Questor: ‘An attractive opportunity in a value-scarce world’: buy these two Japanese trusts

Questor investment trust bargain: two funds focus on the large number of Japanese firms that hoard cash to the detriment of shareholders

Richard Evans 6 February 2020 • 6:00am

Tokyo cityscape — A shake-up of Japanese corporate governance could see company share prices rise Credit: Akio Kon/Bloomberg

If you are a professional investor in investment trusts, you are always on the lookout for pockets of value. One of these investors thinks he has found just such a pocket in the Japanese stock market.

Japan has been a graveyard for savers’ hopes for decades but changes are afoot in the seemingly arcane sphere of corporate governance that could shake up the country’s old-fashioned executive culture and give the share prices of some companies a dramatic boost.

And British investors can get a slice of any such gains via two London-based funds dedicated to finding them: AVI Japan Opportunity and Nippon Active Value. Both are dedicated to investing in Japanese companies with excess cash and then putting pressure on them to release it.

“The culture in Japan for a long time has been for companies to hold on to large amounts of cash,” said Richard Curling, manager of the Jupiter Fund of Investment Trusts.

“This is very inefficient but it is very prevalent and has been going on for so long that the market ignores the existence of all this money.” He said Japanese firms now had 100 trillion yen (£700bn) in cash between them, a record figure.

If boards can be persuaded to return the cash to shareholders, the overall effect is a big gain: investors will still own the same company, which is likely to retain its previous stock market valuation because the market had ignored the cash, and they will have that cash in their pocket as well.

Mr Curling said boards were coming around to the idea of returning the cash because of changes to the tax and regulatory regimes.

As part of wider reform to the Japanese economy the government has tried to encourage companies to be more “shareholder-friendly” and made the return of cash to shareholders more tax-efficient, he said. “It has also changed the tax treatment of executives’ share options so that they themselves can more easily benefit – there is better alignment of interests.”

He said there were some extreme examples of the valuations of Japanese companies being driven down by their holding of excessive amounts of cash.

“Among stocks valued at $150m-$300m, 100 have an ‘enterprise value to Ebitda’ ratio of less than two when a figure of 8-10 would be normal,” he said. “Eighty trade at less than the value of their net working capital and 30 have a market value of less than their cash balance.”

He said shareholders, including Japanese ones, were increasingly prepared to use their votes to persuade firms to hand back their cash. “Some high-profile companies have already acted but there’s a raft of smaller ones with value waiting to be released,” Mr Curling said.

“People have been talking about this for some time and progress has been slow but a number of factors, such as the regulatory changes, the government’s own investment arm being mandated to back changes and pressure from investors, are coming together to produce momentum now.”

With regard to AVI Japan Opportunity and Nippon Active Value, Mr Curling said: “AVI is a well established firm [it also runs AVI Global, formerly British Empire] but the managers of Nippon Active Value are equally credible in seeking to exploit this opportunity, which I see as attractive in a value-scarce world.”

Readers may want to follow his example and invest in both; for those who prefer a lean portfolio Questor’s pick would be AVI Japan Opportunity.

Questor says: buy

Ticker: AJOT

Share price at close: 114p

Update: European Opportunities

We advised readers to reinvest in this trust four weeks ago after an earlier sell recommendation as we believed that the manager, Alexander Darwall, would in future avoid excessively large bets on single stocks of the kind we thought he had made on Wirecard, the German payments firm. Mr Darwall has now confirmed that he will avoid such large positions.

Questor says: hold

Ticker: JEO

Share price at close: 922p

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