Bargain hunter: Top performer in 2017, yet still on a 10% discount

Ambitious reforms by Japanese prime minister Shinzo Abe has helped the country’s stock market enjoy a purple patch since the start of 2013. 

There have been a couple of big sell-offs along the way, par for the course when investing in Japan; but those who held their nerve have reaped big rewards, as the Nikkei 225 index has risen from 10,801 points to 23,715 over the five years to 5 January. 

In percentage terms this works out as a gain of 120 per cent, meaning that those who bought the market through a tracker fund will have seen returns of this order, once fund charges have been stripped out. 

Most active funds, however, have produced much larger returns for investors during this sweet spot, compared to Japan’s main index, with the standout performer being the smaller company specialist Baillie Gifford Shin Nippon (BGS). 

The trust has delivered a share price total return of 349 per cent over the past five years, comfortably outstripping Japan’s Topix Small Cap index, which is showing a gain of 141 per cent. Such strong performance has not gone unnoticed, as investors buying in today will have to pay a big premium of 9.3 per cent. 

Usually, as a rule of thumb, a premium in excess of 5 per cent is considered too high a price to pay, although in this case some investors may wish to make an exception. Over the past year BGS has traded on a premium as high as 13 per cent, but eagle-eyed investors were also offered a chance to pick up shares at near par when the premium slipped to 0.4 per cent last May, according to Winterflood, the investment trust broker. 

Given that BGS’s premium rating is far from static, it may well pay to wait until the premium cools or else seek out an alternative. 

In terms of other options, one trust that stands out in terms of its discount is Atlantis Japan Growth (AJG). It has lagged its smaller company trust rivals, which also include Fidelity Japanese Values (FJV) and JPMorgan Japan Smaller Companies (JPS), over the past three and five years. 

But according to Nick Greenwood (who manages the Miton Global Opportunities trust, which aims to exploit inefficiencies in the pricing of investment trusts), a change in management in May 2016 has rejuvenated performance. Last year, for example, AJG returned 51.6 per cent in share price terms, in line with the other three trusts in the sector. 

Greenwood points out that AJG is trading on a discount of 10 per cent, however, in line with its 12-month average – which suggests that investors have not cottoned on to the performance turnaround. 

The other two trusts in the sector, FJV and JPS, are also offering discounts, but are both trading a fair distance below their 12-month average discount figures. 

Moreover, Greenwood adds that AJG has a discount control mechanism in place in order to stop the discount trading more than 10 per cent below its net asset value. Therefore, in addition to its improved performance there’s also scope for the discount to narrow from its current level through the company buying back its own shares. 

‘Investment trusts often trade on the track record of the vehicle rather than that of its latest management team. A classic example is Atlantis Japan, which had struggled until the change of manager in 2016,’ says Greenwood. 

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‘The portfolio has had a decent run since Taeko Setaishi assumed control. Her long-term track record (she is also manager of the open-ended Atlantis Japan Opportunities fund) is one of the best in her peer group. Despite enjoying a profitable year, Atlantis Japan shares usually trade at around a 10 per cent discount, the level the board have targeted to defend.’ 

Peter Walls, manager of Unicorn Mastertrust also added AJG to his portfolio recently. After holding Baillie Gifford Shin Nippon for a number of years, and having seen its premium boom, he decided to sell and purchase AJG in its place. Like Greenwood, he was encouraged by AJG’s recent change in leadership. 

Greenwood adds that Japan’s economy is going from strength to strength, yet its equities trade at a lower rating than other developed markets. Various reforms introduced by Japan’s government has given both Japan’s economy and its stock market a boost. 

For example, pressure has been put on Japanese companies to become more shareholder-friendly, in terms of returning more cash in the form of dividend payments. In addition, another big change has seen Japanese pension funds boost their historically low exposure to Japanese shares. 

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