Japan trust consolidator Nippon Active Value Fund (NAVF) is broadening its investment policy to cope with a surge in assets from its impending mergers with Abrdn Japan (AJIT ) and Atlantis Japan Growth (AJG ).

With assets set to swell 70% to around £285m, the Japan smaller company activist plans to make its portfolio less concentrated. It will reduce the limit on the maximum proportion the fund can invest in any one stock to 20% from 30% and will increase the number of positions to 35 from around 20. The portfolio has already grown to around 29 names.

In addition, it will invest in companies with a market value of up to $3bn (£2.4bn), up from the current limit of $1bn.

‘The portfolio will remain selective and focused, while we will be acknowledging the existing direction of travel,’ said Paul ffolkes Davis, chair of the trust’s fund manager Rising Sun Management.

He said the ‘more significant’ change the expansion of the ‘core universe’ which he said ‘will allow the inclusion of more mid-cap names, providing both greater levels of liquidity and the ability to deploy our larger fund more quickly’.

More details on the investment policy will be released in a circular to shareholders.

Peel Hunt analyst Thomas Pocock was wary about the proposals although he recognised they could reduce trading costs for investors and weight of the company’s fixed costs on shareholders.

‘We will remain watchful as to whether the increased size of the fund leads to a dilution of the top conviction investment ideas and a reduction in the fund’s outperformance potential going forward,’ he commented. 

NAVF unveiled the plans in half-year results for the six months to 30 June. These showed the £153m closed-end fund delivered a total underlying return of 6.7% compared to a 10.9% loss in the same period last year.

Shareholders did much better, however, as the shares rerated, narrowing their discount of 16.5% to net asset value to 3.6% to deliver a total return of 23.2%, a big improvement from a 20.7% loss last year.

‘The outlook is the brightest since NAVF’s IPO in 2020,’ said Davis. Among the contributing factors is a combination of corporate and regulatory reforms starting to seep through, with a ‘sea change’ underway.

However, performance was not as strong as it could have been with the manager stating the slump in the yen against the pound had knocked 16.5% from its underlying local currency return.

The company said it ‘does not currently intend to enter into arrangements to hedge its underlying currency exposure’ however it will review this from time to time.

NAVF is the best performing Japanese smaller company trust with a three-year total shareholder return of 51% that beats the 12.1% from the Topix Small Cap index. Across the broader Japan sector, CC Japan Income & Growth (CCJI) has done slightly better returning 36.6%. Since the half-year NAVF’s share price discount has widened slightly to 7% at 30 August.