AVI activism shakes out returns in Japan's smaller companies

Top contributors to AVI Japan's portfolio this year have been on the receiving end of its high-profile activism, proving that taking boards to task results in a win for shareholders.

Relentless activism at AVI Japan Opportunities (AJOT ) is bearing fruit, with its two high-profile targets becoming top performers this year.

The £246m portfolio of smaller Japanese companies is proving its high-profile activist approach is working in an age of sweeping corporate reform in Japan, that has seen policymakers and regulators step up the pressure on companies to overhaul complex corporate structures and return more cash to shareholders.

The trust, managed by Asset Value Investors’ Joe Bauernfreund, beat its MSCI Japan Small-Cap benchmark in the first six months of the year, with a net asset value (NAV) total return of 11.7% versus a 6.5% increase in the index.

The results should be good news for investors in Fidelity Japan Value (FJV ), which is on course to merge with AJOT at the end of November.

The strongest contribution to the outperformance came from two stocks where AJOT has been pushing heavily for change.

The first is Kurabo Industries, which saw its shares gain 33% over the six months. The former textile manufacturer, turned jack-of-all trades, including chemicals, technology, food and real estate, was encouraged by AJOT to move away from less profitable ventures to focus on technology and high-quality chemicals.

In March, Kurabo shut down its largest and most unprofitable textile factory, and has also implemented many of the manager’s suggestions such as a 10% return on equity target for 2027, a Y20bn buyback, and a commitment to sell its ‘underutilised real estate’.

Kurabo has grown swiftly from its entry into the fund in January 2024 to the top position, making up 12.5% of NAV.

Clothing business TSI, which owns brands such as Pearly Gates and Margaret Howell, also received scrutiny from AJOT. It made changes on the back of the trust’s suggestions, and now has a mid-term plan focusing on improving earnings and optimising non-operational assets to improve capital efficiency.

The shares rose 14% over the period, helped by the announcement that it was selling its former HQ at a price equal to 30% of the market-cap.

Bauernfreund was also pleased with the ongoing buyback programme for 6.4% of the shares. The holding was added to the portfolio in July 2022 and makes up 11.5% of NAV.

‘Japan’s equity market is undergoing a notable transformation, supported by foreign capital, structural reforms, and a renewed commitment to shareholder value,’ he said.

‘Early signs of progress are now becoming tangible, opening-up a broad array of attractive investment opportunities. Our strategy remains disciplined: we continue to build a focused portfolio of 15 to 25 high-conviction positions, guided by selectivity and long-term potential.’

In this vein, Bauernfreund added two new names to the fund and wasted no time taking the boards to task. The largest purchase was Rohto Pharmaceutical, which was swiftly built into a top 10 position from initiation in September 2024.

AJOT has already published a 100-page reporting entitled ‘Awakening Rohto’ setting out a plan for operational improvement and ‘strategy enablement’. New holding Wacom also received similar treatment, with Bauernfreund and his team releasing a ‘Draw Wacom’s Future’ report setting out more than a dozen ‘constructive suggestions’ to management.

Trading in the portfolio was elevated at 67% mostly due to the privatisation of Tecnnos Japan. Bauernfreund said he has ‘several high-conviction ideas in the pipeline’.