The board of AVI Japan Opportunity Trust (AJOT) has proposed a merger with Fidelity Japan. The proposal comes ahead of Fidelity Japan’s continuation vote in May and the retirement of its manager, Nicholas Price, at the end of this year. The trust’s assistant portfolio manager, Ying Lu, will become its lead manager on 1 October.
Fidelity Japan’s largest shareholder, City of London Investment Management, is in favour of the merger but the trust’s board has yet to be convinced.
Norman Crighton, chair of AVI Japan Opportunity Trust, said: “We have sought to engage with the Fidelity Japan trust’s board on numerous occasions to discuss the combination of the two companies to create a market-leading Japanese investment trust.
“We were disappointed to read in Fidelity Japan’s final results statements that the board recommends a continuation of the status quo, with no liquidity offered until 2028, instead of engaging in constructive dialogue regarding our proposal, which we believe is in the best interests of all shareholders.”
The AVI trust has a market value of £214m and would benefit from extra firepower should the merger come to fruition. Creating a larger vehicle would provide increased liquidity and cost benefits, its board said.
Joe Bauernfreund, AVI Japan Opportunity Trust’s investment manager and chief executive officer of Asset Value Investors, said: “The investment case for Japan is extremely compelling. We believe that now is the time to strengthen our position, which is why we are proposing to merge with Fidelity Japan Trust. An enlarged asset base will enable us to be a more dominant shareholder in the companies we invest in, making our engagement even more likely to succeed.”
Fidelity Japan has a market capitalisation of £192m and shares are trading on an 11.2% discount to its net asset value (NAV). If the merger succeeds, shareholders in Fidelity Japan would be offered a cash exit capped at 25% of the trust’s shares in issue.
City of London Investment Management holds approximately 23% of Fidelity Japan’s issued share capital and supports consolidation in the investment trust sector, according to portfolio manager Michael Sugrue.
“The manager of AVI Japan Opportunity Trust has delivered strong investment performance since inception and the ongoing discount control mechanisms implemented by the board have protected shareholder value in an environment where many other closed-end funds have seen their discounts significantly widen,” Sugrue said.
AVI Japan Opportunity Trust will buy back shares if its discount exceeds 5%. From the trust’s initial public offering on 23 October 2018 until 31 March 2025, its shares have traded at an average discount of 0.05% compared to 9.35% for Fidelity Japan over the same period. It also offers its shareholders an uncapped annual exit opportunity.
Bauernfreund said: “Fidelity Japan shareholders rolling into AVI Japan Opportunity Trust will benefit from an immediate uplift in the market value of their shareholding, given the trust’s current discount, while its robust discount control mechanisms provide protection against material discount widening.”
Performance of trusts vs benchmark since AVI Japan Opportunity Trust's inception
Source: FE Analytics
The two trusts have different investment approaches. AVI Japan Opportunity Trust focuses on small-caps and seeks to address material undervaluation through active engagement with management, boards and other stakeholders.
Fidelity Japan’s investment team focuses on bottom-up stock selection and is based in Japan. Price and Lu look for companies with superior mid- to long-term earnings growth potential, competent management focused on raising shareholder returns and attractive absolute and relative valuations.