In the back
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[ WHAT I BOUGHT LAST ]
Historically, Japan has not
been regarded as a particularly
shareholder-friendly environment
(and certainly not one that
welcomed activist investors), but
this is changing
Smith & Williamson’s James Burns says this investment
trust will unlock value in Japanese small caps through
taking an activist approach to its portfolio holdings
Nippon Active
Value Fund
O
ne of the more
interesting
opportunities we
participated in recently
is the Nippon Active
Value Fund (NAVF) – a
new investment trust
that has just listed on
the Specialist Fund
Segment of the London
Stock Exchange. We
purchased this for the
Smith & Williamson MM
Endurance Balanced
fund.
Active duty
NAVF intends to take
an activist approach
to Japanese small-cap
equities (those up to
$1bn in size) and benefit
from the major corporate
governance changes
that have started to take
effect over the past few
TRUSTNET
years. The trust seeks
to generate returns by
unlocking value; this will
be achieved by engaging
with companies to
be better stewards of
shareholders’ capital
and encouraging them
to pay dividends,
special dividends and
utilise share buybacks.
Moreover, the small-
cap end of the market is
under-researched and
relatively inefficient –
broker coverage tends to
be thin, with the majority
of Japanese companies
covered by two or fewer
analysts. This means
there is an abundance of
opportunities for active
investors.
Historically, Japan has
not been regarded as a
particularly shareholder-
friendly environment
(and certainly not one
that welcomed activist
investors), but this is
changing. Six years ago,
Japanese stewardship
requirements began to
move towards Western
norms. More recent
reforms to Japanese
M&A guidelines mean
that if a company
receives a takeover bid,
it has to be evaluated
by the independent
directors who must act
in a fiduciary capacity,
especially with regard to
the interests of minority
shareholders. Protection
for the latter group is
something we largely
take for granted in the
West, but it is a relatively
new phenomenon in
Japan.
Room to run
We think this story can
run for several years.
Many investors see the
benefit of an activist
strategy (return on
equity and return on
investment in Japan
are low, as are net debt
levels, while many firms
are cash-rich – some
even have cash reserves
that exceed their
market capitalisations),
but few investors have
had the confidence to
implement such an
approach due to the
associated reputational
risk in what has always
been a conservative
corporate environment.
The investment
manager of the
vehicle, Rising Sun,
doesn’t expect the
broad direction of
corporate governance
in Japan to change,
regardless of who is in
government; however,
it avoids strategically
important companies, as
it is unlikely that Japan
would ever welcome
foreign ownership of
these assets.
Stock specifics
The launch proceeds
are likely to be fully
deployed across a
focused portfolio of
five to 20 targets over
the next six to nine
months. Adhering
to the trust’s own
principles, governance
is a consideration
and there will be a
continuation vote after
five years and biannually
thereafter. This vehicle
will hopefully provide us
with attractive returns
that are not necessarily
correlated to the broader
market – this will be
a much more stock-
specific story driven by
the success of Rising
Sun’s engagement with
target companies.
James Burns is co-
manager of the Smith
& Williamson MM
Endurance Balanced
fund
trustnet.com