Big gains in Japan
Ian Cowie looks east for profits
While rising economic tensions between America and China dominate the financial headlines, the world’s third-largest economy is quietly advancing with relatively little attention from many investors. The AIC Japan sector has delivered a total return of 20% over the last year, nearly double the performance of the average investment trust over the same period.
The AIC Japan sector has delivered a total return of 20% over the last year, nearly double the performance of the average investment trust over the same period.
Despite these eye-catching gains, bargain-hunters may note that shares in Japan investment trusts still typically trade at 9% below their net asset value (NAV). Better still, a proposed merger between AVI Japan Opportunity (stock market ticker AJOT) and Fidelity Japan Trust (FJV) should reduce ongoing charges if shareholders approve the deal.
Against all that, many investors have bad memories of the lengthy slump in Japanese share prices that followed the main Tokyo index downturn in December 1989, before its recent recovery. Cheap credit during the 1980s had pumped up equity and property valuations to the point where the Nikkei 225 index had soared sixfold and the Imperial Palace in Tokyo was briefly valued at more than all the real estate in California.
But that boom led to a bust that endured for decades. More importantly for investors focused on the future rather than the past, Japan’s recent attempts to stimulate economic growth and improve shareholder returns have begun to bear fruit.
These trends include boosting exports by weakening the local currency and statutory reforms to reduce crossholdings between companies, known as keiretsu, to improve stock market transparency. Over the last five years, the yen has shed nearly a third of its value against sterling, accelerating revenues for Toyota, the world’s biggest car company, among other exporters, including the electronics group Sony, while the Nikkei has soared to new peaks above 42,000.
Few funds – if any – have gained more from Japan’s shareholder-friendly reforms than AVI Japan Opportunity, which specifically sets out to gain from corporate reforms that unlock value for shareholders.
Of course, the weakening yen has adverse effects for UK investors whose holdings are denominated in sterling, but that has not stopped Japan investment trusts doing well. Few funds – if any – have gained more from Japan’s shareholder-friendly reforms than AVI Japan Opportunity, which specifically sets out to gain from corporate reforms that unlock value for shareholders. AJOT’s fund managers, Asset Value Investors (AVI), are also unusual because they invest 25% of their monthly fee in this trust’s shares.
As a result, the stockbroker Investec reports that AVI’s fund management team owns AJOT shares worth £1.9m, meaning they share ordinary investors’ pleasure or pain. Fortunately, it has been more of the former than the latter recently, with AJOT delivering total returns of 28% over the last year, making it the top-performing Japan trust over that period.
AJOT’s total return over the last five years is 83%. Launched in 2018, this £279m fund lacks a ten-year record and has a modest dividend yield of just under 1%, but has increased dividends by an eye-stretching annual average of 28% over the last five years.
By contrast, former Japanese smaller companies high-flyer Baillie Gifford Shin Nippon (BGS) has delivered 15% over the last year after losing 31% in value over five years. Over the past decade it has returned 88%. BGS’s meagre 0.46% yield, with no record of sustained increases, is cold comfort for this shareholder.
No wonder AJOT’s proposed merger with £283m Fidelity Japan Trust has helped to reduce the latter fund’s discount to 3.4%. It also helped lift FJV’s total return over the last year to 20%, making it one of the top performers in the AIC’s Japan sector over that period.
This followed returns of 16% over the last five years and 166% over the last decade. FJV pays no dividends, but British investors may be reassured to see familiar corporate names among its top ten underlying holdings, including Toyota and Sony.
Cost-conscious shareholders may also note that AVI has said that if the merger between AJOT and FJV proceeds, they will reduce their fund management fee from 1%, based on the lower of market capitalisation or NAV, to a tiered structure on assets above £300m. At present values and assuming full take-up of a 50% cash exit option, the merged fund would have net assets above £370m.
Schroder Japan Trust (SJG) may appeal to income-seekers with its dividend yield of just over 4% derived from a blue chip portfolio that includes the diversified conglomerate Hitachi and the brewer Asahi, as well as Toyota.
Elsewhere, Schroder Japan Trust (SJG) may appeal to income-seekers with its dividend yield of just over 4% derived from a blue chip portfolio that includes the diversified conglomerate Hitachi and the brewer Asahi, as well as Toyota. SJG’s total returns over one, five and ten-year periods are 19%, 101% and 157% respectively. The ongoing charge is 0.95%.
Meanwhile the self-descriptive CC Japan Income & Growth (CCJI) seeks dividends and gains from a portfolio led by the electronic games-maker, Nintendo, which – perhaps surprisingly – began by making playing cards in 1889. CCJI delivered total returns of 8% over the last year and 96% over five years. Having been founded in December 2015, it lacks a ten-year record but yields 2.6% with dividends having gone up by an annual average of 3.9% over the last five years. The ongoing charge is 1.03% and CCJI trades at a 10.5% discount to NAV.
CC Japan Income & Growth (CCJI) seeks dividends and gains from a portfolio led by the electronic games-maker, Nintendo, which – perhaps surprisingly – began by making playing cards in 1889.
So investors seeking capital growth or dividend income or a mixture of both have plenty to consider in Japan. Structural reforms have pushed its stock market to new peaks and enthusiasts argue there is more to come from the Land of the Rising Sun.
Figures as at 2 September 2025. Ian Cowie is a shareholder in Baillie Gifford Shin Nippon (BGS).
