AVI Japan Opportunity Trust (AJOT) fund manager Joe Bauernfreund is looking forward to another busy year of pushing for change at some of the country’s cash-laden small caps after using funds from the merger with Fidelity Japan last November to strengthen its activist positions.

Last year was a “transformative” one for the seven-year-old investment trust which saw 68% of FJV shareholders roll into its strategy, lifting the company to nearly £400m, and recorded a third consecutive year of double-digit gains.

Battling a weak yen and a stock market led by larger stocks it does not own, AJOT made a 14.7% total underlying return in sterling and 22.8% in local currency terms. However, this was below the MSCI Japan Small Cap index which returned 19.8% in sterling and 28.4% in yen.

That’s been the trend for a while. Since its 2018 launch, AJOT has generated a 48% investment return compared to the MSCI Japan’s 69% sterling return, but chair Norman Crighton said the activism of the investment team at Asset Value Investors (AVI) had been successful in turning round previously neglected and poorly-performing stocks.

“The board remains confident that AVI is well placed to continue executing the strategy and that there are still plenty of mis-priced investment opportunities to discover,” said Crighton.

Bauernfreund, chief executive of AVI, said the election of Sanae Takaichi as leader of the Liberal Democratic Party and prime minister in October and her subsequent victory in the February general election had triggered a sustained rally across the broader market alongside renewed weakness in the yen.

“Takaichi’s policy agenda is perceived as supportive of defence, energy, semiconductors and advanced technology, resulting in a rally concentrated in Takaichi-aligned sectors and large-cap exporters. The latter has been further underpinned by yen depreciation, reflecting expectations of fiscal stimulus and continued accommodative monetary policy under a Takaichi administration. This dynamic raises important questions around the future evolution of the relationship between the Bank of Japan and the new political leadership,” said the fund manager.

Bauernfreund reassured investors “that rather than individual stock weakness over the last few weeks, we are seeing a slow period of corporate activity as we wait for several catalysts to develop. After a very strong start to the year, followed by an active few weeks over AGM season, we have taken advantage of a quiet period to build up some positions and have been busy behind the scenes, making several large ownership declarations in recent months and significantly improving our engagement position across the portfolio.”

At the end of the year, AJOT held more than 5% in nine companies, accounting for 37% of net assets. Combined with AVI’s holdings across other funds which are invested in the same names, AVI holds more than 5% of voting rights in 13 AJOT companies, accounting for 54% of the portfolio.

“We are particularly encouraged by the appearance of other activists and like-minded investors on the share registers of some of our portfolio companies and look forward to seeing the results of the engagement groundwork we have laid as we head into 2026,” he said.

Our view

Matthew Read, senior analyst QuotedData, said: “This was a transformative year for AJOT. The absorption of Fidelity Japan has taken the trust’s assets above £400m, materially increasing its scale. That should improve liquidity, broaden its appeal to wealth managers and, importantly, give AVI more firepower to build influential stakes in portfolio companies. For an engagement-led strategy, that additional scale is a meaningful advantage and should strengthen AJOT’s ability to push for change.

“While AJOT underperformed its benchmark in 2025, the absolute numbers were still strong, and the underperformance appears largely explained by market dynamics rather than stock-specific issues. It is also worth remembering that AJOT’s strategy is unlikely to produce smooth returns. The trust invests in undervalued companies where value is unlocked through engagement, corporate activity and governance reform, catalysts that can arrive unevenly. That means relative performance may fluctuate from year to year, but AVI’s approach has historically rewarded patient investors as those engagement efforts translate into real corporate change over time.”

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