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AVI Japan taps into governance mood shift among conservative corporates

Prime minister Shinzo Abe has introduced governance and stewardship codes
Shinzo Abe
Abe wants to empower shareholders

As Unilever found out recently, shareholder activism can force even a multinational titan to re-draw its plans.

In Japan, the situation is different.

Watch: AVI Japan Opportunity Trust offering a 'compelling opportunity' in cash-rich companies

Shareholders rank behind a whole list of other stakeholders – employees, pensioners customers and even at times the Japanese economy.

Joe Bauernfreund, manager of the newly-formed AVI Japan Opportunity Trust, says that even tabling a resolution at an AGM is a major deal.

He has personal experience of how awkward this can be, but believes the corporate mood in Japan is changing.

Prime minister Shinzo Abe has introduced governance and stewardship codes to help move shareholders up the pecking order.

But it’s not just a sense of corporate fair play behind the government’s move.

Over-capitalised balance sheets

Vast sums of cash are sitting in company accounts doing nothing and more active shareholders might see some of this money released into the Japanese economy.

It also throws up an opportunity for investors to benefit too, believes Bauernfreund.

Over-capitalised balance sheets have been common among Japanese companies for years.

Poor corporate governance has been a major contributor and also led to ratings well below comparable companies in the West, especially among small caps.

 “There are some remarkable [company] under-valuations”, says Bauernfreund, but now with a catalyst for corporate governance change, it makes an ideal backdrop for the AVI Japan Opportunity Trust.

Dividend payments have already started to creep up he says, but share buybacks, independent directors and an unwinding of cross-holdings are other things AVI Japan intends to promote.

Indeed, AVI has already made one attempt at change at Tokyo Broadcasting System Holdings (TBS), where it recommended the sale of crossholdings and return the resulting proceeds to investors.

Narrow focus and established businesses

AVI Japan will be a very concentrated fund with a maximum of thirty holdings.

Some of these are already known to Bauernfreund through British Empire Trust, where he has been manager since 2015 and are established businesses with solid fundamentals and substantial liquidity.

Indeed, some have more than 100% of their market value covered by their cash holdings.

That equates to effectively a zero or even negative rating on the earnings of the business.

“These are fundamentally cheap companies that now have a catalyst for unlocking value.”

Bauernfreund concedes that any change will be slow given the corporate culture in Japan, but he is convinced the time is now ripe for a patient activist approach.

AVI Japan is looking to rise between £100m-200mln through its offer.

That closes on 18 October and the shares start trading on the premium section of London’s stock market on 23 October.

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