Baillie Gifford Shin Nippon (BGS) has been on a tear this year with the top-performing Japan smaller companies trust delivering a total return of nearly 52% to shareholders, more than double the 22.5% from the Topix Small Cap index. That has extended the five-year total return to nearly 384%, which is miles head of its three remaining rivals, with the portfolio having not missed a beat since manager Praveen Kumar succeeded John MacDougall two years ago.
However, the share price of 877p stands not just at an all-time high but also at a record premium of 12.5% above net asset value of 780.6p per share. That is up from an average premium of 5.4% in the past year to give it an expensive Z-score of 3.5 (see first table below).
Just to recap, a Z-score is a measure used by analysts to tell if an investment trust looks expensive or cheap compared to its history. Roughly speaking, a Z-score of 2 more shows that the shares are trading significantly above their one-year range, ie are dear. Conversely, a Z-score of -2 or below shows it is trading significantly below its 12-month norm and is potentially cheap.
With fund manager Neil Woodford today warning about the red lights flashing ‘bubble’ in parts of the stock market, it is significant to see that all of the ‘expensive’ trusts in our weekly table from Numis Securities, are truly pricey with a Z-score of 3 or more.
|'Expensive' trusts||Share price premium (- discount) to net asset value (%)||12-month average premium (- discount) %||Z-score|
|Geiger Counter (GCL)||23.3||-5.4||5.1|
|Allianz Technology (ATT)||2.3||-4.5||5.1|
|JPMorgan Chinese (JMC)||-4.9||-13.5||5.1|
|BlackRock Frontiers (BRFI)||11.0||2.5||4.2|
|Trinity Capital (TRC)||43.6||-56.8||4.0|
|BB Biotech (BION)||5.4||-2.8||3.8|
|Dunedin Enterprise (DNE)||-26.1||-43.1||3.7|
|BlackRock Greater Europe (BRGE)||-0.6||-4.5||3.6|
|Baillie Gifford Shin Nippon (BGS)||12.5||5.4||3.5|
|Weiss Korea Opportunity (WKOF)||0.5||-4.6||3.4|
|Alternative Liquidity (ALF)||-65.9||-78.7||3.3|
|Templeton Emerging Markets (TEM)||-10.0||-13.0||3.3|
|JPMorgan Claverhouse (JCH)||-2.5||-7.7||3.2|
|Summit Germany (SMTG)||24.3||10.6||3.2|
|Standard Life UK Smaller Cos (SLS)||0.4||-5.7||3.2|
Source: Numis Securities 30/11/17
But returning to Shin Nippon, ranked ninth in the table above, the obvious question is whether investors should take profits and switch to a less expensive stock?
In June I suggested Fidelity Japanese Values (FJV) run by Nicholas Price was a possible contender to take Shin Nippon’s crown, having taken on the fund a month before Kumar started at Shin Nippon. With the help of 20% gearing, FJV has indeed managed to keep pace with the 30% surge in the shares in the past six months. At a 6% discount the shares are cheaper than BGS too, although their Z-score of 2.4 shows they have re-rated a long way since last November when they stood 19% below NAV.
If you think there is more to go for in Japan smaller companies – and plenty of people do – then a better suggestion today looks to be Atlantis Japan Growth (AJG). This comparatively small trust has a chequered history but on a discount of 9% (just below its 10% target) looks interesting as it is in the midst of a performance turnaround under ‘new’ manager Taeko Setaishi.
I say ‘new’ because although Setaishi (pictured) only took on the trust in May last year, she had worked with its previous fund manager Ed Merner since 1993 at Schroders, before they set up on their own as Atlantis Investment Research Corporation three years later.
Setaishi’s pedigree is demonstrated by her record on the Dublin-based Atlantis Japan Opportunities, an open-ended fund which she has run for 14 years and for which she currently has a Citywire AA rating. Over 10 years to October the fund ranks second out of 85 Japan funds in its sector with a total return of 297%.
Atlantis Japan Growth arguably doesn’t get the attention it deserves. A bit like the country it invests in perhaps, investors have out-dated views on a fund that went off the boil in the last years of Merner’s tenure. Setaishi may have worked in Merner’s shadow for a long time but she has her own style and has jettisoned his value approach for what looks like a more successful approach to pay up for good growth stocks.
|Cheap' trusts||Share price premium (- discount) to net asset value (%)||12-month average premium (- discount) %||Z-score|
|MedicX Fund (MXF)||9.3||20.8||-3.9|
|Empiric Student Property (ESP)||-15.4||2.6||-3.4|
|Renewables Infrastructure Group (TRIG)||1.8||8.2||-3.2|
|NextEnergy Solar (NESF)||0.4||7.9||-3.2|
|LXI REIT (LXI)||0.7||6.3||-3.2|
|GCP Student Living (GCP)||-4.3||5.7||-3.0|
|Hadrians Wall Secured Investments C (HWSC)||0.4||3.8||-2.9|
|Gabelli Value Plus (GVP)||-9.4||-4.0||-2.8|
|International Public Partnerships (INPP)||4.9||10.3||-2.7|
|3i Infrastructure (3IN)||10.6||15.6||-2.5|
|Doric Nimrod Air One (DNA)||19.6||34.2||-2.4|
|NewRiver Retail (NRR)||7.3||16.3||-2.4|
|Terra Capital (TCA)||-21.5||-16.1||-2.4|
|GCP Asset Backed Income (GABI)||4.4||7.9||-2.2|
Source: Numis Securities 30/11/17
An annual subscription policy of offering investors the right to buy one new share for every five they owned also irritated shareholders who disliked having to fork out for new shares or have their stake in the company diluted. However, it did have the positive effect of lifting the trust past the £100 million mark, below which trusts tend to slip off the radars of most big investors.
Last month shareholders voted to end the subscription policy. This should lift a cloud over the trust’s performance figures. Because of the dilutive effect of the regular share issuance, the commonly available performance figures don’t quite do full justice to what Setaishi is achieving.
In the past year she has grown AJG's net asset value by 43%, the highest of the four Japan smaller companies trusts. However, the discount on the shares means investors have actually received 39%, the lowest of its peer group.
Figures from Tiburon Partners, which markets and administers the trust in the UK, however, show that ignoring the dilutive effect of the new shares, investors in AJG have seen the NAV of their holdings soar 61% since Setaishi took over, which is significantly higher than Shin Nippon’s 48.5%, Fidelity’s 49.1% and JPMorgan Japan Smaller Companies’ 41%. She still wins even if the performance is shown on a diluted basis, with an NAV total return of 50.6% since May 2016.
Atlantis' Z-score of zero shows that the discount has barely budged since Setaishi started with investors dazzled by Shin Nippon's apparent outperformance. It’s early days but it is possible the discount on AJG could narrow if she continues to improve the trust’s performance and the turnaround - and its ability to challenge Shin Nippon - become more widely known.