The board of Schroder Japan (SJG ) is asking shareholders to approve the use of contracts for difference (CFDs) for borrowing as it aims to avoid a tender offer by continuing to outperform its index.

In its annual results today the board of the £352m trust said it felt using CFDs to increase investment exposure by gearing would be in the ‘best interests of shareholders’ as lending markets have made traditional debt more expensive.

A CFD, which is a derivative, allows the trust to gain access to the movement in a company’s share price without buying the underlying asset. It is a contract between the investment manager and a broker to exchange the difference in a company’s share price from when the contract opens and when it closes.   

The Schroder trust will not be unique in utilising this tool, with its peer, Fidelity Japan (FJV ), already active in the space, with six of its top ten investments having a CFD.

Masaki Taketsume, the investment manager of the trust, reduced gearing in the 12 months to the end of July down from 11.1% to 9.5%. The trust, which has a 6bn yen bank loan expiring in January 2025 and a 2bn yen credit facility which was undrawn at year end, saw its borrowing costs increase to £286,000 from £270,000 in the previous year.

A resolution to amend the investment policy will be included at the annual general meeting on 5 December.

The manager will be hoping the derivative use will help him continue to beat the index as the company has a target to deliver net asset value (NAV) returns of at least 2% higher per annum than the Topix Total Return index over the four-year period from August 2020, with a tender offer for 25% of the issued shares if its unsuccessful.

So far the trust is on track to deliver, even as Japanese stocks reached a three decade high in May. Over three years the company has returned 12.4% on an annualised basis, beating the Topix, which has achieved 8.2%. In the latest financial year, NAV increased by 11.7% while the benchmark gained 9.4%. Shareholders fared even better as the shares narrowed their discount to NAV and generated an 18.7% total return.

The biggest contribution to positive performance was Ibiden, a mid-cap producer of central and graphic processing units, which are used in artificial intelligence data centres and cloud computing.

‘The exponential growth in these markets has driven stronger-than-expected results from Ibiden, leading to significant share price growth and a full recovery from last year’s weakness which had allowed us to build a position in the shares,’ said Taketsume.

Returns took a hit from Mitsui Fudosan, a large property group, which fell on concerns about how a change in monetary policy would impact the market. Kureha, a small cap speciality chemical company and Aeon Financial Services, a non-bank financial, also detracted from performance.

Overall revenues rose in the year from 4.97p to 5.41p per share allowing the board to increase the dividend to 5.40p per share, a 10% increase from the previous year.

The share price discount averaged 11.5% over the 12 months, but has narrowed since, down to 9%. The board purchased 2m shares in the financial year and is looking to renew its buyback authority to purchase up to 14.99% of issued share capital at the upcoming AGM.