Taking advantage of the next wave of corporate reform

By Chris Salih on 17 March 2026 in Asia/Emerging Markets

A guide to the AVI Japan Opportunities Trust

It’s not often that you can make a case for an investment vehicle which has produced a 15.5% annualised return since 2018 being out of favour* – but that may well be the case for the AVI Japan Opportunities Trust (AJOT).

When Shinzo Abe assumed leadership of the country back in 2012 – Japan was burdened by stagnant economic growth, unfavourable population dynamics and a mountain of debt. Abe set about turning the country’s fortunes around with his famed “three arrows” approach of Abenomics, which focuses on loose economic policy, fiscal stimulus and economic reform.

Changes included the introduction of the Japan Revitalisation Strategy and the Stewardship Code as well as the Corporate Governance Code in 2015 to promote board independence, shareholder dialogue, and capital efficiency. We saw major acceleration of the process in 2023 when the Tokyo Stock Exchange (TSE) pushed companies to focus on achieving sustainable growth and enhancing corporate value. It targeted companies that have consistently traded below a P/B ratio of one (over half of companies in the Topix in 2023). The move was designed to put further pressure on Japanese management teams to address issues of capital inefficiency. One of the main reasons for these low P/B ratios is cash in reserve.

The TSE has also been addressing child-parent listings (situations where a parent company and its subsidiary are both publicly traded). Companies are now aggressively buying back shares and dissolving old-world corporate shareholding structures.

However, while small-caps have reaped some benefits from these changes, it is the larger companies which have been the main focus of this reform. In that time small-caps have also had to deal with Covid volatility, interest rates rising in 2022 (and the yen weakening again) and the focus on exporters and cyclical names in 2025.

However, the backdrop is not without risks: the ongoing conflict between the US and Iran have the potential to push global oil prices sharply higher, something that would be particularly negative for resource-poor Japan and could weigh on the broader equity outlook.

Governance reform in Japan is still at an early stage and there are reasons to suggest small-caps could be the next beneficiaries. After initially focusing on large-caps “prime”, the TSE has expanded its efforts to improve capital efficiency, governance, and shareholder returns to the “standard” and “growth” markets, targeting smaller and mid-sized enterprises. We’ve also got greater certainty in markets following the “super majority” won by Prime Minister Sanae Takaichi following the snap election she called for February 2026. Takaichi is a supporter of Abe’s original mandate and was part of the first wave of reform – giving renewed confidence this corporate reform journey shows no sign of stopping any time soon.

Launched in 2018, the portfolio consists of around 15-25 names and has a strong focus on constructive engagement with company management aimed at unlocking shareholder value. AJOT is headed up by Joe Bauernfreund, who joined the firm in 2002 and became CEO and CIO in 2015.

While the likes of the TSE work on corporate reform from the outside, AJOT works from within, by placing a heavy focus on operational and strategic changes within a company. This may be weak governance or general inefficiencies (such as having business lines which are loss making).

The focus on being bottom-up, high conviction and with a focus on undervalued business has borne fruit. AJOT has produced a 61.2% outperformance of the MSCI Small Cap Japan index since launching in 2018*.

Investment process

Taking advantage of overlooked markets

AJOT’s investment philosophy is based on the belief that markets are inefficient, with areas of the stock market being neglected or overlooked by investors, creating mis-pricings that the team seeks to exploit through bottom-up fundamental research. This is particularly the case in Japan, where the small-cap space is overlooked due to limited sell-side research and poor company disclosure. The aim is to identify these companies and actively engage with senior management to drive these businesses towards improving corporate value and generating shareholder return.

The team cover an investment universe of approximately 3,700 companies, looking for appropriate opportunities based on metrics like profitability, valuations and businesses with substantial net cash and securities relative to the size of the business.

The team then take a closer look at the 70 or so companies remaining, to see which meet their quality and valuation criteria. Further qualitative research is then undertaken on the businesses – focusing on the likes of return on assets, earnings stability and growth outlook – coupled with discussions with management. The team also evaluate managements’ openness to their suggestions and analyse the shareholder register to gauge likely support. The team will avoid companies where management is unresponsive or where radical change is needed to address a low valuation.

AJOT completed a merger with Fidelity Japan Trust in November 2025, giving the team further scope to invest in this under-researched area of the market. The move saw two-thirds of investors roll over into the AJOT portfolio.

Why now for this portfolio

• High conviction strategy has been successful in a number of market conditions since launch.
• Their activist approach and engagement with company management allows them to make meaningful changes to the businesses they invest in.
• Corporate reforms have only just started to impact the small-cap market. This coupled with the lack of research on Japanese small-caps raises the potential for significant long-term gains.
• Merger with Fidelity Japan Trust gives AJOT significantly more scale to invest in new and existing opportunities.
• Takaichi’s snap election victory means Japan finally has political stability for the first time in a number of years.

Manager’s View

After four prime ministers in the past five years, Nicola says political stability is welcome news in Japan. Takaichi’s super majority victory means she can effectively push through whatever policies her party would like to implement. It is also seen as a green light for the continued improvements in corporate Japan, because of her long-held backing of low interest rates and robust fiscal spending to stimulate growth. She is an acolyte of the late Shinzo Abe’s mandate, having been a significant figure in the first sweep of corporate governance reforms more than a decade ago. Takaichi has been vocal about companies with large cash sums on their balance sheets being penalised.

Despite two rate rises in the past year, the weakening yen also continues to hinder smaller companies. It has now lost a third of its value relative to the US dollar since 2021.

Nicola says: “The truth is we have a weak yen and no one knows if it is going to change soon. But we do know Takaichi is concerned about the impact of imported inflation on her voters – she has been talking about getting rid of consumption tax on food, but that is only 10% and most of the staples have doubled in the past couple of years and the real culprit for that is the weak yen. She has to balance the economically stimulating effect of the weak yen with the economically constricting effect of it when it comes to domestic consumption.”

More levers to press on small-caps through corporate and operational reform

Despite more than a decade of change already, Nicola says there is still much further to go on corporate reform in Japan, pointing to a large number of companies trading below book value, which have very basic/non-existing communications with the market. She says they still don’t publish information in English and have huge piles of cash and real estate on the balance sheet.

“The pool of companies is large and a decade ago we would’ve considered around 1% of them investable because they were engageable – today the number is so much higher,” she says.

Interestingly, she says in a recent catch-up, the TSE told them, despite all the changes being made they were only happy with 10-15% of companies in the prime section of the exchange (large-caps). Nicola says despite the changes being made by large-caps, a number were already far more sophisticated in terms of dealing with shareholders than their smaller peers – adding that they are used to talking about concepts like return on investment, working capital, cash on balance sheets and cross shareholdings.

She says the great benefit for Japanese small-caps with 50-70% in net cash is that it means they do not have to give all of it away to comply with these corporate reforms.

Some issues are prevalent across the entire Japanese market regardless of size – such as cash piles, real estate, investment securities and cross shareholdings. However, other areas like operational improvement can also help to bolster the position of businesses – and this is where small-caps can feel a greater benefit. Nicola points to an example of a business which made widgets for a phone but also made biros for no reason and were losing money on it. She says companies like this are reticent to restructure their business to improve those efficiencies which is where they can help.

She says: “This is a lever which has much more scope to be pulled further down the market-cap scale where there are greater inefficiencies. Ultimately, it is culturally more difficult to change small-caps and there are also many more of them, that is why corporate reforms will take longer.”

The activist approach

AJOT’s investment approach is centred around operational and strategic improvement of companies with inefficiencies – making dialogue with these firms an essential part of the process – to build a balanced portfolio of companies in early, mid and late-stage engagement.

Meaningful change often means a reasonable exposure to a business (often 5% or more of the voting rights), this is reflected by the fact that the top 10 holdings account for two-thirds of the portfolio.

The team will try to remain as constructive and private as possible – but they can (and have) gone public with campaigns if they have been invested for a while and a company is not making changes. Examples of this include a public campaign in April 2025 targeting Rohto Pharmaceutical, urging the company to sharpen its focus on core, profitable businesses like skincare and eye care while reducing investment in its regenerative medicine division. Another is “Draw Wacom’s Future” following the sluggish performance of its Branded Business segment.

A recent example of their approach is Synchro Food – where AVI requisitioned an extraordinary general meeting following both operational and governance issues. The result of which was the removal of two board members and the introduction of AVI’s head of research Kaz Sakai as a director.

Another example would be Broadmedia Corporation, where AVI launched a tender offer to increase its holding from 30-40% to drive corporate governance improvements – a move which Nicola says gives them control given the voting turnout.

“We have a few tools at our disposal – like the 5% announcement rule within Japan (if you breach this barrier it means it has to be made public). Given our strong reputation it is effectively a tool we can use with companies where we say we own 4.8%, we’d like to own more but we’d like to know what your position is on X, Y and Z,” Nicola says.

Portfolio positioning and changes

As mentioned, AJOT tends to hold companies for three to five years with a balance between early, mid and late-stage engagement. However, there has been a slight pickup in turnover due to private equity, with four and two firms taken out in 2024 and 2025 respectively. The combination with Fidelity Japan has given AJOT extra flexibility to increase their stakes and engagement – with three new positions added following the merger.

One of these is Asiro, a platform which does legal matching (if you have an issue it matches you with a lawyer). Nicola says the business has been growing 40-50% and has a market cap of 20%, but despite that it has been trading at a really low valuation and at a discount to its peers. She says the forward valuations are negative and they have some attractive assets. She says: “It is more of an operational improvement. It has businesses outside the core business which we don’t think it should be focusing on. They can improve their relationship with the stock market so people know more about them and what they are doing.”

Other additions in December 2025 included Foster Electric, a global supplier of automotive audio systems, and Senshu Electric, which provides various electric wires.

With a £2 billion market cap, Mitsubishi Logistics is the largest company in the portfolio. Nicola says it is one of the oldest logistic companies in Japan and has a number of prime real estate holdings revolving around logistic warehousing. She says they have been growing for 10 years and their prize asset is their real estate portfolio – which falls into both their traditional real estate, which they use, and a separate portfolio which they loan out.

“We estimate the two together are 200% of the market cap. It trades at below 1x price-to-book and we have a great relationship with the board and meet them every quarter and are very aware of why their share price is undervalued. They are getting education on this from us and also TSE – it is a gold plated business in Japan and is on the name and shame list. They are very aware something needs to happen with the real estate; however the biggest challenge is they don’t have the internal expertise. They have good logistic maestros but nothing in the real estate space. They have now set up an internal review committee to look at the real estate business and very recently they replaced one of their board members with a real estate expert. So they are trying to bring this expertise in house,” Nicola says.

At the other end of the spectrum they have businesses like Ines Corp (£184 million) and Wakamoto Pharmaceutical (£50 million).

Nicola says the capital structure is attractive at Ines Corp. They have prime real estate in central Tokyo and are also trading at below 1x price-to-book. She says they are a niche IT provider focusing on the public sector, giving them stable, recurring revenues.

Performance

Performance has been excellent since launch in 2018, producing an annualised return of 15.5% (vs. 11.7% for MSCI Japan Small Cap)*. AJOT has faced more headwinds in the past 12 months, particularly following the Takaichi trade – which has seen a focus on large-caps, exporters, defence and AI stocks – none of which is in AJOTs favour.

The focus on engagement-led investment in undervalued businesses is highlighted by the 77.8% share price total return over five years (NAV total return 83.6%)**.

What else do investors need to know?

• Gearing on AJOT tends to be held at mid-single digits (currently 6%) – although the trust can go up to 25% of NAV at time of drawdown.
• AJOT has traded at a slight discount (-1.5%) over the past five years***. It should be noted that rising interest rates in 2022 and 2023 played a role in discounts widening over this period. AJOT has been trading at a premium on and off in recent months (-0.8% discount at 10 March 2026).
• AJOT completed a tender offer in January 2026, with approximately 10.9% of shares tendered. The tender price was calculated at a 2% discount to the net asset value (NAV).
• AJOT does not have an income objective. However, the focus on engagement and increasing dividends and buyback has resulted in dividends increasing on the portfolio since its launch in 2018. For the last financial year ended 31 December 2024, AJOT paid a total dividend of 2.2p per share.
• Following the merger with Fidelity Japan Trust in late 2025, AJOT implemented a new tiered management fee structure that sees investors charged 1% on the first £300 million of net assets; falling to 0.95% on the next £50 million (£300 million to £350 million) and 0.9% on assets above £350 million.

Outlook

Since its launch in 2018, manager Joe Bauernfreund and the team have consistently delivered strong performance across a variety of market conditions. They have shown they are able to take advantage of the opportunities created by the major changes to Japanese corporate governance. We like AVI Japan Opportunity Trust’s focus on targeting high-quality companies with excess cash where there is potential to unlock value through active engagement with management – something they have consistently demonstrated since launch.

Things are changing rapidly in Japan. Political stability and a widening of reforms opens the door significant opportunities in this under-researched area of the market. We believe AJOT can continue to take advantage of this opportunity and work with business to create significant shareholder value.

*Source: AVI, Morningstar, 31 January 2026

**Source: AIC, as at 11 March 2026

***Source: FE fundinfo, as at 11 March 2026