Not only is it Spring – nice sunny days, great for solar funds – it is also results season. Funds with calendar year ends have started publishing their annual figures. One of these is AVI Japan Opportunities (AJOT).
The prospect of interest rate rises has been overshadowing markets. This week, we finally saw the US Federal Reserve hike rates and the Bank of England followed up with another 0.25% increase, taking the UK base rate to 0.75%. Higher rates depress growth stocks, as we have discussed in previous QD views.
Japanese growth stocks and Japanese smaller companies trusts have been hit quite hard by fears of higher rates. Baillie Gifford Shin Nippon’s NAV is off 27.1% over the past 12 months, for example. Japan is also notable for being a net importer of energy. Higher oil prices are not great for its economy.
Bucking the trend
AVI Japan Opportunities is bucking the trend, however. Over the course of 2021, its NAV return was 12.3% and its share price return 10.0%, both well ahead of the -1.4% return posted by its benchmark, the MSCI Japan Small Cap Index. As we mentioned in our news story covering the results, these figures would have been even better, were it not for a 9.6% fall in the value of the Japanese Yen relative to the pound over the year.
Since the year end, the trust’s NAV and share price have fallen a little, but nowhere near as much as the benchmark. AVI Japan Opportunities is also still trading on a modest but well-deserved premium. It is keen to expand, as its manager has identified quite a few new potential investments.
Fishing in a deep but murky pool
The pool of stocks within the Japanese equity market is quite deep. When we wrote our initiation note in July 2021, we said that were almost 3,800 listed stocks in the country. There are also quite a few new companies coming to the market. Over 2021, the Tokyo Stock Exchange saw 125 IPOs – 5 more than on the LSE. Many of these companies are not followed by investment analysts. That means that the chances of a company being mispriced are high, which gives AVI’s team a better chance of adding value.
AVI Japan Opportunities is looking for stocks that have sizeable cash piles or investments in other companies that could be sold without impacting on the operation of the business. Oftentimes those investments and the cash add up to more than the market cap of the company. The trust’s managers engage with these companies with the aim of unlocking that value. They may also make suggestions as to how businesses can grow and/or become more profitable.
Managers have been busy
Two companies in the portfolio – Daibiru and Secom Joshinetsu – were bid for by their parent companies during 2021. The underlying performance of many other portfolio companies was good too. This helped drive returns. The big corporate governance wins – like the two bids – require patience. The manager’s statement says that AVI sent 41 letters or presentations and held over 118 meetings with the 28 companies in the portfolio during the year.
Big upside
AVI Japan Opportunities is a great example of a fund that has its destiny in its own hands. These numbers demonstrate that it can make money even when markets are falling. It reckoned that at the end of 2021, its portfolio was valued on a 41.2% discount to its true value. That’s a potential 70% upside if the value can be unlocked.