Performance pick-up at smaller company-focused trust should see discount narrow
Thursday 12 Dec 2019 Author: James Crux

Investors should buy Aberdeen Japan Investment Trust (AJIT) at an attractive 9.4% discount to net asset value (NAV). This has scope to narrow as performance improves and an enhanced dividend policy stimulates demand.

Trade tensions between the US and China as well as Japan and South Korea are headwinds for the Japanese equity market, yet this fund’s exposure to mid and small caps with wide competitive moats and strong balance sheets should help it avoid the pitfalls and capture any upside Japan provides in 2020.

Managed by Aberdeen Standard Investments, Aberdeen Japan targets capital growth by investing in companies with above-average growth prospects. After adopting a Japan-focused mandate back in 2013, the trust underperformed for some time, although it has outperformed more recently.

Risks to weigh include the fact Aberdeen Japan is the least liquid Japanese investment trust and its portfolio is concentrated. Since the mandate change, the proportion of small cap companies has increased. This could prove positive in the year ahead, as small caps could be more immune to trade war tensions and the rising yen.

For the six months to 30 September, Aberdeen Japan’s share price and NAV outperformed the Topix benchmark. And after several false dawns, corporate governance is improving and payout ratios are rising in Japan, making it a far more attractive market for investors.

Admittedly, the ongoing trade tussle between the US and China has dampened Japan’s corporate earnings and October’s VAT hike has crimped household spending, yet the fund is invested in domestic firms whose growth potential could prove more resilient.

They include skincare products maker Shiseido, ‘running a cost-cutting programme even as it expands’ according to Chern-Yeh Kwok, Aberdeen Standard Investment’s head of Japanese equities.

The trust is also invested in firms that have diversified overseas to reduce dependence on the Japanese market such as baby products maker Pigeon, which is targeting a growing middle class population in China and South East Asia.

Chern-Yeh Kwok believes market leaders with strong balance sheets are best able to drive their own growth, sustain dividend payments and capitalise on record low interest rates to complete earnings-enhancing acquisitions.

Among names in the fund, non-life insurer Tokio Marine bought a US-based peer to tap into the market for wealthy clients; and air con specialist Daikin bought a European freezer manufacturer.

Other portfolio positions include Chugai Pharmaceutical, musical instrument maker Yamaha and car and motorbike parts maker Musashi Seimitsu.

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