Japan is overlooked and mispriced – here's how to buy in

A new investment trust, the AVI Japan Opportunity Trust, focuses on neglected bargains in Japan's small-cap sector.

Japan Shintora Festival ©  Shizuo Kambayashi/AP/Shutterstock

Investors should look beyond Japan's "impossible script"

Japan Shintora Festival © Shizuo Kambayashi/AP/Shutterstock

Yet again, Japan has been left behind. The US has returned nearly 20% this year and Europe 16%. Japan has returned 7%. There are two possible explanations: the "secular stagnation" of Japan and the lack of interest from professional equity investors.

Economic growth of below 1% limits the potential for domestic companies, although there are plenty of opportunities overseas. There is nothing novel about Japan's slow growth. It is the result of a falling population; output per capita is as robust as anywhere in the developed world.

Japan: a 20% discount to America

Analysis by Thompson Reuters at the end of March estimated the Japanese market to be trading on 13.5 times 2019 earnings, slightly higher than Europe, the UK and emerging markets, but 20% less than the US. It also anticipated a 2.7% drop in corporate earnings this year and growth of only 3.7% next, though both figures look too pessimistic. Of course, market averages can hide a multitude of traps and opportunities. Simon Edelsten, co-manager of Mid Wynd International Investment Trust, enthuses about NTT, Japan's telecom giant. Revenues haven't grown for 25 years, but earnings per share have doubled in five years, thanks to efficiency improvements and share buybacks. The shares still only trade at the book value of the assets. Joe Bauernfreund, manager of AVI Global Trust (AGT, formerly British Empire) is focusing on the outstanding value in smaller firms. Japan now accounts for 21% of AGT's portfolio and £100m has been raised for a new trust, AVI Japan Opportunity Trust (LSE: AJOT), to invest alongside. "People say that nothing ever changes in Japan," he says, "as a result of which there are overlooked, neglected and mispriced assets."

Japanese firms have piles of cash

The median market capitalisation is £400m, so these are not tiddlers, yet 90% of them are covered by two or fewer analysts, so they go unnoticed. Why invest now? "The combination of extraordinary undervaluation, corporate governance reform... and growing shareholder activism." Historically, accountability to shareholders was poor and companies protected each other through cross-holdings. Only 5% of companies have a majority of independent directors. Poor share-price performance was the result.

The key to change, Bauernfreund says, is sympathetic rather than aggressive engagement with companies. The strategy is already working with a two year return of 15.8% in AGT from Japan against a Topix index return of 2.1%, while AJOT has returned 5.1% in seven months when the Topix index is down 1.3%.

The other explanation for Japan's lacklustre recent performance is that many investors regard the country, with its impossible script and idiosyncratic customs, as too troublesome and expensive to bother with. Until, that is, renewed outperformance makes fools of them. Bauernfreund's enthusiasm suggests that may be in sight

Recommended

Tech stock carnage: do you think Apple, Amazon and Alphabet will save you? Think again
Tech stocks

Tech stock carnage: do you think Apple, Amazon and Alphabet will save you? Think again

As tech stocks continued to slide, there is a view that you can escape all the carnage by holding really high quality profitable stocks. That view is …
24 Jan 2022
Which assets will benefit as the “jam tomorrow” bubble pops?
Investment strategy

Which assets will benefit as the “jam tomorrow” bubble pops?

With tech stocks, cryptocurrencies and many other “long duration” investments crashing hard, the “jam tomorrow” bubble looks to be bursting. John Step…
24 Jan 2022
Three innovative Asian stocks to buy now
Share tips

Three innovative Asian stocks to buy now

Professional investor Fay Ren of the Cerno Pacific Fund highlights three of her favourite Asian stocks to buy now
24 Jan 2022
Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022

Most Popular

Ask for a pay rise – everyone else is
Inflation

Ask for a pay rise – everyone else is

As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why yo…
17 Jan 2022
Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Interest rates might rise faster than expected – what does that mean for your money?
Global Economy

Interest rates might rise faster than expected – what does that mean for your money?

The idea that the US Federal Reserve could raise interest rates much earlier than anticipated has upset the markets. John Stepek explains why, and wha…
6 Jan 2022