Value Added

Asset value investors has been investing globally for decades, but in recent years activism at japanese small caps has become a key part of its strategy, writes iuri strut.

Asset Value Investors, established in 1985, has invested money in Japan for years. But it wasn’t until Joe Bauernfreund took over as chief investment officer in 2015 that its Japanese activism really took off. Around a third of Asset Value’s 1 billion-pound main closed-end fund, AVI Global Trust, is currently invested in Japan, and in October 2018 the activist launched AVI Japan Opportunity Trust, which manages around 140 million pounds.

Bauernfreund and his team of London-based analysts typically fly to Japan four or five times a year to meet with executives, directors, and other shareholders of his portfolio companies. The COVID-19 pandemic put these trips on hold, but not the engagements. The asset manager recently hired investment consultant Jason Bellamy in Tokyo to conduct meetings on its behalf, and Bauernfreund himself makes calls via Skype or phone.

Asset Value continues engaging with most portfolio companies, but unlike other foreign activists, it rarely goes public. In every company there are people that “understand the objectives of the corporate governance code” and others that are “more old-fashioned and resistant to change,” Bauernfreund said in an interview with Activist Insight Monthly. “Our job is to win the argument.”

Measured style, strong results

Historically an investor in undervalued global closed-end funds, Asset Value has used discreet, behind-the-scenes activism to prompt changes at funds such as Aberdeen Private Equity, Vietnam Phoenix Fund, and Eurocastle Investment Trust. In Japan, it has used a similar playbook, but in a few cases was forced to go public as management was especially resistant to its suggestions.

According to Activist Insight Online, Asset Value has initiated four public campaigns in Japan since 2017, including two this year at elevator maker Fujitec and SoftBank Group. Still, the investor has never launched a proxy contest in Japan, limiting its activism to letters, meetings with managements, and shareholder proposals. Bauernfreund does not rule out a proxy fight down the road but says he would have to “assess” his chances of success because it is a “costly process”.

“Historically an investor in undervalued global closed-end funds, Asset Value has used discreet, behind-the-scenes activism to prompt changes.”

“Typically, our approach is to engage with companies privately and go public only as a last resort,” Bauernfreund said.

This measured style of activism does appear to yield results. The fund trades at a 2.5% premium to its NAV, as of June 30, a rarity in the closed-end fund world, and even more so for an activist fund. Bill Ackman’s Pershing Square Holdings and Dan Loeb’s Third Point Offshore have been trading at double-digit discounts for many years. Even Asset Value’s AVI Global fund trades at a 10% discount.

Bauernfreund attributes the premium to the concentrated shareholder base, and structural features such as the possibility to redeem shares at NAV four years after inception and a promise to buy back shares if the discount falls below 5%.

Two-pronged approach

Bauernfreund has a two-pronged investment approach. “We’re looking for good quality businesses and valuations that are attractive. In order to perform, we need to engage with the managements of these companies to build a relationship and try to encourage them to do things to eliminate that undervaluation,” Bauernfreund said.

“Increasingly, we felt that there is an opportunity to engage with companies on how to improve the strategic outlook, [and] how to make operational improvements.”

According to an investor presentation seen by Activist Insight Monthly, freezer manufacturer Daiwa Industries doubled its payout ratio to 40% following letters from Asset Value, while car seat manufacturer Tachi-S, electronic components maker Kanaden (an affiliate of Mitsubishi Electric), medical monitors provider Fukuda Denshi, and machinery manufacturer C Uyemura also announced enhanced capital return programs after private engagements and letters. Since AVI Japan’s inception, 16 portfolio companies announced capital return programs, including eight following pressure from Asset Value, while three were acquired.

In two previously unreported campaigns, Asset Value invested in and wrote detailed letters suggesting capital allocation and corporate governance improvements at NuFlare Technology and Toshiba Plant, prior to the two companies being acquired by majority shareholder Toshiba. While other investors had shunned the companies out of fear their interests would be deprioritized in any takeover transaction by the parent, as is often the case in Japan, Bauernfreund saw an opportunity. Toshiba ultimately paid a 45% premium for NuFlare and 28% for Toshiba Plant, prices Bauernfreund said were close to the companies’ true value.

Evolving strategy

Asset Value’s strategy continues to evolve. One thing Bauernfreund’s experience taught him is that domestic investors have a “much more long-term perspective” and are less inclined to back short-term proposals such as buybacks. So instead of calling for dividends and share repurchase programs, this year Asset Value launched a campaign at escalator manufacturer Fujitec calling for improved governance, capital discipline, and a strategic review, including the exploration of consolidation opportunities.

The escalator manufacturing space has seen considerable interest from private equity firms recently, but Fujitec has a poison pill in place and the founding family is still heavily involved, despite owning just 7.7% of the shares. Bauernfreund will remain patient until next year’s annual meeting, but Oasis Management is also on the share register and threatened in late June to call a special meeting to change the leadership. If Asset Value cannot “win the argument,” Fujitec may have to answer to shareholders.

“Increasingly, we felt that there is an opportunity to engage with companies on how to improve the strategic outlook, [and] how to make operational improvements. Particularly at the small-cap end of the universe, these issues have largely been overlooked by managements for many years,” Bauernfreund said. To help identify such opportunities, he’s now looking to hire more Japan-focused analysts in London to work under Daniel Lee, his top Japan analyst.


Asset Value targets Nuflare Technology and Toshiba plant were both acquired by Toshiba.


Article published by Activist Insight Online.

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