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.