ATLANTIS JAPAN GROWTH FUND (AJG, 188p)
It is nearly five years since we last wrote about Atlantis Japan Growth Fund in detail, so we were glad to have the chance to speak to manager Taeko Setaishi in person as she was over from Tokyo where she is based, along with Robert Tull, who recently joined the team. The trust also has a continuation vote at its 2023 AGM in September that is by no means guaranteed. The trust is quite small with net assets of £83m and trades on a discount of 7.8%.
AJG takes a high conviction approach to investing in Japanese companies across the capitalisation range, with a growth style that proved a drag last year. Taeko agrees there was a style headwind, one that was shared by the majority of Japanese investment trusts, but she was not going to adapt her style to try to time the market cycle. There has been no style drift here, and Taeko was at pains to make it clear that she is not a fashion investor chasing trends, particularly not in the small cap area where liquidity can be an issue. She says that consistency of approach is more important, along with the sustainability of earnings in the portfolio companies. The focus here is very much on the earnings outlook, based on in-house analysis and company visits. The average holding period is two to three years, although there has been quite a big change in the top ten over the last year as tech has sold off and she has made some portfolio changes. Generally though the portfolio is not event-driven, and the pandemic has not had much impact on its composition. Taeko did say though that the reopening of the Chinese economy may have one important knock-on effect in Japan, a boost to tourism that could help companies in that sector. The trust is concentrated in sectors where it finds innovation and growth, such as services, IT, and communications, and equally it has a zero weighting in many sectors such as iron and steel, textiles, and mining.
We discussed supply chain issues, power prices, and various portfolio holdings before moving on to the subject of activism, an important ingredient for a couple of Japanese investment trusts. Taeko said this trust is not an activist and is not in the business of persuading companies to change, but she acknowledged it was a useful trend for the sector. The trust has gearing of 4% and the managers are comfortable with that level, with no plans to raise it.
The trust pays a quarterly dividend equal to 1% of the average NAV per share during the final month of the preceding financial year, which means it is currently paying 2.15p per quarter for a running yield of 4.6%. We know there is an argument that the dividend helps to attract buyers and therefore limits the discount, but we are not a fan of artificially created dividends paid from capital, and it makes even less sense to us for a small trust that has struggled to expand its capital base: it does not help to make the case for AJG as a coherent growth investment proposition.
We like the conviction style and the managers’ clear determination to stick to their process that has delivered good long-term outperformance since inception in 1995. We hope the trust gets through its continuation vote in the autumn, although we cannot see how it can grow meaningfully in the near-term and note that some smaller trusts are currently realising they have insufficient scale.
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