AVI Japan Opportunity (AJOT ) racked up gains of more than 15% last year in a strong recovery from the troubles of 2022, helping bolster the track record on its five-year anniversary.  

The Japan smaller companies activist may only have net assets of £193m, but made big gains in the year to 31 December, delivering net asset value (NAV) total returns of 15.8% versus a 6.9% rise in the MSCI Japan Small-Cap benchmark, as the country’s corporate governance reforms bore fruit, annual results this month showed. Shareholder returns totalled 14.8%

This is in stark contrast to the 4.3% fall in 2022. A large part of the bounce back has been attributed to the steep decline in the yen, which depreciated 11.5% against the pound over the year and was a headwind for sterling-based returns.

‘2023 then was a year in which (other) investors’ enthusiasm for Japanese equities grew and scepticism waned. The strong economic backdrop, ultra-loose monetary policy, low relative valuations, weak yen, and unabated progress on corporate governance reform drew global attention,’ chair Norman Crighton said. 

Active management

Portfolio manager Joe Bauernfreund managed to outperform despite the year favouring large-cap, value stocks, to which the fund has little exposure. Instead, he said it was ‘testament to the strategy of generating idiosyncratic returns from a concentrated portfolio of high-quality, over-capitalised, undervalued companies’.

There was a ‘boom’ in activist activity in 2023, with the number of shareholder proposals from engagement funds growing from just under 60 in 2022 to 82 in 2023. Bauernfreund contributed to this number by filing shareholder proposals at architectural coatings firm SK Kaken and conveyor manufacturer NC Holdings.

The biggest contributor was TSI Holdings, whose share price rose 68% over the year. The owner of a range of athleisure and outdoor wear clothing and footwear brands stands out from its competitors but ‘it trades at a steep discount due to a bloated balance sheet’. The share price re-rated after management disclosed initiatives to address the low valuation.

Glue maker Konishi saw its shares increase 65% following strong earnings growth, while shares in Jade Group, which operates a fast-fashion e-commerce platform, almost doubled as operating profits grew 76%.

In the case of SK Kaken it is the third consecutive year that proposals have been submitted, and despite ‘some success’ the company has ‘refused to improve shareholder returns’.

‘Despite gaining 35% support, which, considering the founding family’s nearly 50% control, represents a majority of minorities, SK Kaken persists in maintaining a measly 12% dividend payout ratio, resulting in cash accumulating each year,’ said Bauernfreund.

‘So long as we are shareholders, we will continue to apply pressure on the family to improve the situation.’

The largest sale was a long-standing position in transportation systems firm Fujitec, where the fund generated a 111% return on investment and a 32% internal rate of return over the five-year holding period.

Looking ahead

The pressure for reform in Japan will is unlikely to abate in 2024, Crighton said. The Ministry of Economy Trade & Industry finalised guidance for corporate takeovers over 2023 that could pave the way for ‘more unsolicited takeover approaches’.

There have also been drastic changes in economic policy in the past month, with wage negotiations with unions resulting in an average increase of 5.28% – the most in 33 years – as the country deals with rising inflation and labour shortages.

The Bank of Japan has also confirmed the historic decision to end eight years of negative interest rates, increasing the base rate from -0.1% to 0.1%, the first increase since 2007.

Over five years, the trust has delivered shareholder returns of 48%, beating the benchmark’s 26%, data from Deutsche Numis shows. The shares currently trade at a 5% discount.