
The managers of AJIT have largely maintained gearing levels at around 12% (as of 31/01/2020). We understand from the manager that gearing at around these levels is likely to remain a structural feature of the trust. Presently trading on a discount of c. 8.1% (as of 31/01/2020), the board has been active in buying back shares.
Performance was notably improved in 2019, after a period where the trust had struggled somewhat. Five-year returns had been negatively impacted by a previous decision to partially hedge exposure to the Japanese yen (although in totality throughout its longer-term existence the contribution of this hedge was reasonably flat). This policy was reversed in July 2018.
We think AJIT’s portfolio’s tilt towards overseas revenues could prove supportive if the global economy sees improved growth, and if trade war fears continue to recede. In a less rosy environment, the financial strength of the underlying companies (through significant excess capital on balance sheets) should provide resilience. With the ongoing corporate governance reform tailwind, the trust could well see an increasing number of companies choose to return an increasing amount of capital to shareholders in the near future.
With AJIT now having explicitly outlined an enhanced dividend aimed at increasing investor’s appetite for the shares, as well as the board remaining actively engaged in buying back shares to reduce discount volatility, we think the improved performance seen in 2019 could serve as a further prompt for investors to revisit AJIT.
|Exposure to cash-generative businesses offers potential for return of excess capital in a supportive environment||Japanese exporters likely to display above-average vulnerability to the global market cycle|
|Increased dividend could attract marginal buyers to AJIT||Small size of trust means OCF is higher than average for sector|
|Discount to NAV is seeing some support from share buybacks||Gearing can exacerbate the existing tendency to underperform in falling markets|