This quarter’s strong performance, with a NAV return of +9.5% vs the MSCI Small Cap Japan’s +0.6%, was particularly pleasing after we added to positions which suffered from weakness over the summer. Six of the top ten contributors this quarter were amongst the largest detractors last quarter. Toshiba Plant, for example, was this quarter’s largest contributor with a share price increase of +48% following a fall of -10% last quarter, and Teikoku Sen-i was the third largest contributor this quarter (+34%; -15% as the largest detractor previously). While only a small sample size, this highlights the benefits of taking advantage of short-term price declines which increase the discrepancies between fundamental value and the market value of our investments.
November was a particularly strong month for AJOT’s performance. This was primarily driven by Toshiba Corp’s offer to acquire 100% of two of its listed subsidiaries that we held in our portfolio. Both NuFlare Technology and Toshiba Plant received bids from their parent, Toshiba Corp, at significant premia to prevailing share prices. The two Toshiba subsidiaries have been successful investments for AJOT, generating an IRR of 110% in the case of NuFlare, and 35% for Toshiba Plant.
Most companies are reporting Q2 results and, so far, they have broadly been in line with expectations. Encouragingly, it seems that fears of a prolonged slowdown in earnings have subsided and in October foreigners turned net buyers giving a boon to the Japanese market.
As we approach AJOT’s first anniversary it is interesting to note how difficult this period has been for Japanese equity markets. The MSCI Japan Small Cap has fallen -1% since launch against the S&P 500 which rose +10% and the MSCI Europe which gained +15%. The fractious US-China trade war and the view from foreign investors that Japan is a never-changing, expensive proxy for global growth has continued to take its toll.
August was a tough month for many of our portfolio companies. The ongoing US – China trade war continues to weigh on sentiment. However, many of our companies have suffered seemingly irrational share price falls which appear to be more about liquidity and market inefficiency than fundamentals.
Towards the end of the month, Japanese companies started reporting their quarterly earnings. Profits had been forecast to be somewhat weaker than this period last year, and this was indeed the case. Many companies are experiencing margin pressures and suffering from a general slowdown in economic activity. Our portfolio companies have not escaped the impact of the ongoing trade war between the US and China, which has been weighing on sentiment towards the Japanese stock market.
Japan continues to be overlooked, underappreciated, and unloved. 2018 saw four straight quarters of foreign selling, and this has continued throughout 2019. Between 2012 and 2015, the introduction of Abenomics drove foreign inflows of JPY22 trillion into Japanese equities; since then, the market has witnessed an almost complete reversal.
With a raft of announcements in May, buybacks for the first five months of 2019 have surpassed the total value of buybacks for the whole of 2018 (which itself was a record year).
Nittofc (4033) (2.3% of NAV) announced on 7th May 2019 that it received a tender offer for all of its outstanding shares at ¥1,200 per share, representing a 37.6% premium to the undisturbed price. We have been acquiring shares in Nittofc since launch in October 2018 and built a stake at an average price of ¥772 per share. We sold the entire position in Nittofc on 9th May 2019 for a price of ¥1,202, crystallising a +57% gain in both JPY and GBP. The investment added +1.2% to AJOT’s NAV.
Activism or ‘shareholder engagement’ is no longer a rarity in Japan. Attitudes towards shareholder involvement have shifted dramatically since the taboo days of 2005, when activists’ arguments were seen as myopic and, without the structure of the Corporate Governance Code, baseless. Companies today are open to shareholder suggestions and, in some cases, we would even go so far as to say, welcome them.
AVI Japan Opportunity Trust p.l.c is referred to as ‘AJOT’ throughout the website. AJOT’s investment managers, Asset Value Investors are referred to as ‘AVI’