I will start with a bit of history on Asset Value Investors (AVI) first, which was launched in 1985 to manage the £1bn British Empire Trust (BET), and to this day is focused on that.
BET has three areas of investment: family owned companies, other closed-ended funds and trusts, and special situations.
It is the latter bucket that is of interest today as for the past year or so this special situations portion has increasingly focused on Japan and the types of company that will make up the new AVI Japan Opportunity Trust.
Led by Asset Value’s chief executive and chief investment officer Joe Bauernfreund, this trust will focus on a very specific part of the Japanese stock market.
It will hold about 30 companies with similar characteristics.
It will target companies up to about £500m in size that hold large cash balances and no debt.
Mr Bauernfreund estimates there are about 400-500 companies with a minimum of 30 per cent cash to market cap; a by-product of decades of deflation where cash was worth more a year later.
There are companies sitting with 100 per cent of the market value of the business in cash; in other words you are getting the trading business for free.
It is not just cash that is important, though. The underlying business has to be profitable, growing and adding to the cash pile each year.
Another common factor is that most of these companies are under researched and largely forgotten by the analyst community.
Shareholder awareness and good corporate governance is the third arrow in prime minister Abe’s reforms, and arguably the least successful to date, however things are improving.
The AVI team intend to actively engage with company management to facilitate change, unlock value and to start using this cash to better effect.
Companies showing better corporate governance are typically being rewarded by the stock market.
So to the boring bit. The trust is looking to raise between £100m and £200m at launch.
The annual management fee will be 1 per cent based on the lower of market cap and net asset value (NAV) and 25 per cent of this will be paid in shares of the trust rather than cash.
There is a decent buyback policy of 5 per cent below NAV, which should help encourage early investors that their investment will not fall to a large discount.
I am a big fan of Japan and I like the approach and management team for this new launch. It will not be a smooth ride, but I will award it four out of five.
Ben Yearsley is a director at Shore Financial Planning
