Nippon enjoys the spoils from activist 'crusade'
Strengthening Japanese stock markets may have closed the discount gap at Nippon Active Value (NAVF ), but it believes its economic ‘crusade’ to reform corporate Japan will be the real driver of returns.
The £428m portfolio of Japanese smaller companies run by Rising Sun Management’s Paul ffolkes Davis, delivered a net asset value (NAV) increase of 7.6% and a share price increase of 8.5% over the six months to end of June, outpacing the 5% rise in the MSCI Japan Small Cap index.
Along with other global markets, Japan’s stock market was hit in April by US tariffs before making a full recovery by the end of June, while the main Topix index went on to hit new highs in July.
Despite the residual uncertainty around global markets, the rollercoaster moves in the fund’s listed investments - 10% of the portfolio can be held in unlisted companies - helped to narrow the trust’s discount from 10.1% to a small premium of 1.5% before ending the period at a small discount of 2.2%.
However, ffolkes Davis was not focused on short-term share price movements but rather on the ongoing activism that NAVF puts at the heart of its strategy, as it is the only thing that is within investors’ control. He urged investors to consider themselves ‘a co-venturer on a great crusade to bring economic rationality to undermanaged businesses in the Japanese market’.
He said company assets have been undermanaged for ‘several decades’, with boards scarred by long-run bear markets and collapsing real estate prices and adopting a ‘bunker mentality’ that has ultimately driven share prices too low.
In an attempt to change the status quo and realise returns, NAVF submitted shareholder proposals at 12 annual general meetings in the first half of the year. The most high profile of these was Fuji Media, which has been in ffolkes Davis’ sights all year due to the sexual harassment scandal that ‘exposed deep-seated issues within the company’s leadership’.
NAVF issued a public campaign and created a ‘media storm’ in Japan, calling for the resignation of long-serving executive Hisashi Hieda, dubbed the ‘Emperor’, and a break-up of the inefficient business structure.
The appointment of new directors from what ffolkes Davis said was ‘an old boys’ club’ came just before a governance report that showed ‘systemic mismanagement’. It led ffolkes Davis to demand a widespread reform, including an 8% target return on equity, divesting Y100bn of shareholdings over three years, a Y250bn five-year investment plan, and the removal of Hieda and his ‘allies’.
Ffolkes Davies said the AGM in June ‘marked a turning point’ and a new board has adopted most of the reforms, allowing the stock to rally more than 30% in the second quarter.
NAVF also delivered a ‘strategic coup’ at Hogy Medical which came under pressure after an earning revision and disappointing sales of new medical kits, as well as uncovering deeper operational issues that put its future as a listed company into doubt. NAVF proposals saw Rising Sun’s James Rosenwald appointed to the board, giving NAVF more firepower to advocate for a management buyout or privatisation.
NAVF recommended directors were also appointed to the board of Eiken Chemicals, which ffolkes Davis said was a ‘significant concession’.
Taking corporate action reflects ffolkes Davis belief in a shift in Japanese corporate culture and NAVF’s campaigns have contributed to a record number of ‘going-private transactions’ totalling 32 in the first quarter, more than double the same period in 2024.
‘As the company continues to expand its influence, its actions are likely to inspire further reforms, benefiting not only its own investors but also the broader ecosystem of Japanese equities,’ he said.
