Discovering overlooked and under researched investment opportunities to unlock long term value.
Investing in the Japanese market for over two decades, with a dedicated team in London and Tokyo
|Software and Services||14.2%|
|Commercial and Professional Services||10.4%|
|Foods and Staples Retailing||5%|
|Automobiles and Components||4%|
|Health Care Equipment and Services||2.9%|
|Media and Entertainment||0.4%|
Over the final quarter of 2021, AJOT’s NAV returned a respectable +1.5%, despite a -3.4% weakening in the Yen, and our benchmark, the MSCI Japan Small Cap Index, falling -8.2%. That takes AJOT’s 2021 NAV return to +10.0%, vs -1.4% for the MSCI Japan Small Cap Index and since inception (Oct-18) +26.9% vs +9.7%.
AJOT’s NAV increased by +2.1% over the month while the MSCI Japan Small Cap Index fell -2.6%, both figures aided by a +4.0% rise in the Yen vs. Sterling. The EV/EBIT of the portfolio was unchanged at 5.3x while our estimated discount to intrinsic value widened from 41.5% to 43.2%.
AVI Japan Opportunity Trust (AJOT)’s NAV fell -3.7% over the month, driven by a -3.5% fall in the Yen. King (+6bps) and Aichi (+3bps) were the largest contributors while DTS (-48bps) and Daibiru (-39bps) the largest detractors, although their detraction was more a function of currency with their share prices falling by a modest -4.4% and -2.0% respectively.
It was a buoyant quarter for the Japanese stock market: AJOT’s NAV grew +7.9% and the MSCI Japan Small Cap Index returned +6.0%, outperforming the MSCI World Index which returned +1.4%, (all in GBP). At the start of September, Japan’s prime minister Yoshihide Suga resigned amidst dangerously low approval ratings. His lack of charisma and English-speaking ability made him unpopular with overseas investors and his resignation stoked excitement for a more likable replacement. Unfortunately, this was short-lived as favourite candidate Taro Kono, who latterly headed the hugely successful vaccination effort, lost to Fumio Kishida, who the LDP members favoured as a more predictable, conservative leader.
It was a good month for performance, with a NAV return of 5.5%, aided modestly by a 0.9% strengthening of the Yen. Over the month our companies finished reporting results for the quarter ending June 2021. On a trailing twelve-month basis, profits are now +6% above where they were pre-COVID, while those of the MSCI Japan Small Cap index are -4% lower. Profits for the last quarter alone grew +53% YoY, albeit with an easy comparison – solidifying the strong recovery.
Over the month AJOT’s NAV fell slightly (-1.4%), driven by Digital Garage and SoftBank Group which detracted 60bps and 31bps respectively. Digital Garage suffered as its 20% stake in listed kakaku.com fell -11% on continued social restrictions and concerns regarding lower restaurant consumption.
Over the second quarter, AJOT’s NAV rose 3.2% despite the MSCI Japan Small Cap index falling and a 1% headwind from Yen weakness. Over the quarter we benefitted from the take-over of Secom Joshinetsu (5% position in AJOT) at a 66% premium to the pre-announcement share price; five of our companies announcing buybacks; a number improving investor communication and governance; and weighted average profits increased by 13% to above pre-COVID levels.
Since the launch of AJOT in October 2018 we have argued that the continued existence of parent-child subsidiary structures in Japan would be unlikely to survive the corporate governance revolution. Such arrangements are advantageous to the parent company, but abusive of minority shareholders. The corporate governance code challenges their existence, and we believe their days are numbered.
We wanted to provide this mid-month update as we have launched three public campaigns. As we commented in our April newsletter, we submitted shareholder proposals to seven companies ahead of their June 2021 AGMs. Since then, we have withdrawn proposals from three, are still in discussions with one (where we have a meeting with the President and its parent company at the end of the month) and three remain active, of which we highlight details below.
We formally submitted shareholder proposals to seven of our portfolio companies in April. We say formally, as we have been informally putting forward the same suggestions to management persistently since we first invested in each company. The submission of the shareholder proposals came as no surprise to management, as in the preceding months we have taken the time to explain, at great lengths, the reasonings for our actions. In fact, the shareholder proposals have allowed us to have more frequent and meaningful dialogue with our investee companies which has fostered closer relationships.
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’