Investment Trusts  

Small companies rush 'prompted by passives'

Small companies rush 'prompted by passives'

The manager of the AVI Japan Opportunity Trust has said the growth of funds being launched to invest in smaller companies has been prompted by active managers fighting back against passives.

Joe Bauernfreund launched his £82m trust, which invests in Japanese smaller companies, in September.

His trust was one of several which launched in the second half of last year to focus on smaller companies, including Terry Smith's Smithson trust, Mark Mobius's Mobius Investment Trust and the Merian Chrysalis trust.

Mr Bauernfreund said there was "definitely" a connection between the launch of these investment trusts.

He said: "When we [are] moving ever more towards passive, those investors who put themselves out to be genuinely active managers need to justify their existence. They have to beat benchmarks and they have do more than just a passive fund.

"I think what we are seeing is there are opportunities for alpha in areas of the market that are overlooked by other investors and by sell-side research."

The AVI Japan Opportunity Trust is aiming to invest in small Japanese companies which have large amounts of cash on their balance sheet and which are undervalued.

It aims to exploit the fact that Japanese corporate governance reforms, introduced as part of prime minister Shinzo Abe's economic reforms, are encouraging companies to spend their cash and reward shareholders.

Mr Bauernfreund said because of the huge amounts of surplus cash these companies were sitting on, he was able to buy them for "ridiculously low" valuations, which he predicted would change as the reforms kicked in.

He said: "What has happened since the start of 2019 is companies have started to report their numbers for 2018 and we have seen a good handful of them conduct share buybacks and in some cases these are companies that have never done that before.

"What has happened is small fry but it is a step in the right direction and is demonstrating that these companies have this surplus cash."

Mr Bauernfreund said the trust will take an activist approach towards the companies it invests in, encouraging managers to embrace the reforms.

But he said Japan was a "very traditional" society so he would aim not to embarrass managers through his activism.