Five years of
change in Japan
Welcome to our 2023 Annual Report
AVI Japan Opportunity Trust plc / Annual Report 2023
AVI Japan Opportunity
Trust plc (“AJOT” or “the
Company”) invests in a
focused portfolio of quality
small and mid-cap listed
companies in Japan that
have a large portion of their
market capitalisation in cash
or realisable assets.
NET ASSETS†
£183 million*
LAUNCH DATE
23 October 2018
ANNUALISED RETURN
6.8%*
ONGOING CHARGES RATIO
1.5%*
† For all Alternative Performance Measures,
please refer to the definitions in the Glossary
on pages 73 and 74.
* As at 31 December 2023.
AN ACTIVE APPROACH TO INVESTING RESPONSIBLY
As an active investor, AVI considers all drivers
relevant to each company’s success, offering
suggestions to enhance sustainable corporate
value in consideration of all stakeholders and in
the best long-term interest of our clients.
We aim to build strong relationships with the boards and management of
our portfolio companies. Through constructive engagement, we encourage
and expect them to take meaningful action in the context of long-term
value creation.
Read more about our ESG Perspective on pages 32 and 33 of the
Annual Report
Scree
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AVI Japan Opportunity Trust plc / Annual Report 2023
SR
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KEY STORIES
Five years of change in Japan
Read more on pages 08 and 09 of the Annual Report
Incorporating ESG in our strategy
Read more on pages 32 to 35 of the Annual Report
Focus on small and mid-cap business
Portfolio Breakdown by Market Capitalisation
CONTENTS
Strategic Report
02 Company Performance
04 Company Overview
06 Chairman’s Statement
10 Our Top 10 Holdings
12
Investment Manager’s Report
20 Portfolio Construction
21
22
Japan Investment Team
Investment Portfolio
23 Business Model
25 Stakeholders
30 Key Performance Indicators
32 ESG Policy
34 Our Approach to ESG
36 Principal Risks and Uncertainties
Governance
38 Directors
39 Directors’ Report
41 Corporate Governance Statement
46 Directors’ Remuneration Report
49 Statement of Directors’
Responsibilities in Relation to
the Annual Report and Financial
Statements
50 Report from the Audit Committee
52
Independent Auditor’s Report
Financial Statements
56 Statement of Comprehensive
Income
57 Statement of Changes in Equity
58 Balance Sheet
59 Statement of Cash Flows
60 Notes to the Financial Statements
Shareholder Information
72 AIFMD Disclosures
73 Glossary
75
Investing in the Company
76 Company Information
<£250m
£250m - £500m
£500m - £750m
£750m - £1bn
£1bn - £2.5bn
>£2.5bn
2023
17%
21%
21%
29%
11%
1%
2022
26%
15%
19%
17%
23%
0%
The Company’s website www.ajot.co.uk,
includes useful information on the Company,
such as price performance, news, monthly
and quarterly reports, as well as previous
Annual and Half-Year reports.
Read more on pages 10 and 11 of the Annual Report
@AVIJapan
u/avi-ajot
avi-japan-opportunity-trust
02
Strategic Report / Company Performance
Performance Summary
Net Asset Value*
£182,943,000
£156,395,000
31 December 2023
31 December 2022
Net Asset Value per Share (total return) for the year
Share price total return for the year*
Comparator Benchmark
MSCI Japan Small-Cap Index (£ adjusted total return)
Portfolio Valuation*
Net Cash as % of Market Cap
Net Financial Value as % of Market Cap
EV/EBIT
FCF Yield
Earnings and Dividends
Profit/(loss) before tax
Investment income
Revenue earnings per share
Capital earnings per share
Total earnings per share
Ordinary dividends per share
Ongoing Charge
Management, marketing and other expenses
(as a percentage of average Shareholders’ funds)
2023 Year’s Highs/Lows
Net asset value per share
15.8%
14.8%
6.9%
35.8%
49.6%
8.7x
4.4%
-4.3%
-4.5%
-1.0%
41.9%
63.0%
6.0x
6.0%
Year to 31 December 2023
Year to 31 December 2022
£25.2m
£4.0m
1.76p
15.89p
17.65p
1.70p
1.5%
High
130.3p
-£6.6m
£3.7m
1.69p
-6.79p
-5.10p
1.55p
1.5%
Low
110.1p
Net asset value per share
Share price
Discount (difference between share price and net asset value)
31 December 2023
31 December 2022
130.3p
127.0p
2.5%
114.1p
112.3p
1.6%
* For all Alternative Performance Measures, please refer to the definitions in the Glossary on pages 73 and 74.
AVI Japan Opportunity Trust plc / Annual Report 2023 140
120
100
80
12
9
6
60
3
0
-3
Net Asset Value, Share Price* and Benchmark
-6
-9
-12
-15
140
120
03
100
80
60
Oct 18
Apr 19
Oct 19
Apr 20
Oct 20
Apr 21
Oct 21
Apr 22
Oct 22
Apr 23
Oct 23
AVI Japan Opportunity Trust NAV TR
AVI Japan Opportunity Trust Share Price TR
MSCI Japan Small Cap Index (£ adjusted total return)
Premium or Discount to Net Asset Value (%)
15
10
5
0
-5
-10
-15
Oct 18
Apr 19
Oct 19
Apr 20
Oct 20
Apr 21
Oct 21
Apr 22
Oct 22
Apr 23
Oct 23
AVI Japan Opportunity Trust plc
Average Premium: 0.7%
* For all Alternative Performance Measures, please refer to the definitions in the Glossary on pages 73 and 74.
AVI Japan Opportunity Trust plc / Annual Report 2023IRGFSSISR
04
Strategic Report / Company Overview
Finding compelling opportunities in Japan
OUR PURPOSE
COMPANY OBJECTIVES AND STRATEGY
AJOT aims to provide Shareholders with total returns in excess
of the MSCI Japan Small Cap Index in GBP (“MSCI Japan
Small Cap”), through the active management of a focused
portfolio of equity investments listed or quoted in Japan,
which have been identified by Asset Value Investors Limited as
undervalued and typically have a significant proportion of their
market capitalisation held in cash, listed securities and/or other
realisable assets.
AVI seeks to unlock this value through proactive engagement with management and capitalising
on the increased focus on corporate governance, balance sheet efficiency, and returns to
shareholders in Japan.
The companies in the portfolio are selected for their high quality, whether having strong
prospects for profit growth or economically resilient earnings. By investing in companies whose
corporate value should grow overtime, AVI can be patient in its engagement to unlock value.
Benchmark
The MSCI Japan Small Cap Index.
The Association of Investment Companies (“The AIC”)
The Company is a member of The AIC.
WHAT DO WE INVEST IN?
AJOT aims to achieve long-term capital growth by engaging
with its concentrated portfolio of Japanese equities to unlock
value.
Sector Breakdown (% of Portfolio)
Materials
Capital Goods
Health Care Equipment and Services
Software and Services
Consumer Durables and Apparel
Technology Hardware and Equipment
Consumer Discretionary Distribution and Retail
Banks
Transportation
Automobiles and Components
Food, Beverage and Tobacco
23%
19%
16%
12%
10%
5%
5%
4%
3%
2%
1%
Discovering overlooked and
under-researched investment
opportunities, utilising
shareholder engagement to
unlock long-term value.
ABOUT ASSET
VALUE INVESTORS
The Company has appointed
Asset Value Investors Limited
(“AVI” or the “Investment
Manager”) as its Alternative
Investment Fund Manager.
Asset Value Investors (“AVI”) has been
investing in Japan for three decades.
AVI focuses on undervalued companies
with resilient and growing earnings, that
are overlooked by investors due to non-
fundamental factors.
By utilising nearly 40 years of capital
markets experience, having analysed and
met with hundreds of Japanese companies
across a wide variety of industries, AVI
works with management teams, making
suggestions on how to grow long-term
corporate value and address share price
undervaluation.
AVI’s engagement focuses on four main
areas of improvement: capital efficiency,
ESG, shareholder communication and
operational strategy. While AVI seeks to
work privately and collaboratively with
management teams, if progress is not
made, AVI will consider sharing its ideas
with other shareholders in a public forum.
Capital Structure
As at 31 December 2023, the Company’s
issued share capital comprised
140,836,702 Ordinary Shares of 1p each,
of which 400,000 were held in treasury and
therefore the total voting rights attached to
Ordinary Shares in issue were 140,436,702.
As at 13 March 2024 it comprised
140,836,702 Ordinary Shares, 400,000 of
which were held in treasury, and therefore
the total voting rights attached to Ordinary
Shares in issue were 140,436,702.
AVI Japan Opportunity Trust plc / Annual Report 2023
05
KEY PERFORMANCE INDICATORS (“KPIs”)
OUR CORE VALUES
NAV Performance (2023)
1 YEAR
15.8%
Ongoing Charges (2023)
31 DECEMBER 2023
1.5%
Since Inception ("SI")
40.5%
2022
1.5%
6.8%
SI Annualised
JAPAN ECONOMIC SNAPSHOT
GDP1
Population2
Fortune Global 500 Companies
1 Source: International Monetary Fund (2023).
2 World Bank Data (2022, USD).
Japan Relative to Global
4th largest
$4.2tn
2%
125m
9%
47
RESPONSIBLE INVESTORS
What do we invest in?
We believe that the integration of ESG
and sustainability considerations into our
investment strategy is not only integral
to comprehensively understanding each
investment’s ability to create long-term
value, but is also aligned with our values as
responsible investors.
Find more about AVI on page 4 of the
Annual Report
Purp
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P r i n
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Engaged
Building relationships with companies,
actively working together to improve
shareholder value.
Concentrated
Our portfolio of 15-25 stocks means we
devote ample resources to research and
engagement for every investment.
Long-term
A five-year horizon aligns our interests with
those of management.
Unique
Discovering overlooked and under
researched investment opportunities to
unlock long-term value.
Experienced
Investing in the Japanese market for over
two decades, with a dedicated team in
London and Tokyo.
Managed by AVI. Visit the website at:
www.assetvalueinvestors.com
Annual General Meeting
The Company’s Annual General Meeting
(“AGM”) will be held at 11.30am on
Wednesday, 1 May 2024 at the offices of
the Association of Investment Companies
(the “AIC”), 9th Floor, 24 Chiswell Street,
London, EC1Y 4YY. Shareholders will be
able to submit questions to the Board and
AVI ahead of the AGM and answers to
these, as well as AVI’s presentation, will be
made available on the Company’s website.
Please refer to the Notice of AGM for further
information and the resolutions which will
be proposed at this meeting.
AVI Japan Opportunity Trust plc / Annual Report 2023IRGFSSISR
06
Strategic Report / Chairman’s Statement
Overview of the Year
On behalf of the Board of Directors (“the Board”)
I am pleased to present the Annual Report
for 2023 for AVI Japan Opportunity Trust plc.
The Company was launched in 2018 to take
advantage of the rich opportunity set in Japan,
believing that the corporate governance reform
agenda first espoused in 2013 had gained
critical momentum, and that a sea change
was imminent. This was not a consensus
view, with Japan considered by most to be a
perennially cheap and largely irrelevant market
for global investors.
2023 then was a year in which (other) investors’
enthusiasm for Japanese equities grew and
scepticism waned. The strong economic
backdrop, ultra-loose monetary policy, low
relative valuations, weak yen, and unabated
progress on corporate governance reform drew
global attention. Notably, at the start of the year
the Tokyo Stock Exchange (“TSE”) announced
it would require companies to disclose capital
efficiency improvement plans, particularly by
those trading below 1x book value.
Japanese equity markets were buoyant, with
the MSCI Japan returning +28.6% over 2023
(in JPY) and the Nikkei seeing its largest one-
year rise since 1989, up +31.0%. This rally,
however, was mostly limited to larger cap names,
which outperformed their small-cap counterparts
by +7.5%.
In this context, it is pleasing to report that your
Company ended the year +15.8% in GBP terms,
outperforming its official comparator benchmark,
the MSCI Japan Small Cap Index, which
returned +6.9%. Since its inception, AJOT has
delivered returns of +40.5% versus +16.2% for
the benchmark. In JPY terms, since inception,
returns are significantly higher, at +73.7% vs
+43.6% for the benchmark.
Your manager, AVI, has continued constructively
engaging with portfolio companies to unlock
value. The Board got a first-hand look at their
efforts this year, as 2023 marked the first
time that we travelled together to Japan. The
enthusiastic response from market participants
and investee companies alike to our visit was
testament to the high regard in which AVI is
held and coupled with the unique benefits of the
investment trust structure that your Company
enjoys, we are more positive than ever on our
future prospects. AVI’s investment team builds
deep relationships with the management of
every portfolio company, holding a great number
of meetings with senior executives and board
directors. This approach has led to numerous
shareholder-friendly measures being introduced
across multiple companies without requiring
public campaigns which has delivered strong
results for our investors.
The preferred approach of private engagement
has led to notable successes, with detailed
letters or presentations sent to nine portfolio
companies over the year. Three portfolio
companies were the subject of public engagement,
including NC Holdings, where three of our
shareholder resolutions were successfully adopted.
Dividend
As provided for in the Prospectus at the IPO,
the Company intends to distribute substantially
all the net revenue arising from the portfolio.
The Company paid an interim dividend of 0.85p
per share in November 2023 and the Board
has elected to propose a final dividend of 0.85p
per share, bringing total dividends for the year
ended 31 December 2023 to 1.70p per share
(2022: 1.55p per share).
Investment Strategy
AJOT listed in October 2018 to take advantage
of the highly attractive opportunity to invest
in under-valued, over-capitalised Japanese
small-cap equities with strong underlying
business fundamentals. Active engagement
and corporate action are the key to unlocking
valuation anomalies and AJOT’s track-record has
demonstrated the potential absolute and relative
returns this approach can deliver.
Over five years since launch, your Company has
performed well in the face of multiple headwinds:
lacklustre performance of small-cap stocks
(MSCI Small Cap Japan has underperformed its
larger MSCI Japan brethren by almost 16%); a
marked depreciation of the Japanese Yen which
has detracted -33% from GBP returns, and a
turbulent global environment encompassing
a pandemic, rapidly rising interest rates and
multiple geopolitical events. The Board remains
confident that AVI is well placed to continue
executing on the strategy and that there are still
plenty of mis-priced investment opportunities.
Share Premium and Issuances
As at 31 December 2023, your Company’s
shares were trading at a discount of -2.5%
to NAV per share. The Board monitors the
premium/discount and carefully manages it
by periodically issuing or buying back shares.
During 2023, we employed the Company’s
authorised block listing facility to increase our
shares in issue by 3,375,000 while 985,000
shares were bought back during the period.
As of 31 December 2023, 140,436,702 shares
were in circulation, a pleasing increase from the
80,000,000 shares at AJOT’s launch.
The Directors believe that the performance of
the Company since IPO should be attractive
to a larger pool of investors and are constantly
exploring avenues to grow AJOT.
The portfolio is well
positioned with a
concentrated, yet
diverse, collection of
high-quality, lowly valued
companies, with multiple
levers for re-ratings. As a
Board, we are confident
that AJOT can build
on its successful track
record of engagement
and will continue to
deliver attractive returns
for investors.
Norman Crighton
Chair
AVI Japan Opportunity Trust plc / Annual Report 2023 07
The mounting pressure for corporate reform
will not subside in 2024. AJOT’s focus on
finding attractively valued, durable companies
and using active engagement to unlock value
holds it in good stead to benefit from the
changing tide. The portfolio is well positioned
with a concentrated, yet diverse, collection
of high-quality, lowly valued companies, with
multiple levers for re-ratings. As a Board, we are
confident that AJOT can build on its successful
track record of engagement and will continue
to deliver attractive returns for investors. The
portfolio as at the year end had 49% of its
market cap covered by net cash and investment
securities and traded at an 8.7x EV/EBIT
multiple.
In the coming weeks I shall be meeting any
institutional investors who would like to sit
down with me, and I hope to see as many
Shareholders as possible at our AGM in May.
The Board and I remain available to all our
Shareholders – institutional and retail – who
may wish to discuss an issue or ask a question.
As always, please feel free to reach out to me
directly (norman.crighton@ajot.co.uk) or contact
our broker, Singer Capital Markets, to arrange
a meeting.
Norman Crighton
Chairman
13 March 2024
Debt Structure and Gearing
As described in the Prospectus, the Board
supports the use of gearing to enhance portfolio
performance. The Company has in place a
¥2.9 billion debt facility, which was renewed on
2 February 2022 and subsequently extended to
5 April 2024 on the same terms while renewal
terms are being agreed. As at 31 December
2023, ¥2.93 billion (£16.3 million) of the facility
had been drawn and net gearing stood at 1.6%.
Board Trip to Japan
In September the Board travelled to Japan for
its first visit. Meeting with a variety of advisors,
market participants, lawyers and the Tokyo Stock
Exchange, it provided Directors with a deeper
understanding of the opportunity set and of how
the Company can be best positioned to benefit.
The Board had the opportunity to meet with six
portfolio companies, including a laboratory tour
and tasting experience at T Hasegawa’s R&D
facilities outside Tokyo. In Osaka, it was a great
privilege when Konishi, your Company’s 4th
largest position, invited the Board to their historic
headquarters built in 1903. This was the first time
a foreign company had been invited to the site
and it was pleasing to see the depth of the ties
AVI has built with the company.
The Board left encouraged with the changes
underway in Japan and the evident success of
AVI’s engagement efforts. Overall, it was a highly
fruitful visit, which confirmed that this time really
is different in Japan.
Outlook
At the end of November, news broke that
Toyota Motors – one of Japan’s last holdouts
to reform its balance sheet – will partially
unwind its cross shareholding in parts maker
Denso. In December, the TSE announced that
it will add further pressure by calling on 1,000
plus companies that have parent-subsidiary
relationships or that have listed or equity affiliates
to increase disclosure around their rationale for
having listed subsidiaries and their efforts to
ensure their independence. Just after the end
of the year in January, the TSE then released
the names of 1,115 companies that disclosed
information regarding actions to implement
policies conscious of cost of capital and share
price, shaming the 2,160 that did not.
AVI Japan Opportunity Trust plc / Annual Report 2023IRGFSSISR 08
Strategic Report / Case Study
Five years of change in Japan
WHAT HAS HAPPENED
IN FIVE YEARS?
It has been five years since
we launched the AVI Japan
Opportunity Trust (“AJOT”).
In Japan, five years is the
blink of an eye, Japanese
companies tend to think in
decades or generations.
However, a lot has happened
in five years.
In 2012, Shinzo Abe’s economic legacy,
known as Abenomics, marked the start of
corporate reform in Japan. The first two
arrows – monetary policy and increased
government spending, were quick to
implement while early signs of the third –
economic structural reform – were starting
to emerge. At AVI, it seemed the right time
to seize the opportunity in Japan.
1.
Governmental and regulatory
bodies pressed ahead with
reform measures, encouraging
shareholder engagement.
2.
Increase in the quantum and
success of shareholder activism.
3.
Changing corporate governance
environment prompted increased
interest from private equity
investors in Japan.
4.
Severe economic shock
following COVID-19 highlighted
the advantage of investing in
resilient companies.
5.
Improvement in management
awareness of shareholders.
Visit the website at:
www.assetvalueinvestors.com/insight/
five-years-of-change-in-japan/
AVI Japan Opportunity Trust plc / Annual Report 2023
09
Q
A
Q
A
What is your current
sentiment to the macro
environment?
We are optimistic about the macro
environment in Japan. The weak
Yen makes Japan highly cost-
competitive, benefiting both tourism and
manufacturing. Inflation has continued
to creep higher, having returned after a
30-year absence. In combination with
wage growth and increased spending,
we anticipate a more rational allocation
of capital and improved productivity.
This bodes well for the companies we
invest in. The Bank of Japan’s (“BoJ”)
expansionary monetary policy over the
past five years has weighed heavily on
the Yen. As a result, on an effective
real exchange rate basis, the Yen is
currently at its cheapest level since the
early 1970s. Even a slight adjustment
in monetary policy could potentially
strengthen the Yen. Such a shift could
serve as a driver for attractive absolute
returns.
Could you share any
closing thoughts?
A famous Japanese proverb is an
apt one: “fall seven times and stand
up eight”. We may need to write
numerous letters and presentations
to the management and boards of
companies before receiving a positive
response, but perseverance ultimately
pays off. The environment has become
more supportive for our approach, and
we remain steadfast in our belief that
our strategy is effective. The regulatory
improvements over the past five
years have led to the opportunity to
unlock vast amounts of value trapped
in Japanese companies and we see
enormous upside potential from
shareholder engagement.
Visit the website at:
www.assetvalueinvestors.com
Q
A
Q
A
By 2021, an updated Corporate
Governance Code had been released,
with the most salient points of this
focused on the appointment of
independent directors possessing
pertinent skills, as well as the mandate for
listed subsidiary companies to oversee
conflicts of interest. This scrutiny on listed
subsidiaries was beneficial for AJOT, as
we had exposure to six listed subsidiaries
at that time.
What other notable
corporate reforms have
had a positive impact on the
shifting investment landscape
in Japan?
In 2023, the Tokyo Stock Exchange
followed through on their announcement
calling on companies to address low
valuations. This was especially aimed
at the 1,800 companies in Japan that
trade on a price-to-book ratio of less
than 1x. It was an encouraging step,
highlighting the regulators’ ongoing
commitment to utilising their powers to
promote reform. Later in the year, the
Ministry of Economy, Trade and Industry
published its “Guidelines for Corporate
Takeover”. The guidelines contained
encouraging language, prompting us to
approach a portfolio company, with the
aim of acquiring a minority stake. The
option of putting forward tender offers
is not suitable for all our holdings, but
we believe the environment has evolved
in such a way that unsolicited tenders
are now a valuable tool to add to our
engagement repertoire.
Could you elaborate on AJOT’s
engagement campaigns?
Over the past five years, while most of our
engagement campaigns remained private,
we launched nine public campaigns,
submitted shareholder proposals to eight
portfolio companies, composed over
100 letters to managements and Boards
and conducted nearly 500 meetings.
Our public campaigns enabled us to
deepen the relationships with our portfolio
companies. The intent of our campaigns
was to raise awareness of issues
weighing on the share price, prompt
management to address them and
encourage other shareholders to exert
pressure on management to rectify these
issues. The responses, for the most part,
have been receptive, and increasingly so.
DANIEL LEE
Co-head of Japan Research
Over the past five years, the
Japanese environment has
become more supportive for
our approach, reinforcing our
conviction in the strategy. The
opportunity within our portfolio
to outperform is huge, and we
view these developments as a
tailwind to our performance.
Q
A
Q
A
How do you think the shift
in favour of shareholder
activism in Japan was
beneficial to AJOT?
The changing corporate governance
environment meant that private equity
companies were quickly opening offices
in Japan. The type of companies that
AJOT held were ripe for acquisition –
they had no debt, copious excess cash,
and demonstrated consistent free cash
flow generation. For example, AJOT’s
first takeover target was Nitto FC which
was privatised at a 38% premium. Since
launch, the strategy has benefited from
five privatisation events, at average
premiums of +46%.
What events in the political
and economic landscape
drove this shift in perspective?
The profound economic shock caused
by unforeseen events such as COVID-19
underscored the benefits of investing
in resilient companies with strong
balance sheets. Throughout that period,
the message from governmental and
regulatory bodies was clear – they would
continually escalate guidelines and
regulations to ensure the continuity of
reform efforts.
AVI Japan Opportunity Trust plc / Annual Report 2023IRGFSSISR
10
Strategic Report / Our Top 10 Holdings
Focus on small and mid-cap businesses
2
3
4
5
72.8%**
The top ten equity investments
make up 72.8% of the net assets*,
with operating businesses spread
across a range of sectors.
1
* For definitions, see Glossary on pages 73 and 74.
** % of net assets.
Top 10 Share of Net Assets
1. NIHON KOHDEN
2. TSI HOLDINGS
101.6%
Incl. gearing
9.7%
of portfolio
15.3x
EV/EBIT
8.7%
of portfolio
4.9x
EV/EBIT
% of AJOT net assets
Top 10
Other holdings
Nihon Kohden is a medical equipment
manufacturer. It has compounded sales over
the past 20 years at 4.9%, with sales declining
in only four of the past 38 years, and has grown
its overseas business to just over a third of
sales. We expect this growth to continue as
the business benefits from increased global
healthcare expenditure and a shift to higher
value-add digital solutions.
TSI Holdings owns a portfolio of diversified
apparel brands. Its unique focus on athleisure
and outdoor wear sets it apart from competitors,
but it trades at a steep discount due to a bloated
balance sheet. Net cash, investment securities
and real estate account for 92% of TSI’s market
cap, obscuring the underlying business. Were
TSI to trade in line with peers, there would be a
+100% upside to the current share price.
72.8%
28.8%
101.6%
Source / Getty Images
Source / TSI Holdings Co Ltd
6. DTS CORP
7.4%
of portfolio
7. EIKEN CHEMICAL
9.9x
EV/EBIT
6.5%
of portfolio
7.9x
EV/EBIT
DTS provides IT-related services to Japanese
corporations. Its business is expanding into
Digital transformation-related (“DX”) fields such
as cloud, robotics and IoT (“Internet of Things”).
Japanese companies have underinvested in their
IT infrastructure, with antiquated processes and
complex legacy systems. With encouragement
from the Government, we believe companies will
dramatically increase their IT expenditure – much
to the benefit of DTS.
Eiken Chemical is a manufacturer of medical
diagnostics equipment, operating a high-
quality business with a proven track record of
growing sales. Eiken Chemical holds a dominant
market position in Colon Cancer Screening,
with an overwhelming global market share in
excess of 70%. Furthermore, Eiken Chemical
is set to experience structural growth from the
ageing population and is a vulnerable takeover
target with an open shareholder register. Our
engagement will focus on capital allocation,
operational improvement, and shareholder
communication.
Source / Getty Images
Source / Eiken Chemical Co Ltd
Visit our investment platforms:
www.assetvalueinvestors.com/ajot/
how-to-invest/platforms/
AVI Japan Opportunity Trust plc / Annual Report 2023
11
6
7
8
9
10
28.8%
3. TAKUMA CO
8.6%
of portfolio
6.7x
EV/EBIT
4. KONISHI
8.5%
of portfolio
5. SHIN-ETSU POLYMER
5.4x
EV/EBIT
7.4%
of portfolio
7.3x
EV/EBIT
Takuma builds waste treatment plants for
municipalities in Japan, and with a labour
shortage, there is increasing demand for
companies to operate these plants after
construction. Our strong conviction lies in
Takuma’s shifting business model, towards
recurring maintenance and operation contracts,
which we don’t think is reflected in Takuma’s
3.9x EV/EBIT multiple at present.
Konishi is famed for its household glue
brand BOND. It has a dominant market
share across the domestic adhesives market
and successfully expanded its business into
infrastructure repair works. We believe Konishi
has potential to grow its adhesive offering into
more industrial applications and to establish itself
overseas, which is not reflected in the lowly
5.4x EV/EBIT valuation.
Shin-Etsu Polymer manufactures an assortment
of devices, but its main product is a container
used to carry semiconductor silicon wafers.
It is a listed subsidiary of Shin-Etsu Chemical,
and our base case is that Shin-Etsu Polymer is
taken over. The companies’ business operations
are intertwined, and the management of both
companies have made indications that they are
open to addressing the parent/child listing issue.
Source / Takuma Co Ltd
Source / Konishi Co Ltd
Source / Shin-Etsu Polymer Co Ltd
8. WACOM
5.6%
of portfolio
9. JADE GROUP
10. NC HOLDINGS
20.0x
EV/EBIT
5.5%
of portfolio
13.1x
EV/EBIT
4.9%
of portfolio
7.0x
EV/EBIT
Wacom is a global leader in digital pen solutions.
It is uniquely positioned to benefit from the
growing adoption of digital pens. Its dominant
market position allows Wacom to be at the
forefront of technological innovation, developing
solutions that utilise big data, artificial intelligence,
and virtual reality. Investors underappreciate
the growth potential of Wacom’s technology,
but under the leadership of the relatively
new President and with improved investor
communication, we think this will change.
JADE GROUP (formerly LOCONDO) operates
a fast-growing, capital light, fashion
e-commerce business. In 2022, JADE GROUP
acquired a stake in Reebok Japan which it has
flawlessly integrated into its logistics network.
There is a long growth runway for e-commerce
in Japan and JADE GROUP is well positioned to
benefit.
NC Holdings owns an eclectic mix of businesses,
including solar panel consulting, conveyor belts
and – the most attractive – car parking systems.
Each standalone business has its merits, but
they have no synergies combined. This partly
explains why the business trades on 7.0x
EV/EBIT vs our fair value of over 10.0x.
Source / Wacom Co Ltd
Source / JADE GROUP Co Ltd
Source / iStock
AVI Japan Opportunity Trust plc / Annual Report 2023IRGFSSISR 12
Strategic Report / Investment Manager's Report
Manager’s Commentary
It was a pleasing end to your Company’s
fifth anniversary year. In a year that strongly
favoured large-cap value stocks, where
AJOT has little exposure, the continued
outperformance of the portfolio is testament to
the strategy of generating idiosyncratic returns
from a concentrated portfolio of high-quality,
overcapitalised, undervalued companies. Driving
returns were TSI Holdings (share price +68% in
Yen), Konishi (+65%) and JADE GROUP (+96%).
TSI Holdings saw its share price rerate following
the disclosure of management initiatives
to address the low valuation, while Konishi
benefitted from +35% earnings growth over the
past 12 months, with JADE GROUP on track to
grow its operating profits by +76% this year.
The Japanese Yen weakness was driven by a
more cautious approach to moderating Yield
Curve Control (“YCC”) from Kazuo Ueda, the
newly appointed Bank of Japan (“BoJ”) governor.
With core inflation expected to stabilise around
the BoJ’s 2% goal, the BoJ are in no rush to
adjust loose monetary policy. With the real
effective exchange rate of the Yen trading at the
cheapest level since the 1970s, on balance, we
believe the chances of Yen strength outweigh
the risk of further weakness. This, however,
is not a prediction, and it doesn’t factor into
our investment allocation. If the Yen were to
strengthen it could be a helpful reversal of the
headwind we have faced over the past years.
Setting aside the weak Yen, in local currency
terms, it was a remarkable period for the
Japanese stock market, as the TOPIX gained
+28.3% (JPY). This outpaced the S&P 500’s
+25.7% gain (USD), the MSCI Europe Index’s
+15.8% gain (EUR) and the FTSE All Share’s
+7.9% gain (GBP). Investors appeared buoyed
by the Tokyo Stock Exchange (“TSE”)’s
announcement requiring companies to disclose
actions aimed at improving corporate value,
particularly those trading at a price-to-book ratio
of less than 1x. This marked the first time the
TSE had explicitly focused on a valuation metric,
which clearly resonated with investors.
Adding further pressure on corporate reform,
the Ministry of Economy Trade & Industry
(“METI”) finalised its guidelines for corporate
takeovers. The guidelines contained encouraging
wording that we believe might pave the way
for more unsolicited takeover approaches. The
Financial Services Agency (“FSA”) is currently
reviewing the tender offer rule and concert party
regulation, aiming to simplify current regulation.
In December, the TSE announced its intention
to call on the over 1,000 companies in parent-
subsidiary relationships or that have listed equity-
affiliates to enhance disclosure regarding the
rationale for having listed subsidiaries. Although
not a regulatory change, Toyota Motors, one of
Japan’s last holdouts to reform its balance sheet,
announced in November that it will partially
unwind its cross shareholding in Denso.
The direction of travel is clear, with shareholders,
regulators and the Government all pushing in the
same direction.
In August, we welcomed Shuntaro Shimizu, our
newest addition to the Japan team. Shuntaro,
joined from Bain & Company’s Tokyo office,
brings valuable financial experience gained at the
Bank of Japan and holds an MBA from Stanford
School of Business. He concentrates on applying
his consulting expertise to engage with our
portfolio companies and research new ideas.
The EV/EBIT of the portfolio increased from 6.0x
to 8.7x over the year. This was in part driven by
the strong portfolio performance but also from
a conscious effort to invest in higher quality
companies where we discern greater opportunity
for business growth. Due to the concentrated
nature of the portfolio, Nihon Kohden and
Wacom, trading on EV/EBIT multiples of 15.3x
and 20.0x, respectively, had an outsized effect
on the aggregate portfolio valuation, with the
median EV/EBIT of the portfolio being a more
modest 6.9x.
The strong markets have not diminished the
opportunity set and there continue to be pockets
of deeply mispriced companies. At the time of
writing, we are building positions in five new
names, which, on average, trade on an EV/
EBIT multiple of 4.0x, with 106% of their market
cap covered by cash, securities and rental real
estate. In each of these positions, we see an
avenue to upsides in the order of 50-100%
and the potential for us to become large
shareholders.
AVI Shareholder Engagement
Shareholder engagement in Japan continues
its rise unabated, with one broker noting that
Japan is undergoing its third activist investor
boom. The number of shareholder proposals
from engagement funds grew from just under 60
last year to a record-high 82 this year and more
shareholders expressed their disappointment
with poor management, with support for
incumbent Presidents falling.
We contributed to the 82 shareholder proposals
this year by filing shareholder proposals at SK
Kaken and NC Holdings. In the case of SK
Kaken, this is the third consecutive year in which
we have submitted proposals to the AGM.
Although we have achieved some success,
such as the company disclosing Scope 1 and
2 greenhouse gas emissions, increasing the
number of outside directors, and conducting a
5-for-1 stock split, the company has refused to
improve shareholder returns. Despite gaining
35% support, which, considering the founding
family’s nearly 50% control, represents a majority
of minorities, SK Kaken persists in maintaining a
measly 12% dividend pay-out ratio, resulting in
cash accumulating each year. So long as we are
shareholders, we will continue to apply pressure
on the family to improve the situation.
JOE BAUERNFREUND
Portfolio Manager
At the time of writing,
we are building positions
in five new names,
which, on average,
trade on an EV/EBIT
multiple of 4.0x, with
106% of their market
cap covered by cash,
securities and rental
real estate. In each of
these positions, we see
an avenue to upsides in
the order of 50 - 100%
and the potential for
us to become large
shareholders.
Dear AJOT Shareholders,
During the period from 1 January to 31 December
2023, your Company returned +15.8% in GBP.
This compares with a return for the benchmark,
the MSCI Japan Small Cap Index, of +6.9%. Over
the course of the period, the Yen depreciated
by -11.5% against the Pound, which has been
a headwind to Sterling-based returns. In Yen,
AJOT’s NAV has increased by +31.0% over the
period and +73.7% since launch.
AVI Japan Opportunity Trust plc / Annual Report 2023 13
While we can’t discuss all the details of our
private engagement, it was a busy period, and
there are several situations which we see coming
to a head in 2024, whether that be shareholder
proposals, mid-term plans or potential
privatisation events. We believe the potential for
alpha generation through engagement has never
been higher, and we are excited by the abundant
opportunities in the year ahead.
PORTFOLIO TRADING
Buying Activity
The largest purchase over the period was
Takuma, the waste treatment plant builder and
operator, which entered the portfolio in April.
Having observed Takuma from the sidelines
for several years, we witnessed the share price
boom +150% higher in an ESG-fuelled bubble
in 2021, only to decline by -46% to the price
at which we started buying. Given its open
shareholder register (32% foreign ownership), a
structural tailwind, and a shifting business model
to more recurring maintenance work (already
50%), we believe that Takuma’s lowly 6.7x EV/
EBIT valuation multiple is entirely unjustified.
Almost half of Takuma’s balance sheet assets
are held in cash and listed securities, accounting
for just over 60% of the market cap. We plan to
start engaging with management on solutions to
address the undervaluation in advance of next
year’s mid-term plan.
The second largest purchase was Eiken
Chemical, a diagnostics company specialising
in the manufacture of medical chemicals that
react with body samples to provide a diagnosis
for cancer, disease or infection. The market is
attractive, with high regulatory barriers to entry,
a razor/razor blade style business model and
stable growth driven by increased diagnostics
healthcare expenditure. Eiken Chemical has
produced a number of niche products, with the
most exciting being its Colon Cancer screening
test, called FIT (Faecal Immunochemical Test),
which accounts for around 40% of sales.
While generating low margins from the sale of
its analyser, Eiken Chemical earns high-margin
recurring income from the subsequent sales of
bottles and solutions, providing recurring sticky
income. Eiken Chemical’s global dominance is
driven by its testing accuracy and consistency,
proprietary technology in its buffer solution, and
the recognition of the OC-Sensor in over 100
journals, enhancing brand recognition and trust
with healthcare providers.
The appeal of the diagnostics business is not
lost on investors, with a set of peers, both
domestic and global, trading on an EV/EBIT of
26x vs Eiken’s 8x. We believe the disparity, in
part, is driven by a misunderstanding of its niche
business model, the roll-off from high margin
COVID-related reagents, and a bloated balance
sheet (32% of assets in net cash). We see almost
+100% upside to the current share price, and if
the company achieves its 2030 plan, possible
with the successful launch of a DNA based stool
test, over +200% upside.
Selling Activity
The largest sale was our long-standing position
Fujitec, where we generated a +111% ROI and
a +32% IRR over our almost five-year holding
period. This tremendous success was driven
by shareholder engagement, starting from the
release of our public presentation in May 2020,
and culminating with the recent overhaul of the
board of directors and ousting of the founding
family President. When we first invested in
Fujitec, it was trading on a 4.7x EV/EBIT multiple,
a significant discount compared to its peers
trading on 16.8x. Over the life of the investment,
that radically changed, and at the time of selling,
Fujitec was trading on a 23.3x EV/EBIT multiple,
a premium to peers’ 20.4x. We took the difficult
decision to sell the position based on valuation
grounds, believing that the exciting prospects
for value creation under the new board were
reflected in the higher valuation.
We sold our position in C Uyemura, which we
had been reducing for some time, generating
an 87% ROI and 21% IRR over the life of our
investment. We sold the last of our stake in
Teikoku Electric, following a strong appreciation
in the share price. Although it was only in the
portfolio for a year, we generated a 52% ROI,
amounting to a 92% IRR.
As has been the case for a few years, our
tolerance for companies with intransigent and
entrenched management who refuse to listen to
shareholder voices has diminished. This explains
our exits from Papyless, Pasona, Tokyo Radiator
and NS Solutions, as well as the reduction of
our stakes in two other small positions. AVI’s
approach is one of cooperative rather than
confrontational engagement, in contrast to some
other activist approaches. There are too many
well-run and undervalued companies in Japan,
with management teams who want to create
value for shareholders, to waste our time with
uncooperative companies that show little interest
in shareholder concerns.
At NC Holdings (“NCHD”), in a notable first for
AVI and a very rare occurrence at Japanese
AGMs in general, we had three shareholder
proposals successfully passed, with a further
three receiving majority shareholder support.
Two dividend-related resolutions were approved,
including an increase in the dividend pay-out
ratio to 70%, and the establishment of a stock-
compensation plan tied to achieving a three-year
total share price return of over 50% and an
average three-year ROIC of over 10%.
While we are pleased with this success, we are
disappointed that our shareholder proposals to
appoint two highly qualified outside directors
did not pass. In addition to largely ignoring
shareholder views for the past two years, the
board opposed six resolutions that achieved
majority shareholder support, engaged in
intimidation and baseless threats related to
purported concert party issues, targeted our
investment team members by name in both their
public and private rebuttals, and even attempted,
unsuccessfully, to claim that NCHD’s business
was of national interest to evade scrutiny at
the AGM. We will continue to engage with
management and seek solutions to improve
NCHD’s corporate value over the coming year.
Towards the end of the year, after almost five
years of private engagement, we released a
public statement expressing our opposition
to Digital Garage’s board of directors and
their misguided strategy. Critiquing the ill-
fated midterm plan released in May 2023, we
announced our intention to vote against all
directors at the upcoming AGM. We believe our
statement was well received and contributed to
raising awareness among other investors about
the necessary actions Digital Garage needs to
take to address its undervaluation.
Our private engagement accounts for most
of our work, and over the period, we sent
8 presentations and 17 letters to portfolio
companies. In our private engagements, we
cover more topics than shareholder proposals
allow, with a strong emphasis on operational
improvement, including strategies for margin
enhancement and growth. Our engagement
is tailored and specific to each company, with
our in-depth understanding highly appreciated
by management. We perceive ourselves
as providing a service akin to investment
consultants.
At the heart of our shareholder engagement is
a long-term approach, and while improvements
might not be reflected straight away, we believe
that through our suggestions we are helping
management create better businesses, ultimately
leading to higher returns for all shareholders.
In all cases, a track record demonstrating
our readiness to make our concerns public
significantly enhances our credibility in
interactions with boards and management.
AVI Japan Opportunity Trust plc / Annual Report 2023IRGFSSISR TSI Holdings
TSI Holdings owns a
portfolio of diversified
apparel brands. Its
unique focus on
athleisure and outdoor
wear sets it apart
from competitors, but
it trades at a steep
discount due to a
bloated balance sheet.
Net cash, investment
securities and real
estate account for
92% of TSI’s market
cap, obscuring the
underlying business.
Were TSI to trade in
line with peers, there
would be a +100%
upside to the current
share price.
14
Strategic Report / Investment Manager's Report continued
Contributors & Detractors
CONTRIBUTORS
TSI Holdings
Contribution (GBP)
% of net assets
3.3%
EV/EBIT
4.9x
8.7%
NFV/Market Cap
82%
TSI Holdings (“TSI”), one of the largest listed apparel companies in Japan,
was the leading contributor in 2023, with its 68% share price increase
adding 335bps to performance. TSI entered the portfolio in July 2022,
and has generated a return on investment of 44%.
TSI’s strong performance can be partly attributed to the TSE’s initiative
to pressure companies to address poor capital efficiency. As a follow-up
to the 2022 TSE market classification review, in March 2023, the TSE
requested listed companies to raise awareness around their corporate
value, particularly if their shares were trading at a price-to-book ratio
(“PBR”) below 1.0x. TSI holds a large amount of non-core business assets
such as cash and deposits, investment securities and rental real estate,
and remarkably, its PBR remains at c. 0.5x
We believe the business side of TSI has also attracted investor interest.
TSI, along with other Japanese apparel companies, faced challenges
stemming from the impacts of COVID-19. Nevertheless, consumer
sentiment recovered strongly in 2023, with the economy further stimulated
by inbound demand from surrounding Asian countries acting as a tailwind.
In addition to the supportive macroeconomic trends, TSI is implementing
operational changes to improve its efficiency. Specifically, TSI focused on
revitalising its historically strong but currently underperforming brands,
such as nano universe, through a rebranding initiative and reform that
involved strengthening senior frontline members. Consequently, nano
universe, whose performance had been on a downward trend over the
past few years, began to exhibit signs of recovery in 2023. Furthermore,
the company has been working towards delivering higher margins,
targeting 4.3% operating margins by 2025 compared to the current
lowly 0.9%.
In terms of engagement, we have deepened our constructive dialogue
on operational improvement and capital policy. As highlighted earlier, TSI
remains significantly undervalued, with a PBR of 0.5x, and we believe
there is still substantial upside to be unlocked through our supportive
engagement efforts.
Indexed Share Price
300
250
200
150
100
Jul 22
Sep 22
Dec 22
Mar 23
Jun 23
Sep 23
Dec 23
Source / TSI Holdings Co Ltd
Since position in AJOT initiated (July 2022)
AVI Japan Opportunity Trust plc / Annual Report 2023 15
CONTRIBUTORS
Konishi
JADE GROUP
Contribution (GBP)
% of net assets
Contribution (GBP)
% of net assets
3.2%
EV/EBIT
5.4x
8.5%
NFV/Market Cap
47%
3.1%
EV/EBIT
13.1x
5.5%
NFV/Market Cap
17%
Konishi, a company engaged in manufacturing of adhesives and civil
engineering, achieved a share price return of +65% over the period,
adding 320bps to performance. Following intense private engagement
with Konishi’s senior management, the company released a mid-term plan
in May 2023, pledging to either invest or return to shareholders all cash
generated over the next three years. The plan also outlined a three-year
EBITDA growth target of +35% (of which +19% growth is forecast to be
achieved in the first year).
This marked the first time Konishi had disclosed a capital allocation plan
and its first commitment to buying back shares. A few weeks after the
mid-term plan, Konishi announced an 8.5% share buyback which sent
the share price +10% higher, and has been increasing further since. Aside
from greater market recognition following the mid-term plan, earnings
growth has buoyed the share price. Profits grew +71% over the six-month
period to 30 September 2023 (Konishi’s interim), driven by price increases
coupled with softening raw material prices.
Despite the +65% share price growth, Konishi’s EV/EBIT multiple
increased only modestly from 4.0x to 5.4x. While Konishi have shown
discipline in their capital allocation for the next three years, they have not
addressed the current large cash pile, which, including listed securities,
accounts for 47% of Konishi’s market cap. We will continue to engage with
the company on improving capital allocation, amongst other operational
measures, and foresee a bright future for the company and its share price.
JADE GROUP (formerly LOCONDO) (“JADE”), an apparel ecommerce
company, achieved a near doubling of its share price, up +96% and
adding 179bps to performance. Full-year profits in February 2023 came in
above forecasts (¥991m vs. ¥900m), but it was the company’s +33% sales
and +76% profit growth forecast for the year ending February 2024 that
propelled the share price. By the 9-month mark at the end of December,
operating profits had grown +99.9%.
JADE had been heavily investing in logistics infrastructure, leading to
ballooning fixed costs weighing on profits and resulting in unutilised
warehouse capacity. Last year it won the right to manage the Reebok
brand in Japan through a joint venture with Itochu. Having already made
the warehouse capacity investments, the company benefited from the
power of operating leverage, with Reebok’s incremental sales flowing
straight to the bottom line. This year’s profit guidance is in line with the
mid-term plan, and management estimate that with further accretive
acquisitions, they can grow profits by another 34% next year.
Alongside these results, JADE announced a 3.6% share buyback,
which was well received. CEO Yusuke Tanaka’s insightful 14-page
shareholder letter detailed the company’s history, what management
have learned and management’s growth strategy. He made a compelling
argument as to why JADE justifies a ¥30bn-50bn market cap, much higher
than the current ¥23bn market cap. While it will require flawless execution
of the plan to achieve the higher end of that range, we do not think it is
entirely unrealistic.
Across AVI funds, we are JADE’s largest shareholder, owning just under
10% of the shares, and have maintained regular engagement with the
company. We are optimistic about the company’s growth prospects,
which we don’t think are being fully reflected in its 13x EV/EBIT multiple.
After the year end in February 2024, JADE announced the acquisition of
Magaseek, which will see Gross Merchandise Value (“GMV”) double and,
although not yet confirmed by the Company, double its profits over the
coming years. At the time of writing, JADE’s share price is up +29% after
the year end.
Indexed Share Price
Indexed Share Price
200
150
100
50
300
250
200
150
100
50
Oct 18
Apr 19
Oct 19 Apr 20
Oct 20 Apr 21 Oct 21 Apr 22 Oct 22 Apr 23 Oct 23
Nov 21
May 22
Nov 22
May 23
Nov 23
Since position in AJOT initiated (Oct 2018)
Since position in AJOT initiated (Nov 2021)
AVI Japan Opportunity Trust plc / Annual Report 2023IRGFSSISR 16
Strategic Report / Investment Manager's Report continued
CONTRIBUTORS
Shin-Etsu Polymer
Nihon Kohden
Contribution (GBP)
% of net assets
Contribution (GBP)
% of net assets
2.2%
EV/EBIT
7.3x
7.4%
NFV/Market Cap
37%
2.0%
EV/EBIT
15.3x
9.7%
NFV/Market Cap
17%
Shin-Etsu Polymer, a semiconductor wafer case manufacturing company,
saw its share price increase by +53%, adding 220bps to performance.
The strong return was propelled by increased scrutiny from the TSE on
the archaic practice of listed parent/subsidiary structures. Despite the
challenging business environment this year for Shin-Etsu Polymer, with
wafer manufacturers adjusting their inventory weighing on the demand for
wafer carrier cases, the business performed resiliently and has forecast
modest sales and profit growth of +2.5% and +2.0% respectively.
Trading on an EV/EBIT of just 7.6x, with net cash amounting to about 33%
of the market cap at the year end, Shin-Etsu Polymer is still undervalued,
owing to its parent/subsidiary structure with Shin-Etsu Chemical, who own
over 50% of the shares. With Shin-Etsu Chemical being both a customer
and supplier of Shin-Etsu Polymer, there are potential conflicts of interest.
The absence of a majority independent board, coupled with the presence
of former Shin-Etsu Chemical employees as directors, raises governance
concerns. While we appreciate that management have made modest
improvements, we believe these measures do not adequately address key
issues enough to rectify the company’s undervaluation.
We have put forward proposals to both Shin-Etsu Polymer and Shin-Etsu
Chemical in private, seeking to achieve a majority independent board
and to dissolve the listed structure entirely. We hope both companies
will recognise the current shortcomings and take further action to grow
corporate value and protect shareholders’ interests. Pressure from the
TSE, shareholders and wider stakeholders to address conflicts from
parent/subsidiary structures will not wane.
Nihon Kohden, was the 5th largest contributor, adding 200bps to
performance with a +42% share price return. Nihon Kohden is a global
leader in medical equipment manufacturing, renowned for launching the
world’s first AC-powered EEG machine. The company is now diversified
across patient monitors, ventilators and defibrillators.
Earnings over the year were respectable, with Nihon Kohden continuing
to benefit from overseas growth and increased healthcare expenditure.
As management work towards a refreshed strategy with their May 2024
mid-term plan, there has been a distinct absence of market moving
announcements from the company. Rather, it was the disclosure from
a well-known US activist fund that it had purchased 5% of Nihon Kohden’s
shares that drove the share price higher. We have admired this fund’s
engagement with Nihon Kohden’s peer, Olympus (a large-cap Japanese
company not held in the portfolio) and referenced the success of Olympus’
transformation plan in our engagement to Nihon Kohden.
Although Nihon Kohden’s discount to peers has narrowed since we
initiated our position, currently trading on an EV/EBIT multiple of 15x
compared to peers’ 20x, we believe this doesn’t fully capture the
substantial potential we envision for the business. Under the leadership
of President Ogino, the Grandson of Nihon Kohden’s founder, we see a
pathway for the business to improve operating margins from 10% to 15%
and transition its focus from lumpy medical equipment sales to recurring
digital services. Coupled with 5% projected annual sales growth, we
estimate that over the next five years operating profits have the potential to
nearly double.
Although the transformation is still in its early stages, we are confident
it can be achieved. It is encouraging to see another activist investor
recognise the potential, and we look forward to continuing our engagement
ahead of the May 2024 mid-term plan. We still see over +100% upside to
the prevailing share price.
Indexed Share Price
Indexed Share Price
200
150
100
50
160
140
120
100
80
Dec 21
Jun 22
Dec 22
Jun 23
Dec 23
Sep 22
Dec 22
Mar 23
Jun 23
Sep 23
Dec 23
Since position in AJOT initiated (Dec 2021)
Since position in AJOT initiated (Sep 2022)
AVI Japan Opportunity Trust plc / Annual Report 2023 17
Shin-Etsu Polymer
Shin-Etsu Polymer manufactures an assortment of
devices, but its main product is a container used
to carry semiconductor silicon wafers. It is a listed
subsidiary of Shin-Etsu Chemical, and our base
case is that Shin-Etsu Polymer is taken over. The
companies’ business operations are intertwined,
and the management of both companies have made
indications that they are open to addressing the
parent/child listing issue.
Source / Shin-Etsu Polymer Co Ltd
AVI Japan Opportunity Trust plc / Annual Report 2023IRGFSSISR Digital Garage
Digital Garage is a holding
company with a high-
quality payments’ platform
business, a portfolio of
fintech VC investments,
and a 20% stake in listed
Kakaku.com. The confusing
structure obfuscates the
strong payment business,
with the consolidation of
profits from its investment
portfolio diminishing its
perception by investors.
18
Strategic Report / Investment Manager's Report continued
DETRACTORS
Digital Garage
Contribution (GBP)
% of net assets
-2.2%
EV/EBIT
10.3x
4.5%
NFV/Market Cap
60%
Digital Garage, which operates one of Japan’s largest payment settlement
businesses, was the leading detractor from performance in 2023, with
a -19% fall in its share price reducing performance by 216bps.
The weak share price can be attributed, in no small part, to the release
of a profoundly disappointing mid-term plan in May. Leading up to
the release of the mid-term plan, AVI had been engaging with Digital
Garage extensively, having sent a letter to the Board advocating for all
strategic options to be considered. This year, we submitted a 72-page
presentation as part of our ongoing engagement, addressing matters
such as shareholder communication, group strategy and the inefficient
holding structure.
Rather than listening to our concerns, as well as those publicly raised by
another shareholder, management persisted with its suboptimal strategy.
The mid-term plan fell short of addressing the holding structure and the
questionable 20% stake in listed Kakaku.com, nor did it make a convincing
case as to how, without change, the performance of the payment business
would improve. The negative share price reaction demonstrated that we
were not alone in our disappointment.
After careful consideration, in November 2023 we issued a press release
aiming to spur management into action. The release conveyed concerns
regarding Digital Garage’s corporate governance and the credibility of its
directors, whilst also announcing our intention to vote against their re-
election at the June 2024 AGM.
Unfortunately, at the end of the year, defiant to the trend of reducing
cross-shareholdings, Digital Garage issued 5.25% of its treasury shares
to Resona HD, with Resona HD committed to purchasing an additional
4.75% in the market. In return, Digital Garage intends to hold discussions
regarding the acquisition of shares in a Resona HD subsidiary and setting
up a venture fund together. We are perplexed as to what led management
to believe that issuing deeply undervalued shares in such a convoluted
manner would create value for shareholders. The lack of concrete tie-ups
with Resona HD suggests a hastily executed deal, where it appears
the primary beneficiaries are the advisors and management focused on
protecting themselves from shareholder accountability.
Source / Getty Images
Indexed Share Price
Digital Garage has been in the portfolio since inception, and despite initially
being a strong performer, its returns have eroded, leading us with a rather
underwhelming return on investment of +6.2% and an IRR of +2.6% over
the holding period. Over the past three years, Digital Garage’s share price
has declined by -1.8%, in contrast to the TOPIX, which has returned
+41.1%. Over longer periods the relative performance has fared no better.
With the current leadership and status quo strategy, we would not be
surprised if Digital Garage continues to erode shareholder value. Despite
our lack of faith in management’s ability to drive shareholder value, the
shares do trade at a significant undervaluation. Overtime, we anticipate
reallocating the position to more attractive opportunities.
200
180
160
140
120
100
80
Dec 18
Dec 19
Dec 20
Dec 21
Dec 22
Dec 23
Since position in AJOT initiated (Jun 2021)
AVI Japan Opportunity Trust plc / Annual Report 2023 19
DETRACTORS
NC Holdings
SK Kaken
Contribution (GBP)
% of net assets
Contribution (GBP)
% of net assets
-1.5%
EV/EBIT
7.0x
4.9%
NFV/Market Cap
65%
-0.7%
EV/EBIT
<0.0x
3.2%
NFV/Market Cap
105%
NC Holdings was the second largest detractor in 2023, reducing returns
by -151 bps. NC Holdings primarily operates multi-storey parking and
conveyor belt businesses in Japan. AJOT initiated its position in NC
Holdings in June 2021, and has experienced a total return of -3.5% in
GBP or +12.7% in Japanese Yen over the period.
During the AGM season in June 2023, we submitted shareholder
proposals to NC Holdings regarding the revision of stock-based
remuneration and dividends. Notably, three proposals were successfully
passed, including a special resolution.
NC Holdings had previously encountered challenges in adequately disclosing
the company’s mid-long-term management policy for enhancing corporate
value. NC Holdings neither conducts financial results briefing meetings nor
publishes supplemental IR presentations. However, following the period
of our public campaign, NC Holdings announced in June 2023 that it is
committed to disclosing information on the management direction that
the board of directors intends to pursue in order to improve its enterprise
value, including the specific measures that they plan to implement. We
await the disclosure with great interest, eager to see how NC Holdings will
communicate concrete growth strategies, investment plans, capital efficiency
improvement policy and business portfolio strategies in the near future.
In terms of business, we understand that potential growth areas include
the expansion of the free line conveyor business, which is the business
of conveying earth and sand by conveyor for civil engineering works
in general, and the expansion of sales to local municipalities. We have
engaged in constructive dialogue with management regarding the
implementation of a shift away from dependence on non-growth domains,
such as coal-fired power plants. We believe that the company’s medium-
to long-term commitment to growing these businesses will contribute to a
better understanding by the market of the potential value of the company.
We expect to realise the upside through ongoing constructive dialogue,
addressing business management, capital policy and investor relations
disclosure.
SK Kaken, a manufacturer of construction coating paints, was the third
largest detractor, reducing performance by 70bps as its share price drifted
-10% lower over the course of the year.
We continued our public engagement initiative, ‘Painting a better
SK Kaken’, and for the third consecutive year we submitted shareholder
proposals to SK Kaken’s AGM. Our engagement has broadly focused
on capital allocation, liquidity enhancement, corporate governance and
shareholder communications. At this year’s AGM, we campaigned for
the return of the excess cash accumulated on the balance sheet to
shareholders via dividends, along with the cancellation of treasury shares.
While we achieved majority support from minority shareholders, the
resolution was not passed, primarily due to the founding family’s significant
ownership stake.
On a more positive note, despite repeatedly resisting our suggestions for
the past four years, management finally took steps in the right direction,
as they conducted a 5-for-1 stock split, reduced the director tenure and
transitioned to a company with an audit and supervisory committee,
greater board independence and improved disclosure of ESG performance
and quarterly results. Although we are pleased with the progress on these
points, further action is needed to rectify the undervaluation, with SK
Kaken currently trading on a negative EV/EBIT multiple, underscored by
net cash covering 103% of the market cap.
SK Kaken has been in the portfolio since inception, and despite our
engagement efforts has been a poor performer, yielding a return on
investment of -18.4%, with an IRR of -4.4%. With a remarkably cheap
valuation and stable business, we still see significant upside, albeit the
timing of realising this upside is in the hands of the family.
Indexed Share Price
Indexed Share Price
200
160
120
80
120
100
80
60
40
Jun 21
Dec 21
Jun 22
Dec 22
Jun 23
Dec 23
Dec 18
Dec 19
Dec 20
Dec 21
Dec 22
Dec 23
Since position in AJOT initiated (Jun 2021)
Since position in AJOT initiated (Inception: Oct 2018)
AVI Japan Opportunity Trust plc / Annual Report 2023IRGFSSISR 20
Strategic Report / Portfolio Construction
The objective of AVI’s portfolio construction is to
create a concentrated position in about 15-25
holdings, facilitating a clear monitoring process
of the entire portfolio.
AVI picks stocks that meet our investment criteria and once we decide
to invest, a minimum position size of approximately 2% of the portfolio
is initiated. In determining position sizes, AVI is mindful of liquidity and
the likely timing of any catalysts to unlock value. A key consideration
is the make-up of the shareholder register, a proxy for how receptive
management might be to our suggestions. The portfolio is diverse in the
industries within it, however, we are sector agnostic and select investments
based on quality and value.
Portfolio value by sector
Equity portfolio value by market capitalisation
Materials
Capital Goods
Health Care Equipment and Services
Software and Services
Consumer Durables and Apparel
Technology Hardware and Equipment
Consumer Discretionary Distribution and Retail
Banks
Transportation
Automobiles and Components
Food, Beverage and Tobacco
2023
2022
23%
19%
16%
12%
10%
5%
5%
4%
3%
2%
1%
29%
19%
7%
18%
6%
6%
0%
0%
2%
4%
0%
<£250m
£250m - £500m
£500m - £750m
£750m - £1bn
£1bn - £2.5bn
>£2.5bn
2023
2022
17%
21%
21%
29%
11%
1%
26%
15%
19%
17%
23%
0%
Average voting ownership of portfolio companies
across all AVI funds
Top 10 Concentration (% of Net Assets)
6.0%
6.0%
5.0%
5.0%
4.0%
4.0%
3.0%
3.0%
2.0%
2.0%
80%
70%
60%
50%
40%
Jun 21
Jun 21
Dec 21
Dec 21
Jun 22
Jun 22
Dec 22
Dec 22
Jun 23
Jun 23
Dec 23
Dec 23
Dec 18
Dec 19
Dec 20
Dec 21
Dec 22
Dec 23
AVI Japan Opportunity Trust plc / Annual Report 2023 Strategic Report / Japan Investment Team
21
OUTLOOK
The cascade of regulatory improvements
in 2023 is, in our view, a seminal moment
in the long and winding road to unlocking
the enormous value trapped in Japanese
companies. We see abundant opportunities
to exploit mispriced companies in a highly
inefficient market. The concentrated nature
of our portfolio and large upsides leaves
us excited about the potential to generate
significant alpha. This was evidenced by
Alps Logistics and JADE GROUP, who, at
the time of writing have seen their share
prices appreciate by +51% and +29%
respectively in 2024.
Joe Bauernfreund
Asset Value Investors Limited
13 March 2024
JOE BAUERNFREUND
DANIEL LEE
CEO, Portfolio Manager
Co-Head of Japan Research
* Native Japanese speaker.
KAZ SAKAI
SHUNTARO SHIMIZU
JASON BELLAMY
Co-Head of Japan Research*
Senior Investment Analyst*
Senior Engagement Consultant*
LUKE HUTCHERSON
ESME MORTER
YUKI NICOLAS
Junior Investment Analyst
ESG Analyst
Japan Team Assistant*
AVI Japan Opportunity Trust plc / Annual Report 2023IRGFSSISR 22
Strategic Report / Investment Portfolio
As at 31 December 2023
Company
Nihon Kohden
TSI Holdings
Takuma
Konishi
Shin Etsu Polymer
DTS
Eiken Chemical
Wacom
JADE GROUP
NC Holdings
Top ten investments
Digital Garage
T Hasegawa
SK Kaken
Aichi
A-One Seimitsu
Alps Logistics
Soft99
Kyoto Financial Group
Shiga Bank
Hachijuni Bank
TSE: 6849
TSE: 3608
TSE: 6013
TSE: 4956
TSE: 7970
TSE: 9682
TSE: 4549
TSE: 6727
TSE: 3558
TSE: 6236
TSE: 4819
TSE: 4958
TSE: 4628
TSE: 6345
TSE: 6156
TSE: 9055
TSE: 4464
TSE: 5844
TSE: 8366
TSE: 8359
Stock Exchange
Identifer
% of
AJOT
net assets
Cost
£’000*
Market
value
£’000
% of
investee
company
NFV/Market
capitalisation1
9.7%
8.7%
8.6%
8.5%
7.4%
7.4%
6.5%
5.6%
5.5%
4.9%
14,230
17,735
11,146
15,983
13,281
15,802
11,065
15,600
10,298
13,555
11,452
13,488
10,755
11,896
13,911
10,254
7,013
10,005
0.8%
4.5%
1.9%
3.0%
1.8%
1.5%
3.1%
1.8%
7.4%
8,613
8,998
18.4%
72.8%
111,764
133,316
4.5%
4.4%
3.2%
3.0%
2.8%
2.6%
1.8%
1.5%
1.5%
1.4%
9,982
6,799
9,445
4,728
4,571
3,067
2,811
2,226
2,410
2,198
8,176
7,942
5,836
5,580
5,189
4,787
3,249
2,732
2,685
2,567
0.8%
1.1%
0.9%
1.2%
9.1%
1.5%
1.9%
0.1%
0.3%
0.1%
2.5%
2.3%
EV/EBIT1
15.3
4.9
6.7
5.4
7.3
9.9
7.9
20.0
13.1
7.0
10.3
10.5
<0.0
5.1
15.1
6.1
2.2
2.4
<0.0
2.2
17.3
<0.0
6.9x
8.7x
17%
82%
51%
47%
37%
43%
40%
14%
17%
65%
60%
30%
105%
54%
70%
31%
78%
85%
110%
82%
70%
185%
57%
50%
Top twenty investments
99.5%
160,001
182,059
Yaizu Suisankagaku Industry
TSE: 2812
Daidoh
TSE: 3205
1.1%
1.0%
1,806
1,602
1,918
1,880
Total investments
101.6%
163,409
185,857
Portfolio median
Portfolio weighted average
Other net assets and liabilities
Net assets
(1.6%)
100.0%
(2,914)
182,943
* Please refer to Glossary on pages 73 and 74.
1 Estimates provided by AVI. For all Alternative Performance Measures, please refer to the definitions in the Glossary on pages 73 and 74.
AVI Japan Opportunity Trust plc / Annual Report 2023 23
Strategic Report / Business Model
Business Model
Company Status
The Company is registered as a public limited company under
the Companies Act 2006 and is an investment company
under Section 833 of the Companies Act 2006. It is a
member of The AIC.
HOW WE INVEST
Portfolio Characteristics
The Company was incorporated on 27 July 2018 and listed
on the London Stock Exchange on 23 October 2018.
The Company has been approved as an investment trust
under Sections 1158/1159 of the Corporation Tax Act 2010.
The Directors are of the opinion, under advice, that the
Company continues to conduct its affairs as an Approved
Investment Trust under the Investment Trust (Approved
Company) (Tax) Regulations 2011.
The Company qualifies as an Alternative Investment Fund in
accordance with the Alternative Investment Fund Managers
Directive (“AIFMD”).
Investment Objective
The Company’s investment objective is to provide
Shareholders with a total return in excess of the MSCI
Japan Small Cap Index, through the active management of
a focused portfolio of equity investments listed or quoted in
Japan which have been identified by AVI as undervalued and
having a significant proportion of their market capitalisation
held in cash, listed securities and/or realisable assets.
Investment Policy
The Company invests in a diversified portfolio of equities listed
or quoted in Japan which are considered by the Investment
Manager to be undervalued and where cash, listed securities
and/or realisable assets make up a significant proportion
of the market capitalisation. AVI seeks to unlock this value
through proactive engagement with management and taking
advantage of the increased focus on corporate governance
and returns to shareholders in Japan. The Board has not set
any limits on sector weightings or stock selection within the
portfolio. Whereas it is not expected that a single holding
(including any derivative instrument) will represent more than
10% of the Company’s gross assets at the time of investment,
the Company has discretion to invest up to 15% of its gross
assets in a single holding, if a suitable opportunity arises.
No restrictions are placed on the market capitalisation of
investee companies, but the portfolio is weighted towards
small and mid-cap companies. The portfolio normally consists
of between 15 and 25 holdings although it may contain a
lesser or greater number of holdings at any time.
The Company may invest in exchange traded funds, listed
anywhere in the world, in order to gain exposure to equities
listed or quoted in Japan. On acquisition, no more than 15%
of the Company’s gross assets will be invested in other UK
listed investment companies.
The Company may also use derivatives for gearing and
efficient portfolio management purposes.
The Company will not be constrained by any index
benchmark in its asset allocation.
1
2
3
Undervalued and Surplus Cash
Small-Cap Focused
High Quality Businesses
Defining our Universe
c.3,900
Listed Japanese Companies
1
2
3
4
Net Financial Value
>30% market cap1
Average daily traded value
>£25k
EV / EBIT
<10x
Industry Focus
Excl. financial sector
c.800
Companies in the AJOT Universe
1 Net Financial Value (“NFV”) = investment securities + cash + treasury share value - net debt -
net pension liabilities.
How we Generate Returns
1
2
3
Value Growth
At the core of all AVI’s investments are attractive businesses with durable
earnings growth.
Discount Tightening
140
Occurs when the share price rises more than the NAV.
100
Compounding Effect
When these two sources of returns occur simultaneously, an attractive
60
compounding effect enhances investment returns.
Share Price
NAV
Discount (% RHS)
0%
-20%
-40%
-60%
-80%
140
100
60
0%
- 20%
- 40%
- 60%
- 80%
Share Price
NAV
Discount (% RHS)
Theoretical example of how returns are generated in an AJOT investment.
AVI Japan Opportunity Trust plc / Annual Report 2023IRGFSSISR
24
Strategic Report / Business Model continued
Borrowing Policy
The Company may use borrowings for
settlement of transactions, to meet ongoing
expenses and may be geared through
borrowings and/or by entering into long-only
contracts for difference or equity swaps that
have the effect of gearing the Company’s
portfolio to seek to enhance performance.
The aggregate of borrowings and long-only
contracts for difference and equity swap
exposure will not exceed 25% of NAV at the
time of drawdown of the relevant borrowings
or entering into the relevant transaction, as
appropriate. It is expected that any borrowings
entered into will principally be denominated
in JPY.
Hedging Policy
The Company does not currently intend to enter
into any arrangements to hedge its underlying
currency exposure to investments denominated
in JPY, although the Investment Manager and the
Board may review this from time to time.
Material Changes to the Investment Policy
No material change will be made to the
Company’s investment policy without
Shareholder approval. In the event of a breach of
the Company’s investment policy, the Directors
will announce through a Regulatory Information
Service the actions which have been taken to
rectify the breach.
Management Arrangements
The Company has an independent Board
of Directors which has appointed AVI, the
Company’s Investment Manager, as Alternative
Investment Fund Manager (“AIFM”) under the
terms of an Investment Management Agreement
(“IMA”) dated 6 September 2018. The IMA is
reviewed annually by the Board and may be
terminated by one year’s notice from either party
subject to the provisions for earlier termination as
stipulated therein.
The portfolio is managed by Joe Bauernfreund,
the Chief Executive Officer and Chief Investment
Officer of AVI. He also manages AVI Global Trust
PLC, and AVI’s open-ended and segregated
portfolios across Family Holding Companies
and Japan strategies. He conducts regular
visits to Japan, engaging with prospective
and current investments, which he has done
for over 15 years.
Management fees are charged in accordance
with the terms of the management agreement,
and provided for when due. The Investment
Manager is entitled to an annual fee of 1%
per annum of the lesser of the Company’s NAV
or the Company’s market capitalisation, invoiced
monthly in arrears. The IMA requires AVI to
invest not less than 25% of the management
fee in shares in the Company. Management fees
paid during the year were £1,613,000 and the
number of shares held by AVI is set out in
note 16.
J.P. Morgan Europe Limited was appointed
as Depositary under an agreement with the
Company and AVI dated 6 September 2018
(the “Depositary Agreement”). The Depositary
Agreement is terminable on 90 calendar days’
notice from either party.
JPMorgan Chase Bank, London Branch, has
been appointed as the Company’s Custodian
under an agreement dated 6 September 2018
(the “Custodian Agreement”). The Custodian
Agreement is terminable on 90 calendar days’
notice from the Company or 180 calendar days’
notice from the Custodian.
Link Company Matters Limited was appointed
as corporate Company Secretary on 27 July
2018. The current annual fee is £76,000,
which is subject to an annual RPI increase. The
agreement may be terminated by either party on
six months’ written notice.
Link Alternative Fund Administrators Limited
has been appointed to provide general
administrative functions to the Company.
The Administrator receives an annual fee of
£113,000. The agreement can be terminated by
either the Administrator or the Company on six
months’ written notice, subject to an initial term
of one year.
DIRECTORS’ DUTIES
Overview
The Directors’ overarching duty is to act in
good faith and in a way that is the most likely
to promote the success of the Company as
set out in Section 172 of the Companies Act
2006 (“Section 172”). In doing so, Directors
must take into consideration the interests of
the various stakeholders of the Company,
the impact the Company has on the community
and the environment, take a long-term view
on consequences of the decisions they make,
as well as aim to maintain a reputation for
high standards of business conduct and f
air treatment between the members of
the Company.
Fulfilling this duty naturally supports the
Company in achieving its investment objective
and helps to ensure that all decisions are
made in a responsible and sustainable way.
In accordance with the requirements of
the Companies (Miscellaneous Reporting)
Regulations 2018, the Company explains how
the Directors have discharged their duty under
Section 172 below.
To ensure that the Directors are aware of, and
understand, their duties, they are provided with
the pertinent information when they first join the
Board, as well as receive regular and ongoing
updates and training on the relevant matters.
They also have continued access to the advice
and services of the Company Secretary, and
when deemed necessary, the Directors can
seek independent professional advice. The
schedule of matters reserved for the Board, as
well as the terms of reference of its committees,
are reviewed on at least an annual basis and
further describe Directors’ responsibilities
and obligations and include any statutory and
regulatory duties. The Audit Committee has
the responsibility for the ongoing review of the
Company’s risk management systems and
internal controls and, to the extent that they are
applicable, risks related to the matters set out in
Section 172 are included in the Company’s risk
register and are subject to periodic and regular
reviews and monitoring.
Decision-making
The importance of stakeholder considerations,
in particular in the context of decision-making,
is taken into account at every Board meeting.
All discussions involve careful consideration of
the longer-term consequences of any decisions
and their implications for stakeholders. Examples
of decisions made by the Board on this basis
include the buyback of 985,000 shares in order
to control the discount, as the Board believes
that this is in the interest of Shareholders as a
whole. The Board also decided that it would be
beneficial to visit Japan in person, to meet with
the Tokyo Stock Exchange, a variety of portfolio
companies, market participants, lawyers and
advisors and to appoint a Japanese PR firm.
This visit deepened the Directors’ understanding
of the opportunity set and of how the Company
can be best positioned to benefit and thereby
increased the Directors’ ability to fulfill their
responsibilities to stakeholders. In addition, in
line with increasing stakeholder attention to
Environmental, Social and Governance (“ESG”)
matters, the Board requests regular updates
from its main service providers on these topics.
Following feedback received from proxy advisers
in their reports on the 2022 Annual Report, the
Company has included more details on Board
effectiveness, succession planning and in the
Report from the Audit Committee.
AVI Japan Opportunity Trust plc / Annual Report 2023 25
Stakeholders
The Board seeks to understand the needs
and priorities of the Company’s stakeholders
and these are taken into account during all its
discussions and as part of its decision-making.
The Board has discussed which parties should
be considered as stakeholders of the Company.
Following thorough review, it was concluded that, as the Company is
an externally managed investment company and does not have any
employees or customers, its key stakeholders comprise its Shareholders
and service providers. The section on the pages following discusses why
these stakeholders are considered of importance to the Company and the
actions taken to ensure that their interests are taken into account.
Stakeholder
Importance
Board Engagement
Continued Shareholder support and
engagement are critical to the existence of
the Company and the delivery of the long-
term strategy of the Company.
The Company has over 200 Shareholders, including institutional and
retail investors. The Board is committed to maintaining open channels
of communication and to engaging with Shareholders in a manner
which they find most meaningful, in order to gain an understanding of
the views of Shareholders. These include:
Shareholders
Annual General Meeting – The Company welcomes and
encourages attendance and participation from Shareholders
at the AGM. Shareholders have the opportunity to meet the
Directors and Investment Manager and to address questions to
them directly. Shareholders who are unable to attend the AGM
in person are offered the opportunity to submit questions via
email. The Investment Manager attends the AGM and provides
a presentation on the Company’s performance and the future
outlook, which is made available on the Company’s website
following the meeting. The Company values any feedback and
questions it may receive from Shareholders ahead of and during
the AGM and will take action or make changes, when and as
appropriate;
Publications – The Annual Report and Half-Year results are made
available on the Company’s website and the Annual Report is
circulated to Shareholders. These reports provide Shareholders
with a clear understanding of the Company’s portfolio and
financial position. This information is supplemented by the daily
calculation and publication of the NAV per share and a monthly
factsheet and quarterly reports which are available on the
Company’s website and the publication of which is announced
via a Regulatory Information Service. Feedback and/or questions
the Company receives from the Shareholders help the Company
evolve its reporting, aiming to render the reports and updates
transparent and understandable;
Shareholder meetings – Unlike trading companies, Shareholder
meetings often take the form of meeting with the Investment
Manager rather than members of the Board. Shareholders
are able to meet with the Investment Manager throughout the
year and the Investment Manager provides information on the
Company and videos on the Company’s website and via various
social medial channels. Feedback from all meetings between the
Investment Manager and Shareholders is shared with the Board.
The Chairman, the Chairman of the Audit Committee or other
members of the Board are available to meet with Shareholders
to understand their views on governance and the Company’s
performance where they wish to do so. With assistance from
the Investment Manager, the Chairman seeks meetings with
Shareholders who might wish to meet with him and Shareholders
can contact him through our broker, Singer Capital Markets;
AVI Japan Opportunity Trust plc / Annual Report 2023IRGFSSISR 26
Strategic Report / Business Model continued
Stakeholder
Importance
Board Engagement
Shareholders
continued
Shareholder concerns – in the event Shareholders wish to raise
issues or concerns with the Directors, they are welcome to do
so at any time by writing to the Chairman at the registered office.
Other members of the Board are also available to Shareholders
if they have concerns that have not been addressed through the
normal channels;
Exit opportunities – the Directors may, at their discretion,
offer Shareholders the opportunity to exit the Company at
close to NAV every two years. The Board and the Corporate
Broker carried out a consultation regarding the potential
exit opportunity in 2022 during the summer of 2022, with
Shareholders representing a significant majority of the shares
in issue. The Company established that Shareholders who
expressed an opinion were supportive of the Company forgoing
the administrative burden and expense of an exit opportunity
in October 2022. A similar consultation will take place in the
months leading up to future potential exit opportunities, with the
next consultation taking place in 2024; and
Investor Relations updates – at every Board meeting, the
Directors receive updates from the Company’s broker on
the share trading activity, share price performance and any
Shareholders’ feedback, as well as an update from the
Investment Manager on any publications or comments by
the press. To gain a deeper understanding of the views of its
Shareholders and potential investors, the Investment Manager
also undertakes regular Investor Roadshows. Any pertinent
feedback is taken into account when Directors discuss the
share capital, any possible fundraisings or the dividend policy
and actioned as and when appropriate. The willingness of the
Shareholders, including the partners and staff of the Investment
Manager, to maintain their holdings over the long-term period
is another way for the Board to gauge how the Company is
meeting its objectives and suggests a presence of a healthy
corporate culture.
AVI Japan Opportunity Trust plc / Annual Report 2023
27
Stakeholder
Importance
Board Engagement
Service Providers
The Investment
Manager
Holding the Company’s shares offers
investors an investment vehicle through
which they can obtain exposure to AJOT’s
diversified portfolio of small to mid-cap
Japanese equities. The Investment
Manager’s performance is critical for
the Company to successfully deliver its
investment strategy and meet its objective
to provide Shareholders with a total return
in excess of the MSCI Japan Small Cap
Index through active management of the
portfolio and engagement with portfolio
companies.
In order to function as an investment trust
with a premium listing on the London
Stock Exchange, the Company relies on a
diverse range of reputable advisors
for support in meeting all relevant
obligations.
The Administrator,
the Company
Secretary, the
Registrar, the
Depositary, the
Custodian and the
Corporate Broker
Maintaining a close and constructive working relationship with the
Investment Manager is crucial, as the Board and the Investment
Manager both aim to continue to achieve consistent, long-term
returns in line with the investment objective. Important components in
the collaboration with the Investment Manager, representative of the
Company’s culture, are:
• encouraging open discussion with the Investment Manager,
allowing time and space for original and innovative thinking;
• the Chairman has frequent conversations with the Investment
Manager to talk through any matters discussed by the Board
between scheduled meetings, as well as any matters raised by the
Investment Manager;
• the IMA requires AVI to invest not less than 25% of the
management fee in shares in the Company and to hold these
for a minimum of two years which ensures that the interests of
Shareholders and the Investment Manager are well aligned;
• recognising the alignment of interests mentioned above, adopting
a tone of constructive challenge, balanced with robust negotiation
of the Investment Manager’s terms of engagement if those interests
should not be fully congruent;
• drawing on Board Members’ individual experience and knowledge
to support the Investment Manager in its monitoring of and
engagement with portfolio companies; and
• willingness to make the Board Members’ experience available
to support the Investment Manager in the sound long-term
development of its business and resources, recognising that the
long-term health of the Investment Manager is in the interests of
Shareholders in the Company.
The Board maintains regular contact with its key external providers
and receives regular reporting from them, both through the Board
and committee meetings, as well as outside of the regular meeting
cycle. Their advice, as well as their needs and views are routinely
taken into account. The Board formally assesses their performance,
fees and continuing appointment at least annually, to ensure that the
key service providers continue to function at an acceptable level and
are appropriately remunerated to deliver the expected level of service.
During the year under review, the Board decided to appoint Equiniti
Limited as its Registar, replacing Link Group plc, to achieve a cost
saving. Each year, all key service providers are asked to complete a
questionnaire regarding the matters discussed above, the results of
which are discussed during a formal review of service providers at the
March Board meeting. The Audit Committee reviews and evaluates the
control environment in place at each service provider and also requests
confirmation that key service providers have the relevant policies in
place, including those on business continuity, cyber security and fraud
prevention.
AVI Japan Opportunity Trust plc / Annual Report 2023IRGFSSISR 28
Strategic Report / Business Model continued
Stakeholder
Importance
Board Engagement
Other Stakeholders
Lender
Proxy Advisors
Availability of funding and liquidity are
crucial to the Company’s ability to take
advantage of investment opportunities as
they arise.
Therefore, the Company aims to demonstrate to lenders that it is a
well-managed business, capable of consistently delivering long-term
returns.
Where relevant, the evolving practice and
support (or lack thereof) of proxy adviser
agencies are considered by the Directors,
as the Company aims to build a good
reputation and maintain high standards
of corporate governance, which contribute
to the long-term sustainable success of
the Company.
When deemed relevant, the Company will engage with proxy advisers
regarding resolutions that will be proposed to the Company’s
Shareholders at AGMs and, based on feedback received, incorporate
changes to future Annual Reports to enhance disclosures.
This year, the Company has further expanded its disclosures on
Board effectiveness, succession planning and the Report from the
Audit Committee based on feedback received from proxy advisors in
their reports on the 2022 Annual Report.
Regulators
The Company can only operate with the
approval of its regulators who have a
legitimate interest in how the Company
operates in the market and treats its
Shareholders.
The Company follows voluntary and best-practice guidance, regularly
considers how it meets various regulatory and statutory obligations
and how any governance decisions it makes can have an impact on
its stakeholders, both in the shorter and in the longer-term.
The above mechanisms for engaging with stakeholders are kept under review by the Directors and are discussed on a regular basis at Board meetings,
to ensure that they remain effective.
AVI Japan Opportunity Trust plc / Annual Report 2023 29
As institutional investors,
we have a duty to act in
the best long-term interests
of our beneficiaries. In this
fiduciary role, we believe that
ESG issues can affect the
performance of investment
portfolios (to varying degrees
across companies, sectors,
regions, asset classes and
through time).
We also recognise that applying these
Principles may better align investors with
broader objectives of society. Therefore,
where consistent with our fiduciary
responsibilities, Asset Value Investors
Limited commit to the following:
• to incorporate ESG issues into
investment analysis and decision-making
processes;
• to be an active owner and to incorporate
ESG issues into our ownership policies
and practices;
• to seek appropriate disclosure on ESG
issues by the entities in which we invest;
• to promote acceptance and
implementation of the Principles within
the investment industry;
• to work with the PRI Secretariat and other
signatories, to enhance their effectiveness
in implementing the Principles; and
• to report on our activities and progress
towards implementing
the Principles.
AVI became a signatory to the UN-supported
Principles for Responsible Investment (PRI)
on 9 April 2021.
CULTURE
The Directors agree that establishing and
maintaining a healthy corporate culture within
the Board and in its interaction with the
Investment Manager, Shareholders and other
stakeholders, will support the delivery of its
purpose, values and strategy. The Board seeks
to promote a culture of openness, debate
and integrity through ongoing dialogue and
engagement with its service providers,
principally the Investment Manager.
The Board strives to ensure that its culture is
in line with the Company’s purpose, values
and strategy. The Company has a number
of policies and procedures in place to assist
with maintaining good corporate governance,
including those relating to diversity, Directors’
conflicts of interest and Directors’ dealings in
the Company’s shares. The Board assesses and
monitors compliance with these policies, as well
as the general culture of the Board, regularly
through Board meetings and in particular
during the annual evaluation process (for more
information see the performance evaluation
section on page 44).
The Board seeks to appoint the best possible
service providers and evaluates their service on
a regular basis as described on page 27. The
Board considers the culture of the Investment
Manager and other service providers, including
their policies, practices and behaviour, through
regular reporting from these stakeholders and
in particular during the annual review of the
performance and continuing appointment of all
service providers.
ENVIRONMENTAL, SOCIAL
AND GOVERNANCE MATTERS
As an investment trust without employees, the
Company’s own direct environmental impact is
minimal and as such, the Company is also not
required to report against the TCFD framework.
The Company has minimal direct greenhouse
gas emissions to report from its operations
(2022: minimal), nor does it have responsibility
for any other emissions producing sources
under the Companies Act 2006 (Strategic
Report and Directors’ Reports) Regulations 2013
or the Companies (Directors’ Report) and Li
mited Liability Partnerships (Energy and Carbon
Report) Regulations 2018. Where a large
company does not consume more than 40,000
kWh of energy in a reporting period, it qualifies
as a low energy user and is exempt from
reporting under these regulations. This
exemption applies to the Company.
As the Directors traveled to Japan during the
year under review, they considered several
schemes available to offset the carbon footprint
of their visit. Following an in-depth review of the
schemes, the Board concluded that none of the
schemes was currently able to offer a solution
which could be considered the best use of
Shareholder's funds. Accordingly, the Directors
undertook to each review individually the best
way to offset the carbon footprint of this visit.
The Company’s operations are delegated to
third-party service providers, and the Company
has no employees. The Board seeks assurances,
at least annually, from its suppliers that they
comply with the provisions of the UK Modern
Slavery Act 2015 and maintain adequate
safeguards in keeping with the provisions of
the Bribery Act 2010 and Criminal Finances
Act 2017.
The Directors do not have service contracts.
There are four Directors, two male and two
female. Further information on the Board’s policy
on diversity and recruitment of new Directors is
contained on page 42.
Both the Board and AVI recognise that social,
human rights, community, governance and
environmental issues have an effect on its
investee companies. The Board supports AVI
in its belief that good corporate governance will
help to deliver sustainable long-term Shareholder
value. AVI is an investment management firm
that invests on behalf of its clients and its primary
duty is to produce returns for its clients. AVI
seeks to exercise the rights and responsibilities
attached to owning equity securities in line with
its investment strategy. A key component of AVI’s
investment strategy is to understand and engage
with the management of public companies. AVI’s
Stewardship Policy recognises that Shareholder
value can be enhanced and sustained through
the good stewardship of executives and boards.
It therefore follows that in pursuing Shareholder
value AVI will implement its investment strategy
through proxy voting and active engagement
with management and boards. Further details
on AVI’s environmental, social and governance
policy can be found on pages 32 and 33.
AVI became supporters of the Task Force on
Climate-related Financial Disclosures (“TCFD”) in
May 2021 and a signatory to the UN-supported
Principles for Responsible Investment (“PRI”)
on 9 April 2021. The PRI is the world’s leading
proponent of responsible investment which
entails the following commitments, developed by
an international group of institutional investors.
AVI Japan Opportunity Trust plc / Annual Report 2023IRGFSSISR 30
Strategic Report / Business Model continued
Key Performance Indicators
The Company’s Board meets regularly and at each meeting reviews
performance against a number of key measures. In selecting these
measures, the Directors considered the key objectives and expectations
of typical investors in an investment trust such as the Company. These
indicators are alternative performance measures (“APM”s).
The Company has a successful discount control policy whereby if, under
normal market conditions, the four-month average share price discount
to NAV is greater than -5%, the Company will buy back shares with the
intention of reducing the discount to a level no greater than -5%. Since
IPO, the Company has bought back shares on seven occasions under
this policy.
NAV Total Return Performance1
1 YEAR*
15.8%
Since Inception ("SI")
6.8%
SI Annualised
Peer Group NAV Performance Total Return AIC Japanese
Smaller Companies Sector*
AVI JAPAN OPPORTUNITY TRUST
40.5%
15.8%
The Directors regard the Company’s NAV total return as being the overall
measure of value delivered to Shareholders by the Investment Manager
over the long term. Total return reflects both the NAV growth of the
Company and also dividends paid to Shareholders. Since the launch on
23 October 2018, the Company’s NAV has increased by 40.5%, resulting in
an annualised return of 6.8%. The Investment Manager’s investment style is
such that performance is likely to deviate materially from that of any broadly
based equity index. The Board considers the most useful comparator to be
the MSCI Japan Small Cap Index. Since the launch on 23 October 2018,
the benchmark has increased by 16.2%, resulting in an annualised return
of 3.0%. For the year ended 31 December 2023, the Company’s NAV
increased by 15.8%. The MSCI Japan Small Cap Index increased by 6.9%.
A full description of performance and the investment portfolio is contained in
the Investment Manager’s Report, commencing on page 12.
Discount/Premium1
DISCOUNT, 31 DECEMBER 2023
-2.5%
Premium, High for the period
3.5%
Discount, Low for the period
-7.4%
The Board believes that an important driver of an investment trust’s
discount or premium over the long term is investment performance.
However, there can be volatility in the discount or premium. Therefore, the
Board seeks Shareholder approval each year to buy back and issue shares
with a view to limiting the volatility of the share price discount or premium.
During the period under review, 3,375,000 new shares were issued under
the authorisation granted at the AGM, using the Company’s Block Listing
Facility (as well as 985,000 previously bought back shares issued from
treasury). During the year, 985,000 shares were bought back into treasury
under the authorisation granted at the AGM.
As at 13 March 2024, the Company had 140,836,702 shares in issue.
* Returns are for the year to 31 December 2023.
1 For all Alternative Performance Measures, please refer to the definitions in the
Glossary on pages 73 and 74.
6.0% Average AIC peer group
4.6% JP Morgan Japan Smaller Companies
-9.8% Baillie Gifford Shin Nippon
Nippon Active Value
23.1%
The Board is aware of other investment trusts in The AIC Japanese Smaller
Companies Sector. Each investment trust has its own focus and strategy
which will differ from the one implemented by AVI. The Company’s activist
approach is concurrent with the focus on corporate governance reform
taking place in Japan.
Ongoing Charges1
31 DECEMBER 2023
1.5%
31 December 2022
1.5%
The Board continues to be conscious of expenses and aims to maintain a
sensible balance between good service and costs. In reviewing charges,
the Board reviews in detail each year the costs incurred and ongoing
commercial arrangements with each of the Company’s key suppliers. The
majority of the ongoing charges ratio is the cost of the fees paid to the
Investment Manager. This fee is reviewed annually and the Board believes
that the cost is reasonable, given the Investment Manager’s activist
approach to fund management and the resources required to provide the
level of service. The Company adheres to The AIC guidance in calculating
its ongoing charges ratio.
Going Concern
The Directors have made an assessment of the Company’s ability to
continue as a going concern based on detailed profit and loss and cash
flow forecasts, covering the period up to and including 31 December 2025.
These forecasts have been ‘stressed’ for inflation, as well as a severe and
sudden downturn in market conditions under which it is assumed that the
investment portfolio will lose 45% of its value. Even under this extreme
‘stress’ scenario, the Company has adequate resources to continue in
operational existence for the foreseeable future (being a period of at least
12 months from the date these financial statements were approved). The
Directors also regularly assess the resilience of key third-party service
providers, most notably the Investment Manager and Fund Administrator.
The Directors do not have any concerns about the financial viability of the
Company’s third-party service providers.
AVI Japan Opportunity Trust plc / Annual Report 2023 31
Going Concern continued
Furthermore, the Directors are not aware of any material uncertainties
that may cast significant doubt upon the Company’s ability to continue
as a going concern, having taken into account liquidity of the Company’s
investment portfolio and the Company’s financial position in respect of its
cash flows, borrowing facilities and investment commitments (of which
there are none of significance) and the potential exit opportunity in October
2024 as discussed in the viability statement below. Therefore, the financial
statements have been prepared on a going concern basis.
possibility of a wide-ranging collapse in corporate earnings and/or the
market value of listed securities. To the latter point, it should be borne
in mind that a significant proportion of the Company’s expenses are
investment management fees, which would reduce if the market value of
the Company’s assets were to fall. In arriving at its conclusion, the Board
has taken account of the potential effects of another global event (e.g.
similar to the COVID-19 pandemic or the invasion of Ukraine) on the value
of the Company’s assets, income from those assets and the ability of the
Company’s key suppliers to maintain effective and efficient operations.
In order to maintain viability, the Company has a robust risk control
framework which follows the FRC guidelines and has the objectives of
reducing the likelihood and impact of: poor judgement in decision-making,
risk-taking that exceeds the levels agreed by the Board, human error or
control processes being deliberately circumvented.
Taking the above into account, and the potential impact of the principal
risks as set out on pages 36 and 37, the Directors have a reasonable
expectation that the Company will be able to continue in operation and
meet its liabilities as they fall due for a period of five years from the date
of approval of this Annual Report.
Viability
The Directors consider viability as part of their continuing programme of
monitoring risk. The Directors believe five years to be a reasonable time
horizon to consider the continuing viability of the Company, reflecting
a balance between a longer-term investment horizon and the inherent
shorter-term uncertainties within equity. The Company is an investment
trust whose portfolio is invested in readily realisable listed securities and
with some short-term cash deposits.
The five-year time horizon takes into account that the Directors may offer
Shareholders a potential opportunity to exit the Company at close to NAV
in October 2024 and every two years thereafter. The Board, together with
its advisers, will canvass opinion from Shareholders in the months leading
up to October 2024 when making the decision in respect of any potential
Exit Opportunity. Such a consultation previously took place during the
year to 31 December 2022. Following consultation with Shareholders
representing a significant majority of the shares in issue during the summer
of 2022, the Company established that Shareholders who expressed
an opinion were supportive of the Company forgoing the administrative
burden and expense of an exit opportunity in October 2022. The Directors
have reviewed the Shareholders of the Company, Shareholder feedback,
the current market position and performance. Considering this, no
significant uptake by Shareholders of any potential exit opportunity in 2024
is expected. The investment strategy remains robust.
The following facts support the Directors’ view of the viability of the
Company:
• in the year under review, expenses (including finance costs and
taxation) were adequately covered by investment income and there is
no expectation that these expenses would significantly increase over
the next five years. In addition, cash flow forecasts have been prepared
and stress tested to simulate: a) inflation at 20% and b) a 45% fall in
the value of the investment portfolio. These forecasts illustrate that the
Company would continue to hold sufficient cash even under the most
severe stress scenarios;
• the Company’s investment portfolio is made up of listed equities;
• the Company has short-term debt of ¥2.9 billion (£16.3 million) via an
unsecured revolving credit facility (extended for two years to February
2024 during February 2022 and subsequently extended to 5 April 2024
on the same terms). The facility is to be extended for a further two years.
In the unlikely event that the facility could not be extended, the Board
has reviewed detailed liquidity analysis and is comfortable that the debt
could be repaid from available cash and liquid investments, should this
be necessary. This debt was covered over 12 times as at the end of
December 2023 by the Company’s total assets. The Directors are of the
view that, subject to unforeseen circumstances, the Company will have
sufficient resources to meet the costs of annual interest and eventual
repayment of principal on this debt; and
• the Company has a large margin of safety over the covenants on its debt.
The Company’s viability depends on the Japanese and the global economy
and markets continuing to function. The Directors also consider the
AVI Japan Opportunity Trust plc / Annual Report 2023IRGFSSISR OUR PURPOSE
Helping our clients to make the
most of their financial future.
The people at Asset Value Investors (“AVI”)
are committed to leveraging our long heritage,
stewardship, and expertise to make investing
responsible, accessible, and profitable for
everyone – individuals, families, institutions,
private companies, and listed companies.
Financial returns matter but we are in a unique
position to influence positive change by
questioning the practices of the companies
we invest in for a more sustainable future.
OUR PHILOSOPHY
We are fundamentally
committed to supporting long-
term sustainable businesses
that will grow and participate in
the prosperity of the economy,
with a responsible approach to
the environment, society, and
governance.
We believe that the integration of ESG and
sustainability considerations into our investment
strategy is not only integral to comprehensively
understanding each investment’s ability to create
long-term value, but aligned with our values as
responsible investors.
32
Strategic Report / ESG Policy
ESG Perspective
ABOUT ASSET VALUE INVESTORS
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It is our view that a responsible approach to the environment,
society and governance is key to long-term sustainable
businesses. This guiding principle is embedded not only in
our investment philosophy but in how we manage Asset Value
Investors as a company.
Our primary goal is to reduce emissions,
however we are also researching appropriate
methods to offset unavoidable emissions.
AVI'S 2023 EMISSIONS FROM
COMMUTING AND BUSINESS
TRAVEL
People are the most important asset at
AVI. We recognise that our industry has
traditionally been skewed towards a less
diverse workforce. We are actively
challenging this.
DIVERSITY OF WORKFORCE*
86 tonnes CO2e*
* Calculated in accordance with GHG Protocol
Standards (distance-based method).
We believe that shareholders and stakeholders
need not be in conflict.
EMPLOYEES WITH EQUITY
OWNERSHIP IN AVI
39%
Male
Female
2023
Number
16
7
2023
%
70
30
* Data as at 31 December 2023.
AVI Japan Opportunity Trust plc / Annual Report 2023
33
OUR PRINCIPLES
OUR APPROACH
We are aligned with the PRI’s
belief that an economically
efficient, sustainable global
financial system is a necessity
for long-term value creation.
Such a system will reward long-term responsible
investment and better align investors with the
broader objectives of society. AVI became a
signatory to the UN-supported Principles for
Responsible Investment (“PRI”) on 9 April 2021.
In doing so, we have confirmed our belief in our
duty to act in the best long-term interests of our
beneficiaries.
As research-driven value
investors, we seek to truly
understand each company in
our portfolio and the context
within which it operates on a
case-by-case basis.
AVI has built ESG factors into its proprietary
database and implemented a number of
processes to support the integration of ESG
considerations into each stage of the
investment process.
DEFINING ‘E’, ‘S’ & ‘G’
Drawing on the World Economic Forum’s ‘21 core metrics’, AVI
has identified the factors that we believe are the most material
and relevant to our investments and developed a bespoke ESG
monitoring system to track the performance and progress of our
portfolio companies against defined ESG metrics.
E
S
G
We define Environmental
sustainability within the
context of:
Our Social focus is divided
into:
Our approach to
Governance includes:
• Environmental Impact
• Dignity and Equality
• Quality of Governing Body
• Tackling Climate Change
• Wellbeing and Development
• Corporate Strategy
• Sustainable Management
• Community Engagement
• Ethical Behaviour
We believe that the dynamism
and knowledge necessary for
strong governance is supported
by the presence of diverse
perspectives and skills.
Our metrics in this section
examine the composition,
representation and
independence of the governing
body, its integration of
sustainability, and the policies
and procedures in place to
ensure corporate integrity,
as well as the mechanisms
available to ensure misconduct
can be reported and remedied.
We believe that there is a
collective duty to take urgent
and meaningful action in
tackling climate change, and
corporate transparency and
accountability is integral to this.
Our metrics enable us to track
a company’s environmental
impact and assess the extent
to which strategies to reduce
negative impacts and manage
climate-related risks and
opportunities are integrated into
business strategy.
These metrics are key to
highlighting unsustainable
business strategy and
assessing vulnerability in the
context of limited resources,
increasingly stringent
environmental regulations,
and a responsibility to embed
environmentally sustainable
business practices.
We believe that long-term value
is most effectively created
by serving the interests of all
stakeholders.
Promoting dignity and equality
and investing in the wellbeing
and development of employees
not only positively impacts
society but the sustainability of
a company.
Our metrics assess the
measures that our investee
companies have in place to
foster a work environment
that is inclusive, safe and
rewarding. Moreover, we track
the company’s approach to
community engagement and
the steps taken to ensure
responsible conduct throughout
their supply chain.
Pre-Investment
Exclusionary screening is not our guiding
framework, however there are certain
exceptions to this.
AVI will not invest in a company with direct
involvement* in:
• Tobacco
• Controversial Weapons
• Pornography
Or companies that engage in child labour
or human exploitation as defined by the
relevant ILO conventions.
Assess company’s exposure to ESG risks
and opportunities, including climate-
related risks and opportunities.
Identify whether the company is involved
in any actual or potential violations
of international norms and standards
supported by ISS^ Norms-based
Research.
* whereby more than 5% of that company’s NAV is derived
from these activities.
^ Institutional Shareholders Services group of companies.
Investment Period
ESG monitoring system built into our
proprietary database to ensure ESG factors
are considered alongside financial analysis.
Ongoing ESG assessments of portfolio
companies’ performance against defined
ESG metrics. A scoring system is used to
assess trends and highlight potential areas
for engagement.
Tailored questionnaires sent to all
companies based on our assessments to
request additional ESG information and
promote improved sustainability disclosure.
Ongoing controversy monitoring
following a clear engagement pathway if
companies are flagged.
Constructive engagement with boards
and management to help sustainably
increase corporate value by building
resilience to ESG risks and promoting
responsible business practices.
AVI became a signatory to the UN-supported
Principles for Responsible Investment (“PRI”)
on 9 April 2021.
AVI Japan Opportunity Trust plc / Annual Report 2023IRGFSSISR 34
Strategic Report / Our Approach to ESG
Incorporating ESG in our strategy
OUR STEWARDSHIP
BESPOKE ENGAGEMENT
PROXY VOTING
As responsible, active stewards
of capital, we vote carefully and
thoughtfully at every AGM.
AJOT 2023 Proxy Voting Record
TOTAL VOTED
100%
100%
AGAINST MANAGEMENT
45%
45%
WITH MANAGEMENT
55%
55%
AGAINST ISS*
26%
26%
WITH ISS*
74%
74%
*
ISS (Institutional Shareholder Services) is an
organisation that provides proxy advisory services.
While AVI utilises ISS’ research, it has different
voting policies and is not bound to vote in line
with ISS guidance where it feels the guidance
is not in shareholders’ best interests.
Good stewardship should be
viewed as a continuous practice
and is essential to preserving
and enhancing long-term value.
Our engagement is highly
bespoke and takes a holistic
approach, covering a wide range
of topics including ESG themes.
Active engagement is at the core of our
investment strategy and our ESG monitoring
system plays an important role in helping us to
identify potential areas of engagement. As long-
term investors, our aim is to build constructive
relationships with the boards and management
of the companies in which we invest, addressing
issues and offering suggestions to sustainably
improve corporate value in consideration of all
stakeholders and in the best long-term interest
of our clients.
Controversy Monitoring
Supported by ISS Norms Based Research,
we also closely monitor any controversies
and potential violations of international norms
and standards associated with our universe.
Whilst our hope is that controversies do not
occur, they can be a marker of how well a
company’s policies are integrated into business
operations and culture, highlighting vulnerabilities
or structural problems and indicating where
improvements can be made.
We identify ESG engagement topics on a case-
by-case basis and avoid generic guidance,
instead carefully analysing issues within the
company’s particular context and offering
detailed analysis and specific suggestions.
During 2023, we engaged a total of 124 times
with 23 portfolio companies. Each engagement
may address multiple topics at once.
E
We engaged on environmental themes with 5
companies a total of 17 times.
S
We engaged on social themes with 7
companies a total of 23 times.
G
We engaged on governance themes with 20
companies a total of 78 times.
No two engagements are the same; we do not
believe that a ‘one-size-fits-all approach is the
optimal way to achieve results. We do not have
a prescriptive escalation process, however there
is a natural evolution to our engagement. The
majority of our engagement takes place behind
the scenes. However, if necessary, we will take
our concerns public to raise awareness and
compel change.
In 2022 we submitted shareholder resolutions
at SK Kaken’s AGM, one of which addressed
its failure to transparently report and address its
environmental impact. This resulted in SK Kaken
publicly disclosing its annual emissions for the
first time in 2023. We continue to engage with
the company and in 2023 submitted further
shareholder proposals addressing other matters.
We believe that a responsible
approach to the environment,
society and governance is key
to the long-term sustainability
of our companies.
We are committed to actively engaging
with our portfolio companies to help build
resilience to long-term financially relevant
ESG risks, and to promote sustainable
attitudes.
During 2023:
• We conducted ESG assessments on
100% of portfolio companies, helping us
to identify and address ESG-related issues
with our portfolio companies.
• We sent tailored questionnaires to our
portfolio companies helping us to better
understand their progress and approach
to ESG issues. This has proven to be a
useful starting point in engaging with our
companies on sustainability themes.
AVI Japan Opportunity Trust plc / Annual Report 2023 35
HIGHLIGHTS FROM 2023
Increasing transparency and
stakeholder understanding.
1.
AVI reported through the PRI
for the first time.
We scored comfortably above the median
PRI score throughout, receiving a four- or
five-star rating in each module.
2.
AVI published its Stewardship
and Voting Policy.
This outlines our approach and process
as actively engaged investors as well as
defining our ESG voting guidelines.
3.
AVI published its first
ESG Report.
This includes further insights into our
approach and quantitative details of ESG
matters in AJOT companies.
All policies and reports can be found on our
website:
www.assetvalueinvestors.com/
responsible-investing/esg-reporting/
TSI HOLDINGS
We are encouraged by TSI Holdings’ progress
in weaving sustainable practices into the fabric
of the company.
AVI first invested in TSI Holdings, which owns a collection of
diversified apparel brands including PEARLY GATES, Margaret
Howell, HUF and Stüssy, in July 2022 and we are now the largest
shareholder with c. 8% stake across all AVI funds. We have built
a strong relationship and constructive dialogue with the company,
holding 16 meetings, visiting its HQ in Japan, and sending a 43-
page presentation, offering detailed suggestions to address its
undervaluation and build sustainable corporate value.
Our approach to engagement is highly bespoke, looking at the
company as a whole and considering all drivers relevant to its
long-term success. Companies operating in the apparel sector are
exposed to heightened environmental and social risks. As part of
wider analysis on both financial and operational enhancements,
our presentation identified a number of ESG-related improvements
regarding the visualisation and management of GHG emissions,
responsible supply chain management, diversity, employee training
and development, and sustainability performance linked pay.
TSI Holdings recognises that the majority of its impact on
the environment and society occurs in its value chain and is
demonstrating its commitment to managing this. The company has
partnered with Boost Technologies to develop a centralised mapping
and managing tool, covering all of the company’s more than 50
apparel brands, to monitor emissions and drive decarbonisation
across the entire supply chain. This commitment is bolstered by
TSI Holdings having its emission reduction targets approved by the
Science Based Targets initiative (“SBTi”) in October 2023.
The board and management continue to be receptive to our
suggestions and we are encouraged by their proactive mindset. TSI
Holdings’ share price has increased by 126% since we initiated our
investment*. We continue to engage with the company on a wide
range of themes, and we see significant opportunities to unlock
further value.
* Including dividends on JPY term gross of fees, as at the end of 2023.
THREE PUBLIC CAMPAIGNS IN 2023
Nine Public campaigns since our strategy launch in 2018
Company
Campaign Name
AVI Engagement
NC Holdings
Enhancing the Common Interests
of NCHD’s Shareholders
Shareholder
proposals
Digital Garage Voicing Concerns over Digital
Garage’s Corporate Governance
SK Kaken1
Painting a Better SK Kaken
Public
statement
Shareholder
proposals
1 Public campaign started in 2021. New shareholder proposals were
submitted in 2022 and 2023, along with further public engagement.
Source / TSI Holdings Co Ltd
AVI Japan Opportunity Trust plc / Annual Report 2023IRGFSSISR
36
Strategic Report / Principal Risks and Uncertainties
The Board has a robust ongoing process for
identifying, evaluating and managing the emerging
and principal risks and uncertainties faced by the
Company, including those that could threaten its
business model, future performance, solvency
or liquidity.
The Board considers the following as the principal risks faced by
the Company and the following controls are in place to manage or
mitigate these risks:
t Increased
t Decreased
tu No change
Risk Area
Investment Objective
The Company may be unsuccessful in
achieving its investment objective, leading to a
potential loss of demand for its shares.
Controls and Mitigation
The Company has a clearly defined strategy and investment remit. The portfolio
is managed by a highly experienced Investment Manager backed by a strong
team. The Board relies on the Investment Manager’s skills and judgement to make
investment decisions based on research and analysis of individual stocks and
sectors.
The Board reviews the performance of the portfolio against the Company’s
Benchmark Index, that of its competitors and the outlook of the markets on a
regular basis.
The Board ensures that there is regular dialogue with major investors, primarily
through the Company’s broker and the Investment Manager; it follows up on any
concerns and regularly reviews the discount control policy.
Investment opportunities matching the criteria
encapsulated in the investment objective may
become less available in the future.
The Board monitors the portfolio’s composition, performance and development.
Should appropriate opportunities diminish, the Board will consider the future of
the Company and may recommend that the Company’s investments are sold, it is
wound up and cash returned to Shareholders.
Gearing
The use of borrowings by the Company has
the effect of amplifying the gains or losses the
Company experiences.
The Board and the Investment Manager regularly review gearing, as well as the
effect of interest rate movements on the Company’s finances and the Company’s
ongoing compliance with the loan covenants. Aggregate borrowings may not
exceed 25% of net assets.
A significant fall in portfolio value could cause
gearing levels to exceed pre-set limits, requiring
the Company to sell investments at short
notice.
The Company has in place a two-year ¥2.9 billion (£16.3 million) unsecured
revolving facility agreement which was renewed in February 2022 and extended
to 5 April 2024 on the same terms while renewal terms are being agreed. As at
31 December 2024, ¥2.9 billion (£16.3 million) of the facility had been drawn.
Interest is payable at a rate equal to TONAR plus 1.15%. As at 31 December
2023, gearing stood at 1.6%.
tu
tu
tu
Reliance on the Investment Manager and
Other Service Providers
The Company has no employees and relies
on a number of third-party service providers,
principally the Investment Manager, Registrar,
Administrator and Custodian / Depositary. It
is dependent on the effective operation of its
service providers’ control systems with regard
to the security of the Company’s assets,
dealing procedures, accounting records
and the maintenance of regulatory and legal
requirements.
The Board carries out regular reviews of the delegated services to ensure their
continued competitiveness and effectiveness, which include assessment of the
providers’ control systems, whistleblowing, anti-bribery and corruption policies and
business continuity plans.
t
The likelihood of this risk occurring has reduced during the year as the
relationships with service providers have been proven over the years since launch
and the monitoring processes utilised by the Board are well established.
The Company is heavily reliant on the
Investment Manager’s processes, both in
terms of making investment decisions and
compliance with the investment policy.
The Investment Manager has an established investment process which has proven
to be successful within the AVI Global Trust plc portfolio. The Board evaluates
the investment process and compliance with investment limits and restrictions in
conjunction with its portfolio review at every Board meeting.
tu
AVI Japan Opportunity Trust plc / Annual Report 2023 37
tu
t
Controls and Mitigation
The Board monitors the preparedness of its service providers in general and
requests and reviews updates from key service providers on cyber security and
other matters. Following this review, the Board remained satisfied that the risk is
given due priority.
The Investment Manager monitors trading volumes and prices, and looks to
ensure that a proportion of the portfolio is invested in readily realisable assets.
The Board also receives updates on the liquidity of the portfolio and the current
level of liquidity of the Company on a regular basis. Following review of the liquidity
analysis, the Board considered that this risk has reduced during the year.
It is the Company’s current policy not to hedge against currency risk, however the
Investment Manager and the Board continuously monitor currency movements
and exposure.
tu
The revolving credit facility is denominated in Yen and therefore the effect of Yen
exchange rate movements on the drawn down facility will be offset against the
assets.
The Board continuously monitors global developments and their potential impact
on the Company; it scrutinises the performance of the Investment Manager and
is aware of emerging risks and has a robust process for addressing them. All key
service providers are asked to provide updates on business continuity, anti-bribery
and corruption, and information security processes on an annual basis.
The Investment Manager, the Corporate Broker and the Board have a good
understanding of the investor base and have good lines of communication
with investors in general and a direct communication channel with the major
Shareholders in particular.
tu
tu
Risk Area
Cyber Security
The Company has limited direct exposure to
cyber risk. However, the Company’s operations
or reputation could be affected if any of its
service providers suffered a major cyber
security breach.
Portfolio Liquidity
The market for smaller Japanese stocks can
be illiquid. The Company is exposed to the risk
that it will not be able to sell its investments at
the current market value or on a timely basis,
when the Investment Manager chooses or is
required to do so to meet financial liabilities.
Foreign Exchange
The functional and presentation currency of the
Company is Pounds Sterling. All investments
held and income derived from these
investments are denominated in Japanese Yen.
Certain costs of the Company are impacted
by the underlying value of the investments
denominated in Japanese Yen and converted
to Pounds Sterling. The Company is subject
to currency risk on exchange rate movements
between Pounds Sterling and Japanese Yen.
Global/Climate/Systemic
Unforeseen global disruption, such as a
pandemic, climate and nature change-
related event, geopolitical conflict or systemic
technology failure, could lead to dramatically
increased market and Company share price
volatility. Fraud and cyber security vulnerability
could increase for key service providers.
Concentrated Share Register
A substantial portion (around 36%) of the
Company’s shares are held by two major
Shareholders, City of London Investment
Management and Finda Oy. A concentrated
share register can potentially present issues
with regards to voting or liquidity.
Approval of Strategic Report
The Strategic Report has been approved by the Board and is signed on its behalf by:
Norman Crighton
Chairman
13 March 2024
AVI Japan Opportunity Trust plc / Annual Report 2023IRGFSSISR
38AVI Japan Opportunity Trust plc / Annual Report 2023
SR
G
FS
SI
38
Governance / Directors
Your Board
NORMAN CRIGHTON
EKATERINA THOMSON
YOSHI NISHIO
MARGARET STEPHENS
Chairman, Non-Executive
Director
Chairperson of the
Audit Committee,
Non-Executive Director
Non-Executive Director
Date of Appointment:
27 July 2018
Date of Appointment:
5 September 2018
External Appointments:
RM Infrastructure Income plc and
Harmony Energy Income Trust plc.
External Appointments:
Allianz Technology Trust PLC and
Henderson EuroTrust plc.
Date of Appointment:
27 July 2018
External Appointments:
–
Experience and Contribution:
Katya is Chairperson of the Audit
Committee. She is a corporate
finance, strategy and business
development professional, with over
25 years of experience with UK and
European blue-chip companies.
Katya is a non-executive director
and audit committee chairman of
Allianz Technology Trust PLC and
Henderson EuroTrust plc. She is a
member of the Institute of Chartered
Accountants in England and Wales.
Katya is British and resident in the
United Kingdom.
Experience and Contribution:
Yoshi began his career at Goldman
Sachs International, where he
had overall responsibility for the
trading of Japanese equities and
equity derivative products. Since
then, he has combined his twin
specialisations of finance and
media as an investor, advisor and
consultant. Much of his work has
had a Japanese focus, with clients
ranging from family offices to the
office of the chairman of Columbia
Pictures in Hollywood in the period
following the studio’s acquisition
by the Sony Corporation, to the
Ministry of Finance of the Russian
Federation. Yoshi is fluent in
Japanese and in English. He was
born in Japan but now holds
dual British/American citizenship
and lives in the United States of
America.
Experience and Contribution:
Norman Crighton is an experienced
public company director, having
served on the boards of nine
closed-end funds and one
operating company. Presently,
Norman is also non-executive chair
of RM Infrastructure Income plc and
Harmony Energy Income Trust plc.
Norman has extensive fund
experience, having previously been
Head of Closed-end Funds at
Jefferies International and Investment
Manager at Metage Capital Limited,
leveraging his 32 years of experience
in investment trusts. His career
in investment banking covered
research, sales, market making and
proprietary trading, servicing major
international institutional clients over
15 years. His work in many countries
included restructuring closed-end
funds, as well as several IPOs. As
a fund manager, Norman managed
portfolios of closed-end funds on
a hedged and unhedged basis
covering developed and emerging
markets.
Following on from his long-term
promotion of best corporate
governance practice, Norman has
more recently been focusing on
expanding his work into Environmental
and Social issues. His work in the
investment trust industry is backed
up with a master’s degree from the
University of Exeter in Finance and
Investment. Norman is British and
resident in the United Kingdom.
Chairperson of the
Nomination and
Remuneration Committee,
Non-Executive Director
Date of Appointment:
5 September 2018
External Appointments:
VH Global Sustainable Energy
Opportunities plc and Sequoia
Economic Infrastructure Income
Fund Limited.
Experience and Contribution:
Margaret is a non-executive board
member and chair of the audit
and risk committee of VH Global
Sustainable Energy Opportunities
plc and a non-executive director of
Sequoia Economic Infrastructure
Income Fund Limited. She was a
partner of KPMG until 2016, having
qualified as a Chartered Accountant
in 1988. From 2007, she played a
key role in building KPMG’s Global
Infrastructure Practice, also leading
UK and international due diligence
and structuring services on major
merger and acquisition transactions
and public private partnerships.
Margaret was a trustee director
of the Nuclear Liabilities Fund and
chair of the audit committee until
January 2024, non-executive board
member and chair of the audit
and risk assurance committee
of the Department for Exiting the
European Union and was also a
board trustee of the London School
of Architecture. Margaret is British
and resident in the United Kingdom.
AVI Japan Opportunity Trust plc / Annual Report 2023
Governance / Directors' Report
39
The Directors present their report and the
audited financial statements for the year ended
31 December 2023.
The Investment Portfolio on page 22, the Corporate Governance
Statement on pages 41 to 45, Report from the Audit Committee on pages
50 and 51 and the Shareholder Information on pages 72 to 76 form part of
the Report of the Directors.
Directors
The Directors of the Company are listed on page 38. All served throughout
the year under review. The Directors will retire at the forthcoming AGM and
offer themselves for re-election.
As set out on page 44, the Board carries out an annual review of
each Director and of the Board as a whole. The Board considers that
all Directors contribute effectively, possess the necessary skills and
experience, and continue to demonstrate commitment to their roles as
non-executive Directors of the Company. Following the performance
review, it was agreed that all Directors should stand for re-election,
and the re-election of each of the Directors is recommended by the Board.
The Company has provided indemnities to the Directors in respect of
costs or other liabilities which they may incur in connection with any claims
relating to their performance or the performance of the Company whilst
they are Directors.
The beneficial interests of the current Directors and their connected
persons in the securities of the Company as at 31 December 2023
are set out in the Directors’ Remuneration Report on page 48.
Share Capital
The Company’s share capital comprises Ordinary Shares with a nominal
value of 1p each. The voting rights of the shares on a poll are one vote for
each share held. There are no restrictions on the transfer of the Company’s
Ordinary Shares or voting rights, no shares which carry specific rights
with regard to the control of the Company and no agreement which the
Company is party to that affects its control following a takeover bid. To
the extent that they exist, the revenue profits of the Company (including
accumulated revenue reserves) are available for distribution by way of
dividends to the holders of the Ordinary Shares. Upon a winding-up,
after meeting the liabilities of the Company, the surplus assets would be
distributed to the Shareholders pro rata to their holding of Ordinary Shares.
At 31 December 2023, there were 140,836,702 Ordinary Shares of 1p
each in issue, of which 400,000 were held in treasury, and therefore the
total voting rights attaching to Ordinary Shares in issue were 140,436,702.
In the period from 1 January 2024 to 13 March 2024 there were no
changes to the number of issued shares or shares held in treasury and
therefore the voting rights attaching to Ordinary Shares as at 13 March
2024 were 140,436,702.
The Directors intend to seek annual authority from Shareholders to
allot new Ordinary Shares, to disapply pre-emption rights of existing
Shareholders and to buy back Ordinary Shares for cancellation or to be
held in treasury.
Issues of Shares
At the AGM held on 2 May 2023, the Company was granted authority
to allot up to 28,072,300 Ordinary Shares on a non-pre-emptive basis.
This authority is due to expire at the Company’s forthcoming AGM on
1 May 2024. As at 31 December 2023, the remaining authority to allot
Ordinary Shares under the authority granted at the AGM held on 2 May
2023 was 27,012,300 Shares and this remained the same as at 13 March
2024.
The Company has a block listing of Ordinary Shares to be listed to the
premium segment of the Official List of the FCA and admitted to trading
on the premium segment of the LSE’s main market. During the year, the
Company issued 3,375,000 shares utilising the block listing, details of
which are provided in the schedule below. As at 31 December 2023, the
remaining authority under the block listing facility was 18,008,140 Ordinary
Shares and this remained the same as at 13 March 2024.
Including issuance of shares from treasury, 4,360,000 Ordinary Shares
were issued during the year to 31 December 2023, with an aggregate
nominal value of 43,600 and a total net consideration of £5,258,000 was
received for these allotments.
Shares issued during the year
Date
No of shares
Price paid
per share
Mid-market
price
16/02/2023
650,000*
£1.2200
£1.2175
17/02/2023
1,900,000
£1.2200
£1.2200
21/02/2023
750,000
£1.2200
£1.2100
23/05/2023
250,000**
£1.2775
£1.2700
30/05/2023
335,000***
£1.2475
£1.2400
31/05/2023
475,000
£1.2525
£1.2400
Total
4,360,000
* This issue is comprised of 400,000 treasury shares and 250,000 shares under
the block listing.
** This issue is comprised of 250,000 treasury shares.
*** This issue is comprised of 335,000 treasury shares.
Purchase of Shares
At the general meeting held on 2 May 2023, the Company was
granted authority to purchase up to 14.99% of the Company’s Ordinary
Shares in issue as at the close of business on 10 March 2023, such
authority to expire on conclusion of the 2024 AGM. During the year,
985,000 Ordinary Shares were bought back for an aggregate amount
of £1,134,000 (nominal value £9,850, representing 0.7% of the called up
share capital as at the start of the period) under this authority in order to
control the discount. As at 31 December 2023, authority to buy back a
further 20,640,219 Ordinary Shares remained.
AVI Japan Opportunity Trust plc / Annual Report 2023SRFSSIG 40
Governance / Directors' Report continued
Sale of Shares from Treasury
At the AGM held on 2 May 2023, the Company was authorised to waive
pre-emption rights in respect of treasury shares, such authority to expire
on conclusion of the 2024 AGM. At the start of the year, 400,000 Ordinary
Shares were held in treasury, which were sold on 16 February 2023 for
an aggregate amount of £488,000. Following share buybacks carried out
in April 2023, the Company held 585,000 shares in treasury, which were
subsequently sold on 23 and 30 May 2023 (250,000 and 335,000 shares
respectively). The Company then carried out further share buybacks,
resulting in 400,000 shares being held in treasury as at 31 December 2023
and as at the date of this report.
Related Party Transactions
The Company’s related parties in the year were its Directors, the
Investment Manager and City of London Investment Management and
Finda Oy as the Company’s largest Shareholders.
There have been no material transactions between the Company and its
Directors during the year and the only amounts paid to them were in respect
of expenses and remuneration for which there were no outstanding amounts
payable. Directors’ shareholdings are disclosed on page 48.
In relation to the provision of services by the Investment Manager, other
than fees payable by the Company in the ordinary course of business and
the facilitation of marketing activities with third parties, there have been no
material transactions with the Investment Manager affecting the financial
position of the Company during the year under review. More details on
transactions with the Investment Manager, including amounts outstanding
at 31 December 2023 and shares held by AVI, are given in note 16 on
page 71.
Finda Oy and City of London Investment Management Company Limited
(“City of London”), significant Shareholders of the Company, are deemed
to be related parties of the Company for the purposes of the Listing Rules
by virtue of their holding in the Company’s issued share capital. During the
year under review, no transactions took place between the Company and
Finda Oy or City of London.
Interests in Share Capital
At 31 December 2023, the following holdings representing more than
3% of the Company’s voting rights had been reported to the Company
in accordance with the Disclosure Guidance and Transparency Rules.
This information was correct at the date of notification, however it should
be noted that these holdings may have changed since notified to the
Company and may not therefore be wholly accurate statements of actual
holdings as at 31 December 2023. However, notification of any change is
not required until the next applicable threshold is crossed. For the sake of
completeness, other holdings which exceed 3% but where no notification
has been received, are also included.
During the period between 31 December 2023 and 13 March 2024, no
further notifications have been received.
As at 31 December 2023, AVI Ltd & AVI employees owned 2.7m shares.
Dividends
The Directors are proposing a final dividend of 0.85p per Share for the
year to 31 December 2023. Subject to the approval of Shareholders at the
forthcoming AGM, the proposed final ordinary dividend will be payable on
24 May 2024 to Shareholders on the register at the close of business on
26 April 2024. The ex-dividend date will be 25 April 2024.
Financial Instruments
The Company utilises financial instruments, which comprise equity
investments, cash balances, receivables, payables and borrowings.
The risks identified arising from the financial instruments are market risk
(which comprises market price risk, interest rate risk and foreign currency
risk), liquidity risk and credit and counterparty risk. The Company may
also enter into derivative transactions to manage risk. The Board and
Investment Manager consider and review the risks inherent in managing
the Company’s assets which are detailed in note 15.
Annual General Meeting (“AGM”)
The AGM will be held on Wednesday 1 May 2024 at the offices of
the Association of Investment Companies (the “AIC”), 9th Floor, 24
Chiswell Street, London, EC1Y 4YY. The Notice of Meeting and details of
the resolutions to be put to the AGM are contained in the circular sent to
Shareholders with this report.
Directors’ Statement as to Disclosure of Information to Auditor
Each of the Directors, who were all members of the Board at the date of
approval of this Report, confirms that to the best of his or her knowledge
and belief, there is no information relevant to the preparation of the Annual
Report of which the Company’s Auditors are unaware and he or she
has taken all the steps a Director might reasonably be expected to have
taken to be aware of relevant audit information and to establish that the
Company’s Auditors are aware of that information.
Listing Rule 9.8.4
Listing Rule 9.8.4 requires the Company to include certain information
in a single identifiable section of the Annual Report or a cross reference
table indicating where the information is set out. The information required
under Listing Rule 9.8.4(7) in relation to Shares issued by the Company is
set out on page 39.
Other Information
Information on future developments and financial risks is detailed in the
Strategic Report. There are no post balance sheet events to report.
By order of the Board
Finda Telecoms Oy*
30,000,000
21.36
Number of
Ordinary
Shares
Percentage of
voting rights
City of London Investment Management
Company Limited
21,008,661
14.96
13 March 2024
For and on behalf of Link Company Matters Limited
Company Secretary
Hargreaves Lansdown
7,502,344
Investec Wealth & Investment Limited
4,320,570
Charles Stanley
Interactive Investor
4,863,419
4,805,455
5.34
3.08
3.46
3.42
* During the year, Finda Oy notified the Company that its holding had been
transferred to Finda Telecoms Oy, a subsidiary of Finda Oy.
AVI Japan Opportunity Trust plc / Annual Report 2023 Governance / Corporate Governance Statement
The Corporate Governance Statement forms part
of the Report of the Directors.
Applicable Corporate Governance Codes
The Company is committed to high standards of corporate governance.
This statement, together with the Statement of Directors’ Responsibilities
on page 49, indicates how the Company has applied the principles of
recommended governance of the Financial Reporting Council’s (“FRC”)
2018 UK Corporate Governance Code (the “UK Code”) and The AIC’s
Code of Corporate Governance issued in 2019, (the “AIC Code”), which
complements the UK Code and provides a framework of best practice for
investment trusts.
The Board considers that reporting against the principles and provisions
of the AIC Code, which has been endorsed by the FRC, provides more
relevant information to Shareholders and that by reporting against the
AIC Code the Company has met its obligations in relation to the UK Code
and associated disclosure requirements under paragraph 9.8.6 of the
Listing Rules.
The UK Code is available on the FRC website (www.frc.org.uk). The AIC
Code is available on the AIC website (www.theaic.co.uk) and includes an
explanation of how the AIC Code adapts the principles and provisions set
out in the UK Code to make them relevant for investment companies.
Statement of Compliance
The UK Code includes provisions relating to:
• the role of the chief executive;
• executive directors’ remuneration;
• management performance;
• remuneration and succession planning;
• workforce policies (including remuneration) and practices; and
• the need for an internal audit function.
For the reasons explained in the AIC Code, the Board considers that
these provisions are not relevant to the Company, being an externally
managed investment company with no employees. The Company has
therefore not reported further in respect of these provisions. The Board
is responsible for ensuring the appropriate level of corporate governance
and considers that the Company has complied with the principles and
provisions of the AIC Code during the year under review except as
disclosed below:
• provision 14: No senior independent director has been appointed.
All the Directors have different qualities and areas of expertise on
which they lead, and concerns can be conveyed to another Director
if Shareholders do not wish to raise concerns with the Chairman or
the Chairman of the Audit Committee. Any other Director will chair the
Board or Nomination and Remuneration Committee meeting when the
annual evaluation of the Chairman’s performance, his re-election, or the
recruitment of his successor, is discussed;
• provision 17: As all of the Directors are independent of the Investment
Manager, the Board is of the view that there is no requirement for a
separate management engagement committee. The Board as a whole
will review the terms of appointment and performance of the Investment
Manager and the Company’s other third-party service providers (other
than the Auditor who is reviewed by the Audit Committee);
41
• provision 23: Directors are not appointed for a specified term, as all
Directors are non-executive and the Board believes that a Director’s
performance and their continued contribution to the running of the
Company is of greater importance and relevance to Shareholders
than the length of time for which they have served as a Director of
the Company. Each Director is subject to the election and re-election
provisions set out in the Articles, which provide that a Director appointed
during the year is required to retire and seek election by Shareholders at
the next AGM following their appointment. Thereafter the Directors intend
to offer themselves for re-election annually but, under the Articles, are only
required to submit themselves for re-election at least once every three
years. Directors who have served for more than nine years will be subject
to annual re-election, provided that the Nomination and Remuneration
Committee and the Board remain satisfied that the relevant Director’s
independence is not impaired by their length of service.
Role of the Board
A management agreement between the Company and the Investment
Manager sets out the matters over which the Investment Manager has
authority. This includes management of the Company’s assets and some
marketing services. The Board is collectively responsible for the success
of the Company and a formal schedule of matters reserved to the Board
for decision has been approved, which is available on the Company’s
website: www.ajot.co.uk. This includes strategy and management,
Board and committee membership and other appointments, appointment
and oversight of delegates, corporate structure and share capital,
remuneration, financial reporting and controls, company contracts, internal
controls, corporate governance and policies.
The Board is responsible for the approval of annual and half-year results
and other public documents and for ensuring that such documents
provide a fair, balanced and understandable assessment of the Company’s
position and prospects.
The Board’s role is to provide leadership within a framework of prudent
and effective controls that enable risk to be assessed and managed. It
is responsible for setting the Company’s standards and values and for
ensuring that its obligations to its Shareholders and other stakeholders
are understood and met. The Board sets the Company’s strategic aims
(subject to the Company’s Articles of Association, and to such approval
of the Shareholders in General Meeting as may be required from time to
time) and ensures that the necessary resources are in place to enable the
Company’s objectives to be met. The Articles of Association may only be
amended by way of a special resolution of shareholders.
The Board meets formally at least four times a year, with additional ad hoc
Board or Committee meetings arranged when required. The Directors have
regular contact with the Investment Manager and Company Secretary
between formal meetings. Full and timely information is provided to the
Board to enable it to function effectively and to allow Directors to discharge
their responsibilities.
At each meeting the Directors follow a formal agenda, which includes a
review of the Company’s NAV, share price, premium, financial position,
gearing levels, peer group performance, investment performance, asset
allocation and transactions and any other relevant business matters to
ensure that control is maintained over the affairs of the Company. The
Board monitors compliance with the investment restrictions required by the
FCA and s1158 of the Corporation Tax Act 2010, the Company’s objective,
investment, borrowing and hedging policies and reviews the investment
strategy. The Board regularly receives reports from the Investment
Manager on marketing and investor relations. The proceedings at all Board
and Committee meetings are fully recorded through a process that allows
any Director’s concerns to be recorded in the minutes.
AVI Japan Opportunity Trust plc / Annual Report 2023SRFSSIG 42
Governance / Corporate Governance Statement continued
There is an agreed procedure for Directors to take independent
professional advice if necessary and at the Company’s expense.
This is in addition to the access that every Director has to the advice
and services of the Company Secretary, Link Company Matters Limited,
which is responsible to the Board for ensuring that Board procedures are
followed, and that applicable rules and regulations are complied with.
Board Composition
The Board is chaired by Norman Crighton, and consists of four
non-executive Directors who have all served throughout the year. All of
the Board are regarded as independent of the Company’s Investment
Manager, including the Chairman. The Directors have a breadth of
investment, financial and professional experience relevant to the
Company’s business and brief biographical details of each Director
are set out on page 38.
A review of Board composition and balance is included as part of the
annual performance evaluation of the Board, details of which may be
found below.
The Directors acknowledge the benefits of Board diversity and continual
review of the Board’s and individual Directors’ effectiveness, while
seeking to retain a balance of knowledge of the Company, diversity and
continuity in the relationship with the Investment Manager. The Board has
adopted a Diversity Policy in line with its commitment to ensuring that the
Company’s Directors bring a wide range of skills, knowledge, experience,
backgrounds and perspectives to the Board. The Board does not feel that
it would be appropriate to set targets as all appointments must be made
on merit. However, diversity generally will be taken into consideration when
evaluating the skills, knowledge and experience desirable to fill each Board
vacancy. The Board has established the following objectives for achieving
diversity on the Board:
• all Board appointments will be made on merit, in the context of the skills,
background, knowledge and experience that are needed for the Board
to be effective; and
• long lists of potential non-executive directors should include diverse
candidates of appropriate merit.
The terms and conditions of Directors’ appointments are set out in formal
letters of appointment, copies of which are available for inspection on
request at the Company’s registered office during normal business hours
and at the Company’s AGM.
The Board notes the FCA’s rules on diversity and inclusion on company
boards included in Listing Rule 9.8.6 (9-11), namely that from accounting
periods commencing on or after 1 April 2022:
• At least 40% of individuals on the Board to be women;
• At least one senior Board position to be held by a woman; and
• At least one individual on the Board to be from a minority ethnic
background.
In accordance with Listing Rule 9 Annex 2.1, the below tables, in
prescribed format, show the gender and ethnic background of the
Directors at the year end, demonstrating that the Company has met
the targets set in Listing Rule 9.8.6 (9-11).
Gender identity or sex
Men
Women
Not specified/
prefer not to say
Ethnic background
White British or other White
(including minority white groups)
Mixed/Multiple Ethnic Groups
Asian/Asian British
Black/African/Caribbean/
Black British
Other ethnic group,
including Arab
Not specified/ prefer not to say
Number of
Board
members
Percentage
on the Board
Number of
senior positions
on the Board*
2
2
–
50%
50%
–
1
1
–
Number of
Board
members
Percentage
on the Board
Number of
senior positions
on the Board*
3
–
1
–
–
–
75%
–
25%
–
–
–
2
–
–
–
–
–
*
Listing Rule 9.8.6(9) includes only the positions of chair, chief executive, senior
independent director and chief financial officer in this category. Other than the
Chairman of the Board, the Company does not have these roles, as it is an
externally managed investment trust without employees and therefore this target
is not applicable. The Company has chosen to report against this target by
including the position of Audit Committee Chairperson as a senior position.
The data in the above tables was collected through self-reporting by the
Directors, who were asked to indicate which of the categories specified
in the prescribed tables were most applicable to them.
Responsibilities of the Chairman, the Board and its Committees
The Chairman leads the Board and is responsible for its overall
effectiveness in directing the affairs of the Company. The Company has
adopted a document setting out the responsibilities of the Chairman,
which is available on the website: www.ajot.co.uk.
Tenure
Directors are generally initially appointed by the Board, until the following
AGM when, as required by the Company’s Articles of Association, they will
stand for re-election by Shareholders. Thereafter, a Director’s appointment
is subject to an annual performance evaluation and the approval of
Shareholders at each AGM, in accordance with corporate governance
best practice.
Under the Articles of Association, Shareholders may remove a Director
before the end of his or her term by passing a special resolution at a
meeting, and may by ordinary resolution appoint another person who is
willing to act to be a Director in his or her place. A special resolution is
passed if more than 75% and an ordinary resolution if more than 50% of
the votes cast, in person or by proxy, are in favour of the resolution.
In accordance with the above and the AIC Code, all Directors will stand
for re-election at the 2024 AGM. The contribution and performance
of the Directors seeking re-election was reviewed by the Nomination
and Remuneration Committee at its meeting in March 2024, which
recommended to the Board their continuing appointment.
AVI Japan Opportunity Trust plc / Annual Report 2023 Tenure continued
The Board has adopted a formal tenure policy for Directors based on
a continual review of performance. The Board does not believe that
length of service in itself necessarily disqualifies a Director from seeking
reappointment but, when making a recommendation, the Board takes
into account the ongoing requirements of the UK Corporate Governance
Code, including the need to refresh the Board and its Committees.
It is not anticipated that any of the Directors would normally serve in
excess of nine years. In exceptional circumstances, which would be fully
explained to Shareholders at the time, a one or two-year extension might
be appropriate.
Similarly, it is not anticipated that the Chairman will normally serve in
excess of nine years. However, in exceptional circumstances, which
would be fully explained at the time, a one- or two-year extension might
be appropriate, given the entirely non-executive nature of the Board and
in particular where the Chairman has not been appointed in his position
for the entire duration of his tenure as a Director. As with all Directors,
the continuing appointment of the Chairman is subject to ongoing review
of performance, including a satisfactory annual evaluation, annual re-
election by Shareholders and may be further subject to the particular
circumstances of the Company at the time he or she intends to retire
from the Board.
Board Independence
All Directors are non-executive, have a range of other interests and
are not dependent on the Company itself. At the Nomination and
Remuneration Committee meeting in March 2024, the Directors
reviewed their independence and confirmed that all Directors remain
wholly independent of the Investment Manager. During the year there
was a two-week period during which Katya Thomson was a director
of two companies managed by the same investment manager, as AVI
was appointed as the manager of MIGO Opportunities Trust plc with
effect from 15 December 2023. Katya stood down from her position as
director of MIGO Opportunities Trust plc with effect from 29 December
2023. Due to the brevity of the period during which Katya served on the
board of two companies managed by the same investment manager, the
Board continues to consider her independent. The Board has determined
that all Directors are independent in character and judgement and that
their individual skills, broad business experience and knowledge and
understanding of the Company are of great benefit to Shareholders.
There were no contracts subsisting during or at the end of the year in
which a Director of the Company is or was materially interested and which
is or was significant in relation to the Company’s business. No Director
has a contract of service with the Company and there are no agreements
between the Company and its Directors concerning compensation for loss
of office.
Directors’ Conflicts of Interest
The Company’s Articles of Association permit the Board to consider and,
if it sees fit, to authorise situations where a Director has an interest that
conflicts, or may possibly conflict, with the interests of the Company
(“situational conflicts”).
43
A schedule of interests for each Director is maintained by the Company
and reviewed at every Board meeting. The Board has a formal system
in place, in line with the Articles of Association for Directors, to declare
any new situational conflicts to be considered for authorisation by those
Directors who have no interest in the matter being considered. In deciding
whether to authorise a situational conflict, the non-conflicted Directors act
honestly and in good faith with a view to the best interests of the Company
and they may impose limits or conditions when giving the authorisation,
or subsequently, if they think this is appropriate. Any situational conflicts
considered, and any authorisations given, are recorded in the relevant
meetings’ minutes and the register of interests. The prescribed procedures
have been followed in deciding whether, and on what terms, to authorise
situational conflicts, and the Board believes that the system it has in place
for reporting and considering situational conflicts continues to operate
effectively. The Chairman has had no relationship that may have created
a conflict between his interests and those of the Company’s Shareholders.
Induction and Training
On appointment, the Company Secretary provides all Directors with
induction training. The training covers the Company’s investment strategy,
policies and practices. The Directors are also given regular briefings on
changes in law and regulatory requirements that affect the Company and
the Directors. It is the Chairman’s responsibility to ensure that the Directors
have sufficient knowledge to fulfil their role and Directors are encouraged
to attend industry and other seminars covering issues and developments
relevant to investment trust companies. Regular reviews of Directors’
training needs are carried out by the Chairman by means of the evaluation
process described below.
The Directors have access to the advice and services of the Company
Secretary through its appointed representative, who is responsible
for general secretarial functions and for assisting the Company with
compliance with its continuing obligations as a company listed on the
premium segment of the Official List. The Company Secretary is also
responsible for ensuring good information flows between all parties.
Directors’ Insurance and Indemnification
Directors’ and Officers’ liability insurance cover was in place throughout
the year and remains in place at the date of this report. The Company’s
Articles of Association provide, subject to the provisions of UK legislation,
an indemnity for Directors in respect of costs which they may incur relating
to the defence of any proceedings brought against them arising out of their
positions as Directors, in which they are acquitted or judgment is given in
their favour by the Court. The Company has granted indemnity to Directors
to the extent permitted by law in respect of liabilities that may attach to
them in their capacity as Directors of the Company.
Board Committees
The Board delegates certain responsibilities and functions to the Audit
Committee and the Nomination and Remuneration Committee. Both
Committees comprise all Directors. The terms of reference for these
Committees are available on the website www.ajot.co.uk or via the
Company Secretary.
A separate Management Engagement Committee has not been
established as the Board consists of only independent non-executive
Directors. The investment management agreement and performance
of the Investment Manager is reviewed by the Board as a whole on a
regular basis, ensuring that the terms are fair and reasonable and that
its continuance, given the Company’s performance over both short and
longer terms, is in the best interests of the Company and its Shareholders.
The Board as a whole also reviews the terms of appointment and
performance of the Company’s other service providers.
AVI Japan Opportunity Trust plc / Annual Report 2023SRFSSIG 44
Governance / Corporate Governance Statement continued
Audit Committee
The Audit Committee comprises all Directors and is chaired by Katya
Thomson, who is a Chartered Accountant. The other Audit Committee
members have a combination of financial, investment and other experience
gained throughout their careers and the Board is satisfied that at least
one of the Audit Committee’s members has recent and relevant financial
experience. The Audit Committee as a whole is considered to have
competence relevant to the sector. All members of the Audit Committee
are independent. The Chairman of the Board is a member of the Audit
Committee but, in line with the AIC Code, does not chair it and was
considered independent on appointment. The Chairman’s membership
of the Audit Committee is considered appropriate given his extensive
knowledge of the Investment Trust sector.
The current intention is for recruitment for the first two new Directors to
commence in 2025, with appointments to follow in 2026. Further changes
will then take place in the following years to refresh the entire Board. The
Nomination and Remuneration Committee has scheduled these Board
changes in a manner which will at times result in the Board consisting of
five Directors, to ensure an orderly handover of in particular the functions
of the Chairman of the Audit Committee and the Chairman of the Board.
Further information on succession planning and recruitment will be
provided in future Annual Reports, as and when appropriate.
Board and Committee Meeting Attendance
The table details the number of scheduled Board and Committee meetings
held during the year under review and the number of meetings attended by
each Director.
The Report of the Audit Committee, which forms part of this Corporate
Governance Statement, can be found on pages 50 and 51.
Nomination and Remuneration Committee
The Nomination and Remuneration Committee, consisting of all of the
Directors and chaired by Margaret Stephens, meets at least annually.
The Nomination and Remuneration Committee is responsible for setting
Directors’ fees in line with the Remuneration Policy set out on page 46,
which is subject to periodic Shareholder approval. The Nomination and
Remuneration Committee is also responsible for ensuring that the Board
has an appropriate balance of skills and experience to carry out its
duties, to select and propose suitable candidates for appointment when
necessary and for making recommendations regarding the re-election of
existing Directors.
When considering succession planning and tenure policy, the
Nomination and Remuneration Committee bears in mind the balance
of skills, knowledge, experience, gender and diversity of Directors, the
achievement of the Company’s investment objective and compliance with
the Company’s Articles of Association and the AIC Code. The Nomination
and Remuneration Committee keeps the Company’s needs under
continual review and will make recommendations when the recruitment of
additional non-executive Directors is required. Once a decision is made to
recruit additional Directors to the Board, a formal job description is drawn
up, based on a review of the skills required to complement those of the
remaining Directors. The Company may use external agencies as and
when recruitment becomes necessary.
The Nomination and Remuneration Committee also reviews and
recommends to the Board the Directors seeking re-election.
Recommendation is not automatic and will follow an annual performance
evaluation of the Board, its Committees and individual Directors and
consideration of the Director’s independence. The evaluation of individual
Directors takes into account whether they have devoted sufficient time
and contributed adequately to the work of the Board and its Committees.
The evaluation of the Board and its Committees considers the balance
of experience, skills, independence, corporate knowledge, its diversity,
including gender, and how it works together.
The Nomination and Remuneration Committee met in March 2024 to
carry out its annual review of the Board, its composition and size and
its Committees, the results of which are detailed in the Performance
Evaluation paragraph on this page. Notwithstanding the fact that all of
the current Directors have now served for five years and in order to
ensure an orderly transition, the Nomination and Remuneration Committee
has considered succession planning and agreed that a staggered
approach will be taken to replace the current Directors in due course and
refresh the Board.
Norman Crighton
Yoshi Nishio
Margaret Stephens
Katya Thomson
Board
Audit
Committee
Nomination and
Remuneration
Committee
4(4)
4(4)
4(4)
4(4)
2(2)
2(2)
2(2)
2(2)
2(2)
2(2)
2(2)
2(2)
The number in brackets denotes the number of meetings each Director
was entitled to attend.
The Directors also met on an ad hoc basis during the year to undertake
business, such as to review portfolio developments with the Investment
Manager.
Performance Evaluation
In February 2024, the Nomination and Remuneration Committee
conducted a review of the Board’s performance, together with that of its
Committees, the Chairman and each individual Director, as well as their
independence. This was conducted by way of individual discussions
between the Nomination and Remuneration Committee Chairman
and, separately, Chairman of the Board, with each Director, as well as
a discussion between the Chairman of the Board and the Nomination
and Remuneration Committee Chairman. A summary of the findings
was then discussed at the Nomination and Remuneration Committee
meeting held in March 2024. It was concluded that the performance of
the Board, its Committees, the Chairman and each individual Director was
satisfactory, and the Board has a good balance of skills, knowledge and
experience, and includes individuals from different social, geographical and
ethnic backgrounds. It is considered that each of the Directors remains
independent of the Investment Manager, makes a significant contribution
and devotes sufficient time to the affairs of the Company, the Chairman
continues to display effective leadership and all Directors seeking re-
election at the Company’s AGM merit re-election by Shareholders.
Internal Control
The Board has overall responsibility for the Company’s system of internal
control and for reviewing its effectiveness. The Audit Committee supports
the Board in the continuous monitoring of the internal control and risk
management framework. The Board has established an ongoing process
for identifying, evaluating and managing the principal and new or emerging
risks faced by the Company. The process accords with the FRC’s
guidance on Risk Management, Internal Control and Related Business and
Financial Reporting published in September 2014.
AVI Japan Opportunity Trust plc / Annual Report 2023 45
Internal Control continued
The risk management process and system of internal control was in
operation throughout the year and up to the date of this report. The system
is designed to meet the specific risks faced by the Company and takes
account of the nature of the Company’s reliance on its service providers
and their internal controls. The system therefore manages rather than
eliminates the risk of failure to achieve the Company’s business objectives
and provides reasonable, but not absolute assurance against material
misstatement or loss.
In arriving at its judgement of what risks the Company faces, the Board,
through the Audit Committee, has considered the Company’s operations in
light of the following factors:
• the nature and extent of risks which it regards as acceptable for the
Company to bear within its overall business objective;
• the threat of such risks becoming reality;
• the Company’s ability to reduce the incidence and impact of risk on its
performance; and
• the extent to which third parties operate the relevant controls.
The Company maintains a risk matrix which identifies key risks faced by
the Company and has controls in place to mitigate those risks. The risks
are assessed on the basis of the likelihood of them happening, the impact
on the business if they were to occur and the effectiveness of the controls
in place to mitigate against them. This risk matrix is reviewed twice a year
by the Audit Committee and at other times as necessary.
The Directors confirm that they have carried out a robust assessment of
the Company’s emerging and principal risks as identified by the Board,
which are set out on pages 36 and 37, as well as the controls in place to
manage or mitigate those risks.
The Board reviews financial information produced by the Investment
Manager and the Administrator on a regular basis. Most functions
for the day-to-day management of the Company are subcontracted,
and the Directors therefore obtain assurances and information, including
internal control reports, from key third-party suppliers regarding the internal
systems and controls operated in their respective organisations. During
the year under review, the Board also requested and reviewed updates
from key service providers on business continuity, cyber security and
fraud prevention.
Accountability and Relationship with AVI
The Statement of Directors’ Responsibilities in respect of the Financial
Statements is set out on page 49, the Independent Auditors’ Report on
pages 52 to 55 and the Viability Statement on page 31.
The Board has delegated contractually to external third parties, including
the Investment Manager, the management of the investment portfolio,
the custodial services (including the safeguarding of the assets), the
day-to-day accounting and cash management, company secretarial
and administration requirements and registration services. Each of these
contracts was entered into after full and proper consideration by the
Board of the quality and cost of the services offered, including the control
systems in operation in so far as they relate to the affairs of the Company.
Further information on management arrangements can be found on
page 24.
The Board receives and considers regular reports from the Investment
Manager and ad hoc reports and information are supplied to the Board
as required. The Investment Manager takes decisions as to the purchase
and sale of individual investments. The Investment Manager also ensures
that all Directors receive, in a timely manner, all relevant management,
regulatory and financial information.
Representatives of AVI attend Board meetings, enabling the Directors
to probe further on matters of concern. The Board and the Investment
Manager operate in a supportive, co-operative and open environment.
Continued Appointment of the Investment Manager
The Board considers the arrangements for the provision of investment
management and other services to the Company on an ongoing basis.
In addition to the monitoring of investment performance at each Board
meeting, an annual review of the Company’s investment performance over
both the short and longer terms is undertaken.
Following an annual review, it is the Directors’ opinion that the continuing
appointment of AVI, the Investment Manager, on the existing terms, is in
the best interests of the Company and its Shareholders as a whole.
By order of the Board
For and on behalf of Link Company Matters Limited
By the means of the procedures set out above, the Board confirms that
it has reviewed, and is satisfied with, the effectiveness of the Company’s
system of internal control for the year ended 31 December 2023, and to
the date of approval of this Annual Report and Financial Statements.
Company Secretary
13 March 2024
During the course of its review of the system of internal control, the Board
has not identified nor been advised of any failings or weaknesses which it
has determined to be significant. Therefore, a confirmation in respect
of necessary actions has not been considered appropriate.
Internal Audit Function
As the Company is an externally managed investment company
with day-to-day management and administrative functions being
outsourced to third parties, and as the Company does not have executive
Directors, employees or internal operations, the Board does not consider
it necessary to establish an internal audit function, as it believes the
existing system of monitoring and reporting by the third parties to be
appropriate and sufficient.
AVI Japan Opportunity Trust plc / Annual Report 2023SRFSSIG 46
Governance / Directors' Remuneration Report
Directors’ Remuneration Policy
The Remuneration Policy provides details of the remuneration policy
for the Directors of the Company. The Remuneration Policy was
approved by Shareholders at the AGM of the Company held on 3 May
2022. Remuneration Policy Provisions apply until they are next put to
Shareholders for approval at intervals of not more than three years, or if
the Remuneration Policy is varied, in which event Shareholder approval for
the new Remuneration Policy will be sought. The Remuneration Policy is
provided below, which remains as approved at the 2022 AGM.
Report on Implementation
This Report is prepared in accordance with Schedule 8 of the Large
and Medium-sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2008 as amended in August 2013. The report
also meets the relevant requirements of the Companies Act 2006 (the “Act”)
and the Listing Rules of the FCA and describes how the Board has applied
the principles relating to Directors’ remuneration. The Company’s Auditors
are required to report on certain information contained within this report;
where information set out below has been audited it is indicated as such.
The Company follows the recommendation of the AIC Code of
Corporate Governance that non-executive Directors’ remuneration
should reflect the time commitment and responsibilities of the role. The
Board’s policy is that the remuneration of non-executive Directors should
reflect the experience of the Board as a whole and be determined from
time to time at the Board’s discretion with reference to comparable
organisations and appointments.
All Directors are non-executive, and the Company has no chief
executive officer or employees; as such some of the reporting requirements
contained in the Regulations are not applicable and have not been
reported on, including the requirement for a future policy table and an
illustrative representation of the level of remuneration that could be received
by each individual Director. It is believed that all relevant information is
disclosed within this report in an appropriate format.
All Directors are non-executive, appointed under the terms of letters of
appointment. There are no service contracts in place. The Company has
no employees. In line with the majority of investment trusts and the AIC
Code, there are no performance conditions attached to the remuneration
of the Directors as the Board does not consider such arrangements or
benefits necessary or appropriate for non-executive Directors.
The Board has set three levels of fees: one for a Director and additional
fees for the Chairman of the Audit Committee and the Chairman of
the Board. Fees are reviewed annually in accordance with the above
policy. Annual fees are pro-rated where a change takes place during a
financial year. The fee for any new Director appointed to the Board will be
determined on the same basis.
In addition to the annual fee, under the Company’s Articles of Association,
any Director who is requested to perform services which, in the opinion of
the Board, go beyond the ordinary duties of a director, may be paid such
extra remuneration as the Board may in its discretion decide in addition
to or in substitution for any other remuneration that they may be entitled
to receive. Should any extra remuneration be paid during the year, details
of the events, duties and responsibilities that gave rise to the additional
Directors’ fees would be disclosed in the Annual Report. Directors are also
entitled to reimbursement of reasonable fees and expenses incurred by
them in the performance of their duties.
The approval of Shareholders would be required to increase the aggregate
annual Directors’ Remuneration limit of £250,000, as set out in the
Company’s Articles of Association.
None of the Directors has any entitlement to pensions or pension related
benefits, medical or life insurance schemes, share options, long-term
incentive plans, or performance-related payments. No Director is entitled
to any other monetary payment or any assets of the Company, except
in their capacity (where applicable) as Shareholders of the Company.
Directors’ Letters of Appointment expressly prohibit any entitlement to
payment on loss of office.
Directors’ and Officers’ liability insurance cover is maintained by the
Company, at its expense, on behalf of the Directors. The Company has
also provided indemnities to the Directors in respect of costs or other
liabilities which they may incur in connection with any claims relating to
their performance or the performance of the Company whilst they
are Directors.
The Company is committed to ongoing Shareholder dialogue and any
views expressed by Shareholders on the fees being paid to Directors
would be taken into consideration by the Board when reviewing the
Directors’ Remuneration Policy and in the annual review of Directors’ fees.
The Board may amend the level of remuneration paid to individual Directors
within the parameters of the Remuneration Policy.
Statement from the Chairman of the Nomination and
Remuneration Committee
Directors’ remuneration is determined by the Nomination and
Remuneration Committee, at its discretion, within an aggregate set
amount per annum. This aggregate ceiling had been set at £250,000 in
the Company’s Articles of Association and in the Remuneration Policy as
approved on 2 May 2022.
The Nomination and Remuneration Committee comprises all Directors and
is chaired by Margaret Stephenson. Each Director abstains from voting
on their own individual remuneration. The Board has not been provided
with advice or services by any person in respect of its consideration of the
Directors’ remuneration.
During the year the Board carried out a review of the level of Directors’ fees
in accordance with the Remuneration Policy. As part of this review, the
Board considered the Company’s performance, the demands placed on
Directors’ time and the level of fees being paid to non-executive directors
in the Company’s peer group. Taking these matters into consideration, the
review concluded that the fees being paid to the Company’s Directors were
below the average. As a result, with effect from 1 January 2024, fees were
increased to £45,000 (previously £40,500) per annum for the Chairman,
£41,000 (previously £37,800) per annum for the Chairperson of the
Audit Committee and £38,000 (previously £35,100) per annum for other
Directors. The Board is satisfied that the changes to the remuneration of
the Directors are compliant with the Directors’ Remuneration Policy.
There have been no other major decisions on Directors’ remuneration or
any other changes to the remuneration paid to each individual Director in
the year under review.
Directors’ Emoluments (audited information)
Directors are only entitled to fixed fees at such rates as are determined
by the Board from time to time and in accordance with the Directors’
Remuneration Policy as approved by the Shareholders.
None of the Directors has any entitlement to pensions or pension-related
benefits, medical or life insurance schemes, share options, long-term
incentive plans, or performance-related payments. No Director is entitled
to any other monetary payment or any assets of the Company.
Accordingly, the Single Total Figure table below does not include columns
for any of these items or their monetary equivalents. Directors’ & Officers’
liability insurance is maintained and paid for by the Company on behalf
of the Directors.
AVI Japan Opportunity Trust plc / Annual Report 2023 140
120
47
100
Directors’ Emoluments (audited information) continued
In line with market practice, the Company has agreed to indemnify the Directors in respect of costs, charges, losses, liabilities, damages and expenses,
arising out of any claims or proposed claims made for negligence, default, breach of duty, breach of trust or otherwise, or relating to any application
under Section 1157 of the Companies Act 2006, in connection with the performance of their duties as Directors of the Company. The indemnities would
also provide financial support from the Company should the level of cover provided by the Directors’ & Officers’ liability insurance maintained by the
Company be exhausted.
80
The Directors who served during the year received the following emoluments:
Single Total Figure Table (audited information)
60
Fees paid*
Taxable benefits
Name of Director
2023
2022
2023
2022
2023
Norman Crighton
Yoshi Nishio
Margaret Stephens
Katya Thomson
40,500
35,100
35,100
37,800
37,500
32,500
32,500
35,000
148,500
137,500
–
–
–
–
–
–
–
–
–
–
* Excluding Employer’s National Insurance Contribution.
Total
2022
37,500
32,500
32,500
35,000
40,500
35,100
35,100
37,800
148,500
137,500
% change
2022-2023
% change
2021-2022
% change
2020-2021
8.0%
8.0%
8.0%
8.0%
8.0%
5.3%
6.1%
6.1%
5.7%
5.8%
1.8%
2.1%
2.1%
1.9%
2.0%
Sums Paid to Third Parties (audited information)
None of the fees referred to in the above table were paid to any third party in respect of the services provided by any of the Directors.
Other Benefits
Taxable benefits – Article 105 of the Company’s Articles of Association provides that Directors are entitled to be reimbursed for reasonable expenses
incurred by them in connection with the performance of their duties and attendance at Board and General Meetings or any other meeting which they,
as Directors, are entitled to attend.
Pensions related benefits – Article 106 permits the Company to provide gratuities or pensions or similar benefits for Directors of the Company. However,
no pension schemes or other similar arrangements have been established and no Director is entitled to any pension or similar benefits.
Performance
The chart below illustrates the total Shareholder return for a holding in the Company’s shares, as compared to the MSCI Japan Small Cap (£ adjusted
total return), which the Board has adopted as the measure for both the Company’s performance and that of the Investment Manager for the year, over
the period since inception of the Company.
Total Shareholder Return vs MSCI Japan Small Cap
140
120
100
80
60
Oct 18
Apr 19
Oct 19
Apr 20
Oct 20
Apr 21
Oct 21
Apr 22
Oct 22
Apr 23
Oct 23
AVI Japan Opportunity Trust NAV TR
MSCI Japan Small Cap Index (£ adjusted total return)
AVI Japan Opportunity Trust plc / Annual Report 2023SRFSSIG
48
Governance / Directors' Remuneration Report continued
Relative Importance of Spend on Pay
The table below shows the proportion of the Company’s income spent
on pay.
Spend on Directors’ fees*
Distribution to
Shareholders
Management fee and
other expenses**
2023
£’000
149
2022
£’000
138
2,391
2,146
2,508
2,322
Difference
£’000
11
245
186
* As the Company has no employees the total spend on remuneration comprises
only the Directors’ fees.
** Note: the items listed in the table above are as required by the Large and
Medium sized Companies and Groups (Accounts and Reports) (Amendment)
Regulations 2013 s.20, with the exception of the management fee and other
expenses, which has been included because the Directors believe it will help
Shareholders’ understanding of the relative importance of the spend on pay. The
figures for this measure are the same as those shown in note 3 to the financial
statements.
Statement of Directors’ Shareholding and Share Interests
(audited information)
Neither the Company’s Articles of Association nor the Directors’ Letters
of Appointment require a Director to own shares in the Company. The
interests of the Directors and their connected persons in the equity and
debt securities of the Company at 31 December 2023 are shown in the
table below:
Statement of Voting at AGM
At the 2023 AGM, 45,178,017 votes (99.73%) were received voting for
the resolution seeking approval of the Directors’ Remuneration Report,
122,511 (0.27%) were against, none were at the Chairman’s discretion
and 3,500 were withheld; the percentages of votes excludes votes
withheld. In relation to the approval of the Remuneration Policy which was
most recently approved at the 2022 AGM, 42,292,385 (99.33%) votes
were received for the resolution, 98,679 (0.23%) were against, 187,917
(0.44%) were at the Chairman’s discretion and 4,500 were withheld. The
percentages of votes excludes votes withheld.
Annual Statement
On behalf of the Board and in accordance with Part 2 of Schedule 8 of
the Large and Medium-sized Companies and Groups (Accounts and
Reports) (Amendment) Regulations 2013, I confirm that the above Report
on Remuneration Implementation summarises, as applicable, for the year
to 31 December 2023:
(a) the major decisions on Directors’ remuneration;
(b) any discretion which has been exercised in the award of Directors’
remuneration;
(c) any substantial changes relating to Directors’ remuneration made
during the year; and
(d) the context in which the changes occurred and decisions have
been taken.
A resolution to approve this Directors’ Remuneration Report will be
proposed at the AGM to be held on 1 May 2024.
Name of Director
Norman Crighton
Yoshi Nishio
Margaret Stephens
Katya Thomson
Total
Ordinary Shares
26,575
–
10,000
10,000
46,575
There have been no changes to Directors’ interests between 31 December
2023 and the date of this Report.
Margaret Stephens
Chairman of the Nomination and Remuneration Committee
13 March 2024
AVI Japan Opportunity Trust plc / Annual Report 2023 Governance / Statement of Directors' Responsibilities in Relation to
the Annual Report and Financial Statements
49
The Directors are responsible for preparing the Annual Report and the
Financial Statements in accordance with UK adopted international
accounting standards and applicable law and regulations.
Company law requires the Directors to prepare financial statements for
each financial year. Under that law the Directors are required to prepare
the financial statements and have elected to prepare the company financial
statements in accordance with UK adopted international accounting
standards. Under company law the Directors must not approve the
financial statements, unless they are satisfied that they give a true and fair
view of the state of affairs of the Company and of the profit or loss for the
Company for that period.
In preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and
prudent;
• state whether they have been prepared in accordance with UK adopted
international accounting standards, subject to any material departures
disclosed and explained in the financial statements;
• prepare the financial statements on the going concern basis, unless it
is inappropriate to presume that the Company will continue in business;
and
• prepare a Directors’ report, a strategic report and Directors’
remuneration report which comply with the requirements of the
Companies Act 2006.
The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Company’s transactions and
disclose with reasonable accuracy at any time the financial position of the
Company and enable them to ensure that the financial statements comply
with the Companies Act 2006.
They are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities. The Directors are responsible for
ensuring that the Annual Report and Accounts, taken as a whole, are fair,
balanced, and understandable and provides the information necessary
for Shareholders to assess the Company’s position and performance,
business model and strategy.
Website Publication
The Directors are responsible for ensuring the Annual Report and
the Financial Statements are made available on a website. Financial
statements are published on the Company’s website in accordance
with legislation in the United Kingdom governing the preparation and
dissemination of financial statements, which may vary from legislation
in other jurisdictions. The maintenance and integrity of the Company’s
website is the responsibility of the Directors. The Directors’ responsibility
also extends to the ongoing integrity of the financial statements
contained therein.
Directors’ Responsibilities Pursuant to DTR4
The Directors confirm to the best of their knowledge:
• The Financial Statements have been prepared in accordance with the
applicable set of accounting standards, give a true and fair view of the
assets, liabilities, financial position and profit and loss of the Company.
• The Annual Report includes a fair review of the development and
performance of the business and the financial position of the Company,
together with a description of the principal risks and uncertainties that
they face.
In the opinion of the Board, the Annual Report and Financial Statements
taken as a whole, is fair, balanced and understandable and it provides the
information necessary to assess the Company’s position and performance,
business model and strategy.
Directors Statement as to the Disclosure of Information to Auditor
All of the current Directors have taken all the steps that they ought to
have taken to make themselves aware of any information needed by the
Company’s auditors for the purposes of their audit and to establish that the
auditors are aware of that information. The Directors are not aware of any
relevant audit information of which the auditors are unaware.
For and on behalf of the Board
Norman Crighton
Chairman
13 March 2024
AVI Japan Opportunity Trust plc / Annual Report 2023SRFSSIG 50
Governance / Report from the Audit Committee
I am pleased to present the Audit Committee Report for the year ended
31 December 2023.
• considered the appropriate level of dividend to be paid by the Company
for recommendation to the Board; and
The Audit Committee (the “Committee”) met twice during the year under
review and once following the year end. The Company’s Auditors are
invited to attend meetings as necessary. Representatives of the Investment
Manager may also be invited.
Details of the composition of the Committee are set out in the Corporate
Governance Statement on page 44.
Responsibilities of the Committee
The Committee’s responsibilities are set out in formal terms of reference
which are available on the Company’s website and are reviewed at least
annually. The Committee’s primary responsibilities are set as follows:
• to monitor the integrity of the financial statements of the Company,
including its Annual and Half-Yearly reports and any other formal
announcements of the Company relating to its financial performance,
and to review and report to the Board on significant financial reporting
issues and judgements which those statements contain, having regard
to matters communicated to it by the Auditor;
• to review the Half-Yearly and Annual Reports;
• to review the Company’s internal financial controls and the internal
control and risk management systems of the Company and its third-
party service providers;
• to make recommendations to the Board in relation to the appointment
of the external auditor and their remuneration;
• to review the scope, results, cost effectiveness, independence and
objectivity of the external auditor;
• to develop and implement policy on the engagement of the external
auditor to supply non-audit services and consider relevant guidance
regarding the provision of non-audit services by the external audit firm;
and
• to review circulars issued in respect of major non-routine and corporate
transactions.
Activities in the Year
During the year, the Committee has:
• conducted a detailed review of the internal controls and risk
management systems of the Company and its third-party service
providers;
• reviewed the service levels provided by the Company’s Custodian and
Depositary;
• considered the emerging and principal risks facing the Company and the
mitigating controls in place;
• carried out a detailed review of the external Auditor’s performance
during the 2022 audit;
• agreed the audit plan and fees with the Auditor in respect of the Annual
Report for the year ended 31 December 2023, including the principal
areas of focus;
• reviewed the Company’s Half-Yearly Report and financial statements,
discussed the appropriateness of the accounting policies adopted and
recommended these to the Board for approval;
• assessed whether it was appropriate to prepare the Company’s financial
statements on a going concern basis and made recommendations to
the Board. This review included challenging the assumptions on viability
of the Company and reviewing stress tests focused on its ability to
continue to meet its liabilities;
• examined in detail the methodology and assumptions applied in valuing
the assets of the Company.
Following the year end, the Committee has received and discussed
with the Auditor their report on the results of the audit and reviewed this
Annual Report and Financial Statements, discussed the appropriateness
of the accounting policies adopted and recommended these to the Board
for approval.
Significant Issues
The Committee considered the following key issues in relation to
the Company’s financial statements during the year. A more detailed
explanation of the consideration of the issues set out below, and the steps
taken to manage them, is set out in the principal risks and uncertainties on
pages 36 and 37.
Valuation of Investments
The Committee considered the valuation of the investment portfolio.
The Company’s portfolio currently consists of quoted investments,
which are valued by reference to their bid prices on the relevant exchange.
Any future unquoted or illiquid investments will be valued by the Directors
based on recommendations from the Investment Manager’s pricing
committee.
Maintaining Internal Controls
The Committee has considered carefully the internal control systems.
As the Company relies heavily on third-party suppliers, the Committee
monitors the services and control levels of all of its suppliers on an ongoing
basis, as explained below.
Going Concern and Long-term Viability of the Company
The Committee considered the Company’s financial requirements
for the next 12 months and concluded that it has sufficient resources to
meet its commitments. Consequently, the financial statements have been
prepared on a going concern basis. The Committee also considered the
longer-term viability statement within the Annual Report for the year ended
31 December 2023, covering a five-year period, and the underlying factors
and assumptions which contributed to the Committee deciding that this
was an appropriate length of time to consider the Company’s long-term
viability. The Company’s viability statement can be found on page 31.
Internal Controls
The Committee carefully considers the internal control systems by
continually monitoring the services and controls of its third-party
service providers.
The Committee reviewed the risk matrix at both of its meetings held during
the year under review and where appropriate it was updated. The results of
this ongoing process, as well as the principal risks identified, and controls
put in place to manage or mitigate these risks are detailed on pages 36
and 37 of this Report. The Committee received a report on internal control
and compliance from the Investment Manager and the Company’s other
service providers and no significant matters of concern were identified.
The Company does not have an internal audit function. During the
year, the Committee reviewed whether an internal audit function would
be of value and concluded that this would provide minimal additional
comfort at considerable extra cost to the Company. While the Committee
believes that the existing systems of monitoring and reporting by third
parties remain appropriate and adequate, it will continue, on an annual
basis, to actively consider possible areas within the Company’s controls
environment which may need to be reviewed in detail.
AVI Japan Opportunity Trust plc / Annual Report 2023 51
Independence and Objectivity of the Auditor
The Committee has considered the independence and objectivity
of the Auditor. £nil non-audit fees were paid to BDO LLP during the year
to 31 December 2023 (2022: £nil). The Committee is satisfied that the
Auditor has fulfilled its obligations to the Company and its Shareholders
and remains independent and objective.
Appointment of the Auditor
Following consideration of the performance of the Auditor, the services
provided during the year and a review of its independence and objectivity,
the Committee has recommended to the Board the reappointment of
BDO LLP as Auditor to the Company.
Ekaterina Thomson
Chairperson of the Audit Committee
13 March 2024
External Auditor
BDO LLP has been the Auditor to the Company since launch in 2018. No
tender for the audit of the Company has been undertaken. In accordance
with the Competitions and Markets Authority Order, a competitive audit
tender must be carried out at least every ten years. The Company is
therefore required to carry out a tender no later than in respect of the
financial year ending 31 December 2029. The Committee reviews the
continuing appointment of the Auditor on an annual basis and gives regular
consideration to the Auditor’s fees and independence, along with matters
raised during each audit.
The Audit Partner is due to rotate every five years. This is the third year the
current Audit Partner is in place.
The Audit Committee specifically considered and discussed with the
Auditor the tax treatment of foreign exchange gains/losses on the revolving
credit facility and the presentation of the revolving loan facility in the 2022
Annual Report, as well as the disclosures regarding the renewal of the
facility in this report. The Committee further discussed the disclosures in
this report around the potential exit opportunity in 2024 and made some
changes to these at the Auditor’s recommendation. Key audit matters
raised by the Auditor are detailed in their report on pages 52 to 55, as well
as the materiality threshold.
Audit fees and Non-audit Services provided by the Auditor
In accordance with the Company’s non-audit services policy, the Audit
Committee reviews the scope and nature of all proposed non-audit
services before engagement, to ensure that auditor independence and
objectivity are safeguarded. The policy includes a list of non-audit services
which may be provided by the Auditor provided there is no apparent threat
to independence, as well as a list of services which are prohibited.
Non-audit services are capped at 70.0% of the average of the statutory
audit fees for the preceding three years.
Information on the fees paid to the Auditor is set out in note 3 to the
Financial Statements on page 63.
Effectiveness of the External Audit
The Audit Committee monitors and reviews the effectiveness of the
external audit carried out by the Auditor, including a detailed review
of the audit plan and the audit results report, and makes recommendations
to the Board on the re-appointment, remuneration and terms of
engagement of the Auditor. This review takes into account the experience
and tenure of the audit partner and team, the nature and level of
services provided, and confirmation that the Auditor has complied with
independence standards. During the year to 31 December 2023, the
Committee carried out a detailed review of the quality and effectiveness
of the 2022 audit. The review was based on feedback requested from the
Investment Manager, the Administrator and the Company Secretary and
discussions with the Auditor. No issues were identified with regards to the
effectiveness of the external audit. Any concerns with effectiveness of the
external audit process would be reported to the Board.
AVI Japan Opportunity Trust plc / Annual Report 2023SRFSSIG Based on the work we have performed, we have not identified any material
uncertainties relating to events or conditions that, individually or collectively,
may cast significant doubt on the Company’s ability to continue as a going
concern for a period of at least twelve months from when the financial
statements are authorised for issue.
In relation to the Company’s reporting on how it has applied the UK
Corporate Governance Code, we have nothing material to add or
draw attention to in relation to the Directors’ statement in the financial
statements about whether the Directors considered it appropriate to adopt
the going concern basis of accounting.
Our responsibilities and the responsibilities of the Directors with respect to
going concern are described in the relevant sections of this report.
Overview
Key audit
matters
Materiality
2023
2022
Valuation and ownership of quoted investments
Company fnancial statements as a whole
£1.8m based on 1% of net assets (£1.5m based on 1%
of net assets)
An overview of the scope of our audit
Our audit was scoped by obtaining an understanding of the Company and
its environment, including the Company’s system of internal control, and
assessing the risks of material misstatement in the financial statements.
We also addressed the risk of management override of internal controls,
including assessing whether there was evidence of bias by the Directors
that may have represented a risk of material misstatement.
Key audit matters
Key audit matters are those matters that, in our professional judgement,
were of most significance in our audit of the financial statements of the
current period and include the most significant assessed risks of material
misstatement (whether or not due to fraud) that we identified, including
those which had the greatest effect on: the overall audit strategy, the
allocation of resources in the audit, and directing the efforts of the
engagement team. These matters were addressed in the context of our
audit of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters.
52
Governance / Independent Auditor's Report
to the Members of AVI Japan Opportunities Trust plc
Opinion on the financial statements
In our opinion the financial statements:
• give a true and fair view of the state of the Company’s affairs as at 31
December 2023 and of its profit for the year then ended; and
• have been properly prepared in accordance with UK adopted
international accounting standards.
We have audited the financial statements of AVI Japan Opportunity Trust
plc (the ‘Company’) for the year ended 31 December 2023 which comprise
the Statement of Comprehensive Income, Statement of Changes in
Equity, Balance Sheet, Statement of Cash Flows and notes to the financial
statements, including a summary of significant accounting policies. The
financial reporting framework that has been applied in their preparation is
applicable law and UK adopted international accounting standards.
Basis for opinion
We conducted our audit in accordance with International Standards on
Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under
those standards are further described in the Auditor’s responsibilities for
the audit of the financial statements section of our report. We believe
that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion. Our audit opinion is consistent with the
additional report to the Audit Committee.
Independence
Following the recommendation of the Audit Committee, we were appointed
by the Board of Directors on on 8 October 2018 to audit the financial
statements for the year ended 31 December 2019 and subsequent
financial periods. The period of total uninterrupted engagement including
retenders and reappointments is five years, covering the years ended 31
December 2019 to 31 December 2023. We remain independent of the
Company in accordance with the ethical requirements that are relevant to
our audit of the financial statements in the UK, including the FRC’s Ethical
Standard as applied to listed public interest entities, and we have fulfilled
our other ethical responsibilities in accordance with these requirements.
The non-audit services prohibited by that standard were not provided to
the Company.
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the Directors’
use of the going concern basis of accounting in the preparation of the
financial statements is appropriate. Our evaluation of the Directors’
assessment of the Company’s ability to continue to adopt the going
concern basis of accounting included:
• Evaluating the appropriateness of the Directors’ method of assessing the
going concern in light of economic and market conditions by reviewing
the information used by the Directors in completing their assessment;
• Assessing the appropriateness of the Directors’ assumptions and
judgements made by comparing the prior year forecasted costs to the
actual costs incurred to check that the projected costs are reasonable;
Reviewing loan arrangements with the bank for covenants in place,
recalculating the year end covenant compliance and assessing future
covenant compliance and headroom under market downturn scenarios;
• Assessing the appropriateness of the Directors’ assumptions and
judgements made in their base case and stress tested forecasts
including consideration of the available cash resources relative to
forecast expenditure and committments; and
• Challenging the Directors’ assumptions and judgements made in their
forecasts by performing an independent analysis of the liquidity of the
portfolio.
AVI Japan Opportunity Trust plc / Annual Report 2023 53
How the scope of our audit addressed
the key audit matter
We responded to this matter by testing the valuation
and ownership of the entire portfolio of investments.
We performed the following procedures:
• Confirmed the year-end bid price was used by
agreeing to externally quoted prices;
• Assessed if there were contra indicators, such
as liquidity considerations, to suggest bid price is
not the most appropriate indication of fair value
by considering the realisation period for individual
holdings;
• Recalculated the valuation by multiplying the
number of shares held per the statement obtained
from the custodian by the valuation per share; and
• Obtained direct confirmation of the number
of shares held per equity investment from the
custodian regarding all investments held at the
balance sheet date.
Key observations:
Based on our procedures performed we did not
identify any matters to suggest the valuation or
ownership of the quoted equity investments was not
appropriate.
Key audit matter
Valuation and ownership of
quoted investments
(Note 8 on page 66)
The investment portfolio at the year-end comprised of
quoted equity investments held at fair value through
profit or loss.
We considered the valuation and ownership
of investments to be a significant audit area as
investments represent the most significant balance in
the financial statements and underpins the principal
activity of the Company.
Given the nature of the portfolio is such that it
comprises solely of level 1 investments, we do
not consider the use of bid price to be subject to
significant estimation uncertainty. However, there is a
risk that the bid price used as a proxy for fair value of
investments held at the reporting date is inappropriate.
There is also a risk of error in the recognition of
investment holdings such that those recognised
do not appropriately reflect the ownership of the
Company.
For these reasons and the materiality to the financial
statements as a whole, they are considered to be a
key area of our overall audit strategy and allocation of
our resources and hence a Key Audit Matter.
Our application of materiality
We apply the concept of materiality both in planning and performing
our audit, and in evaluating the effect of misstatements. We consider
materiality to be the magnitude by which misstatements, including
omissions, could influence the economic decisions of reasonable users
that are taken on the basis of the financial statements.
In order to reduce to an appropriately low level the probability that any
misstatements exceed materiality, we use a lower materiality level,
performance materiality, to determine the extent of testing needed.
Importantly, misstatements below these levels will not necessarily be
evaluated as immaterial as we also take account of the nature of identified
misstatements, and the particular circumstances of their occurrence, when
evaluating their effect on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the
financial statements as a whole and performance materiality as follows:
Company financial statements
2023
2022
Materiality
£1,820,000
£1,500,000
Basis for
determining
materiality
1% of Net assets
Rationale for
the benchmark
applied
As an investment trust, the net asset value is
the key measure of performance for users of the
financial statements.
Performance
materiality
Basis for
determining
performance
materiality
£1,360,000
£1,120,00
75% of materiality
Rationale for
the percentage
applied for
performance
materiality
The level of performance materiality applied was
set after having considered a number of factors
including the expected total value of known and
likely misstatements and the level of transactions in
the year.
Reporting threshold
We agreed with the Audit Committee that we would report to them all
individual audit differences in excess of £36,000 (2022: £30,000). We
also agreed to report differences below this threshold that, in our view,
warranted reporting on qualitative grounds.
AVI Japan Opportunity Trust plc / Annual Report 2023SRFSSIG
54
Governance / Independent Auditor's Report continued
to the Members of AVI Japan Opportunities Trust plc
Other information
The Directors are responsible for the other information. The other
information comprises the information included in the Annual Report
other than the financial statements and our auditor’s report thereon. Our
opinion on the financial statements does not cover the other information
and, except to the extent otherwise explicitly stated in our report, we do
not express any form of assurance conclusion thereon. Our responsibility
is to read the other information and, in doing so, consider whether the
other information is materially inconsistent with the financial statements or
our knowledge obtained in the course of the audit, or otherwise appears
to be materially misstated. If we identify such material inconsistencies or
apparent material misstatements, we are required to determine whether
this gives rise to a material misstatement in the financial statements
themselves. If, based on the work we have performed, we conclude that
there is a material misstatement of this other information, we are required
to report that fact.
We have nothing to report in this regard.
Corporate governance statement
The Listing Rules require us to review the Directors’ statement in relation
to going concern, longer-term viability and that part of the Corporate
Governance Statement relating to the Company’s compliance with the
provisions of the UK Corporate Governance Code specified for our review.
Based on the work undertaken as part of our audit, we have concluded
that each of the following elements of the Corporate Governance
Statement is materially consistent with the financial statements or our
knowledge obtained during the audit.
Going
concern and
longer-term
viability
• The Directors’ statement with regards to
the appropriateness of adopting the going
concern basis of accounting and any material
uncertainties identified set out on page 49; and
• The Directors’ explanation as to their
assessment of the Company’s prospects, the
period this assessment covers and why the
period is appropriate set out on page 49.
Other Code
provisions
• Directors’ statement on fair, balanced and
understandable set out on page 49;
• Board’s confirmation that it has carried out a
robust assessment of the emerging and principal
risks set out on page 36 and 37;
• The section of the annual report that describes
the review of effectiveness of risk management
and internal control systems set out on page 44
and 45; and
• The section describing the work of the audit
committee set out on page 44.
Other Companies Act 2006 reporting
Based on the responsibilities described below and our work performed
during the course of the audit, we are required by the Companies Act
2006 and ISAs (UK) to report on certain opinions and matters as described
below.
Strategic
report and
Directors’
report
In our opinion, based on the work undertaken in the
course of the audit:
• the information given in the Strategic report and
the Directors’ Report for the financial year for
which the financial statements are prepared is
consistent with the financial statements; and
• the Strategic report and the Directors’ Report
have been prepared in accordance with
applicable legal requirements.
In the light of the knowledge and understanding of
the Company and its environment obtained in the
course of the audit, we have not identified material
misstatements in the strategic report or the Directors’
Report.
Directors’
remuneration
In our opinion, the part of the Directors’ Remuneration
Report to be audited has been properly prepared in
accordance with the Companies Act 2006.
Matters on
which we
are required
to report by
exception
We have nothing to report in respect of the following
matters in relation to which the Companies Act 2006
requires us to report to you if, in our opinion:
• adequate accounting records have not been
kept, or returns adequate for our audit have not
been received from branches not visited by us; or
• the financial statements and the part of the
Directors’ Remuneration Report to be audited
are not in agreement with the accounting records
and returns; or
• certain disclosures of Directors’ remuneration
specified by law are not made; or
• we have not received all the information and
explanations we require for our audit.
Responsibilities of Directors
As explained more fully in the Statement of Directors’ Responsibilities, the
Directors are responsible for the preparation of the financial statements and
for being satisfied that they give a true and fair view, and for such internal
control as the Directors determine is necessary to enable the preparation
of financial statements that are free from material misstatement, whether
due to fraud or error.
In preparing the financial statements, the Directors are responsible
for assessing the Company’s ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using
the going concern basis of accounting unless the Directors either intend
to liquidate the Company or to cease operations, or have no realistic
alternative but to do so.
AVI Japan Opportunity Trust plc / Annual Report 2023 55
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes
our opinion. Reasonable assurance is a high level of assurance, but is not
a guarantee that an audit conducted in accordance with ISAs (UK) will
always detect a material misstatement when it exists. Misstatements can
arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
Extent to which the audit was capable of detecting irregularities,
including fraud
Irregularities, including fraud, are instances of non-compliance with laws
and regulations. We design procedures in line with our responsibilities,
outlined above, to detect material misstatements in respect of irregularities,
including fraud. The extent to which our procedures are capable of
detecting irregularities, including fraud is detailed below:
Non-compliance with laws and regulations
Based on:
• Our understanding of the Company and the industry in which it
operates;
• Discussion with the Investment Manager and Administrator and those
charged with governance; and
• Obtaining and understanding of the Company’s policies and
procedures regarding compliance with laws and regulations;
we considered the significant laws and regulations to be Companies Act
2006, the FCA listing and DTR rules, the principles of the AIC Code of
Corporate Governance, industry practice represented by the AIC SORP,
the applicable accounting framework, and the Company’s qualification as
an Investment Trust under UK tax legislation as any non-compliance of this
would lead to the Company losing various deductions and exemptions
from corporation tax.
Our procedures in respect of the above included:
• Agreement of the financial statement disclosures to underlying
supporting documentation;
• Enquiries of management and those charged with governance relating
to the existence of any non-compliance with laws and regulations;
• Reviewing minutes of meetings of those charged with governance
throughout the period for instances of non-compliance with laws and
regulations; and
• Reviewing the calculation in relation to Investment Trust compliance to
check that the Company was meeting its requirements to retain their
Investment Trust Status.
Fraud
We assessed the susceptibility of the financial statement to material
misstatement including fraud.
Our procedures in respect of the above included:
• In addressing the risk of management override of control, we:
– Performed a review of estimates and judgements applied
by management in the financial statements to assess their
appropriateness and the existence of any systematic bias;
– Considered the opportunity and incentive to manipulate accounting
entries and tested relevant adjustments made in the period end
financial reporting process;
– To include an element of unpredictability we tested a sample of low
value items;
– Considered if there were any significant transactions outside the
normal course of business and found none; and
– Performed a review of unadjusted audit differences, for indications
of bias or deliberate misstatement.
We also communicated relevant identified laws and regulations and
potential fraud risks to all engagement team members, who were deemed
to have the appropriate competence and capabilities, and remained alert
to any indications of fraud or non-compliance with laws and regulations
throughout the audit.
Our audit procedures were designed to respond to risks of material
misstatement in the financial statements, recognising that the risk of not
detecting a material misstatement due to fraud is higher than the risk of
not detecting one resulting from error, as fraud may involve deliberate
concealment by, for example, forgery, misrepresentations or through
collusion. There are inherent limitations in the audit procedures performed
and the further removed non-compliance with laws and regulations is from
the events and transactions reflected in the financial statements, the less
likely we are to become aware of it.
A further description of our responsibilities is available on the
Financial Reporting Council’s website at: www.frc.org.uk/
auditorsresponsibilities. This description forms part of our auditor’s
report.
Use of our report
This report is made solely to the Company’s members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the Company’s
members those matters we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent permitted by law, we
do not accept or assume responsibility to anyone other than the Company
and the Company’s members as a body, for our audit work, for this report,
or for the opinions we have formed.
Our risk assessment procedures included:
• Enquiry with the Investment Manager, the Administrator and those
Chris Meyrick (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
charged with governance regarding any known or suspected instances
of fraud;
London
• Review of minutes of meetings of those charged with governance for
any known or suspected instances of fraud; and
13 March 2024
• Discussion amongst the engagement team as to how and where fraud
might occur in the financial statements.
BDO LLP is a limited liability partnership registered in England and Wales
(with registered number OC305127).
Based on our risk assessment, we considered the areas most susceptible
to be management override of controls.
AVI Japan Opportunity Trust plc / Annual Report 2023SRFSSIG 56
Financial Statements / Statement of Comprehensive Income
For the year ended 31 December 2023
For the year ended 31 December 2023
For the year ended 31 December 2022
Income
Investment income
Gains/(losses) on investments held at fair value
Exchange (losses)/gains on currency balances
Expenses
Investment management fee
Other expenses
Profit/(loss) before finance costs and tax
Finance costs
Exchange gains/(losses) on revolving credit facility
Profit/(loss) before taxation
Taxation
Profit/(loss) for the year
Earnings per Ordinary Share – basic and diluted (pence)
2
8
3
3
4
4
5
7
Revenue
return
£’000
Capital
return
£’000
Total
£’000
Revenue
return
£’000
Capital
return
£’000
Notes
Total
£’000
3,667
(7,657)
950
3,956
–
–
–
23,115
(1,158)
3,956
23,115
(1,158)
3,667
–
–
–
(7,657)
950
3,956
21,957
25,913
3,667
(6,707)
(3,040)
(162)
(886)
(1,460)
–
(1,622)
(886)
(152)
(806)
(1,364)
–
(1,516)
(806)
2,908
(18)
–
20,497
(163)
1,933
23,405
(181)
1,933
2,709
(21)
–
(8,071)
(187)
(1,044)
2,890
(418)
22,267
–
25,157
(418)
2,688
(377)
(9,302)
–
(5,362)
(208)
(1,044)
(6,614)
(377)
2,472
22,267
24,739
2,311
(9,302)
(6,991)
1.76
15.89
17.65
1.69
(6.79)
(5.10)
The total column of this statement is the Income Statement of the Company prepared in accordance with UK-adopted international accounting
standards. The supplementary revenue and capital columns are presented in accordance with the Statement of Recommended Practice issued
by the Association of Investment Companies (“AIC SORP”).
All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year.
There is no other comprehensive income, and therefore the profit for the year after tax is also the total comprehensive income.
The accompanying notes are an integral part of these financial statements.
AVI Japan Opportunity Trust plc / Annual Report 2023
Financial Statements / Statement of Changes in Equity
For the year ended 31 December 2023
Ordinary
Share capital
£’000
Share
premium
£’000
Special
reserve*
£’000
Capital
reserve*
£’000
Revenue
reserve**
£’000
For the year ended 31 December 2023
Balance as at 31 December 2022
Issue of Ordinary Shares
Expenses of share issues
Ordinary Shares issued from treasury
Ordinary Shares bought back and held in treasury
Total comprehensive income for the year
Ordinary dividends paid
1,375
33
–
–
–
–
–
60,155
4,099
(76)
77
–
–
–
77,153
–
–
1,125
(1,134)
–
–
15,928
1,784
–
–
–
–
–
–
–
–
22,267
–
2,472
(2,315)
57
Total
£’000
156,395
4,132
(76)
1,202
(1,134)
24,739
(2,315)
Balance as at 31 December 2023
1,408
64,255
77,144
38,195
1,941
182,943
For the year ended 31 December 2022
Balance as at 31 December 2021
Issue of Ordinary Shares
Expenses of share issues
Ordinary Shares issued from treasury
Ordinary Shares bought back and held in treasury
Total comprehensive income for the year
Ordinary dividends paid
Balance as at 31 December 2022
1,332
43
–
–
–
–
–
1,375
55,374
4,849
(93)
25
–
–
–
77,324
–
(6)
270
(435)
–
–
25,230
–
–
–
–
(9,302)
–
1,461
–
–
–
–
2,311
(1,988)
160,721
4,892
(99)
295
(435)
(6,991)
(1,988)
60,155
77,153
15,928
1,784
156,395
* Distributable reserves. Within the balance of the capital reserve, £15,452,000 (31 December 2022: £12,705,000) relates to realised gains which is distributable.
The remaining £22,743,000 (31 December 2022: £3,223,000) relates to unrealised gains on investments and is non-distributable.
** Revenue reserve is fully distributable.
The accompanying notes are an integral part of these financial statements.
AVI Japan Opportunity Trust plc / Annual Report 2023SRGFSSIFS 58
Financial Statements / Balance Sheet
For the year ended 31 December 2023
Non-current assets
Investments held at fair value through profit or loss
Current assets
Receivables
Cash and cash equivalents
Total assets
Current liabilities
Revolving credit facility
Payables
Total assets less current liabilities
Non-current liabilities
Revolving credit facility
Net assets
Equity attributable to equity Shareholders
Ordinary Share capital
Share premium
Special reserve
Capital reserve
Revenue reserve
Total equity
As at
31 December
2023
£’000
As at
31 December
2022
£’000
Notes
8
9
11
10
185,857
164,323
185,857
164,323
388
13,430
13,818
196
7,792
7,988
199,675
172,311
(16,301)
(431)
(16,732)
–
(384)
(384)
182,943
171,927
12
–
(15,532)
182,943
156,395
13
1,408
64,255
77,144
38,195
1,941
1,375
60,155
77,153
15,928
1,784
182,943
156,395
Net asset value per Ordinary Share – basic and diluted
14
130.27p
114.11p
Number of shares in issue excluding treasury
13
140,436,702
137,061,702
These financial statements were approved and authorised for issue by the Board of AVI Japan Opportunity Trust plc on 13 March 2024 and were signed
on its behalf by:
Norman Crighton
The accompanying notes are an integral part of these financial statements.
Registered in England & Wales No. 11487703
AVI Japan Opportunity Trust plc / Annual Report 2023
Financial Statements / Statement of Cash Flows
For the year ended 31 December 2023
Reconciliation of profit/(loss) before taxation to net cash inflow from operating activities
Profit/(loss) before taxation
(Gains)/losses on investments held at fair value through profit or loss
Decrease in other receivables
Exchange (gains)/losses on revolving credit facility
Exchange losses/(gains) on currency balances
Interest paid
(Decrease)/increase in other payables
Taxation paid
Net cash inflow from operating activities
Investing activities
Purchases of investments
Sales of investments
Net cash inflow/(outflow) from investing activities
Financing activities
Dividends paid
Issue of shares
Issue of Ordinary Shares from treasury
Cost of share issues
Payments for Ordinary Shares bought back and held in treasury
Drawdown of revolving credit facility
Repayment of revolving credit facility
Interest paid
Cash inflow/(outflow) from financing activities
59
31 December
2023
£’000
31 December
2022
£’000
25,157
(23,115)
132
(1,933)
1,162
200
(30)
(418)
1,155
(55,633)
56,966
1,333
(2,315)
4,132
1,202
(76)
(1,134)
2,703
–
(200)
4,312
(6,614)
7,657
71
1,044
(737)
190
74
(377)
1,308
(55,223)
54,628
(595)
(1,988)
4,923
264
(99)
(435)
5,999
(9,013)
(190)
(539)
Increase in cash and cash equivalents
6,800
174
Reconciliation of net cash flow movement
Cash and cash equivalents at beginning of year
Exchange losses on currency balances
Increase in cash and cash equivalents
Cash and cash equivalents at end of year
The accompanying notes are an integral part of these financial statements.
7,792
(1,162)
6,800
8,165
(547)
174
13,430
7,792
AVI Japan Opportunity Trust plc / Annual Report 2023SRGFSSIFS 60
Financial Statements / Notes to the Financial Statements
For the year ended 31 December 2023
1. General Information and Accounting Policies
AVI Japan Opportunity Trust plc is a public limited company incorporated on 27 July 2018 and registered in England and Wales. The principal activity
of the Company is that of an investment trust company within the meaning of Sections 1158/1159 of the Corporation Tax Act 2010 and its investment
approach is detailed in the Strategic Report.
The Company commenced trading and was listed on the London Stock Exchange on 23 October 2018.
The Company’s financial statements have been prepared in accordance with UK-adopted international accounting standards and the AIC SORP.
Basis of Preparation
The financial statements of the Company have been prepared for the year ended 31 December 2023.
In order to better reflect the activities of an investment trust company and in accordance with guidance issued by The AIC, supplementary information
which analyses the Statement of Comprehensive Income between items of revenue and a capital nature has been prepared alongside the Statement
of Comprehensive Income.
The Company invests in Japan with subsequent cash flows (dividend receipts and interest payments) being received in Japanese Yen, however the
Directors consider the Company’s functional currency to be Pounds Sterling as the Shares of the Company are listed on the London Stock Exchange,
it is regulated in the United Kingdom, principally having its Shareholder base in the United Kingdom, and pays dividend and expenses in Pounds Sterling.
The Directors have chosen to present the financial statements in Pounds Sterling rounded to the nearest thousand, except where otherwise indicated.
Going concern
The financial statements have been prepared on a going concern basis and on the basis that approval as an investment trust company will continue
to be met. The Directors have made an assessment of the Company’s ability to continue as a going concern and are satisfied that the Company
has adequate resources to continue in operational existence for a period of at least 12 months from the date when these financial statements were
approved.
In making the assessment, the Directors of the Company have considered the likely impacts of international and economic uncertainties on the
Company, operations and the investment portfolio. The Directors also regularly assess the resilience of key third-party service providers, most notably the
Investment Manager and Fund Administrator. In making their assessment, the Directors have considered the likely impacts of international and economic
uncertainties on the Company, operations and the investment portfolio. These include, but are not limited to, geopolitical events, the war in Ukraine, the
ongoing Israel/Palestine conflict, political and economic instability in the UK, and inflationary pressures.
The Directors noted that the Company, with the current cash balance and holding a portfolio of listed investments, is able to meet the obligations
of the Company as they fall due. The surplus cash enables the Company to meet any funding requirements and finance future additional investments.
The revolving credit facility (extended to 5 April 2024) is fully utilised at year end and the facility is to be extended for a further two years. The Company
is able to repay the facility at its own discretion from available cash and liquid investments. The Investment Manager assesses the exposure to risk when
making each investment decision, monitors cash flows and the performance of the portfolio on a daily basis. The Company is a closed-ended fund,
where assets are not required to be liquidated to meet day-to-day redemptions.
The Directors have completed stress tests assessing the impact of changes in market value, inflation and income with associated cash flows. In making
this assessment, they have considered severe but plausible downside scenarios and simulated a 50% reduction in NAV during April 2024, the impact
on future cash flows as a result of this through to December 2028. The conclusion was that in a severe but plausible downside scenario the Company
could continue to meet its liabilities. Whilst the economic future is uncertain, and the Directors believe that it is possible the Company could experience
further reductions in income and/or market value, and changes in expenses, the opinion of the Directors is that this should not be to a level which would
threaten the Company’s ability to continue as a going concern.
The Company’s IPO Prospectus stated that the Directors may, at their discretion, deliver a full or a partial exit opportunity to Shareholders every two
years, from October 2022 onwards. The mechanism would be dependent on various factors including the number of Shareholders seeking to participate
in the exit opportunity, the liquidity of the underlying market and/or the demand for Shares from other investors.
In 2022, the Company consulted with Shareholders representing a significant majority of the shares in issue and, in line with the opinion expressed
by the consulted Shareholders, the Company did not offer an exit opportunity at that time. The Company intends to follow a similar consultation
process ahead of October 2024. The Directors have reviewed the Shareholders of the Company, Shareholder feedback, the current market position
and performance. It is anticipated there will be no significant uptake by Shareholders of any potential exit opportunity in 2024 and the Company will
continue as a going concern.
The Directors are not aware of any material uncertainties that may cast significant doubt on the Company’s ability to continue as a going concern,
having taken into account the liquidity of the Company’s investment portfolio and the Company’s financial position in respect of its cash flows, borrowing
facilities and investment commitments (of which there are none of significance). Therefore, the financial statements have been prepared on the going
concern basis.
Segmental Reporting
The Directors are of the opinion that the Company is engaged in a single segment of business, being investment business.
The Company invests in companies listed in Japan on recognised exchanges.
AVI Japan Opportunity Trust plc / Annual Report 2023 61
1. General Information and Accounting Policies continued
Accounting Developments
New and amended IAS Standards that are effective for the current year.
In the current year, the Company has applied a number of amendments to UK-adopted international standards that are mandatorily effective for an
accounting period that begins on or after 1 January 2023. Their adoption has not had any material impact on the disclosures or on the accounts
reported in these financial statements. In accordance with an amendment to IAS1, Presentation of Financial Statements, the Company now discloses its
material accounting policy information instead of significant accounting policies. The updates incorporated:
• Disclosure of Accounting Policies – Amendments to IAS 1 and IFRS Practice Statement 2;
• Definition of Accounting Estimates – Amendments to IAS 8;
• Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction – Amendments to IAS 12; and
• IFRS 17 Insurance Contracts.
There are amendments to IAS/IFRS that will apply from 1 January 2024 as follows:
• Classification of liabilities as current or non-current – Amendments to IAS 1;
• Non-current liabilities with Covenants – Amendments to IAS 1; and
• Supplier Finance Arrangements – Amendments to IAS 7 and IFRS 7.
The Directors do not anticipate the adoption of these will have a material impact on the financial statements.
Critical Accounting Judgements and Key Sources of Estimation Uncertainty
The preparation of financial statements in conformity with UK-adopted international accounting standards requires management to make judgements,
estimates and assumptions that affect the application of policies and the reported amounts in the Balance Sheet, the Statement of Comprehensive
Income and the disclosure of contingent assets at the date of the financial statements. The estimates and associated assumptions are based on
historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making
judgements about carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The areas requiring judgement and estimation in the preparation of the financial statements are: recognising and classifying unusual or special dividends
received as either revenue or capital in nature; allocation of expenses between capital and income, and setting of the level of dividends paid and
proposed.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which
the estimate is revised if the revision affects only that period, or in the period of the revision and future period if the revision affects both current and future
periods. There are no further significant judgements or estimates in these financial statements.
Investments
The investment objective of the Company is to provide Shareholders with a total return in excess of the MSCI Japan Small Cap Index in GBP, through
the active management of a focused portfolio of equity investments listed or quoted in Japan which have been identified by the Investment Manager as
undervalued and having a significant proportion of their market capitalisation held in cash, listed securities and/or realisable assets.
The investments held by the Company are measured ‘at fair value through profit or loss’. All gains and losses are allocated to the capital return within the
Statement of Comprehensive Income as ‘Gains or losses on investments held through profit or loss’. Also included within this heading are transaction
costs in relation to the purchase or sale of investments. When a purchase or sale is made under a contract, the terms of which require delivery within the
timeframe of the relevant market, the investments concerned are recognised or derecognised on the trade date.
All investments are designated upon initial recognition as held at fair value through profit or loss, and are measured at subsequent reporting dates at fair
value, which is the bid price. The Company derecognises a financial asset only when the contractual right to the cash flows from the asset expire, or
when it transfers the financial asset and subsequently all the risks and rewards of ownership to another entity. On derecognition of a financial asset, the
difference between the asset’s carrying amount and the sum of the consideration received and receivable, and the cumulative gain or loss that had been
accumulated is recognised in profit or loss.
All investments for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy in note 15.
Foreign currency
Transactions denominated in currencies other than Pounds Sterling are recorded at the rates of exchange prevailing on the date of transaction. Items
which are denominated in foreign currencies are translated at the rates prevailing on the Balance Sheet date. Any gain or loss arising from a change in
exchange rate subsequent to the date of the transaction is included as exchange gain or loss in the capital reserve or revenue reserve depending on
whether the gain or loss is capital or revenue in nature.
Cash and Cash Equivalents
Cash comprises cash in hand and balances held in interest bearing accounts revalued for exchange rate movements.
For the purpose of the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above.
AVI Japan Opportunity Trust plc / Annual Report 2023SRGFSSIFS 62
Financial Statements / Notes to the Financial Statements continued
For the year ended 31 December 2023
1. General Information and Accounting Policies continued
Revolving Credit Facility
The revolving credit facility is shown at amortised cost and revalued for exchange rate movements. Any gain or loss arising from changes in exchange
rates is included in the capital reserve and shown in the capital column of the Statement of Comprehensive Income.
Income
Dividends receivable on quoted equity shares are taken to revenue on an ex-dividend basis. Dividends receivable on equity shares where no ex-dividend
date is quoted are brought into account when the Company’s right to receive payment is established. Dividends from overseas companies are shown
gross of any withholding taxes. Irrecoverable withholding taxes are disclosed within taxation in the Statement of Comprehensive Income.
Special dividends are taken to the revenue or capital account depending on their nature. In deciding whether a dividend should be regarded as a capital
or revenue receipt, the Board reviews all relevant information as to the reasons for the sources of the dividend on a case-by-case basis.
When the Company has elected to receive scrip dividends in the form of additional shares, rather than cash, the amount of the cash dividend forgone
is recognised as income. Any excess in the value of the cash dividend is recognised in the capital column.
All other income is accounted for on a time-apportioned accruals basis and is recognised in the Statement of Comprehensive Income.
Expenses and Finance Costs
Expenses incurred directly in relation to arranging debt finance are amortised over the term of the finance. All expenses and finance costs are accounted
for on an accruals basis. On the basis of the Board’s expected long-term split of total returns the Company charges 90% of its management fee and
finance costs to capital.
Taxation
The charge for taxation is based on the net revenue for the year and takes into account taxation deferred or accelerated because of temporary
differences between the treatment of certain items for accounting and taxation purposes.
The tax charge consists of overseas tax not recoverable.
Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amount for
financial reporting purposes at the reporting date. Deferred tax assets are only recognised if it is considered more likely than not that there will be suitable
profits from which the future reversal of timing differences can be deducted. In line with the recommendations of the SORP, the allocation method used
to calculate the tax relief on expenses charged to capital is the ‘marginal’ basis. Under this basis, if taxable income is capable of being offset entirely by
expenses charged through the revenue account, then no tax relief is transferred to the capital account.
Dividends Payable to Shareholders
Dividends to shareholders are recognised as a liability in the period in which they are paid or approved in general meetings and are taken to the
Statement of Changes in Equity. Dividends declared and approved by the Company after the Balance Sheet date have not been recognised as a liability
of the Company at the Balance Sheet date.
Share Premium
The share premium account represents the accumulated premium paid for shares issued above their nominal value less issue expenses. This is a reserve
forming part of the non-distributable reserves. The following items are taken to this reserve:
• costs associated with the issue of equity; and
• premium on the issue of shares.
Special Reserve
The special reserve was created by the cancellation of the share premium account by order of the court and forms part of the distributable reserves.
The following items are taken to this reserve:
• costs of share buybacks; and
• crediting the cost of share buybacks for shares reissued.
Capital Reserve
The following are taken to the capital reserve through the capital column in the Statement of Comprehensive Income:
Capital reserve – other, forming part of the distributable reserves:
• gains and losses on the disposal of investments;
• issue expenses on revolving credit facility;
• exchange differences of a capital nature; and
• expenses, together with the related taxation effect, allocated to this reserve in accordance with the above policies.
Capital reserve – investment holding gains, not distributable:
• increase and decrease in the valuation of investments held at the year end.
Revenue Reserve
The revenue reserve represents the surplus of accumulated profits and is distributable by way of dividends.
AVI Japan Opportunity Trust plc / Annual Report 2023 63
31 December
2023
£’000
31 December
2022
£’000
4,179
(16)
(207)
3,956
3,772
(24)
(81)
3,667
2. Income
Income from investments
Overseas dividends
Bank and deposit interest
Exchange losses on receipt of income*
Total income
* Exchange movements arise from ex-dividend date to payment date.
3. Investment Management Fee and Other Expenses
Management fee
162
1,460
1,622
152
1,364
1,516
Year ended 31 December 2023
Year ended 31 December 2022
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
Other expenses:
Directors’ emoluments – fees
Directors’ insurances and other expenses
Directors’ National Insurance Contributions
Auditor’s remuneration – audit services
Marketing
Printing and postage costs
Registrar fees
Custodian fees
Depositary fees
Advisory and professional fees
Regulatory fees
Irrecoverable VAT
Sundry expenses
Total other expenses
149
18
16
51
190
32
28
22
33
296
33
(11)
29
886
–
–
–
–
–
–
–
–
–
–
–
–
–
–
149
18
16
51
190
32
28
22
33
296
33
(11)
29
886
138
12
15
47
212
27
18
28
32
240
29
8
–
806
–
–
–
–
–
–
–
–
–
–
–
–
–
–
138
12
15
47
212
27
18
28
32
240
29
8
–
806
The management fee of 1% per annum is calculated on the lesser of the Company’s NAV or Market Capitalisation at each quarter end. The Investment
Manager will invest 25% of the management fee it receives in shares of the Company (through open market purchases) and will hold these for
a minimum of two years.
At AVI’s request, the Board agreed in September 2023 to temporarily reduce the investment to 10% of the management fee, to bolster AVI’s cash
reserves for an acquisition on the basis that the Investment Manager would increase the reinvestment level subsequently, in order to ensure that 25% of
the management fees were reinvested by 31 December 2024.
4. Finance Costs
Year ended 31 December 2023
Year ended 31 December 2022
Revenue
return
£’000
JPY revolving credit facility
Exchange gain/(loss) on JPY revolving credit facility*
(18)
–
* Revaluation of revolving credit facility.
Details of the revolving credit facility are set out in notes 10, 11 and 12.
Capital
return
£’000
(163)
1,933
Total
£’000
(181)
1,933
Revenue
return
£’000
(21)
–
Capital
return
£’000
(187)
(1,044)
Total
£’000
(208)
(1,044)
AVI Japan Opportunity Trust plc / Annual Report 2023SRGFSSIFS 64
Financial Statements / Notes to the Financial Statements continued
For the year ended 31 December 2023
5. Taxation
Analysis of charge for the year
Overseas tax not recoverable*
Tax charge for the year
Year ended 31 December 2023
Year ended 31 December 2022
Revenue
return
£’000
Capital
return
£’000
418
418
–
–
Total
£’000
418
418
Revenue
return
£’000
Capital
return
£’000
377
377
–
–
Total
£’000
377
377
* Tax deducted on payment of overseas dividends by local tax authorities.
The tax assessed for the year is the standard rate of corporation tax in the United Kingdom of 19%. The differences are explained below:
Return on ordinary activities after interest payable
but before appropriations
Profit/(loss) before taxation multiplied by the standard
rate of corporation tax of 23.5% (2022: 19%)
Effects of:
– Tax – exempt overseas investment income
– Foreign exchange (gains)/losses not taxable
– (Losses)/gains on investments and exchange
losses on capital items
– Excess management expenses carried forward
– Movement in non-trading loan relationship deficit
not utilised
– Overseas tax not recoverable
Tax charge for the year
Year ended 31 December 2023
Year ended 31 December 2022
Revenue
return
£’000
Capital
return
£’000
Total
£’000
Revenue
return
£’000
Capital
return
£’000
Total
£’000
2,890
22,267
25,157
2,688
(9,302)
(6,614)
549
4,231
4,780
511
(1,767)
(1,256)
(794)
39
–
203
3
418
418
–
(147)
(4,392)
277
31
–
–
(794)
(108)
(4,392)
480
34
418
418
(717)
15
–
182
9
377
377
–
18
1,455
259
35
–
–
(717)
33
1,455
441
44
377
377
At 31 December 2023, the Company had unrelieved tax losses of £11,463,000 (31 December 2022: £8,758,000) that are available to offset future
taxable revenue. A deferred tax asset of £2,866,000 (31 December 2022: £2,189,000), which has been calculated using a corporation tax rate of
25% (2022: 25%), has not been recognised because the Company is not expected to generate sufficient taxable income in future periods to utilise
these tax losses.
Deferred tax is not provided on capital gains and losses arising on the revaluation or disposal of investments because the Company meets (and intends
to continue for the foreseeable future to meet) the conditions for approval as an investment trust company.
6. Dividends
Amounts recognised as distributions to equity holders in the year:
Final dividend for the year ended 31 December 2022 of 0.80p (2021: 0.70p) per Ordinary Share
Interim dividend for the year ended 31 December 2023 of 0.85p (2022: 0.75p) per Ordinary Share
31 December
2023
£’000
31 December
2022
£’000
1,118
1,197
960
1,028
2,315
1,988
AVI Japan Opportunity Trust plc / Annual Report 2023 65
6. Dividends continued
Set out below are the interim and final dividends paid or proposed on Ordinary Shares in respect of the financial year, which is the basis on which the
requirements of Section 1159 of the Corporation Tax Act 2010 are considered:
Interim dividend for the year ended 31 December 2023: 0.85p (2022: 0.75p) per Ordinary Share
Proposed final dividend for the year ended 31 December 2023 of 0.85p (2022: 0.80p) per Ordinary Share
31 December
2023
£’000
31 December
2022
£’000
1,197
1,194*
2,391
1,028
1,118
2,146
* Based on shares in circulation on 13 March 2024.
7. Earnings per Ordinary Share – basic and diluted
The earnings per Ordinary Share is based on the Company’s net profit after tax of £24,739,000 (year ended 31 December 2022: loss of £6,991,000) and
on 140,094,621 (year ended 31 December 2022: 136,908,472) Ordinary Shares, being the weighted average number of Ordinary Shares in issue during
the year.
The earnings per Ordinary Share detailed above can be further analysed between revenue and capital as follows:
Year ended 31 December 2023
Year ended 31 December 2022
Revenue
Capital
Total
Revenue
Capital
Total
Net profit/(loss) (£’000)
Weighted average number of Ordinary Shares
2,472
22,267
24,739
140,094,621
2,311
(9,302)
(6,991)
136,908,472
Earnings per Ordinary Share –
basic and diluted (pence)
1.76
15.89
17.65
1.69
(6.79)
(5.10)
There are no dilutive instruments issued by the Company.
8. Investments Held at Fair Value Through Profit or Loss
Financial assets held at fair value
Opening book cost
Opening investment holding gains
Opening fair value
Movement in the year:
Purchases at cost: Equities
Sales proceeds: Equities
– realised gains on equity sales
Increase/(decrease) in investment holding gains
Closing fair value
Closing book cost
Closing investment holding gains
Closing fair value
31 December
2023
£’000
31 December
2022
£’000
160,623
3,700
152,677
18,572
164,323
171,249
55,710
(57,291)
4,367
18,748
55,224
(54,493)
7,215
(14,872)
185,857
164,323
163,409
22,448
160,623
3,700
185,857
164,323
AVI Japan Opportunity Trust plc / Annual Report 2023SRGFSSIFS 66
Financial Statements / Notes to the Financial Statements continued
For the year ended 31 December 2023
8. Investments Held at Fair Value Through Profit or Loss continued
Transaction costs
Cost on acquisition
Cost on disposals
Analysis of capital gains
Gains on sales of financial assets based on historical cost
Movement in investment holding gains/(losses) for the year
Net gains/(losses) on investments held at fair value
Year ended
31 December
2023
£’000
Year ended
31 December
2022
£’000
32
33
65
32
30
62
4,367
18,748
23,115
7,215
(14,872)
(7,657)
The Company received £57,291,000 (year ended 31 December 2022: £54,493,000) from investments sold in the year. The book cost of these
investments when they were purchased was £52,924,000 (year ended 31 December 2022: £47,278,000). These investments have been revalued over
time and until they were sold any unrealised gains or losses were included in the fair value of the investments.
The Company has six investments of 3% or more of the equity capital of the investee companies, which are set out in the Investment Portfolio on
page 22.
9. Receivables
Due from brokers
Other receivables and prepayments
No receivables are past due or impaired.
10. Current Liabilities
Revolving credit facility
Payables:
Management fees
Interest payable
Due to brokers
Accrued expenses
Total current liabilities
2023
£’000
324
64
388
2023
£’000
16,301
133
70
79
149
431
16,732
2022
£’000
–
196
196
2022
£’000
–
124
51
1
208
384
384
AVI Japan Opportunity Trust plc / Annual Report 2023 67
Year ended 31 December 2023
Year ended 31 December 2022
¥’000
£’000
¥’000
£’000
2,465,000
465,000
–
–
15,532
2,703
–
(1,934)
2,930,000
1,000,000
(1,465,000)
–
2,930,000
16,301
2,465,000
2,930,000
16,301
2,930,000
18,787
5,999
(9,013)
(241)
15,532
18,462
11. Revolving Credit Facility
Opening balance
Proceeds from amounts drawn
Proceeds from amounts repaid
Exchange rate movement
Closing balance
Maximum facility available
Effective 2 February 2022, the Company extended the revolving credit facility (“the facility”) for a further two years to 2 February 2024, with the ¥1.4 billion
option removed to leave a facility size of ¥2.9 billion. The facility was subsequently extended to 5 April 2024 on the same terms, while renewal terms are
being agreed. Interest is charged at the Tokyo Overnight Average Rate (“TONAR”) (if TONAR – the reference rate is less than zero this shall be deemed to
be zero). The interest is payable bi-annually, and the current interest rate (and also the effective rate) is 1.15%.
When less than 50% of the facility is utilised, commitment fees of 0.375% are charged on undrawn balances. If over 50% is drawn down, 0.325% is
payable on the undrawn amount. As at the date of this report, the Company has drawn down ¥2.465 billion of the facility and the commitment fee is
payable. The commitment fees are payable quarterly.
Under the terms of the facility, the net assets shall not be less than £75 million and the adjusted total net assets to borrowing ratio shall not be less
than 4.5:1.
The facility is shown at amortised cost and revalued for exchange rate movements. Costs of £20,000 were incurred in relation to the extension of the
facility. Any gain or loss arising from changes in exchange rates are included in the capital reserves and shown in the capital column of the Statement of
Comprehensive Income. Interest costs are charged to capital and revenue in accordance with the Company’s accounting policies.
12. Non-Current Liabilities
Revolving credit facility
Total
13. Share Capital
Allotted, called up and fully paid
Balance at beginning of year
Issue of Ordinary Shares
Treasury shares:
Balance at beginning of year
Issue of Ordinary Shares from treasury
Buyback of Ordinary Shares into treasury
Balance at end of year
Total Ordinary Share capital excluding treasury shares
2023
£’000
–
–
2022
£’000
15,532
15,532
As at 31 December 2023
Ordinary Shares of 1p each
Nominal
value
£’000
1,375
33
1,408
Number
of shares
137,461,702
3,375,000
140,836,702
400,000
(985,000)
985,000
400,000
140,436,702
During the year ended 31 December 2023, 4,360,000 (31 December 2022: 4,491,000) Ordinary Shares were issued for a net consideration of
£5,258,000 (31 December 2022: £4,824,000), including 985,000 Ordinary Shares issued from treasury (31 December 2022: 250,000).
During the year, 985,000 Ordinary Shares (31 December 2022: 400,000) were bought back and placed in treasury for an aggregate consideration
of £1,134,000 (31 December 2022: £171,000).
AVI Japan Opportunity Trust plc / Annual Report 2023SRGFSSIFS
68
Financial Statements / Notes to the Financial Statements continued
For the year ended 31 December 2023
14. NAV per Ordinary Share
The NAV per Ordinary Share is based on net assets of £182,943,000 (31 December 2022: £156,395,000) and on 140,436,702 (31 December 2022:
137,061,702) Ordinary Shares, being the number of Ordinary Shares in issue at the year end.
15. Financial Instruments and Capital Disclosures
Investment Objective and Policy
The investment objective of the Company is to achieve a total return through a focused portfolio of investments, particularly in companies whose share
prices stand at a discount to estimated underlying NAV.
The Company’s investment objective and policy are detailed on page 23.
The Company’s financial instruments comprise equity investments, cash balances, receivables, payables and borrowings. The Company makes use of
borrowings to achieve improved performance in rising markets.
Risks
The risks identified arising from the financial instruments are market risk (which comprises market price risk, interest rate risk and foreign currency risk),
liquidity risk and credit and counterparty risk. The Company may also enter into derivative transactions to manage risk.
The Board and Investment Manager consider and review the risks inherent in managing the Company’s assets which are detailed below.
Market Risk
Market risk arises mainly from uncertainty about future prices of financial instruments used in the Company’s business. It represents the potential loss
which the Company might suffer through holding market positions by way of price movements, interest rate movements, exchange rate movements and
systematic risk (risk inherent to the market, reflecting economic and geopolitical factors). The Investment Manager assesses the exposure to market risk
when making each investment decision and these risks are monitored by the Investment Manager on a regular basis and the Board at quarterly meetings
with the Investment Manager.
Market Price Risk
Market price risk (i.e. changes in market prices other than those arising from currency risk or interest rate risk) may affect the value of investments.
Adherence to investment policies mitigates the risk of excessive exposure to any particular type of security or issuer. The portfolio is managed with
an awareness of the effects of adverse price movements through detailed and continuing analysis, with the objective of maximising overall returns to
shareholders. The assessment of market risk is based on the Company’s portfolio as held at the year end. The Company has experienced volatility in
the fair value of investments during recent years due to geopolitical events. Further additional volatility during the year has resulted from the Russian
invasion of Ukraine, the ongoing Israel/Palestine conflict, UK political instability, and inflation. The Company has used 10% to demonstrate the impact of
a reduction/increase in the fair value of the investments and the impact upon the Company that might arise from future events.
The portfolio is managed with an awareness of the effects of adverse price movements through detailed and continuing analysis with the objective
of maximising overall returns to Shareholders. If the fair value of the Company’s investments at the year end increased or decreased by 10%, then it
would have had an impact on the Company’s capital return through (losses)/gains on investments held at fair value, impacting profit/(loss) and the NAV,
by 18,586,000 (31 December 2022: £16,432,000).
Foreign Currency
The value of the Company’s assets and the total return earned by the Company’s Shareholders can be significantly affected by foreign exchange
rate movements as most of the Company’s assets are denominated in currencies other than Pounds Sterling, the currency in which the Company’s
financial statements are prepared. Income denominated in foreign currencies is converted to Pounds Sterling upon receipt. The JPY exchange rate
at 31 December 2023 was ¥179.74:£1 (31 December 2022: ¥158.705:£1).
Currency Risk
At 31 December 2023
Receivables
Cash and cash equivalents
JPY revolving credit facility
Payables
Currency exposure on net monetary items
Investments held at fair value through profit or loss
Total net currency exposure
GBP
£’000
JPY
£’000
Total
£’000
64
311
–
(282)
93
–
93
324
13,119
(16,301)
(149)
(3,007)
185,857
388
13,430
(16,301)
(431)
(2,914)
185,857
182,850
182,943
AVI Japan Opportunity Trust plc / Annual Report 2023 15. Financial Instruments and Capital Disclosures continued
Currency Risk continued
At 31 December 2022
Receivables
Cash and cash equivalents
JPY revolving credit facility
Payables
Currency exposure on net monetary items
Investments held at fair value through profit or loss
Total net currency exposure
69
GBP
£’000
37
1,066
–
(332)
771
–
771
JPY
£’000
Total
£’000
159
6,726
(15,532)
(52)
(8,699)
164,323
196
7,792
(15,532)
(384)
(7,928)
164,323
155,624
156,395
A 5% decline in Sterling against foreign currency denominated (i.e. non Pounds Sterling) assets and liabilities held at the year end would have
increased the net assets and exchange gains and losses, impacting profit/(loss), by £9,143,000 (31 December 2022: £7,781,000). A 5% rise in Sterling
against foreign currency denominated assets and liabilities held at the year end would have decreased the net assets and exchange gains and losses,
impacting profit/(loss) by £9,143,000 (31 December 2022: £7,781,000).
Interest Rate Risk
Interest rate movements may affect:
• the level of income receivable on cash deposits; and
• the interest payable on variable rate borrowings.
The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment
decisions.
The exposure at 31 December of financial assets and financial liabilities to interest rate risk is shown by reference to floating interest rates.
Exposure to floating interest rates
Cash and cash equivalents
JPY revolving credit facility
31 December
2023
£’000
31 December
2022
£’000
13,430
(16,301)
7,792
(15,532)
If the above level of cash was maintained for a year, a 1% increase in interest rates would decrease the revenue return and net assets by £134,000
(31 December 2022: £77,000). Management proactively manages cash balances. If there was a fall of 1% in interest rates, it would potentially impact the
Company by turning positive interest to negative interest. The total effect would be a change in profit/(loss) and the NAV, through a cost increase/revenue
reduction, of £134,000 (31 December 2022: £77,000).
The current interest rate chargeable on the revolving credit facility (the “facility”) is 1.15% and the effective interest rate 1.15%. The effective rate
chargeable for a year on the current drawn down balance of ¥2,930,000,000 is £187,000. The facility has been extended to 5 April 2024, after which
it will be renewed when terms have been agreed.
AVI Japan Opportunity Trust plc / Annual Report 2023SRGFSSIFS 70
Financial Statements / Notes to the Financial Statements continued
For the year ended 31 December 2023
15. Financial Instruments and Capital Disclosures continued
Liquidity Risk
Liquidity risk is mitigated by the fact that the Company has £13,430,000 (2022: £7,792,000) cash at bank, the assets are readily realisable, which can
be easily sold to meet funding commitments and further short-term flexibility is available through the use of bank borrowings. The current revolving credit
facility is repayable on 5 April 2024, or prior to that date. Repayment may be completed through cash repayments, further borrowings and/or
disposal of investments. Unlisted investments, if any, in the portfolio are subject to liquidity risk which is taken into account by the Directors when arriving
at their valuation.
The Company is a closed-ended fund, assets do not need to be liquidated to meet redemptions, and sufficient liquidity is maintained to meet obligations
as they fall due.
The remaining contractual payments on the Company’s financial liabilities at 31 December 2023, based on the earliest date on which payment can be
required and current exchange rates at the Balance Sheet date undiscounted amounts, were as follows:
At 31 December 2023
Revolving credit facility
Payables
At 31 December 2022
Revolving credit facility
Payables
In one year
or less
£’000
Total
£’000
(16,301)
(431)
(16,301)
(431)
(16,732)
(16,732)
In one year
or less
£’000
In more
than 1 year
but not more
than 2 years
£’000
Total
£’000
(173)
(384)
(557)
(15,617)
–
(15,790)
(384)
(15,617)
(16,174)
Credit Risk
Credit risk is mitigated by diversifying the counterparties through which the Investment Manager conducts investment transactions. The credit standing
of all counterparties is reviewed periodically, with limits set on amounts due from any one counterparty. As at 31 December 2022, cash was held with
J.P. Morgan Chase Bank (A2* Moody’s credit rating).
The total credit exposure represents the carrying value of cash and receivable balances and totals £13,818,000 (31 December 2022: £7,988,000).
Fair Values of Financial Assets
The Company measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements.
The fair value is the amount at which the asset could be sold or the liability transferred in an orderly transaction between market participants, at the
measurement date, other than a forced or liquidation sale.
Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the
relevant assets as follows:
• Level 1 – valued using quoted prices unadjusted in active markets for identical assets or liabilities.
• Level 2 – valued by reference to valuation techniques using observable inputs for the asset or liability other than quoted prices included within Level 1.
• Level 3 – valued by reference to valuation techniques using inputs that are not based on observable market data for the asset or liability.
The table below sets out fair value measurements of financial instruments as at the year end, by the level in the fair value hierarchy into which the fair
value measurement is categorised.
AVI Japan Opportunity Trust plc / Annual Report 2023 71
15. Financial Instruments and Capital Disclosures continued
Fair values of Financial Assets continued
Financial assets at fair value through profit or loss at 31 December 2023
Equity investments
Financial assets at fair value through profit or loss at 31 December 2022
Equity investments
Level 1
£’000
185,857
185,857
Level 1
£’000
164,323
164,323
Level 2
£’000
Level 3
£’000
–
–
–
–
Level 2
£’000
Level 3
£’000
–
–
–
–
Total
£’000
185,857
185,857
Total
£’000
164,323
164,323
There have been no transfers during the year between Levels 1, 2 and 3.
Capital Management Policies and Procedures
The structure of the Company’s capital is described on page 39 and details of the Company’s reserves are shown in the Statement of Changes in Equity
on page 57.
The Company’s capital management objectives are:
• to ensure that it will be able to continue as a going concern;
• to achieve capital growth through a focused portfolio of investments, particularly in companies whose share prices stand at a discount to estimated
underlying NAV, through an appropriate balance of equity capital and debt; and
• to maximise the return to Shareholders while maintaining a capital base to allow the Company to operate effectively and meet obligations as they
fall due.
The Board, with the assistance of the Investment Manager, regularly monitors and reviews the broad structure of the Company’s capital on an ongoing
basis. These reviews include:
• the level of gearing, which takes account of the Company’s position and the Investment Manager’s views on the market; and
• the extent to which revenue in excess of that which is required to be distributed should be retained.
The Company’s objectives, policies and processes for managing capital are set out in the Strategic Report. The Company is subject to externally
imposed capital requirements:
• as a public company, the Company is required to have a minimum share capital of £50,000; and
• in accordance with the provisions of Sections 832 and 833 of the Companies Act 2006, the Company, as an investment company:
– is only able to make a dividend distribution to the extent that the assets of the Company are equal to at least one and a half times its liabilities
after the dividend payment has been made; and
– is required to make a dividend distribution each year such that it does not retain more than 15% of the income that it derives from shares
and securities.
These requirements are unchanged since last year and the Company has complied with these requirements at all times since commencing trading
on 23 October 2018.
16. Related Party Disclosures and Investment Management Fees
Fees paid to the Company’s Directors are disclosed in the Directors’ Remuneration Report on page 47 and in note 3 on page 63.
The Company paid management fees to AVI during the year amounting to £1,613,000 (2022: £1,525,000). As at the year end, £133,000 remained
outstanding in respect of management fees (2022: £124,000). At 31 December 2023, AVI held 1,500,000 Ordinary Shares (2022: 1,275,000 Ordinary
Shares) of the Company.
Finda Oy and City of London Investment Management Company Limited (“City of London”), significant Shareholders of the Company, are deemed to
be related parties of the Company for the purposes of the Listing Rules by virtue of their holding in the Company’s issued share capital. During the year
under review, no material transactions took place between the Company and Finda Oy or City of London. As at 31 December 2023, the Company had
not been notified of any change to Finda Oy’s holding, apart from a small reduction in the percentage held by Finda Oy due to an increase in the issued
share capital during the year. At the date of the latest notification, on 5 May 2023, Finda Oy’s holding represented 21.5% of the voting rights. City of
London informed the Company on 23 February 2023 that its holding had reduced to 15.9% of the voting rights and on 26 September 2023 that its
holding had reduced to 14.9%. As at 13 March 2024, no further notifications have been received from either of the significant Shareholders.
17. Post Balance Sheet Events
There are no post balance sheet events to report.
AVI Japan Opportunity Trust plc / Annual Report 2023SRGFSSIFS 72
Shareholder Information / AIFMD Disclosures
The Company’s AIFM is Asset Value Investors Limited.
The AIFMD requires certain information to be made available to
investors in AIFs before they invest and requires that material changes
to this information be disclosed in the annual report of each AIF. Those
disclosures that are required to be made pre-investment are included
within an AIFMD Investor Disclosure Document. This, together with
other necessary disclosures required under AIFMD, can be found on the
Company’s website www.ajot.co.uk. All authorised AIFMs are required
to comply with the AIFMD Remuneration Code. The AIFM’s remuneration
disclosures can be found on the Company’s website www.ajot.co.uk.
AVI Japan Opportunity Trust plc / Annual Report 2023 Shareholder Information / Glossary
Alternative Performance Measure (“APM”)
An APM is a numerical measure of the Company’s current, historical or
future financial performance, financial position or cash flows, other than a
financial measure defined or specified in the applicable financial framework.
The definitions below are utilised for the measures of the Company, the
investment portfolio and underlying individual investments held by the
Company. Certain of the metrics are to look through to the investments
held, excluding certain non-core activities, so the performance of the
actual core of the investment may be evaluated. Where a company in
the investment portfolio holds a number of listed investments these are
excluded in order to determine the actual core value metrics.
Comparator Benchmark
The Company’s Comparator Benchmark is the MSCI Japan Small Cap
Index, expressed in Sterling terms. The benchmark is an index which
measures the performance of the Japan Small-Cap equity market. The
weighting of index constituents is based on their market capitalisation.
Dividends paid by index constituents are assumed to be reinvested in the
relevant securities at the prevailing market price. The Investment Manager’s
investment decisions are not influenced by whether a particular company’s
shares are, or are not, included in the benchmark. The benchmark is used
only as a yardstick to compare investment performance.
Cost
The book cost of each investment is the total acquisition value,
including transaction costs, less the value of any disposals or capitalised
distributions allocated on a weighted average cost basis.
Discount/Premium
If the share price is lower than the NAV per share it is said to be trading at
a discount. The size of the discount is calculated by subtracting the share
price of 127.0p (2022: 112.3p) from the NAV per share of 130.3p (2022:
114.1p) and is usually expressed as a percentage of the NAV per share,
2.5% (2022: 1.6%). If the share price is higher than the NAV per share, this
situation is called a premium.
The discount and performance are calculated in accordance with
guidelines issued by The AIC. The discount is calculated using the net
asset values per share inclusive of accrued income.
Earnings Before Interest and Taxes (“EBIT”)
EBIT is equivalent to profit before finance costs and tax set out in the
statement of comprehensive income.
Enterprise Value (“EV”)
Enterprise Value reflects the economic value of the business by taking
the market capitalisation less cash, investment securities and the value of
treasury shares plus debt and net pension liabilities.
Enterprise Value (“EV”)/Earnings Before Interest and Taxes (“EBIT”)
A multiple based valuation metric that takes account of the excess capital
on a company’s balance sheet. For example, if a company held 80% of
its market capitalisation in NFV (defined under Net Financial Value/Market
Capitalisation), and had a market capitalisation of 100 and EBIT of 10, the
EV/EBIT would be 2x, (100-80)/10.
73
Enterprise Value (“EV”) Free Cash Flow Yield (“EV FCF Yield”)
A similar calculation to free cash flow yield, except the free cash flow
excludes interest and dividend income and is divided by enterprise value.
This gives a representation for how overcapitalised and undervalued a
company is. If a company were to pay out of all of its NFV (defined under
Net Financial Value/Market Capitalisation) and the share price remained
the same, the EV FCF Yield would become the FCF yield. For example,
take a company with a market capitalisation of 100 that had NFV of 80 and
FCF of 8. The FCF yield would be 8%, 8/100, but if the company paid out
all of its NFV the FCF yield would become 40%, 8/(100-80). This gives an
indication of how cheaply the market values the underlying business once
excess capital is stripped out.
Free Cash Flow (“FCF”) Yield
Free cash flow is the amount of cash profits that a business generates,
adjusted for the minimum level of capital expenditure required to maintain
the company in a steady state. It measures how much a business could
pay out to equity investors without impairing the core business. When free
cash flow is divided by the market value, we obtain the free cash flow yield.
Gearing
Gearing refers to the ratio of the Company’s debt to its equity capital.
The Company may borrow money to invest in additional investments
for its portfolio. If the Company’s assets grow, the Shareholders’ assets
grow proportionately more because the debt remains the same. But if the
value of the Company’s assets falls, the situation is reversed. Gearing can
therefore enhance performance in rising markets but can adversely impact
performance in falling markets.
The gearing of 8.9% (31 December 2022: 9.9%) represents borrowings
of £16,301,000 (31 December 2022: £15,532,000) expressed as a
percentage of Shareholders’ funds of £182,943,000 (31 December
2022: £156,395,000). The gearing of 1.6% (31 December 2022: -5.1%)
represents borrowings net of cash of (£2,915,000) (31 December 2022:
£7,928,000) expressed as a percentage of Shareholders’ funds of
£182,943,000 (31 December 2022: £156,395,000).
Net Asset Value (“NAV”)
The NAV is Shareholders’ funds expressed as an amount per individual
share. Shareholders’ funds are the total value of all of the Company’s
assets, at their current market value, having deducted all liabilities and prior
charges at their par value, or at their asset value as appropriate. The total
NAV per share is calculated by dividing the NAV by the number of Ordinary
Shares in issue.
Net Cash/Market Capitalisation
Net cash consists of cash and the value of treasury shares less debt and
net pension liabilities. It is a measure of the excess cash on a company’s
balance sheet and, by implication, how much value the market attributes
to the core operating business. For example, the implied valuation of the
core operating business of a company trading with a net cash/market
capitalisation of 100% is zero.
Net Financial Value (“NFV”)/Market Capitalisation
Net Financial Value consists of cash, investment securities (less capital
gains tax) and the value of treasury shares less debt and net pension
liabilities. A measure of the excess cash on a company’s balance sheet
and, by implication, how much value the market attributes to the core
operating business. For example, the implied valuation of the core
operating business of a company trading with a NFV/market capitalisation
of 100% is zero.
AVI Japan Opportunity Trust plc / Annual Report 2023SRGFSSI 74
Shareholder Information / Glossary continued
Ongoing Charges Ratio
The Company’s Expense Ratio is its annualised expenses (excluding
finance costs and certain non-recurring items) of £2,485,000 (2022:
£2,322,000) (being investment management fees of £1,622,000
(2022: £1,516,000) and other expenses of £886,000 (2022: £806,000)
less non-recurring expenses of £23,000 (2022: £nil)) expressed as a
percentage of the average daily net assets of £166,887,000 (2022:
£154,813,000) of the Company during the year.
Portfolio Discount
A proprietary estimate of how far below fair value a given company is
trading. For example, if a company with a market capitalisation of 100 had
80 NFV and a calculated fair value of the operating business of 90, we
would attribute it a discount of -41%, 100/(90+80) -1. This indicates the
amount of potential upside. The company trading on a -41% discount has
a potential upside of +69%, 1/(1-0.41).
Portfolio Yield
The weighted-average dividend yield of each underlying company in
AJOT’s portfolio.
Return on Equity (“ROE”)
A measure of performance calculated by dividing net income by
Shareholder equity.
ROE ex Non-Core Financial Assets
Non-core financial assets consists of cash and investment securities
(less capital gains tax) less debt and net pension liabilities. The ROE is
calculated as if non-core financial assets were paid out to Shareholders.
Companies with high balance sheet allocations to non-core, low yielding
financial assets have depressed ROEs. The exclusion of non-core financial
assets gives a fairer representation of the true ROE of the underlying
business.
Total Return – NAV and Share Price Returns
The combined effect of any dividends paid, together with the rise or fall
in the share price or NAV. Total return statistics enable the investor to
make performance comparisons between investment trusts with different
dividend policies. Any dividends received by a Shareholder are assumed to
have been reinvested in either additional shares in the Company or in the
assets of the Company at the prevailing NAV, in either case at the time that
the shares begin to trade ex-dividend.
AVI Japan Opportunity Trust plc / Annual Report 2023 75
Shareholder Information / Investing in the Company
The Company’s Ordinary Shares are listed on the London Stock Exchange
and can be bought directly on the London Stock Exchange or through the
platforms listed on www.ajot.co.uk/how-to-invest/platforms/.
Share Prices
The share price is published daily in The Financial Times, as well as on the
Company’s website: www.ajot.co.uk.
Dividends
Shareholders who wish to have dividends paid directly into a bank
account, rather than by cheque to their registered address, can complete
a mandate form for the purpose. Mandate forms may be obtained from
Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex
BN99 6DA on request or downloaded from Equiniti’s website
www.shareview.com. The Company operates the BACS system for the
payment of dividends. Where dividends are paid directly into Shareholders’
bank accounts, dividend tax vouchers are sent to Shareholders’ registered
addresses.
Change of Address
Communications with Shareholders are mailed to the last address held on
the share register. Any change or amendment should be notified to Equiniti
Limited using the contact details given above, under the signature of the
registered holder.
Daily NAV
The daily NAV of the Company’s shares can be obtained from the London
Stock Exchange or via the website: www.ajot.co.uk
AVI Japan Opportunity Trust plc / Annual Report 2023SRGFSSI 76
Shareholder Information / Company Information
Secretary
Link Company Matters Limited
6th Floor
65 Gresham Street
London
EC2V 7NQ
Solicitors
Stephenson Harwood LLP
1 Finsbury Circus
London
EC2M 7SH
Custodian
J.P. Morgan Chase Bank
National Association
London Branch
25 Bank Street
Canary Wharf
London
E14 5JP
Depositary
J.P. Morgan Europe Limited
25 Bank Street
Canary Wharf
London
E14 5JP
Investment Manager and AIFM
Asset Value Investors Limited
2 Cavendish Square
London
W1G 0PU
Directors
Norman Crighton (Chairman)
Ekaterina (Katya) Thomson
Yoshi Nishio
Margaret Stephens
Administrator
Link Alternative Fund Administrators
Limited
A Waystone Group Company
Broadwalk House
Southernhay West
Exeter
EX1 1TS
Auditor
BDO LLP
55 Baker Street
London
W1U 7EU
Corporate Broker
Singer Capital Markets
1 Bartholomew Lane
London
EC2N 2AX
Registered Office
Link Company Matters Limited
6th Floor
Gresham Street
London
EC2V 7NQ
Registrar and Transfer Office
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
Registrar’s Online Platform
www.shareview.co.uk
Registrar’s Shareholder Helpline
Tel. 0371 384 2030
Lines are open 8.30am to 5.30pm,
Monday to Friday.
Registrar’s Broker Helpline
Tel. 0906 559 6025
Calls to this number cost £1 per
minute from a BT landline, other
providers’ costs may vary. Lines are
open 8.30am to 5.30pm, Monday
to Friday.
AVI Japan Opportunity Trust plc / Annual Report 2023
77
Design and Production
www.carrkamasa.co.uk
AVI Japan Opportunity Trust plc / Annual Report 2023SRGFSSIPrinted by:perivan.com