Atlantis Japan Growth Fund

Transcription

1 Jun/12 Sep/12 Dec/12 Mar/13 Jun/13 Sep/13 Dec/13 Mar/14 Sep/14 Dec/14 Mar/15 Jul/14 Aug/14 Sep/14 Oct/14 Nov/14 Dec/14 Jan/15 Feb/15 Mar/15 Apr/15 May/15 Share Price Atlantis Japan Growth Fund Stock picking in Japan Investment trusts Atlantis Japan Growth Fund (AJGF) is an actively managed growthoriented fund entirely invested in Japanese equities. Given this mandate the portfolio has tended to have a bias to small and medium-sized companies. The fund s objective is to generate long-term capital appreciation. Since the fund was launched in 1996, day-to-day investment decisions have been advised by Ed Merner, who has long experience as a Japanese equity adviser and manager. AJGF has outperformed both Topix and MSCI Japan Smaller Companies indices over one, three and five years. 12 months ending Total share price return (%) Total NAV return (%) Topix (%) MSCI Japan Small Cap (%) MSCI AC World (%) FTSE All- Share (%) 30/06/ (3.8) (0.7) (3.7) (3.1) 30/06/ /06/ (1.2) /06/ Note: 12-month rolling discrete -adjusted total return performance. Investment strategy: Looking for growth and value Ed Merner and the team at Atlantis Investment Research Corporation (AIRC) follow a bottom-up approach looking for each stock to offer both value and growth. Their process includes screening, company meetings and evaluation to create a buy list from which a diversified portfolio of stocks is selected. Merner underlines that company contacts are the key part of the process as they not only help determine how well founded the investment case for a company is, but also shed light on industry dynamics and often provide further investment ideas among competitors or suppliers. Market outlook: Positive trends emerging While the success of Abenomics in reviving growth in the Japanese economy remains a matter of debate, expectations are already muted with the IMF, for example, forecasting growth of 0.8% this year and still below 1% pa in the years to Having said this, there are some signs that the first two arrows of economic policy, government spending and quantitative easing, are having some effect with surveys showing inflation and income expectations at higher levels than previously. The adviser sees the market background as encouraging, looking for earnings to grow, potentially in double digits, and with starting valuations at a reasonable level. Further encouragement comes from the potential change generated by moves to improve corporate governance. Valuation: Discount nearer wide end of its range The current discount of over 9% is nearer the wider end of its three-year range ( %). Any clearer signs of improvement in the Japanese economic backdrop would be likely to prompt a positive market response and a tightening of the discount. 21 July 2015 Price 137.1p Market cap 55.5m AUM 67.8m NAV* p Discount to NAV 9.5% NAV** 151.5p Discount to NAV 9.5% *Excluding income. **Including income. Yield 0% Ordinary shares in issue 40.5m Code AJG Primary exchange LSE AIC sector Japanese Smaller Companies Share price/discount performance AJG Equity Discount Three-year cumulative perf. graph AJG Equity Topix GBP Discount (%) 52-week high/low 142.8p 112.0p NAV** high/low 158.5p 121.2p **Including income. Gearing Gross* 10.7% Net* 9.0% *As at 30 June Analysts Andrew Mitchell +44 (0) Gavin Wood +44 (0) investmenttrusts@edisongroup.com Edison profile page Atlantis Japan Growth Fund is a research client of Edison Investment Research Limited

2 DPS (p) Cost/proceeds ( m) Exhibit 1: Trust at a glance Investment objective and fund background Recent developments Atlantis Japan Growth Fund (AJGF) aims to achieve long-term capital growth 8 May 2015: payment relating to March 2015 redemption point made with the through investing wholly or mainly in listed Japanese equities. Currently all matching facility reducing the redemption to 0.6m shares or 0.89m. investments are in Japanese equities and there is a bias to smaller and mediumsized companies. October +6.4%, in line with Topix TR 17 December 2015: interim report. NAV total return for six months to end index. Forthcoming Capital structure Fund details AGM October 2015 Ongoing charges 1.98% Inv adviser Atlantis Investment Research Corp Final results July Net gearing 9.0% Inv manager Tiburon Partners Year end April Annual mgmt fee 1.0% of NAV Address Investor Services, 21 St James s Dividend paid See page 11 Performance fee None Square, London, SW1Y 4JP. Launch date 10 May 1996 Company life Indefinite subject to cont.vote Phone Continuation vote Conditional on discount Credit facility Yen 1.5bn Website Dividend policy and history Share buyback policy and history Full year div payment Special dividends Repurchases Allotments Shareholder base (as at 9 July 2015) Distribution of portfolio (as at 30 June 2015) LIM Advisors (16.2%) South Yorks. Pension (14.8%) 1607 Capital Partners (10.3%) Ecclesiastical IM (5.6%) Reliance Mutual (4.3%) CG Asset Mgmt. (1.6%) Other (47.2%) < US$500m (55.6%) US$500m to US$2bn (24.3%) US$2bn to US$5bn (3.3%) US$5bn to US$10bn (6.5%) > US$10bn (10.3%) Top 10 holdings (as at 30 June 2015) % of NAV Company Industry 30 June June 2014* Tokio Marine Holdings Insurance 4.2 N/A Sakai Moving Service Land transportation 3.5 N/A TDK Electric appliances Hito Communications Commercial services Macnica Fuji Electronics Holdings Wholesale trade 2.7 N/A Lintec Other products 2.6 N/A Ai Holdings Wholesale trade Aeon Delight Services CKD Machinery-diversified 2.4 N/A Hard Off Retail 2.3 N/A Total Source: Atlantis Japan Growth Fund, Edison Investment Research. Note: *N/A where not in June 2014 top 10, total is for the top 10 at that point. Atlantis Japan Growth Fund 21 July

3 Apr/04 Dec/04 Aug/05 Apr/06 Dec/06 Aug/07 Apr/08 Dec/08 Aug/09 Apr/10 Dec/10 Aug/11 Apr/12 Dec/12 Aug/13 Apr/14 Dec/14 Apr/04 Dec/04 Aug/05 Apr/06 Dec/06 Aug/07 Apr/08 Dec/08 Aug/09 Apr/10 Dec/10 Aug/11 Apr/12 Dec/12 Aug/13 Apr/14 Dec/14 Market outlook: Challenge and opportunity Japan s post-war economic miracle years came to an end in 1990, when a real estate and stock market bubble burst. Since then, Japan s history has broadly been one of low growth and deflationary tendencies; compound annual GDP growth was below 1% between 1995 and 2014 and consumer price inflation barely positive (0.1%). The election of Shinzo Abe as prime minister in December 2012, provided fresh hope of a revival through a three-pronged strategy of government spending, monetary stimulus (instigated by the Bank of Japan) and structural reform. Fiscal stimulus and quantitative easing are in place but the third of Abe s three arrows remains a work in progress and sceptics doubt how effective the entire programme will be. The country s demographic profile with an ageing and shrinking population and high levels of government debt, are among the challenges faced (see last two columns Exhibit 2). Forecasts for Japan s growth take account of these considerations to a greater or lesser extent and the IMF, for example, looks for GDP to grow by 0.8% pa between 2015 and 2020, some way behind the growth expected for other large developed economies. Exhibit 2: Japan selected metrics in a world context 2015e unless stated GDP $bn GDP per capita US$ GDP CAGR e % Inflation % Unemployment % Govt. net debt/gdp % Pop. growth e % Japan 4,210 33, Euro area 11,681 N/A United States 18,125 56, United Kingdom 2,853 43, World 74,551 N/A N/A N/A 5.2 Source: IMF WEO database April 2015 and US Census Bureau. Note IMF 2015 GDP growth estimates subsequently trimmed in June update: Japan and World by 0.2% to 0.8% and 3.3% respectively. An important objective of policy initiatives is to lift inflation expectations and stimulate consumer confidence and spending. As Exhibit 3 shows, there are tentative recent signs of improvement in both general confidence and willingness to buy durable goods, although both measures remain below pre-financial crisis levels. Exhibit 4 suggests that positive inflation expectations are beginning to take hold, although the lengthy experience of deflation/low inflation may mean time is required before this results in significant changes in behaviour. Exhibit 3: Consumer confidence, willingness to buy Exhibit 4: % of respondents expecting prices to rise Source: Datastream Consumer confidence Willingness to buy consumer durables Source: Datastream % of survey respondents expecting prices to rise There are other positive economic indicators in Japan including an increased level of lending, rising wages and expectations of rising income, but for the moment it appears prudent to expect a modestly improving domestic economic background (with downside risks). However, from a stock market perspective, given that this probably represents a central view, any significantly positive surprises could be reflected favourably or very favourably in share prices. Over the last ten years, the Topix index has made progress in absolute terms (a 72% total return in sterling terms). It also significantly outperformed the world index during the financial crisis but then Atlantis Japan Growth Fund 21 July

4 ROE % Jun/05 Jun/06 Jun/07 Jun/08 Jun/09 Jun/10 Jun/11 Jun/12 Jun/13 Jun/05 Jun/06 Jun/07 Jun/08 Jun/09 Jun/10 Jun/11 Jun/12 Jun/13 drifted (see Exhibit 5) echoing Japan s subdued economic performance, ending the ten years to end June 2015 down 23% in relative terms. Given the exposure of AJGF to the small and mid-cap stocks in the Japanese market, we also show how small cap stocks have performed relative to the Topix index (Exhibit 6) and, while the performance over the last five years has been ahead of the broader index, there was a period of underperformance leading up to the financial crisis and a relative recovery thereafter. Although small caps have performed strongly in absolute terms they have modestly underperformed the Topix index over the last year, reflecting a degree of large-cap leadership in a period when exportexposed companies have performed well against the backdrop of a weaker yen. Prospectively, positive surprises in the implementation of reform measures and any evidence of better than expected trends in the economy could be helpful for the typically more domestically-oriented smaller companies. Exhibit 5: Topix and Topix versus world market Exhibit 6: Japan small cap and small cap versus Topix Topix Topix/MSCI AC World (RHS) MSCI Jpn Sml Cap MSCI Jpn Sml Cap/Topix Source: Datastream, Edison Investment Research, terms Source: Datastream, Edison Investment Research, terms Turning to valuation, Japan s forward P/E multiple is modestly below the world and UK indices but noticeably lower than that of the US and also markedly lower than the 10 year average (all Datastream indices). The index yield in Japan is lower than for the other markets shown here, a sign of the historically low priority given to shareholder returns in the country. This is also arguably evident in the relatively low return on equity as shown in Exhibit 8, which appears to warrant the lower price to book awarded to Japanese stocks on average. Having said this, a combination of regulatory reform, such as the Corporate Governance Code and some economic acceleration holds out the hope of both stronger earnings, and an increased focus on generating returns for equity holders. The current ROE of nearly 8% already compares favourably with the ten-year average of 6.7%. Exhibit 7: Valuation comparison Exhibit 8: ROE and price to book comparison Forward P/E as % of Yield P/E 10-year avg. Price/book (%) Japan Europe US UK World Europe Japan UK World US Price/book Source: Datastream, Edison Investment Research Source: Datastream, Edison Investment Research Atlantis Japan Growth Fund 21 July

5 An investor may consider a country-specific Japan fund, both to gain exposure to this significant market 1 at a time of potentially positive change, and to benefit from greater geographical diversification. A small cap fund also gives an active manager the potential to extract any illiquidity premium and to exploit the more limited research coverage in this area. To get a sense of the potential diversification benefits, we have examined the historical correlation of AGJF shares, together with Topix, MSCI Japan Small Cap, MSCI Asia Pacific ex Japan, S&P 500, Stoxx Europe 600 and FTSE All-Share indices. The results for a calculation using 30 day returns over the three years to 1 July 2015 are set out in Exhibit 9. They show that the Japanese indices, Topix and MSCI Japan Small Cap, had comparatively low correlations with Asia Pacific ex Japan, US and European indices, while AJGF s correlation with these indices was somewhat lower again in most instances. Reflecting a bias towards small/mid cap stocks, AJGF has a slightly higher correlation with the MSCI Japan Small Cap index than with Topix. A similar exercise based on returns over 14 years, including the global financial crisis, produces a similar pattern, albeit with a somewhat higher general level of correlation. While this exercise suggests the potential for increased diversification through investment in Japan, it should be remembered that history may not be a guide to future stock market correlations. Exhibit 9: Correlations between indices and AJGF share price AJGF Topix MSCI Japan small cap MSCI AC Asia Pacific ex Japan S&P 500 STOXX Europe 600 FTSE All- Share AJGF 1.00 Topix MSCI Japan small cap MSCI AC Asia Pac ex Japan S&P STOXX Europe FTSE All-Share Source: Datastream, Edison Investment Research. Note: based on 30 day returns in three years to 01/07/15. In summary, there are challenges in the macroeconomic background in Japan, but expectations for growth are subdued, and from a stock market perspective valuations look reasonable on a geographical comparison, and potentially attractive relative to history. If there are positive surprises flowing from the implementation of structural reforms, and in particular improvements in corporate governance, then an investment in a managed Japanese fund could be a valuable addition to a diversified portfolio. Fund profile: Selected small and mid-cap equities AJGF was launched in May 1996 with Ed Merner of Atlantis Investment Research Corporation (AIRC) responsible for day-to-day investment advice from inception. Tiburon Partners is appointed as the company s investment fund manager with AIRC acting as investment adviser. Merner and fellow AIRC team member Taeko Setaishi had previously worked at Schroder Investment Management, where Merner managed the Schroder Japan Smaller Companies fund for nearly 20 years. AJGF s consistent objective has been to achieve long-term growth through investing wholly or mainly in listed Japanese equities. Reflecting Merner s experience, the fund has a bias to small/mid cap investments where the investment adviser sees opportunities to identify investments with unrecognised growth and valuation upside, through bottom-up research. Currently nearly 80% of the portfolio is invested in companies with market caps below US$2bn. Smaller cap investing can result in greater volatility in times of market stress and AJGF s use of gearing has had both positive and negative impacts on performance historically, but the longer-term performance of the fund compares favourably with the Topix index (see performance section page 9). 1 Japan accounts for approximately 6% of global GDP (IMF in US$ terms) and 7% of global equity market capitalisation (WFE). Atlantis Japan Growth Fund 21 July

6 The fund manager: Ed Merner The manager s view: Positive on earnings and opportunities When thinking about the outlook for the market as a whole, Merner notes that historically there has been a strong correlation between the trends in earnings and the market level and observes that if you can predict the trend of the economy and earnings then, barring extreme events, you can usually predict the trend in the market. The manager has a broadly positive outlook on the economy, earnings and therefore the market. While the pace of economic recovery is a little slower than expected, he sees the general trend as favourable with corporate earnings rising, potentially at a double-digit rate in the fiscal year to end-march Merner welcomes moves to improve corporate governance, and sees this as a big change that is taking place quickly and across the board. Japan s new corporate governance code came into effect at the beginning of June this year, and included principles covering equal treatment of shareholders, appropriate disclosure, the responsibilities of the board (including the establishment of financial goals) and engaging in dialogue with shareholders. Merner notes that the team generally find smaller companies are more open and less bureaucratic than large companies have been historically. He expects the code to encourage changes such as the appointment of independent directors and a greater focus on return on equity. Although stocks are picked on a bottom-up basis and company meetings are central to the investment process (see next section) the team do look at sectors, subsectors and long-term themes. They are particularly interested if there is a change in trend. Where a good idea emerges from company meetings or research, Merner is not afraid to invest in more than one company in an industry where the prospects are good. One example of this is companies that are beneficiaries of increased numbers of tourists coming to Japan. The increase reflects the combination of a helpful weakening in the yen, increasing wealth in Asian countries and a change in Japan s visa regulations resulting in a surge in visitors from countries including China, Korea, Hong Kong and Thailand. This has benefited hotels, restaurants and shops. Among the stocks identified were Royal Hotel, Fujita Kanko, Tokyo Dome, Seibu Railway and chain stores such as Komeiyo and Laox. Other themes include the growth in solar power in Japan, which prompted Merner to take an interest in battery makers whose products will be needed to store power from solar panels (or wind turbines), and the ageing population, which could be positive for companies involved in automation (to compensate for a shortage of skilled workers), medical equipment suppliers and retirement homes. Turning to recent changes in the portfolio, Merner picked out three examples of recent sales and purchases as illustrations of the approach adopted in running the portfolio. Sells included Himaraya, which runs a chain of stores selling sportswear, where the team expected good growth on the back of rising consumer spending. However, the company continued to struggle with a negative trend in same store sales and it missed the manager s expectations for earnings. Having spoken with the company a number of times, it became clear recovery was some way off and the decision was made to sell at a loss (7.9%). Disco (products used in the manufacture of semiconductors) had been held for a number of years and as the price rose substantially, the shares were progressively sold with a complete disposal made when the shares were seen as fully- to over-valued, particularly given the cyclical nature of the business. Here the profit was 68%. Paraca, a company that owns parking lots and manages parking lots for third parties, is a stock the team has followed for some time, where they regard the management as sound. The shares were bought in 2014 but then sold following a strong performance for a gain of nearly 40%. Atlantis Japan Growth Fund 21 July

7 Examples of purchases are Kirindo (a chain of drug stores), where special losses and negative same store sales had featured, but there were signs of a change for the better and the valuation is seen as attractive (current year P/E of 15x and much lower the following year); Mitsubishi Chemical, which has a wide range of niche products, where the team are particularly interested in the carbon fibre business and like the management; and Toyo Shutter, which is a stock that AIRC has followed for some time and Merner believes it will benefit from greater activity in the housing, office and retail property markets: the forward P/E of 7x appears undemanding. In tune with the emphasis placed on company meetings, Merner underlines that that the team is keen to meet with investors (for example at the AGM held last year in London at the beginning of October), and to respond to enquiries. Asset allocation Investment process: Direct company contact is the main thing The AIRC team includes AJGF s portfolio adviser, Ed Merner (CEO and portfolio adviser at AIRC), Taeko Setaishi (director, portfolio adviser) and Robert Burghart (director, portfolio adviser) with analyst Kyomi Ando providing support. Merner, with Taeko Setaishi, founded AIRC in 1996, following more than twenty years at Schroders Investment Management, has lived in Japan for more than 40 years and is fluent in Japanese. Setaishi joined AIRC in 1996, also from Schroders and has more than 15 years of fund management experience. Burghart has over 30 years of buyand sell-side experience and joined AIRC in Merner comments that while each member of the team has their own fund responsibilities, they share a common approach and are able to stand in for each other should the need arise. The steps in the AIRC s investment process can be outlined as follows. 1. Screening on a quarterly basis the team review the output of a number of screens that pick out stocks with features such as sales and operating growth above 10%, sustained operating profit improvement, attractive price-to-book ratios relative to the sector, favourable PEG ratios, a positive ROE trend and undemanding EV/EBITDA. The team underline that the screen is only a starting point but it can be useful both for ideageneration and as a prompt to reconsider existing holdings. 2. Company visits/contact this is at the heart of the AIRC approach with company meetings providing insights into companies and industries. As well as confirming or calling into question an investment case, these meetings are an important source of investment ideas. 3. Evaluation when considering a potential investment, the team consider the sales and earnings growth prospects for a company taking a three to four year perspective and assess the valuation, while taking into account factors such as market capitalisation, liquidity and shareholder concentration. 4. Buy list the process generates a buy list and a watch list for stocks where the fundamental case is strong but valuation is not attractive. 5. Portfolio construction from the buy list, the adviser recommends a diversified portfolio, typically stocks, with no single position accounting for more than 3-4% at the time of purchase (AJGF s formal limit is that no more than 10% will be invested in any company). Potential liquidity constraints are taken into account, with the holdings in the portfolio normally expected to be capable of disposal in two to three days. Stocks are selected on a bottom-up basis with sector weightings not being determined on a top-down basis. 6. Sell discipline potential reasons for a sale include a downturn in the operating environment, earnings disappointment, an unwarranted change in the business model or to avoid too great a concentration within the portfolio. Merner adds that he is prepared to Atlantis Japan Growth Fund 21 July

8 recommend selling at a loss if an investment idea has not worked out, and will take profits even if a company is still seen as fundamentally sound, but is too highly valued. In conversation with the team, it is clear that making contact with companies is a key part of this process and between them they have around 1,000 meetings or contacts a year with management. Discussions with management allow the manager to understand trends in an industry, identify competitors which might be alternative investment candidates or threats and to gauge the capability and attitude of the management team. In terms of investment style, Merner would not characterise his approach as value or growth but a combination of the two, seeing value alone as insufficient to justify a recommended investment action. Current portfolio positioning At the end of June (ex-cash) the portfolio was entirely invested in Japanese equities with no bonds or derivatives. Furthermore there were no currency hedges in place. As shown in Exhibit 10 the majority of the portfolio is invested in sub-us$500m market cap companies while nearly 80% of the fund is in sub-us$2bn market cap stocks. This is broadly similar to the position at the same point last year although there has been a modest shift to the sub-us$500m band within this. Exhibit 10: Asset allocation by market capitalisation (%) End June 2015 End June 2014 Change < US$500m US$500m to US$2bn US$2bn to US$5bn US$5bn to US$10bn > US$10bn Source: Atlantis Japan Growth Fund. Rounding means 2014 figures do not sum to. From a sector perspective, the differentiation from the market is clear. Exhibit 11 illustrates that the largest exposures are to services, retail trade and machinery, each accounting for over 9% of the portfolio and also ranking as the largest overweights compared with the Topix index (more than four percentage points above the Topix weighting in each case). At the other end of the scale the largest underweights are versus transport equipment and banks. Grouped together under other sectors are 10 smaller sectors, each with an index weighting of under 1%, where AJGF has no exposure, making a collective underweight position of 4.2 percentage points. Exhibit 11: AJGF portfolio sector weights versus Topix (end June 2015) Overweight AJGF portfolio Topix Difference Underweight AJGF portfolio Topix Difference Services Construction Retail trade Electric power & gas Machinery Iron & steel Land transportation Info & communication Securities & commodity Chemicals Insurance Foods Wholesale trade Pharmaceutical Real estate Electric appliances Oil & coal products Banks Precision instruments Transport equipment Warehousing & harbour trans Other products Other financial business Metal products Other sectors Nonferrous metals Total Source: Atlantis Japan Growth Fund. Note: Rounding errors may mean figures do not sum. Atlantis Japan Growth Fund 21 July

9 Jun/10 Sep/10 Dec/10 Mar/11 Jun/11 Sep/11 Dec/11 Mar/12 Jun/12 Sep/12 Dec/12 Mar/13 Jun/13 Sep/13 Dec/13 Mar/14 Sep/14 Dec/14 Mar/15 Jul/14 Aug/14 Sep/14 Oct/14 Nov/14 Dec/14 Jan/15 Feb/15 Mar/15 Apr/15 May/15 Performance Performance: Long and near-term relative strength From inception in May 1996 to end June 2015, AJGF s total NAV return in US$ terms was 148.9% compared with 16.8% for the Topix index (137.5% versus 6.0% in terms). This is a strong performance given the fund suffered a perfect storm during the global financial crisis when relative performance was hurt by gearing peaking at over 20% and exposure to mid and small-cap stocks, while its favoured growth and value emphasis was also a relative drag when commodity and cyclical recovery plays outperformed. This weak period is evident in the 10 year returns shown in Exhibits 12 and 13. Nevertheless, as Exhibit 14 makes clear, relative NAV performance subsequently recovered significantly, with outperformance versus the Topix (and the MSCI World index) recorded over all periods of five years or less (Exhibit 13). The fund has also outperformed the MSCI Japan Small Cap index over one, three and five years. Exhibit 12: Investment trust performance to 31 June 2015 Price, NAV and index total return performance, one year rebased Price, NAV and index total return performance (%) m 3 m 6 m 1 y 3 y 5 y 10 y AJG Equity AJG NAV Topix GBP AJG Equity AJG NAV Topix GBP Source: Thomson Datastream, Edison Investment Research. Note: Index performance is sterling adjusted. Three, five and 10-year performance figures annualised. Exhibit 13: Share price and NAV total return performance, versus indices (percentage points) One month Three months Six months One year Three years Five years 10 years Price relative to Topix GBP 1.8 (0.4) (33.2) NAV relative to Topix GBP (25.0) Price relative to MSCI Japan Small Cap (0.8) (1.2) (31.3) NAV relative to MSCI Japan Small Cap (0.5) (22.9) Price relative to MSCI AC World (48.7) NAV relative to MSCI AC World (42.4) Source: Thomson Datastream, Edison Investment Research. Note: Data to end-june Exhibit 14: NAV total return performance relative to index over five years Source: Atlantis Japan Growth Fund, Thomson Datastream, Edison Investment Research All the performance figures above are in sterling terms. For reference in Exhibit 15 we compare total NAV and index returns in sterling and US dollar terms. This shows fluctuating differentials with Atlantis Japan Growth Fund 21 July

10 Jun/12 Oct/12 Feb/13 Jun/13 Oct/13 Feb/14 Oct/14 Feb/15 sterling returns notably higher over a year and ten years. While AJGF accounts are prepared in US$ the underlying exposure is to yen-denominated shares with no hedging employed by the company since launch. Economically, as for other funds, the pure yen exposure is modified to some extent by the revenue mix of the investee companies. Exhibit 12: AJGF NAV and Topix total returns in and US$ terms % One month Three months Six months One year Three years Five years 10 years Sterling AJGF NAV Topix US dollar AJGF NAV Topix Source: Datastream, Edison Investment Research. Discount: Trading at the wider end of recent range Over the last three years, AJGF has traded at an average discount to cum-income NAV of 7.4% and in a range between 1.1% and 11.6% (see Exhibit 16). The current discount of over 9% is closer to the upper end of this range, perhaps a reflection of some recent softening in the Japanese market. During the financial crisis, the discount to NAV widened to a maximum of 25% and, as described in the next section, the company implemented a redemption facility in 2010 that contributed to a significant narrowing of the discount and resulted in a substantial contraction in the share count. In addition to a modified redemption facility, a policy is in place whereby the company is obliged to hold a continuation vote at the next AGM should the shares trade at a discount of more than 10% during any rolling 90-day period, in normal market conditions. Such a vote has not been triggered so far. Finally, the board has discretion to buy back up to 14.99% of outstanding shares. Exhibit 13: Share price discount to NAV (including income) over three years (%) Source: Thomson Datastream, Edison Investment Research. Capital structure and fees The company has one class of shares with 40.5m shares in issue at the end of June. In 2010, to contain the discount and partly in response to the wishes of a significant shareholder group, a fourmonthly redemption facility was introduced and in the three financial years to end April 2013, share redemptions amounting to US$206m were made, accounting for the bulk of a 76% reduction in the share count over this period. In March 2013, the facility was amended with the frequency reduced to twice a year and the introduction of a limit of 5% of the issued share capital at each redemption Atlantis Japan Growth Fund 21 July

11 point. Subsequent redemptions to the half year end, October 2014, were at a more modest level of US$18.4m. In December 2014, in response to views expressed by shareholders about the potential negative impact of redemptions on the expense ratio, the board made further amendments to the redemption facility: (1) the exit charge payable on redemptions up to an individual shareholder s 5% redemption entitlement was increased from 2% to 5%; and (2) while shareholders can still apply to request redemption of more than their 5% entitlement, if other shareholders do not redeem, on this excess element the exit charge will be the rolling 90 day average discount prior to the redemption point, subject to a cap of 10%. Following the significant contraction in net assets resulting from the redemption facility, the board is keen to grow the company in order to increase liquidity and reduce the total expense ratio. To this end, in October 2014 an annual subscription right for shareholders was proposed and approved at an EGM. This gives shareholders the right to subscribe annually for one new share for every five held at the NAV on the preceding 2 October, (hence at a discount to NAV if the NAV has appreciated over the year). The take-up of this subscription right will therefore depend on NAV performance each year, and the level of share price discount to NAV in the exercise period (30 days prior to the subscription day). While existing shareholders would be obliged to subscribe to avoid dilution if the subscription is in the money there would be clear benefits to the expense ratio and liquidity if the company is able to expand. The company will appoint a trustee to attempt to sell any subscription shares not exercised, returning any premium, net of costs, to the relevant shareholders. The company has the ability to employ debt of up to 20% of NAV at the time of borrowing, and has historically employed leverage. Financial year-end leverage (calculated as total assets less cash as a percentage of net assets) has averaged 13.9% over the last 10 years and at the half year end stood at 14.8%. Over this period, leverage ranged between 9.4% in 2006 and 21.9% in Net gearing reported by the company at the end of June was c 9%, seen as a normal level for the fund. The investment manager is entitled to a fee equivalent to 1% of NAV (subject to conditions relating to the value of any assets set aside to meet redemptions). For the financial year to end April 2014 the ongoing charge was 1.98%. There is no performance fee. Dividend policy Given the company s objective is long-term capital growth, the portfolio is not managed to produce any specific level of income. Dividend payments have been restricted to those required to retain investment trust status by limiting retentions to no more than 15% of income from shares and securities. Since AJGF s launch, only two payments have been made: in 2009 and 2012 of US$0.05 and US$0.25 respectively (equivalent to 3p and 15p). Peer group comparison AJGF is classified within the five-strong AIC Japan Smaller Companies sector and in the table below we show both these companies and the four members of the Japan sector for comparative purposes. AJGF has outperformed its small-cap peer group average over one, three and five years, although it was somewhat behind the Japan company average. There is a similar pattern for riskadjusted returns, as represented by the one- and three-year Sharpe ratios. Atlantis Japan Growth Fund 21 July

12 Discounts for the small cap funds are, with one exception in each group, noticeably wider than for the Japan funds perhaps reflecting the smaller size of most of the small cap funds and also the potentially greater cyclical sensitivity of small cap stocks. Although the smallest company in its sector, AJGF s ongoing charge is only modestly above the peer average. In terms of gearing, AJGF is similar to the average for both groups. Exhibit 14: Japan peers as at 21 July 2015 % unless stated Mkt Cap NAV TR NAV TR NAV TR Sharpe Sharpe Discount Ongoing Perf Net Dividend m 1 Year 3 Year 5 Year 1y (NAV) 3y (NAV) (ex-par) charge fee gearing yield (%) Atlantis Japan Growth (9.8) 1.98 No 107 Baillie Gifford Shin Nippon No 107 Fidelity Japanese Values (13.1) 1.83 No 121 JPMorgan Japan Smaller Cos (13.0) 1.59 No 108 Prospect Japan 59.2 (0.8) (0.3) 0.5 (21.2) 2.44 No 90 Average Japan smaller companies (11.2) Aberdeen Japan No Baillie Gifford Japan No 111 JPMorgan Japanese (7.4) 0.78 No Schroder Japan Growth (3.2) 1.37 No Average Japan (2.3) Source: Morningstar, Edison Investment Research. Note: TR=total return. Sharpe ratio is a measure of risk-adjusted return. The ratios shown are calculated by Morningstar for the past 12- and 36-month periods by dividing a fund s annualised excess returns over the risk-free rate by its annualised standard deviation. Net gearing is total assets less cash and equivalents as a percentage of net assets. The board The board has five non-executive directors all of whom are independent. Noel Lamb, who joined the board in 2011, was appointed as chairman in Andrew Martin Smith was appointed to the board in 2002, Eric Boyle in 2000, Philip Ehrmann in 2013 and Takeshi Murakami in All have experience in stockbroking and or asset management and four of the five had roles specifically focused on the Japanese or Asian markets. Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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