AVI JAPAN OPPORTUNITY: Trust that’s beating its peers… just

Investment trust AVI Japan Opportunity has had to negotiate tricky market conditions since it launched in October 2018. Yet, it has managed to keep its head above water – just. 

Investing primarily in smaller Japanese companies, its share price has advanced from £1 at launch to around £1.12. Over the same period, the MSCI Japan Small Cap Index – its benchmark for performance – has fallen by nearly six per cent. Launch investors have also received a trickle of dividends, totalling 3.6 pence. 

‘The trust hasn’t made much money for shareholders so far,’ concedes Joe Bauernfreund, manager and chief executive of the fund’s overarching investment group Asset Value Investors. ‘But it has done well against its peer group.’ 

Since launch, it has outperformed the three other trusts with a focus on Japanese smaller companies – Atlantis Japan Growth, Baillie Gifford Shin Nippon and JPMorgan Japan Small Cap Growth & Income. Asset Value Investors, set up 37 years ago, manages assets in a distinct way.

It looks to buy good quality businesses that are undervalued by the rest of the market. Through active engagement with the companies it invests in, it then attempts to increase shareholder value. 

It’s an approach that it has adopted on AVI Global, a £1.2billion investment trust previously known as British Empire Securities. And it’s a strategy that underpins AVI Japan Opportunity. 

The Japanese trust, capitalised at £148million, is invested in 25 stocks – a common characteristic, in Bauernfreund’s words, being that the companies ‘are undervalued with lots of cash on their balance sheet’. Such businesses, he says, represent a ‘more comfortable place to be’ as a fund manager in trying market conditions. 

Bauernfreund says: ‘The idea is to build a constructive relationship with the management of the companies we invest in and then gently persuade them to effect change that is in the best interests of shareholders.’ 

So, for example, the trust’s biggest position is in lifts manufacturer Fujitec. It’s been in the trust’s portfolio since launch and Bauernfreund likes the business because not only does it make the lifts, but it has the ability to set up lucrative maintenance contracts with the buyers. 

In 2020, AVI published a 70- page presentation outlining how Fujitec could take itself to the next level – through improved corporate governance, concentrating more on maintenance contracts than manufacturing and using some of its excess cash to make acquisitions. 

The company, says Bauernfreund, has listened, undertaken a strategic review and agreed to use some of its surplus cash on mergers and acquisitions – and capital expenditure. The result is a share price that has more than doubled since October 2018. 

Although Fujitec remains the trust’s top holding, AVI has been taking profits on its stake. Share activism, says Bauernfreund, is more nuanced in Japan than in the UK. ‘ You must respect the culture,’ he says. ‘That often means agitating for change through private conversations and persuading management to come around to your way of thinking.’ 

To aid this process, AVI now has two Japanese analysts working out of London, plus someone on the ground in Tokyo meeting companies and building relationships with senior management in the companies it has stakes in. 

The trust’s stock market identification code is BD6H5D3 and its market ticker is AJOT. Its ongoing charges are around 1.5 per cent a year. AVI employees own more than two million of the 137million shares in issue, which means they have a financial interest in ensuring the trust performs well.