While AVI Japan ( AJOT) fell in Feb, with NAV down 1.6% for the month, performance for the underlying companies was healthy with TSI Holdings the standout contributor (+20% share price gain adding 110bps to performance). T Hasegawa and NC Holdings detracted with a more difficult cost environment for both weighing on profits. It was yen weakness that weighed on the NAV, as the cautious tone from Kazuo Ueda, the newly appointed Bank of Japan (BoJ) governor, disappointed those anticipating an imminent end to the BoJ’s Yield Curve Control (YCC) policy. Management for AJOT noted that with January CPI coming in at 4.3%, the highest since 1981, they think it isn’t a matter of if YCC will end but when, which would be a boon for the yen.
The other major development for the month was an announcement from Tokyo Radiator of an off-market share buyback for up to 35% of its shares to facilitate a partial exit from its register of its parent company, Marelli. With the possibility of a privatisation off the cards, AJOT placed the entirety of its shares into the buyback and sold three-quarters of the position at a level +33% higher than where it ended the month.
This marked a positive end to a challenging holding period, with management commenting:
”With Marelli selling a majority of their holding over the month, our thesis that the parent/subsidiary structure would collapse proved right. However, it did not prove to be a successful investment. Although it was never a large position, over our four-year holding period to the end of the month, our investment returned -15% in JPY, a disappointing result considering the resources we committed to engaging.
“We learned a valuable lesson; regardless of undervaluation and a potential catalyst, the longer the holding period the more dependent returns become on the quality of the underlying business. Although often appearing cheap, when investing in low-quality, poorly run businesses – as was the case for Tokyo Radiator – time is against us. Still, in the context of Tokyo Radiator’s declining earnings over our holding period, the -15% return, while disappointing, was not a disaster. We identified correctly that there would be a change to the listed subsidiary structure and realising the majority of our shares through the share buyback event at a higher price, softened the loss.”
AJOT : Solid performance but weak yen weighs down AVI Japan