Discovering overlooked and under researched investment opportunities to unlock long term value.
Investing in the Japanese market for over two decades, with a dedicated team in London and Tokyo
|Software and Services||14.2%|
|Commercial and Professional Services||10.4%|
|Foods and Staples Retailing||5%|
|Automobiles and Components||4%|
|Health Care Equipment and Services||2.9%|
|Media and Entertainment||0.4%|
Over the month, our companies finished reporting earnings. Weighted operating profits grew in aggregate by +2% year-on-year, lagging sales growth of +11%. Over two-thirds of the companies in the portfolio saw margins decline year-on-year which was expected given price increases lag cost pressures. However, we are seeing promising signs that our companies have been better able to pass on cost increases than in the past, as Japanese customers and consumers are accepting the inevitability of the first real inflation since the early 1990s. In fact, we’ve found that some companies have been surprised by their ability to increase prices. Shin-Etsu Polymer is a case in point, seeing sales and profits rise +20% and +55% respectively last quarter.
AJOT’s NAV increased by +8.3% over the month, aided slightly by a +1.7% strengthening in the Japanese Yen. The strong performance was broad-based across the portfolio, with only one company, Fujitec, detracting from returns.
The ruling LDP coalition solidified its position by comfortably winning a majority in the upper house elections, a vote that was overshadowed by the shocking and tragic assassination of former Prime Minister Shinzo Abe at the start of the month. Inflation in June ticked slightly higher to a still manageable 2.4% (headline CPI) with no change to the BoJ’s expansionary monetary policy.
After the end of the quarter, it was with great sadness that former Prime minister Shinzo Abe passed away. His death was a shocking tragedy. It has taken a number of years for companies/management to buy into corporate governance reforms, but there is now clear evidence of a shift in attitudes amongst corporate Japan, and that is one of the many important legacies of Shinzo Abe.
AJOT’s NAV fell -3.8% over the month, due almost entirely to a -3.4% weakening in the Japanese Yen. In local currency terms it was a relatively good period for the Japanese stock market with the MSCI Japan holding up well, returning -4.4% vs the MSCI Europe -9.0% and the S&P 500 -16.2%.
AJOT’s NAV increased by +3.0% over the month, as the portfolio’s companies finished reporting earnings. Our companies are not immune to rising raw material costs, and more of them than not saw margin pressure in the last quarter. However, our companies, which generally have good levels of pricing power, have expressed that they expect to pass on most of the cost increases next year and the impact on margins should subside. For those holdings with a March year-end, dividends increased by an average of 16% with five companies announcing new share buybacks, joining three companies who have ongoing programs.
AJOT’s NAV fell by -5.1% over the month, suffering from a -2.0% decline in the Yen against the Pound, as well as weak stock markets. With little of our gearing capacity being utilised, we have been taking advantage of market weakness to add to one existing holding and to build three relatively new positions. Falling share prices have unearthed a number of investment opportunities that we are actively researching and we expect to build new positions in the coming months.
Despite the turbulent environment, and abhorrent conflict in Ukraine, AJOT’s NAV fell only -4.1%, primarily from a -2.4% weakening of the Yen, while the MSCI Japan Small Cap Index fell -4.5%. The first quarter of 2022 saw a sharp rotation out of growth stocks, as rising interest rates exposed stretched valuations, which was a relative boon for AJOT with only modest exposure to growth companies.
AJOT’s NAV increased by +2.1% over the month, benefitting from continued earnings growth and a more supportive environment for domestically focused small-cap companies. While there are no positive takeaways from the abhorrent conflict in Ukraine, from an economic standpoint the impact on Japan should be limited, mainly felt through higher commodity prices. To the extent that this leads to moderate inflation, it might prove helpful in meeting the Bank of Japan’s so far elusive 2% inflation goal.
In a volatile month for markets, AJOT’s NAV fell by -7.3%. In such environments, we are used to seeing share price changes driven not by fundamentals but more by sentiment. We remain encouraged by our companies’ operational performance, valuations that remain cheap and the continued success with our engagement.
Over the final quarter of 2021, AJOT’s NAV returned a respectable +1.5%, despite a -3.4% weakening in the Yen, and our benchmark, the MSCI Japan Small Cap Index, falling -8.2%. That takes AJOT’s 2021 NAV return to +10.0%, vs -1.4% for the MSCI Japan Small Cap Index and since inception (Oct-18) +26.9% vs +9.7%.
AJOT’s NAV increased by +2.1% over the month while the MSCI Japan Small Cap Index fell -2.6%, both figures aided by a +4.0% rise in the Yen vs. Sterling. The EV/EBIT of the portfolio was unchanged at 5.3x while our estimated discount to intrinsic value widened from 41.5% to 43.2%.
AVI Japan Opportunity Trust p.l.c is referred to as ‘AJOT’ throughout the website. AJOT’s investment managers, Asset Value Investors are referred to as ‘AVI’