Nippon Active Value takes aim at Japanese small caps’ hidden wealth


A new investment trust aimed at tapping into Japan’s changing culture of corporate governance lists in London in the coming week.

Nippon Active Value Fund (LON:NAVF) is raising a maximum of £200mln initially and will target Japan’s small to medium company sector.

California-based value investment specialist Dalton Investments is the trust manager through a newly formed subsidiary, Rising Sun Capital.

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It has been an investor in Japan for 25 years and had had an office in Tokyo for the past twenty, while founder James Rosenwald has over 40 years’ experience investing in Asia.

Gifford Combs, the trust’s other co-manager, says the mood surrounding corporate governance in Japan is undergoing change driven by the government, which is keen to unlock some of the huge amounts of cash sitting in company bank accounts.

Last year, Bloomberg suggested the corporate cash pile might be as much as US$4.8trn, a sum that has tripled since 2013.

Combs says legal and fiscal changes introduced recently have made a big difference, especially tax changes on stock options and a requirement for all takeovers to be referred to independent directors who have a fiduciary duty to evaluate any offer fairly.

This latest move, which was introduced only last year, has already sparked a wave of hostile and non-hostile takeovers but that is only the beginning, says Combs.

In many companies, shareholders rank last in importance behind other stakeholders – employees, pensioners and customers – while dividend payments are low, cross-holdings are frequent and returns on assets poor.

A very concentrated portfolio

Nippon Active will be a very concentrated portfolio with up to twenty companies.

Targets have already been selected for when the fundraising is complete, though a ‘C’ share facility to raise a further £400mln has also been put in place.

Nippon Active is not going after high profile, well-known companies but those (in sterling terms) worth between £100mln-£800mln.

Combs says these will be domestically-focused and names that will barely be recognised outside of Japan.

Usually, there will be no independent investment research.

“These are small companies that have a decent operating business attached to an irrational balance sheet.”

That means no debt, lots of cash and lots of securities.

The aim is to be a catalyst for change at these companies.

Pushy reputation

“We are already known in Japan for being pushy,” Combs says.

Once a company is selected, the trust will immediately submit a shareholder resolution for it to issue stock options to their senior management and board.

Often, though, the company will not want the embarrassment of an outside shareholder tabling a resolution and will act on or propose the resolution itself.

Last year, for example, Dalton proposed 20 resolutions of which nineteen were subsequently withdrawn.

“We will explain how we think companies can restructure to be friendlier to minority shareholder and take the target off their back.

“The best defence against a takeover is a high stock price.”

In some cases all they need to do is to change a dividend policy to get the price moving, he adds.

“The Japanese stock market is not irrational,” says Combs.

“It responds to companies that take care of minority shareholders.”

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