Schroder Japan Growth (SJG ) has bowed to shareholder pressure and offered to buy back a quarter of its shares in four years’ time if the trust’s performance does not pick up.
Annual results this week showed the £222m investment trust underperformed the Japanese stock market for the second financial year in a row. With the shares trading 16% below net asset value (NAV) - the widest discount in its sector - it has pledged to launch a tender offer that would allow shareholders to sell some of their stakes closer to their underlying value in 2024.
The tender offer - which would shrink the trust by up to 25% and risk making it less attractive to big wealth managers - will be triggered unless SJG’s new fund manager Masaki Taketsume (pictured below) decisively beats his Topix index benchmark by more than 2% a year in the four years to July 2024.
City of London Investment Group and 1607 Capital Partners, the institutional value investors that hold nearly half of SJG’s shares, are likely to have pushed for the tender offer which will protect their returns should Taketsume, who replaced SJG’s long-standing fund manager Andrew Rose last year, fail to deliver.
Although SJG’s recent period of lacklustre performance started at the end of Rose’s 12-year tenure, the commitment to a tender offer piles the pressure on Taketsume, who is also seeking to revive the larger Schroder Tokyo open-ended fund he took on from Rose.
Describing the 11.7% drop in net asset value in the year to 31 July as ‘disappointing’, chair Anja Balfour made it clear that Taketsume had only a couple of years to make an impact.
‘Should it become apparent that such outperformance is not possible, the board will consider taking other measures to preserve shareholder value before the end of the performance period,’ Balfour said.
The amount of notice the board must give Schroders if it wants to appoint a new fund manager has been cut to six months.
But Balfour reiterated the board’s confidence in Schroders’ experience and said it did not think it would be ‘appropriate’ to diverge from the trust’s ‘value’ approach at this point of the cycle, following several years of pain for the style.
SJG has already been buying back its shares to minimise the discount though Balfour said it would use this lever ‘more extensively over the coming months’.
High gearing - or borrowing, which stood at 13.3% in July - also dragged on returns, magnifying falls during the coronavirus crash in March.
SJG’s returns suffer by comparison with the biggest names in Association of Investment Companies (AIC)’s Japan sector.
Total returns on NAV now stand at -4.8% over the last three years, versus the 10.3% rise for the Topix and 37.9% gain for its peer group, according to Numis Securities data, which is dominated by the £1.1bn JPMorgan Japanese (JFJ ) and £866m Baillie Gifford Japan (BGFD ) trusts that both focus on the large growth stocks that have led markets.
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