AVI Japan Opportunity Trust (AJOT) has published its annual results for the year ended 31 December 2024, marking another strong year of performance for the £243m market cap trust, which continues to benefit from Japan’s accelerating wave of corporate governance reform. AJOT delivered NAV total returns of 20.9% in sterling terms, outperforming its benchmark by 14.7%, and extending its since-inception outperformance to 46.4 percentage points. Over the year, the MSCI Japan Small Cap Index returned 16.4% in JPY terms, with AJOT comfortably ahead with a 32.4% return in local currency. However, ongoing yen weakness (down 8.8% versus GBP in 2024) weighed on sterling-based returns. Since launch in October 2018, AJOT has delivered 69.9% in sterling terms versus 23.5% for its benchmark, equivalent to a 130.0% return in yen.

Active engagement strategy bearing fruit

The trust’s manager, Asset Value Investors (AVI), continues to take a high-conviction approach to small- and mid-cap Japanese companies, focusing on unlocking value through active engagement. This strategy was vindicated again in 2024, with four holdings receiving tender offer bids at significant premiums – most notably Alps Logistics, which was bought out by KKR-controlled Logisteed at a 194% premium.

One standout performer was Beenos, which added 7.5 percentage points to performance following a tender offer approach from LY Corporation. Beenos’ shares rose 178% during the year. Other top contributors included Alps Logistics (+4.4%), Kurabo Industries (+3.0%), TSI Holdings (+2.6%), and Aoyama Zaisan Networks (+2.0%).

Several holdings initiated shareholder-friendly reforms, buybacks, and dividend increases following AVI’s engagement. AVI held over 150 meetings with portfolio company executives and directors in 2024, and sent detailed letters or presentations to 17 investee companies. Public campaigns were launched at Aichi Corporation and SK Kaken, with the latter receiving shareholder proposals for the fourth consecutive year.

Encouraging TSE reforms

The Tokyo Stock Exchange (TSE) increased pressure on underperforming companies via its now-regular “name and shame” disclosures, holding management accountable for poor capital efficiency and governance. The TSE is also targeting reform of complex cross-shareholdings and parent-subsidiary listings – an area ripe for releasing value.

Structural reforms to Japan’s NISA programme and a leadership transition to PM Shigeru Ishiba, who has signalled continued support for shareholder-friendly policy, create a backdrop that is supportive for AJOT’s active engagement approach. Private equity interest in Japan is also increasing. The trust’s manager highlighted KKR founder Henry Kravis’ public enthusiasm for Japanese opportunities as a positive signal for ongoing corporate action.

Gearing, dividend and shareholder returns

At the year-end, AJOT had net gearing of 4.5%, supported by a ¥2.93bn debt facility, which was subsequently increased to ¥6.6bn in March 2025. The board has proposed a final dividend of 1.20p, bringing total dividends for the year to 2.20p, up from 1.70p in 2023.

The trust’s shares closed 2024 at a 2.1% discount to NAV. During the year, 4.1m shares were bought back, with 137.2m shares in circulation at year-end, up from 80m at IPO. The board reiterated its intention to grow the trust further and enhance liquidity.

AJOT also offered a full exit opportunity via a tender offer in October 2024, taken up by 2.58% of shareholders. This option will now be offered annually.

Portfolio metrics and outlook

The portfolio remains concentrated, with 15–25 positions. At year-end, the weighted average EV/EBIT stood at 8.7x, compared to 14.7x for the MSCI Small Cap Index, with 48% of market cap covered by net cash and investment securities.

New positions in 2024 included Kurabo Industries, Beenos, Aoyama Zaisan Networks, Araya Industrial, and Raito Kogyo. Portfolio turnover was elevated at 68%, largely due to takeover activity.

On the downside, Nihon Kohden (-1.4%) and Jade Group (-1.3%) detracted from performance, with the latter criticised for poor disclosure following a key acquisition.

Looking ahead, AVI remains bullish. “The combination of rising pressure from regulators and activists presents a compelling opportunity to unlock value in Japanese small caps,” said manager Joe Bauernfreund. The team continues to focus on operational improvements, governance reform, and shareholder returns as catalysts for re-ratings.

Management and board changes

During the year, directors Yoshi Nishio and Katya Thomson stepped down and were replaced by Andrew Rose and Tom Yoritaka. Chairman Norman Crighton reaffirmed the board’s commitment to transparency and shareholder dialogue ahead of the upcoming AGM in May.

[QD comment MR: AJOT’s active engagement approach continues to bear fruit and, given Japan’s corporate reform agenda shows no signs of slowing, along with increased interest from private equity, AJOT looks well-placed to continue to benefit. AJOT is also taking its own medicine by offering investors a 100% tender offer annually. For investors seeking exposure to Japanese small caps with an activist tilt, AJOT remains a compelling option.]