Heads of terms have been agreed for a proposed combination of the assets of abrdn Japan Investment Trust with those of Nippon Active Value Fund. The abrdn Japan board says that the proposal follows an extensive review of various investment strategies in the Japan fund sector. It believes the case for taking advantage of recent corporate governance changes in Japan remains compelling [as we do], particularly at the small cap end of the market, where Nippon Active Value Fund has performed strongly.
The proposal includes a partial cash exit option and should help create a larger continuing investment trust with the prospect of improved liquidity. The combination, if approved by each company’s shareholders, will be implemented through a scheme of reconstruction under section 110 of the Insolvency Act 1986 resulting in the reconstruction and voluntary liquidation of abrdn Japan.
Here are the benefits of the proposal as abrdn Japan’s board sees them:
- NAVF’s active management approach, which differentiates it from many of its peers, focuses on unlocking value in cash-rich smaller Japanese companies, an approach which is well aligned with recent developments in Japanese corporate governance and with its structure as a listed UK investment trust. The concentrated portfolio offers investors a high-conviction, uncorrelated opportunity.
- Since the date of its IPO (21 February 2020), NAVF has been the top performing Japanese investment trust over the period to 31 March 2023, having delivered a NAV Total Return of 52.8% in sterling terms.
- Although NAVF has only been in existence for a little over three years, members of its investment adviser’s team have a track record of over 30 years of investing in Japan.
- NAVF has access to the Tokyo based research team of its investment adviser’s affiliate, Dalton Investments LLC and a colleague with corporate legal expertise based in Japan. NAVF also benefits from the option to have other clients of Dalton LLC invest alongside it, which provides the opportunity to take more meaningful stakes in companies and have more effective conversations with investee company management.
- NAVF is listed on the Specialist Fund Segment of the London Stock Exchange. As part of the proposal, it has undertaken to move to a premium listing on the Main Market of the London Stock Exchange, which is expected to improve the access of retail investors to the enlarged fund and therefore its share rating and liquidity.
- Rising Sun Management (NAVF’s manager), has demonstrated its conviction in the combined fund by offering to underwrite the company’s current estimated costs of the proposed merger up to £800,000 including advisory and termination fees and associated VAT.
- The proposal will result in an inflow of capital into the NAVF portfolio which can be deployed at an advantageous time in the cycle, when recent government reforms support, more than ever in the board’s view, NAVF’s strategy of finding undervalued Japanese listed companies and actively engaging with them to deliver returns for shareholders.
- The combination with NAVF is expected to improve the enlarged fund’s liquidity for all shareholders as well as spreading the fixed costs of NAVF, as the continuing entity, over a larger pool of assets.
- The proposal includes a cash exit opportunity of up to 25 per cent. of the company’s shares in issue, providing shareholders with the ability to realise part (or potentially all) of their investment at a 2% discount to formula asset value (FAV – the NAV less any costs associated with this part of the proposal) per ordinary share.
What is in it for Nippon Active Value shareholders?
- Becoming larger with a more diverse shareholder base and greater assets and is expected to improve liquidity in the company’s shares as well as spreading the fixed costs of the company over a larger pool of assets.
- Shift to a main market listing.
- Rising Sun Management covering most of the transaction costs
Why now?
The abrdn Japan board was frustrated with the trust’s persistent discount and a discount-triggered continuation vote was looming. Performance was not great – over the 1, 3 and 5 years to 15 May 2023 the NAV total return has lagged the benchmark Topix Index (in sterling terms) by 1.3%, 12.8% and 9.2%, respectively – and it thinks that the trust is too small – £72.4m market cap when this announcement was being drawn up.
What next?
Shareholders of both funds get a chance to vote on the proposals. A circular will be published in advance of the shareholder meetings and the proposal will be implemented in Q3 2023, if shareholders give their consent.
[This looks like a sensible move to us. abrdn Japan managed to avoid calling a continuation vote last year by a narrow margin but this time around its fate was sealed. It has a couple of US discount-driven investors on its share register who will likely be keen to take the cash exit option, which makes us wonder whether the 25% limit will be well oversubscribed. However, on the back of their superior performance track records, the two corporate governance focused Japan funds – NAVF and AVI Japan Oportunity – are the highest-rated Japanese trusts, and it may be possible for those investors to trade out of any NAVF shares that they end up owning, if they are patient.]
AJIT / NAVF : Surprise move to merge abrdn Japan and Nippon Active Value