An unusual trust that knows how to extract value from companies that have forgotten their investors

Our investment trust pick of the year doesn’t just invest your money and sit back in the hope of profits: it shakes companies up to make them deliver more

In February 2020 we tipped Nippon Active Value as a way to profit from pockets of value in Japanese smaller companies. Almost three years on it has even more going for it and stands out as our investment trust tip of the year for 2023.

The fund invests in cheap, often sleepy, smaller companies in Japan that are hoarding cash. It then engages with those companies to encourage better alignment of interests between shareholders and management teams by, for example, giving managers shares in the business. The aim is to encourage companies to release cash via dividends and share buybacks, improving shareholder returns.

“The key is to engage with the right companies where there is a chance of a turnaround,” says Daniel Lockyer, a fund manager at Hawksmoor Investment Management.

“I think this is a better strategy than simply hoping the market will eventually recognise the value of these businesses. This could take a long time; if you instigate that change yourself and engage with the company, it improves your chances of success.”

In spite of the pandemic, which prevented face-to-face meetings, the fund managers have brought about positive changes at a host of companies. They include Mitsuboshi Belting, a manufacturer of plastics and rubber, which agreed to pay out all of its earnings as dividends and to improve “return on equity” to 8pc.

Since its flotation in February 2020 Nippon Active Value has delivered a share price gain of 21pc and grown its net asset value (NAV) by 38pc. However, it currently trades on a 11pc discount; AVI Japan Opportunity, a similar trust, trades on a 2pc premium despite inferior NAV returns.

We believe Nippon Active Value’s discount offers an attractive entry point to a fund that has the potential to generate attractive returns from here.

“This is not like buying a mainstream Japanese small-cap investment trust,” said Richard Curling, who holds Nippon Active Value in his Jupiter Fund of Investment Trusts. “This is a very specific targeted opportunity of shareholder activism, based on improved corporate governance.”

Given its focus on specific turnaround situations, the trust tends to deliver returns that are less correlated to Japanese shares and international stock markets. However, it is affected by currency movements: although the trust’s shares are priced in sterling, it owns yen assets and doesn’t hedge them. This means it was hit by yen weakness against the pound for a large part of 2022, a trend that started to reverse in December. If this continues, it could support performance this year.

We feel positive about Nippon Active

‘This is a very specific targeted opportunity of shareholder activism, based on improved corporate governance’

Value’s prospects and expect it to continue to grow its NAV. It should be only a matter of time before the share price catches up. Buy.

Questor says: buy

Ticker: NAVF

Share price at close: 123.5p

Update: Taylor Maritime Investments

Our decision to tip Taylor Maritime Investments, the specialist shipping trust, in late August was less than timely. Its shares have fallen by 23pc since then as fears of a global downturn and China’s zero-covid policy weighed on investors’ perceptions of the industry. The trust currently trades on a 35pc discount.

Charter rates have fallen from their summer highs, alongside valuations of smaller “handysize” dry bulk carrier ships that Taylor Maritime acquires and charters.

Investors have also taken fright at the trust’s decision to buy Grindrod Shipping’s 25-strong fleet using debt.

It is widely expected that Taylor Maritime’s NAV update for the end of December will be lower, but it is also important to consider how much is currently in the share price. We believe the potential doom and gloom is more than priced in. Even if the NAV slumps by 10pc the discount will be around 25pc, which looks attractive given the positive dynamics supporting the handysize segment.

The most notable is the ongoing supply-demand imbalance in the dry bulk segment, where more ships are being scrapped than built. Meanwhile, new emissions targets will reduce capacity, as ships are expected to sail more slowly. Taylor Maritime has more bargaining power to determine its charter rates than investors are giving it credit for.

The Grindrod transaction should also boost NAV over time because the ships have been acquired at a discount to their market rate. Hold.