AVI Japan Opportunity Trust – Annual Report Webinar

throughout this recorded presentation attendees will be in listen only mode questions are encouraged they can be submitted at any time using the Q&A tab

situated on the right hand corner of your screen please simply type in your questions at any time and press send the company may not be in a position to

answer every question it receives during the meeting itself how the company can review all questions submitted today and we’ll publish those responses where it’s

appropriate to do so before we begin we’d like to submit the following poll and I’m sure the company be most

grateful for your participation i’d now like to hand over to the team from AVI Japan Opportunities Trust Joe Nicola

good morning good morning all and thank you very much uh for joining us today to talk about

the results the annual results of AVI Japan Opportunity Trust and to delve into the opportunities we are seeing in

Japan how we’re positioned and what we think prospects are for the coming year uh clearly a lot has happened over the

last few days and I’m sure there’ll be some questions on that as we go through the presentation and I’ll be very happy

to take but just from a starting point um to give you a brief overview of AVI

and Japan Opportunities Trust we are a London listed investment trust with

assets of around 240 million pounds we launched in October 2018 so we’ve going

for about six and a half years now and over that time have delivered what I would say is very strong both absolute

and relative returns returns um with fairly fairly substantial outperformance

as you can see here we are a very concentrated portfolio with roughly 15

core holdings the top 10 as you’ll see later make up around 70% of the portfolio and the idea really is to take

advantage of not only the very cheap valuations that we are seeing in in Japan but more importantly and more

fundamentally to take advantage of the very real shift that’s occurring in

Japan with regards to corporate governance reform and the attitudes generally we’re seeing from companies

towards shareholder returns and as part of that AVI and AVI Japan Opportunities

Trust is firmly positioned as one of the activist or engagement funds operating

in Japan and we’ve developed a a strategy and a process that involves

very constructive and intense dialogue with companies that we are invested in in order to

deliver to deliver returns for ourselves and other shareholders so taking a look

uh at 2024 it was a year of strong returns for AVI Japan returning almost

21% in in sterling terms that was well ahead of the peers within the Japanese

investment trust small cap space but also well ahead substantially ahead of our benchmark the MS Japan small cap

index as you see at the bottom half of the page there were some quite

substantial contributors clearly far outweighing the detractors detractors that we see here but more interestingly

when you look at those um contributors a number of them experienced some form of

corporate activity whether that was an explicit takeover bid for the company or

some form of uh improvement or self-help that the company’s directors have adopted in order to improve shareholder

returns and both those aspects are really themes uh that are very much uh

live in Japan and very much in a sense the drivers of our returns in Japan and

we certainly see that continuing the year has started

um pretty well certainly until last week when you look at returns thus far this

year in the first three months of the year returns of about 6% again very much

ahead of uh benchmark and also ahead of of the peer group and again when you

look at the contributors and detractors um substantial corporate activity TSI um

was an example of a company uh that sold a substantial real estate

asset that it had sitting IV on its balance sheet it amounted to roughly a third of its market cap the value that

it achieved was well in excess of the reported value of that asset and it’s an

inefficient balance sheet really has contributed to its undervaluation and so the fact that management are now

addressing that undervaluation are becoming more efficient in their balance sheet management and using those

proceeds to return cash to shareholders by buying back shares is is extremely

accreative and the share price has responded accordingly technos Japan for example is an IT services business that

we’ve owned for about 18 months it was just taken over in January took received

a takeover bid at a substantial premium so again the contributors really have

stemmed from that corporate activity both on the engagement side and both and

also in terms of corporate activity um it’s worth just before we

get delving into the detail uh of the opportunity set in Japan just highlighting some of the macro features

uh that play a part in generating our returns the end depreciation the weakness of the yen has been a key

feature and a key headwind of our sterling based returns pretty much since we launched the trust in 2018 and

certainly over the last uh couple of years um the yen has been weak uh

historically primarily due to monetary policy in Japan that has been on a different trajectory to the rest of the

world stimulating the economy by way of yield curve control by way of zero or

negative interest rates has really weighed on the yen and that has led to substantial outflows over the last few

years by Japanese consumers and institutions out of Japan out of the yen

and into foreign currencies foreign bonds in particular that has been changing and we have started to see some repatriation but

more fundamentally when thinking about the trajectory of the yen going forward

there are some shifts in monetary policy and there are some shifts in economic fundamentals that support um a yen

appreciation story japan has come to the end of deflation finally we’re starting

to see inflation emerge and particularly so when we look at um wage inflation and

some of the wage negotiations that are going on in Japan uh call for pretty substantial wage increases for Japanese

employees we’ve also seen the end of zero and negative interest rates in Japan we’ve seen the Bank of Japan move

cautiously towards a normalization of interest rate policy and with what’s been going on in

um the Federal Reserve and and the interest rate path in the US it does

seem to be as if the scene is set for a strengthening yen going forward but

clearly the introduction of tariffs by the US and the upset and carnage really that we’ve

seen in the market over the last few days uh has led to some uncertainty on that and the yen has been behaving as a

safe haven currency we’ve seen some strength over the la over the last few days but fundamentally the yen remains

cheap and the path going forward um at some point should be positive but you

can see here the differences as they’re translated between pounds in and yen to our returns o over the life of the fund

uh almost 140% in in yen terms compared to about 80% in sterling terms so very

substantial okay so let’s let’s move back uh to the environment it’s been a conducive environment uh for those uh

investors who have embarked on the corporate governance theme who have

played a a role as a shareholder activist and at the heart of this is the third arrow of economics which was

introduced in 2012 and led to the introduction of a corporate governance code and the stewardship code in 2014

and 2015 which fundamentally said to Japanese companies you’ve got all this cash on the balance sheet you’ve got to

start using it be productive put it to good use or give it back to shareholders so they can fire up the economy uh the

stewardship code introduced at the same time said to shareholders um shareholders in Japan typically always

support management they never criticize management you’ve now got to start acting like owners if you’re not happy

you’ve got to say so and force companies to do something about it so at the start

of our journey back in 2018 there was a lot of skepticism and cynicism about the commitment of Japanese uh companies to

really unwind decades of shareholder culture that really demoted shareholders

to the bottom of the pile and promoted the interests of employees pensioners and society uh ahead of of real of

shareholders fast forward uh to where we are today and there’s been a real shift in

attitudes back then it was a struggle to get companies to listen to us to get companies to buy into the idea that they

needed to do more for shareholders but today very often we find ourselves pushing on an open door management have

now accepted that they’ve got to do more to drive share returns that share prices

are too cheap uh and in some cases remarkably so and that if they don’t do

something about it then other investors other corporates or private equity

investors will take advantage of their share price so there is very much a sense today in Japan that the job of

management which may sound bizarre to us but the job of management is to drive uh

share prices higher this is something that we’re used to in other markets but it hasn’t really been the case in Japan

and really there are have been a number of factors at the heart of this the government starting with the

introduction of the codes back in 2014 2015 um various ministries um the

ministry of economic affairs in Japan has become very very targeted on encouraging

uh on encouraging uh takeover activity and the Tokyo stock exchange has also

played its part it’s created name and shame lists of companies who don’t uh

adhere to the highest standards of corporate governance whose share share prices are languishing below book value

and really forcing companies to address undervaluations in in a big way and this

has really led to a a big increase in corporate activity and when you think about

it cheap share prices the catalyst for reversing those cheap share prices is

either corporate activity investors taking advantage of low prices exploiting them or uh it is management

doing the right things themselves in order to to address their undervaluations now both of those things

historically hadn’t happened in Japan for many years and clearly they are happening uh in Japan um and there’s

been a real acceleration in both self-help measures and corporate activity over the last 18

months we highlight a few examples um here here on this slide but the key

message is that the commitment from the authorities in Japan to this governance

reform movement is really uh is very powerful there’s a strong commitment to

it they’re not backing down now and like everything else in Japan it remains a

very very um long-term long-term

commitment so when we look at um our portfolio and we we uh look back at the

performance over the current year and the start of the new sorry the past year and and the start to this year uh I

think you’ll you’ll appreciate the message uh that we’re trying to relay in terms of the current opportunity and the

current environment in Japan so we had two takeover bids

um Binos and and Technos Japan boss was our largest holding at

around 10% of NAB so it really moved the needle um Technos Japan was about a four

or 5% weight so it also moved the needle but to to a lesser extent

on top of that though and the real drivers of of long-term returns and the one which we can have the most impact on

is our engagement with management and the outcomes we’re seeing from there and even in the first three months or so of

the new financial year we’ve had a number of announcements by companies of

improved governance asset sales implemented share buyback programs

reductions in cross shareholdings all of these things are the types of subjects that we are engaging proactively and

intensely with management and the and certainly it’s the case that

a lot of the performance that we’ve generated in the first quarter of this year has arisen because of the positive

reaction that we’ve seen in the share prices of these companies announcing uh announcing these

measures and the impression that we have from our dialogue and our conversation

with these companies and others within the portfolio is that this is not a one-off thing they’re not just trying it

out this is a firm commitment and there is certainly a recognition by many companies in Japan that improved

corporate governance improved capital efficiency reduction in in cross shareholdings and the use of cash more

productively more effectively is certainly um well received by the stock market and well received by other

investors just to give you a little bit more

detail uh on the exits via corporate activity and the prospects uh for

further corporate activity to benefit the portfolio so BOS is one that actually came into the portfolio in

January 2024 so it came out pretty pretty quickly um but and this is a

business that uh provides e-commerce platforms uh for for the sale of clothes in in

Japan um what was interesting about this is that we bought it when we felt the

valuation was very cheap it had too much cash on the balance sheet its growth trajectory was very strong and so the

valuation was very attractive and we ended up accumulating about 10% stake in

the company but the very interesting feature that we’re seeing increasingly uh in Japan today is that there were

other activists in the on the register of that company that followed us into it

um and it ended up being a situation where almost 45% of the shares were held

by so-called activists or engagement funds and although we don’t operate in conjunction or in concert with any of

those other funds it’s fair to assume that uh we want similar outcomes and

have similar objectives when when talking to companies and the fact that so much of the register of the company

is in the hands of investors who want a certain course of action mean that that

means that that’s that course of action is much more likely to happen and it makes um for much more profound robust

conversations and dialogues with management of the company so in that case it’s been a very successful

investment over the life of the fund over the life of the investment I should say um and but it does highlight

increasingly what we’re seeing that um more engagement funds are act are are ending up on the same registers more

engagement funds are owning more of the same companies that they invest in and that is really focusing the mind of of

companies but it is also an interesting prospect for private equity bidders and there is an abundance of private equity

capital looking to exploit undervaluations and undermanaged businesses good businesses that have

been undermanaged for many years in Japan and the fact that a handful of shareholders own substantial stakes in

those companies makes the prospect of takeover bids more realistic and uh we

certainly uh have frequent dialogues with private equity investors about a number of our

companies in the portfolio so that is a trend that has been building for for five or six years it’s reached a tipping

point I would say in the last 12 months and certainly the expectation from our dialog with with those companies is that

there’s likely to be more takeover activity in the Japanese market it doesn’t always happen that

quickly um Alps Logistics is is a company that we owned really since

inception so for about six years uh it ended up um being sold to a KKR backed

company at a very substantial premium uh to its share price logistics is a very popular business area for for private

equity and we saw that exit at a really a substantial valuation multiple much

higher than we actually thought it it would go something like 30 times earnings well ahead of the 20 odd times

that we thought it was worth so it shows that there are really good quality businesses in the portfolio we

benefited we’ve benefited from um long-term growth in earnings of that

business but ultimately uh the attraction and the quality of that business led to a a takeover and the

final example that we saw was NC Holdings a very very small company around 60 million pounds market cap this

was a um a mini conglomerate involved in a number of different business areas some better than others um also had a

lot of cash on the balance sheet we ended up owning around 22% another investor had a similar stake slightly

larger and the fact that two shareholders owned almost 50% of the company meant that uh the wishes of of

us two investors were ultimately um agreed to um by management and the other

investor ended up taking over the c the company and again a very very attractive premium so some examples really of the

kind of corporate activity we’ve we’ve seen in Japan and actually the kind of corporate activity we expect to see uh

continuing in Japan in in the future just to highlight a few things

when we look at the portfolio a few characteristics I said at the start that this is a very concentrated um portfolio

and that’s that’s really by design top 10 making up uh

70% has been a little bit higher has been lower and it really depends upon the timing of of exits and new ideas

coming into the portfolio but the the key point here is that when we engage

with companies it is a very intense process we’re talking to companies not only about corporate governance or about

cash on the balance sheet most of the value ad I would say from Avi Japan and

the team really comes from engaging on operational and strategic aspects the

kind of conversations that management really value uh and really want to hear

from us um our ideas and how we think those operational improvements really

translate into a sustainable increase in corporate value uh for Japanese companies over the long term and the

fact that we’re involved in such intense engagement means we wanted to see a return on our investment um in time and

resource and so and also the fact that we’re involved in very detailed

conversations and dialogues with companies means that we’ve got a great deal of conviction and confidence in our

investments and so it makes absolute sense to have a very concentrated portfolio so when things go well it does

move the needle obviously when things go less well that also plays a part but

fundamentally um and we’re seeing this play out now when you do see panic in markets you do get quite extreme moves

in share prices that are not necessarily rational that not necessarily reflect

underlying fundamentals and given our um knowledge and

understanding of those businesses those are opportunities we can exploit rather than the things that we should be

fearful of boss as you’ll see in the is the top name it’s one I’ve said has been taken

over it is in the portfolio it’s due to be um exited in in May when we receive

cash from the bidder so at the moment it’s effectively effectively cash uh TSI

uh the one that sold the real estate asset is still a very substantial holding um thus far the company has

addressed its balance sheet issues but hasn’t really spent um much time addressing the operational issues which

we believe to be substantial and and from our perspective are a source of

um source of further further profit further return

um rather than delve through um each of these individual companies what I want to highlight on the next page is just

that although we’ve had quite a lot of corporate activity we’ve had some very strong share price performances over the

last 12 to 18 months there are still a number of new ideas coming into the portfolio you see thus far this year in

2025 we’ve had five new names come into the portfolio they’re not necessarily all at full-size position yet I would

say uh and some of them have the potential to be very substantial uh investments for us going forward you’ll

see that they range in terms of size in terms of market cap from some very small subund million pound market cap

companies to some more substantial midcap names of around two billion two

billion dollar market caps but in on top of that um not only have there been new

ideas that have already found place in the portfolio but there are a number of new names for new names here that we

have on a reserve list um and subject to the availability of capital um some or

all of those will find a name will find a place in the portfolio as we go forward and as we get some cash back

from some of the corporate events I’ve described

it’s worth um spending a few moments talking about the team that we’ve built

uh here within AVI to to manage uh this fund and to to research the companies

we’re invested in it’s a team that’s grown very substantially since the time of launch back then it was myself and a

junior analyst sitting here in London but we’ve invested heavily in the resource today we have a number of

Japanese nationals um working on the team primarily based in London with one

exception Jason Bellamy is based in Tokyo full-time the team um spend a lot

of time traveling to Japan meeting with companies but also have the opportunity to meet companies online as is

increasing the norm around the world so it’s a very intense process and um our

most recent hire who’s with me on call today is Nicola um who joined January this year um and she brings a wealth of

experience uh operating in the Japanese equity markets to work with us which is

which is a great thing but also reflects just our continuing investment in the resource in the process recognizing that

um the process that we adopt here in Japan is very intense and uh time

consuming and we need to have more good people working to that in order to

generate more of the same performance more of the outperformance that we’ve generated over the past six

years ca and Shintaro the head of Japan research and also the senior analyst

have the kind of characteristics and experience that we think is very important to exploit the opportunities

both of them have worked in Japan at management consultants both of them are very experienced and familiar with

talking to companies about operational and strategic aspect which we think is the key to unlocking long-term value in

a number of these small cap Japanese names both of course are fluent in English and have studied in the US and

have have breadth of experience we also have um an ESG analyst working on the

team uh we have a new new person joining us uh in in a couple of months time

clearly there’s a commitment here and and interestingly from Japanese companies on ESG and we take that very

seriously so to summarize before um I open it up to questions uh ABI Japan’s

approach is really looking to exploit extreme undervaluations in the

small cap universe in in Japan companies that have got huge amounts of surplus

net cash or other assets on the balance sheet where the key and the pathway to

unlocking value is through intense engagement getting companies to manage

their balance sheets more efficiently but also to improve their operations to

pursue more profitable endeavors rather than languish with all the cash sitting

idly on the balance sheet employing all the people that they want but not really focus on share returns it is a universe

that is very underresarched and lack of interest and that is why it is ripe for

alpha generation or outperformance and really the secret here is hard work

um spending time understanding the businesses building relationships with management getting them to do the right

things for shareholders and we have the benefit of a tail tailwind in Japan when we look at

the corporate governance reforms that have taken effect and the commitment to them going forward as well as the animal

spirits that are getting fired up by the private equity industry who are very keen to get involved in opportunities so

really from all directions it’s all happening in Japan it remains a very cheap market the volatility that we’re

seeing at the moment will throw up more opportunities these companies that that we own um have substantial cash backing

they’re unlikely to go bankrupt um you know even in a recessionary environment

a lot of the businesses are domestically domestically focused roughly 80% of our

company’s revenues come from Japan rather than from international or export markets uh and so there’s there’s a

defensiveness a defensive characteristic there as well and um speaking to the

companies we are pretty confident that the future is bright for them notwithstanding the fact that in the

short term it could it could look a little bit messy and unpleasant so if

there are any questions um I’d be very very happy to take them thank you joe thank you very much indeed for updating

investors ladies and gentlemen please do continue to submit your questions just using the Q&A tab situated on the right hand corner of your screen just want Joe

and Nicola take a couple of moments just to review your questions submitted already i just like to remind you a recording of this presentation along

with a copy of the slides and the published Q&A will be accessible via your investment company platform um

Nicola you’ve had a number of questions uh from investors throughout today’s uh presentation so thank you firstly to

everybody for your engagement if I may uh Nicola just hand back to you for us to for you to moderate through the Q&A

and I’ll pick us uh pick you up at the end yeah thank you i mean I think the first um the first one to start with is

actually sort of a nice segue from what Joe was just discussing which is tariffs and Trump um and the question is you

know how do we think tariffs will affect the portfolio and Joe did allude to the fact that you know the portfolio does have a lot of defensive characteristics

um that we are 80% exposed to um domestic sort of domestic sales rather

than exports um but I think another thing to note is that yes of course if

we see um if we see a sort of a broad-based volatility within the market yes of course the portfolio will move

along with that to a certain extent however what you’re seeing um is really a reversal of some of the um some of the

flows that we’ve seen over the past couple of years and what I mean by that is if you look at Japan over three and

24 it was really these large cap exporters that saw the bulk of inflows

coming in from foreign investors so it was a large inflow coming in and now because of what’s happening you’re

seeing you’re starting to see some of that unwinding um what I would say is that even though it has been those large

cap exporters that have benefited over the past two and a half years um from

that that’s been you know obviously a headwind along with the uh with the weaker yen for strategy but the strategy

still managed to pull out some some very impressive outperformance and I think that goes back to what Joe was saying um

in terms of yes the portfolio will be to some extent exposed to what’s going on

more broadly but the returns that we are looking to find are really idiosyncratic we’re trying to find these companies we

are trying to be the catalyst for change within those companies and work alongside what the TSC are doing what

the government is doing to try and create a healthier more efficient market um and part of the reason again bit

anecdotal but part of the reason I found AVI such an attractive opportunity for me to move into um from my my previous

roles uh was that we very much believe that where we’re going to see that change um the most dramatically within

the Japanese market is within small and midcap Japan um and there are some

companies who are quite happy to change and improve on their own but the vast majority especially within small midcap

Japan you know they need a bit of a helping hand sometimes they need a bit of a push and this is why having that

constructive activism angle is really important um that brings me on to another question that’s been asked about

do we think that the TSSE will really stand firm on their threats to delist

companies that do not comply with their requests Um but it’s happened hasn’t it yes it’s

it’s already happening so the grace period that they gave to companies to sort of get their get their ducks in a

row in terms of um disclosures in terms of assessing their um their valuations

in terms of coming up with a plan to improve those valuations that ended um at the end of March just gone um so now

what they’ve said is okay you’ve had you’ve had your three years so if you haven’t sorted yourselves out by the

next end of your fiscal year um then you will be you will be kicked out and we

actually uh had the Tokyo Stock Exchange we had a meeting with them last week and

they re iterated that they are as Joe mentioned they are really committed and they are standing firm so yes we do

believe that they will they will go through with uh with what they’re saying um I have a uh question for you Joe from

from somebody as well saying how has our portfolio positioning shifted over the

past year and what has influenced those changes if anything

okay well um I I think that um the portfolio has probably been on a journey

towards becoming a little bit more concentrated if you go back from where it was perhaps 18 24 months ago that

reflects the fact that um there’s been growing conviction in the team that there’s going to be some form of

corporate activity amongst our our largest holdings uh and then what naturally will happen

is that as some of those larger holdings uh are exited and and cash comes back

you start the journey again so just in terms of portfolio picture or construction you know it might go to 70

odd percent top 10 and then might come back down to 65 and then we start start the process again uh there’s certainly

been also when you look back to the new ideas that came into the portfolio about 15 months ago at the start of 2024

um a number of much smaller cap opportunities so some below 100 million

pounds some in the lowund million pounds um and there was a sense at the

beginning of last year that’s where the most extreme opportunities were when you look at the names that have come in thus

far this year and the reserve list as well it’s much more balanced so there are some more midcap names or high

larger small cap names as well as some of the the very micro caps uh and so I

you know I think um that’s one that’s one way in which we we’ve seen an evolution or a shift i wouldn’t call it

dramatic it’s more just a journey in terms of sector diversification I think

um it’s remained broadly broadly the same as you know we don’t really target particular sectors or avoid necessarily

avoid sectors looking really for idiosyncratic situations that have got some interesting characteristics

naturally um we avoid more cyclical industries industries where the cash

might be here today but gone tomorrow um and and the business quality is more variable so those are things we avoid um

but we have been able to to invest into more growthy kind of of industries and businesses bos was one um IT services

generally is a sector that we found quite a lot of um good value uh and and opportunities uh so Technos Japan is

clearly in that so there is corporate activity so I think um you know looking forward uh I think it will be more of

the same quite a broad diversification across industries naturally I think it will be more tilted towards the Japanese

domestic economy than towards exporters um there’ll be some very small cap

situations but some some larger ones uh and and there’ll be uh again

return drivers that will be different fundamentally all uh the investment

thesis are built around the idea that earnings will grow that we will work with companies and management teams to

improve their operations improve their profitability at the same time um we think there will be a number of

situations along the way that will benefit from some change of corporate controls and takeover activity

in situations where there’s another question um in situations where uh

management are not as receptive as you hoped um what do you do in those situations okay

right so I mean you’re it’s a good question clearly there have been situations uh and certainly from some of

the earlier investments where management have been less responsive and less willing to change uh

we have one in the portfolio today that’s a good example it’s called SK Khaken uh this is a company that

operates out of Saka it’s a specialist paints business it’s actually quite a good business and it’s got a super

strong balance sheet with around about 80% of its market cap in net cash but it

is controlled by a family who own over 40% of the shares and that family is

dominated or led by uh the founder president patriarch of the family who’s

in his 90s and a deeply traditional man and somebody who resists all the changes

being thrown at him by the corporate governance code and stewardship code and so that’s been a bit of a struggle um

the business has continued to do well but the share price has done nothing over the life of our investment um how

did we deal with it well we’ve submitted shareholder proposals to the AGM over the last four years in fact last year

chairman of AOT and non-executive director attended uh the AGM they were the first foreign investors to attend

such a forum and they were invited to speak and to address uh the shareholders

where we stand is that because the family are in control um we don’t win those resolutions but we get increasing

levels of support from uh from other shareholders and that I think has just opened up a dialogue

that’s become more friendly and a little a little bit more constructive over the last year with management that’s not to

say that they’re rolling over and doing everything we say but the dialogue continues the key here though is that um

in those kind of situations As long as the business is doing reasonably well and continuing to grow

then the investment could still be a reasonable investment rather than a a

bad write off it’s why we have to focus on the business quality along with the

prospects or the potential of shareholder engagement because we never know how the shareholder engagement is

going to go and if it doesn’t go well then all you’re left with is is the operations so we need to make sure we

own good businesses um we need to engage and we need to push and although we prefer private con constructive dialogue

if that doesn’t work we we have to go public um and uh failing that if it

doesn’t work uh if all that really doesn’t come together then we need to move on and accept that there are better

opportunities better uses of our time and better uses of our capital to try and exit some cases it’s easy to exit

there’s abundant liquidity some cases there’s more limited liquidity sk Khaken would be one such example but we are um

managing managing that pretty effectively currently um just changing tech a little

bit I had a few questions on um the fact that the uh approach within AOT is

obviously been quite successful um are there are there opportunities outside of

Ajot more widely at AVI where the same approach can work and what’s the overlap

between AJOT and other strategies at AVI okay so um AVI runs a global strategy uh

the vehicle through which we the flagship vehicle through which we manage that is called AVI global trust it’s

also a London listed investment trust and it broadly speaking looks around the

world for companies that are undervalued that are mispriced uh that are neglected

and overlooked by other investors and that trade at substantial discounts to their net asset value or their intrinsic

value um it does have a a large allocation to Japan japan has been one

of the areas um in which we’ve been you know most excited about for the last few

years so almost almost 30% of AVI Global’s fund is dedicated to Japan

roughly half of that exposure would be in the same kind of companies or the same companies that are invested in Ajot

and half of that Japan exposure is invested in larger companies in Japan also

companies with substantial asset backing both cash both real estate conglomerate structures where there’s a stark

undervaluation but also where there’s an opportunity for active engagement

uh with management from ourselves and other activists investors to unlock value

um and just on how you think about the portfolio in terms of construction are there upper limits in terms of how much

of a company you would own or how much of the portfolio you would have in a single name okay so there two sides to

that question um in terms of how much of a company we would own um at a bare

minimum we we generally want to own more than 1% of a company and the reason behind that is that when you own 1% of a

company in Japan you become entitled to submit resolutions to the annual general meeting and that’s something that we

want to have in our back pocket we don’t always do it but we have done it on many many occasions and uh that that’s a a

good stick to have to waver management the other interesting threshold that we

increasingly focus on is 5% at 5% our stake becomes publicly declared and

given the activities of ourselves and other engagement funds um there are a lot of other investors looking at what

the engagement funds are doing what their next targets are and it can be quite helpful to publicly declare a a 5%

stake beyond that as you get into the higher single digits very often in many

of our portfolio situations you become a dominant shareholder you become a top three

shareholder and that again is very useful in terms of having a dialogue having a seat at the table with management and getting them to take you

seriously and then beyond that as you start getting into the 10% plus teams

and beyond uh then you’ve very much become in the driving seat um and those

are the kind of situations where you would expect us to have some kind of thesis around the change of corporate

control or an a a large scale event at the company to to unlock value it’s

where we’re having quite intense uh situ conversations with management and as I say um the exit will probably come from

some large scale form of corporate activity in terms of how the portfolio

itself um is constructed as I’ve said we want we want our portfolio to be concentrated in practice that means that

we typically have somewhere between 10 and 15 core core holdings and so if

that’s the number of core holdings we want to have on average a four or five percent waiting in the portfolio would

be an initial target and then what seems to happen is as our engagement

progresses as our conviction and confidence in the idea grows we want to have more of it to reflect that and so

you see a couple of names approaching 10% and we’re very comfortable to have

um a handful of names in the high single digits will even have um more

concentrated than that on occasion but generally speaking I prefer to avoid having one very large outside position

and the rest um you know much lower weights so I don’t want the portfolio to be overly exposed to one individual

situation provided we’ve got balance we can be quite concentrated at the top and

given the current madness as someone has called it um how how have you reacted to

that have you raised cash to buffer the portfolio or have you added to existing

positions or have you taken advantage of it to add new positions into the

portfolio since since the start of it okay so over the last few days we’ve done we’ve done very little we certainly

haven’t been panic selling and one thing to note about um small cap names is that

you do get um untoward price price moves sometimes they don’t move despite all

the madness and sometimes they move by mad mad amounts and you see quite

extreme so um we’re in the position where um although on on the face of it

on the surface we have drawn down most of our uh gearing we um we actually are not are

not geared given that BOS 10% weight is effectively cash so we have got the

scope to add substantially to some of the existing portfolio names and uh or

introduce some of the new names uh that hasn’t happened yet but that’s not not to say that we’re not

working on things and we’re just waiting to see how how the dust settles it’s only really been three days and although

we’ve seen some pretty stark uh sharp sharp price moves we’re keeping a close

eye on on where valuations are and what the price moves imply for the valuations

and and a very very useful metric for us is looking at cash as a percentage of market cap um where companies are

trading at 100% cash to market cap that’s clearly an extreme uh level we’ve had that on occasion and what we’re

keeping an eye on is um valuations approaching the kind of levels that we’ve seen in previous very sharp

selloffs notably during the COVID set off or during the summer uh last summer

when we saw again pretty pretty sharp sell off over the space of a couple of weeks so I expect that over the the

coming days we will start um taking advantage but certainly not panicking at

the moment so um I’ve left we’ve had a number of questions around the proposed merger

with the Fidelity Japan Trust and um I’ve left those now that we’ve got a few

minutes left uh a few things why now um is the first why do you think that the

Fidelity um Japan Trust Board has been hesitant to engage around the proposal

and the third question is um what do you think the benefits are for existing shareholders of Fidelity to to move into

Ajot

um well the first and the third part why now and what are the benefits I think go hand in hand uh you know I think um when

we launched ABI Japan if you think back six years ago everybody knew that Japan was cheap it had had a lot of cheap

companies for the best part of 20 years but it had always disappointed investors uh the market went up for a little bit

and then it went down even more and really there was a lot of skepticism and cynicism that Japan would ever change if

you fast forward now six years we’ve demonstrated two important things we’ve

demonstrated that Japan has changed that the commitment to corporate governance reform and shareholder returns um is

real is genuine and they’re not going to dial back on that so I think that really speaks to AOT’s strategy of exploiting

uh the opportunities presented by corporate governments before on top of that we’ve demonstrated uh through our

process um via our process but through the returns that we generated using our process that our ability to engage with

management to build um effective portfolios that can exploit um that

active engagement really really does work and our our brand of engagement

that is constructive that is intense focuses on the kind of subjects management want to want to do means that

they’re more likely to work hand inhand with us and trust us and do the kind of things that we’re asking them to do

so when you throw all of that together and you look at what is going on in Japan today in terms of um the

activities of engagement funds the responsiveness of companies and the presence of private equity it suggests

that that kind of environment is like likely to continue so we think it’s a good environment for our strategy and

having more capital having more capital invested in that strategy actually makes

it more likely that that we will be successful in our engagement as it allows us to own more of the existing

companies that we own um and be more effective in our engagement so I think there are benefits uh you know I think

why now I think it’s a good time for the strategy notwithstanding the strong performance we’ve had growing the assets

is a is an opportunity to make the outcomes more certain more likely so

that’s good for shareholders but one thing to highlight is you know there is

a natural limit to capacity here for us at AVI it’s not about managing more and

more and managing billions of pounds this strategy wouldn’t work were we to be

managing billions of pounds in it there is a definite cap there’s a few hundred

million pounds more of capacity and merging with Fidelity if if that is a successful um process then would

certainly give us additional firepower that we could put to good use make our engagement more effective but more

importantly that we could get invested without any style drift in a very reasonable period of time

as to why the board is hesitant it’s not really for me to speak um for the board they they’ll have their own reasons but

um you know often in these kind of situations uh boards don’t want to give up their

job they don’t want to see an investment trust disappear uh from the universe and

given the relatively poor performance that Fidelity has generated I think it’s

there’s a natural instinct to say “Oh you know that it’s going to come good

hold firm um don’t don’t jump off the bandwagon at the wrong time it’s going

to it’s going to happen.” My response to that is look it’s been a long time but it hasn’t happened

uh Japan has been a market that’s been in and out of favor even over the last six years is an environment in which ABI

has outperformed relatively consistently even in environments which have been very challenging we’ve done

relatively well and so I think our process works in that broad market environment and why would shareholders

want to take the risk of of hoping that growth style will come back in evoke

when a very idiosyncratic very intense very um active process has demonstrated

an ability to outperform in all kind of markets anything to add Nicola

only that what what you what you highlighted about Agot is one of the reasons as I said that I f I found it a

very attractive option to come and join because it has proved itself to be you

know touchwood a strong all-weather performer even though there have been so many headwinds against a art um it has

proven itself uh not really to be beholdened to style and what the market is particularly focused on at that

particular moment in time um the Japan market for those for those who are less familiar on the call is is really um it

diverges very strongly between strategies that follow a quality growth approach and strategies that tend to

follow a more deep value approach um and depending on you know which way the wind is blowing these funds can do well or do

poorly even though you know their stock picking might be solid there’s a lot of other factors that that tend to

influence them um and from my perspective AVI has proven itself you

know through different cycles through different types of market through COVID through everything that that’s been

thrown um at it to be able to produce those returns that are really not um

that are really um separate from what’s happening in the broader market which is

I think a really strong uh characteristic of it and I think with um Fidelity t they tend

to be more of that sort of quality growth uh type of strategy and yes they

did very well in 2020 which was as we know the year of COVID um but but again

I think I think they do tend to be swung by by different market environments which is which is the way for most Japan

funds um and uh I mean nothing else to add other than that really you know I think

I think it will be down to down to the shareholders to see what they want to do um just to bring this back to macro if I

may Joe you had anything else to add on on uh on that topic um we’ve been asked what do we

think of the yen um which you know I I always answer this by saying we’re not we’re not macro managers but

uh I think there are a couple of things that we can highlight one is that um the Bank of Japan has has

committed to uh pretty vocally a normalization of monetary policy um to

uh and and the the upshot of that of course will be that we’ll see hopefully um a slightly stronger yen nothing

probably as dramatic as we’ve seen in terms of the devaluation of the yen over the past couple of years but there are a number of different factors at work one

is that they are very aware that having had decades of quantitative e quantitative easing and and negative

interest rates they want to get to a point where they are on a healthier track to normalize rates and it will be

a very slow process um they have said you know the last thing they want to do is shock markets so it will be um slow

and steady and very measured the other the other facts to consider is that the Bank of Japan and the government are

under a lot of pressure from domestic consumers so the average Japanese person

now is paying almost twice as much for basic goods like rice um and uh and

they’re not very happy about it and this imported inflation that’s coming in from the weekend in terms of food pricing and

energy pricing is hitting not just the nor the everyday consumer but also a lot of domestically focused companies um so

there is there is definitely a uh sort of an orchestrated effort to try and get

um a more stable a more stable level to the yen on the other side of the coin you’ve got America um Trump has been

pretty vocal as well about the fact that he thinks the yen is is far too is far too weak um and that puts um American

exporters at a disadvantage so you have pressure from that side um from that side as well so we you know we we don’t

have a crystal ball and and lots of different things can happen but I think it’s fair to say that at this point the

um the chances of the yen strengthening are probably higher than the yen weakening and that would be as we’ve

mentioned a couple of times now positive for for the strategy yeah one thing to add Nicola um without

complicating things um to the extent that we’re likely to see y strengthening as we have seen over the last few days

uh that is likely to be beneficial to small cap Japan over large cap Japan so large cap Japan has been a great

beneficiary of um the weekend and large cap Japan comprises a lot of the

exporters that have done well from weekend and and historically we’ve we’ve

seen for much of much of the time small capture pan outperform large capture pan

we haven’t seen that over the last couple of years as the yen has been weakening so to the extent that that end

trend is reversing and we’re going to see some strength it’s probably the time which you’d expect small cap pan to do

better than large cap exactly

um if anyone has any more questions please do send them through that’s great

Nicola thank you very much indeed and to to Joe for updating investors and also for being so generous with your time

with the Q&A just mindful I know you guys have got backto-back meetings today um Joe I know investor feedback will be

particularly important to you and Nicola i’ll shortly redirect those on the call to give you their thoughts and their

expectations but before doing so Joe I wonder if I may just come back to you for a couple of closing comments

yeah I think the most uh relevant thing I can say is that um is really to to to

look at what’s been happening uh over the last few days and as one listener

said called it madness and and it is madness and having seen a number of market crashes in my career they never

get any easier but you know deep down I I I know that when you stick to fundamentals when you don’t panic um

when you continue doing what we have demonstrated works um then that’s likely

to lead the the best outcome certainly in the longer term in the short term it can be unpleasant or uncomfortable and

that is really what we’re doing um we know that there’s a commitment in Japan to corporate governance reform to share

returns we know that a lot of our companies have got really good businesses that have got rockolid

balance sheets and that this this market turmoil will throw out opportunities and

uh we we intend and plan on keeping our heads focusing on the fundamentals focusing on what we do know rather than

trying to second guessess what might be coming out of the White House and what might be thrown at markets next and I

think if we do that um we’ve got real real prospect of uh generating not only

strong relative returns but also more importantly strong absolute returns for our shareholders our companies are very

undervalued and there is a there is a strong movement in Japan to capitalize

on that and to generate share returns so you know I’m I’m pretty confident uh

about the future prospects of ABI Japan uh I recognize it could be a little bit

um bumpy in the near term but those bumpy periods of times that we sew uh

really the returns for the future where in a way we do our our best work so I thank you for your support so

thank you that’s great joe Nicola thank you once again for your time this morning companies ask investors not to

close this session when they’ll automatically redirect you for the opportunity to provide your feedback in order the management team can really

better understand your views and expectations this will only take a few moments to complete but I’m sure be greatly valued by the company on behalf

of the management team of AVI Japan Opportunities Trust PLC we’d like to thank you for attending today’s presentation and enjoy the rest of your