This podcast is brought to you by AJ Bell and Shares Magazine. Shares Magazine is published by AJ Bell Media, part of AJ Bell. Hi, welcome to the latest monthly bonus podcast from the AJ Bell Money and Markets team, all about investment trusts. I'm Dan Coatsworth and joining me is Leith Kalaf. Hi Leith. Hi, Dan. Yeah, it's been an interesting time for investment trusts. They've been all over the news over the past month or so. That's because an activist investor called Saba Capital.
is targeting seven investment trusts. It's hoping to gain control of those trusts and become... the manager now herald shareholders one of the trusts they've already voted saba down and we're just going to find out how the other six trusts have gone on later this week their shareholder meetings taking place most of them this week and one next week
And we'll just be diving into the whys and wherefore of what's going on in that sector. And also take a closer look at obviously what's been going on as part of that thing. We're going to talk to James Carthew from Research Group Quoted Data. about what he thinks could actually happen next and also about the role of activist investors in general.
Yeah, and this edition of the podcast is also going to take a deep dive into Law Depenture Investment Trust. And we're also going to be talking to the manager of JP Morgan Japanese Trust about what's going on in that part of Asia. We've got to kick things off with this Saba campaign. Of course, as you said at the start, Leith, it's been all over the news.
Now, I think it's really interesting that we have had the results for one of these really important shareholder meetings. So Leif, bring us up to speed. What's been happening? Yeah, okay. So the story so far is that an activist investor in a hedge fund called Saba has been busy buying up shares in a number of investment trusts, seven investment trusts.
They were trading at a big discount to the net asset value. And Saba has built up a big enough stake, somewhere between 19% and 29% of each of the trusts, so that it can basically make proposals for changes and ask other shareholders. to vote on them. What Saab is basically saying is that the directors of each of the trusts have failed to hold the investment trust managers accountable for performance and for shares.
trading at a wide discount. And basically, shareholders in these trusts are being offered two proposals. Those proposals are get rid of the existing board members, all of them cleaned out. and then appoint two new directors for each trust, one an employee of Saba and the other nominated by Saba. So Saba is saying those new boards...
such as they are, will then decide what's best for each trust to deliver value for shareholders. So that may include a cash exit close to the net asset value of those trusts. It might involve Saba taking over as investment manager of those trusts, which seems to be on the cards. And what Saba would probably then do, based on what it's said so far, is sell a lot of the assets to the extent that they can.
and then use the money that's left in the trust to buy more investment trusts trading at a discount. and then try and do the same thing again with those trusts. So a rinse and repeat, basically. And the idea being that you could then unlock more value by closing discounts on the trust that you buy into. And this is a strategy that Saba has used.
in the US. And as you say, Dan, we've had results for one of the shareholder votes, Herald Investment Trust, and Saba's proposals were roundly defeated in that vote. So of all the votes cast, 65.1% were cast against Saba's proposals, which doesn't sound that compelling. But then if you consider that... Of all the votes cast, Saba were 35%. Actually, if you look at who voted in favor of Saba, apart from Saba, it was just 0.15% of the votes.
cast. So that feels like a pretty big rejection by shareholders. And there's probably a number of reasons why that might have happened. Herald is a longstanding investment trust. It's been around since 1994. And, you know, over that time, it's been run by the same manager, Katie Potts, who's got a good reputation and a good long-term track record. I mean, Saab has kind of picked on the last three years and said it's underperformed its benchmark.
You know, that's a relatively short time period, especially when, you know, we've had pretty volatile markets over that time. And I think Herald in particular is a particularly unique proposition.
tech fund that invest in small caps so if you're holding it and suddenly you have you kind of forced to sell out of it or move into something else it's quite difficult to to replace in your portfolio It's not like a global equity fund which invests in Microsoft and Meta and Amazon, which if you get bought out of one of those, then you could probably find another one pretty easily.
So maybe that all helped. It's possible that investors didn't want to roll over into a new hedge fund that's also investing in new investment trusts. Perhaps Saba could make money from doing this, but it's a very different investment strategy for investors to take on. So, you know, you're invested in a company that...
investing in small cap tech stocks and then suddenly it's kind of taken over and it's investing in UK investment trusts to close discount. It's a very different strategy. So maybe they weren't keen on that. What's quite interesting, I think, Dan, is the discount on this trust. Saba basically says that its buying activity has led to the discount closing at the back end of 2024. And I think there's no...
There's no good reason to dispute that. It's bought a huge number of shares, so that probably is the case. And it's also offered Herald shareholders a cash exit that's pretty close to the net asset value, which is kind of a firmer offer really than it's made to the other. the other trusts. And as a result of that, the discount on Herald actually narrowed to almost nothing in December or January, according to AIC.
data and you know at one point it was actually trading at a premium believe it or not when you consider that throughout 2024 it was kind of trading at 10 to 13 percent discount then that's quite a big deal. So actually investors who did want out at net asset value could get out very close to the net asset value of their portfolio simply by selling the shares on the market in the last two months. And interestingly, what's happened since...
Saba's proposals were rejected was that discount has widened again. And again, according to kind of the AIC figures, that's around a 7% to 8% discount on the shares. Yeah, I think you'd expect... some sort of discount with you on on typically on smaller company investment trust there typically is a discount to reflect that these aren't necessarily stocks that the manager can sell quickly so this is sort of the
you're being slightly penalized because of the potential liquidity issue there. So I don't, perhaps people shouldn't read into Herald being on, you know, seven, 8% discount as being suddenly a really bad thing. It's more like it's a bit of a... Back into the norm, really, isn't it? Back into the norm, yeah. I mean, as I say, if you look at 2024, it was trading at 10% to 13% discount. So we're now moved to an 8% discount. So it's still better.
than it was and you know why is that well you know potentially You know, Saab is still on a big shareholder, isn't it? And we don't know what it's going to do next. It's, you know, it's still got a large number of shares. You know, possibly they might push for more action from the board, even though they've...
they've lost the vote. So, you know, it's going to be really interesting to see what Saba does on that front. It's also going to be really interesting, Dan, to see what happens with the other six trusts. So we've got... Five of the seven trusts, the results of the vote will be announced this week. So that's the week starting the 3rd of February. over which time we're going to hear from Bailey Gifford, US Growth Trust, Keystone Positive Change, Henderson Opportunities Trust.
European Smaller Companies Trust, and CQS Natural Resources Growth and Income. So all of those five will know what the vote said on the cyber proposals this week. And then on 14th of February, we'll have the results of the vote for Edinburgh. worldwide. So this is quite a big shake-up, I think, Dan, in the investment trust world, Saba coming in. We've had activist investors, I think, before on the registers of investment trusts, of course.
But this really seems to have created a lot of drama and a lot of headlines, I think it's fair to say. Yeah, I think it's also brought to attention the importance of voting on these sort of activities. A lot of retail investors will own shares in these investment trusts and they will have been contacted by their investment platform, whether that's Aja Bell or...
another investment platform with information all along the way to say, look, this is what's happening. This is how you vote. And certainly, you know, at AJ Bell, we've introduced a way that you can do all your voting online. um trying to make it easy as possible for you and i think the investment trust industry um body or the association investment trust investment companies that represents the investment trust world they've been really sort of pushing for
awareness that as a shareholder, you have a right to vote on these things. It's really important that you have your say. So if anything, whilst it's caused some disruption in the investment trust sector... It's also really highlighted the importance of voting as well. So something I think we'll hear a lot more about going forward.
Yeah, absolutely. And interestingly, what effect it has on the wider investment trust sector, I think as well, in terms of do other boards start looking at kind of their discounts and thinking, well, maybe we do need. need to do more i mean i think there's you know kind of already a a lot of activity that's going on but maybe the arrival of saba might might prompt some new action on that front as well now regular listeners to the to the pod will know that we often have james carthew from quoted
data on the show to talk about trust because he is a fountain of knowledge. He has been incredibly busy commenting on this Sapa situation in recent weeks, but he has kindly made some time to talk to Dan last week about the topic. So let's hear what he had to say. So, James, thanks ever so much for joining us. Obviously, as we've just been discussing with Leith,
Saba is midway through his campaign against seven investment trusts. As people listen to this podcast, they're going to find out the results of the final EGMs. But taking a step back, Saba... On one hand, getting involved in investment trusts is not new. The fact is, actually, we've seen activists in investment trusts for a while. I wonder if I could just get you to talk about...
You know, the history of investment trusts and activists, where should we start? Should we start with Saba? I certainly know it was involved in European opportunities. in 2023. What happened to that campaign? Were they successful? Yes, I suppose they were really. So they piled into the share register.
We weren't really sure what they were up to, but we could see that there was a big discount and we knew that the performance track record wasn't great at the time. And agitated for a tender offer. And the boards... agreed to that quite quickly I think far quicker than I expected them to I thought they'd at least think about whether it made sense to buy back stock rather than doing a tender offer
But anyway, they did say yes. And then Sava came back and said, we know you bought for 25% tender offer. Actually, we'd quite like you to do 50%. And that was just a way of maximizing its profit, really. So the board said, no, we'll do this one now and then another one in a few years' time. And Sarva seems to have been happy with that result. So it sort of brought a, I can't remember what discounts it brought up. So let's say it's about 15-ish.
and got our Felicrestal asset value for most of its stock. This is getting narrowed in a bit afterwards. So I think you can count that as a win, really. And that, if you like, is the traditional form of activism. so you know you buy on a big discount you say this isn't good enough something needs to change and jump up and down and then um over the board reacts and you actually managed to sell on a narrow discount and that's the right way of going about these things i think
I mean, I know a couple of years ago we had METIJ, if that's how you pronounce it, capital come on the register of a hypnosis songs fund. And actually that trust ended up being taken over. I guess that's another option, isn't it? I presume takeovers are less common versus just the general discount narrowing and then the activists sort of disappearing.
Yeah, definitely, definitely. Mitage, I think they prefer, but honestly, it's got a message at a window mark. Yeah, I mean, takeovers are unusual in the sector because they're expensive to do. And part of the reason that Saba's gone all out to try and buy as many shares as it can do without triggering a bid is because it wants to avoid the cost of doing a takeover.
And obviously the thing about a taker is normally you're losing the money. And part of what Saar was trying to do is actually gain an asset central management. He doesn't want to have to pay for the whole thing. He wants money to be still left in these vehicles afterwards. But if you go back to hypnosis, there were a lot of other disgruntled investors on the register, including me.
Not that particularly significant stakes and anything, but it's nevertheless, I mean, there was a lot of dissatisfaction. And it wasn't the only activist on that register. And... There was enough of a grounds for an opinion that the shareholders were able to convince the board that something needed to happen and the directorship changed. As soon as the directorship changed...
Then things started to happen with the management company. And as soon as it became clear the management company couldn't continue and we needed a new way of running things, then the next logical thing was to see if you could find a buyer for it. And the portfolio, you know, it wasn't great, but it wasn't too bad. And it was definitely worth a lot more than the discount was implied. So the takeover of hypnosis actually worked very well for shareholders. And I think most of them...
would have got their money back. Some of them would have made decent profit. Only if you bought in at the sort of media frenzy at the top would you've lost money. Yeah. I mean, we have, you know, I guess Elliot is quite a good example. came on the register of Alliance Trust and more recently, or seemingly very briefly, onto Scottish Mortgage. The Alliance Trust one, obviously, I think they could be credited with sort of driving...
Quite considerable change there. Scottish mortgage, they seem to just, you know, look like they made a quick buck on it. So, I mean, all these things seem to suggest actually activists. pretty positive for shareholders? Or would you think that's the case? Or actually, have you come across ones which they are actually a bit of a nuisance and they're not the best for the long-term interest of an investment trust?
I think activism can be a force for good. I'm slightly biased because I used to run an activist fund. I don't know if you knew that, but I don't know. I used to run a fund with Advance UK, which was an investment trust itself, but it was set up to try and narrow discounts and get some exits for investors.
And we always tried to be positive in the way that we run about things. So you try and provide solutions that are going to benefit everybody. And it's not always just getting your money back. Sometimes it's... changing the manager, sometimes it's tweaking the investment approach, sometimes it's cutting the fees. And there's all sorts of different things that need to happen to get the scans narrower rather than just buying that stock. And every case is different.
And properly done, activism is definitely a force for good. And I can cite some good examples. Migo Opportunities, Nick Greenwood, he's great at doing this sort of stuff. It's all done in the background. It's all quite agitating. Peter Spiller, Captain Gearing and that team.
They've been involved in quite a few things where they sort of agitated for change. Sometimes a bit mechanistically, you know, sort of this is on a 10 disc and it should be on a six, we want you to do this, you know, without sort of thinking about the underlying forces. But often, you know, they're not aggressively doing these things. And AVI Global Trust, another great example. They've had some fantastic successes.
So they've been behind a lot of the stuff that's happened in private action stuff recently. Again, you'd never know because it's not about jumping up and down and making a big noise in the press and doing it that way. That is necessary if you want to get retail and shareholders on your side. And one of the things, because you go back again to what I used to do.
I never had a very big fund. The most it ever got to was about £100 million. So we were never buying huge stakes and things. So it was all about trying to find a solution that other shareholders would buy into. And this is what Saba isn't doing. It's trying to buy massive stakes and then kind of run through its agenda. And to me that...
Well, I mean, the Herald situation just smacked to desperation. The way they just kept buying more and more and more stock to try and force through their vote. And I think they poured a lot of money down the drain doing that. But, you know, let me go. Yeah, so I mean, the idea of, you know, Saba going about things differently, it's certainly, it's got a lot of publicity. And I wonder whether you think that...
There's going to be lots of other investment trusts now that they're not currently subject to activist campaigns, but it might make them sit up and take notice and think, okay, if we don't do anything, we don't... think of something different to perhaps because we're trading on a discount to net asset value by quite a wide margin.
Someone will come along. I mean, it's one thing whether you thought, are there any sort of obvious trusts that perhaps should be watching this situation very closely and doing something to change? Someone was on the register of all sorts of things. And a lot of them are buying back suede stock. So the pace of buybacks is enormous. It's way higher than I've probably ever seen in my career, I think. And the pace of conservation, the M&A...
And there's an awful lot of that going on. You know, we used to despair that we never see measures in the sectors. And last year we saw, you know, probably 10 or something. I mean, these things are happening. People are taking action.
There are some spectacularly wide discounts left, but they're not so much in the equity funds. So one of the things that most of these activists have tried to do... is to hedge out the underlying position so they're only really taking exposure to the discount so they'll buy the trust on a 15 discount say and then sell the underlying stocks and then
all they're exposed to is the narrowing of discount. And if the discount narrows down, they get a good return on that discount narrowing. That's very hard to do if you've got unlisted like ProEquity who got... you know, things like renewable energy or infrastructure, all that sort of stuff. So that's where the bargains are. But it doesn't mean that those funds are immune.
Again, I'll go back a bit, but in the infrastructure sector, there was a fund that was the John Lang Infrastructure Fund, JDEF, and it got taken over. At some point, somebody looks at his portfolio and goes, Actually, that's way too cheap. I'll have that. And I suppose hypnosis is a good example of that. Roundhill's another one, both in the kind of music sector.
To my mind, it's not going to have a possibility that we'd see a bid for one of the infrastructure funds or renewable energy funds in the future. It's possible. I mean, so just finally on Saba, if obviously as people listening to this episode of the podcast, we're about to find out.
the results of the sort of the remaining six campaigns they've got against sort of UK listed investment trust. Now, if Saba don't... don't win do you think they're just going to pack their bags and say okay we tried uh didn't work out we'll just focus on um perhaps another geography or do you think because you mentioned they've got stakes in other trusts as well which which they haven't sort of um
pushed for change yet. Do you think this is just going to be, it's phase one now, we're going to get phase two of Sava's efforts to try and make a lot of money on investment trust base? I don't know. It totally depends on the character of the guy. He's making a lot of noises as though he's going to stick around and make more trouble. I really don't like what they're doing. It's very sort of scattergun. It doesn't...
The main thing that it's doing, and this is what I find really frustrating, is it's picking on funds that are out of favor because they're at the bottom end of a cycle. So it might be small caps are underperforming at the moment.
Commodities are underperforming at the moment. Tech growth funds are underperforming at the moment unless you've got the Magnuson Stone. So those things, for him, they're kind of easy wins. Everybody hates these at the moment. I buy them under discounts and I wind them up. But what you're losing is the upside. And the upside when these things come good is enormous. All of these things, lots of these funds have doubled or tripled in their history. And it's not...
We'll see that again when the point comes out. If you lose that upside, I think that's criminal. So what I'm hoping is that investors will get so fed up with him. that they'll just, whatever he tries to do, they'll just all rally together and block. And eventually he'll get frustrated and go away. It might happen quicker than that.
The really fascinating thing in Herald, for example, is that you've got different hedge funds appearing on the register that are shorting the stock, that are actively betting against him. And that just kills what he's trying to do. So we've seen the Herald discount widen since the vote. And I think with those short sellers in there, that could carry on going for a bit.
i mean the board won't tolerate it forever and they'll they'll be in there and they'll kind of just again because that's what they they do um but the losses that he incurs will start to mount up. And at that point, he might just say, oh, this isn't worth the effort. I might as well just take my money and go to Ham again. That's what I'd like to see happen. But I think he's going to be a bit more stubborn in the short term. I mean, I guess if you've got 20 to 29% stakes in some of these trusts.
It's not like Saba can just click a finger and sell those stock and walk away. I mean, that's going to be an issue as well. That could actually drag down the price if he's sort of proactively selling in the market. If he starts to sell... The discounts are going to widen out, but you've got to keep remembering that that short-term discount narrowing will be a short-term thing.
it will come much again, and you'll get the NAV performance. So it's not worth killing the fun for the sake of the possibility that it goes down 5%, 10% in the very short term. But it will take some time to do it. What I'd like to see, Harold is a great support, and it was really pleasing to see the love there is for that fund and for the manager.
And what I'd like to see is that that stake gets placed out, say, like a 15 discount or something, to a whole raft of buyers that actually have always thought, well, I really own some hell, but I'd have been able to get a big enough stake. Now, all of a sudden, here you are, you can pick up a 5% chunk or something on an attractive price. That's what I'd like to see happen. Again, it all depends on how Saabert tries to deal with this stuff.
Well, perfect. Well, James, thank you ever so much for coming on the podcast. It's great to have you on again and really fascinating to get your insights into what's been going on. Thank you, Dan. Interesting stuff. That was James Carthy from Research Group Quoted Data. Let's now take a detailed look at one of the more popular trusts with retail investors, something we do once a month. And this one has been requested by a listener called Martin.
Yeah, that's right. Martin's asked us to look at law debenture, which has slightly unusual structure to most investment trusts, as you're now about to find out. So let's bring on Steve Fraser and Ian Conway from Shares magazine to explain everything.
about this trust. So hi, I'm Stephen Fraser of Shares Magazine and I'm joined today by my colleague Ian Conway. And we're talking about... your debenture corporation now now don't tune out i know there's a temptation it sounds terribly boring but actually there's a bit more interesting than than you might credit it um
Lord of the Benches started out, I mean, it's worth 1.3 billion worth of assets. It's a fairly hefty investment trust. And it was formed in 89. No, it was not founded under Thatcher. Actually, that's 1889, when Robert Gascoigne Cecil was the Prime Minister and Queen Vic was on the throne, the history bus out there. Now, it's largely... a kind of value-focused investment trust. And it looks defined.
stuff largely in the UK market, not always in the UK market, but largely in the UK market. So Ian, what have you noticed that stands out to you about Lord Aventure? Well, Steve, it's very interesting. As you say, from the name of it, you can't tune it out straight away.
As you say, founded over 100 years ago, it was originally a professional services business. And what they do is they provide trustees to boards, bond trustees, what's called... service of process so what they like to call sort of plumbing of the financial services business and this was so successful they started generating lots and lots of cash So they set up an investment portfolio and that's...
Now the bigger part of the business, that's 80% of it by assets and the other business is 20% of it. So this is providing professional services to pension funds, other investment costs and the like.
Absolutely, yeah. It's dull, but it's a really good revenue generator. And although it only accounts for 20% of the assets, it actually contributes to 30% of the dividend. And they... either held or increased the dividend every year for 45 years now they haven't quite made it into the aic's dividend hero list because you've got to have raised it every year for the last 20 years But it's kind of on the way there. Yeah, I think I like that.
I think our colleague James Crux, in a recent piece about a year ago, mentioned it got 12 years of consistently growing dividends. So it's heading in the right direction. Absolutely, yeah. So to have stable dividends is... is reassuring, certainly. Yeah. And that independent services business has its own chief executive. And they've been busy as well. Everybody kind of focuses on the investment side, which we will. But I just note that in December, they bought Linklater's agency.
processing unit i can't pretend i know what it does but i do know that now makes lord adventure the number one provider in the uk um but yeah the the investment business is managed by james henderson and laura foe and we know them well don't we because they run Henderson Opportunities as well, and they run Lowland. We've written about them quite a bit, I think most recently in October.
Yeah, the interesting thing, as you say, they take a value approach. And when you look across those three portfolios, actually, Lord of Adventure, Lowland and Henderson, a couple of names come up. a few times. So banks, they like because they're cheap on price to book and PE. Energy, they like. So you'll see Barclays, HSBC. Standard Chartered. You'll see in the rest of the top 10 for Lord Adventure, Rolls-Royce, interesting.
BP and Shell, as I mentioned, Energy, Glaxo, M&S, Tesco. What stands out to me, Ian, as well, is it's not just these kind of fairly dull, consistent. Big FTSE 100 companies. They've also got some spice in there as well. So you mentioned Rolls Royce, which has been an outstanding recovery story for two years or so now. But also their biggest holding is Flutter Entertainment, which we know as the old.
paddy power bookmaking business that's expanded massively and it's moved its primary listing recently to the US, hasn't it? Yeah, absolutely. And interestingly, when you so this tends to be more big cap because of the size of the fund, as you say, it's over a billion pounds of assets. But where they get the opportunity in the smaller funds, they do throw in names you'll know, Cohort, for example, Bothku.
um so they they do like to fish in those smaller ponds as well and so outside of those top 10 you can imagine that there's some quite interesting spicy stuff there too
And we've mentioned the dividend and the fact they've raised it or held it for 45 years. You might think that makes it an income story, but actually, over the last 10 years, it's... beaten the footsie all share by more than 50 percent so it's a terrific total return it really is um we haven't got the december fact sheet yet but up to the end of november It was up 15% on a 12-month basis against just under 11% for the all-share. Over three years, it's...
33% against 25%. Where it really stands out as well is over five years and 10 years, 82% against 32% for the all share. And 10 years is interesting because it's a much more fair... observation of data over different market back cloths. Because obviously, over three years, we've had a very strong stock market, largely. You go out 10 years and we've obviously dealt with the whole COVID pandemic and you're touching on the aftermath of the global financial crisis. Yeah.
So, I mean, it's important to really put that into the context of going through cycles. And I know you're a great believer in making sure you judge companies and share prices through cycles. Yeah, and I think, Steve, to say, to have beaten the FTSE All Share by 50% over 10 years is some going. I think that really, you know, there's not many...
trusts out there you can say that about. There are some interesting issues in terms of their structure. So when we look at costs, for example, what stood out to me is it charges an ordinary ongoing charges fee of... point four nine percent which which is not dirt cheap but i mean it's not terribly expensive either
What they would consider to be an active fund. But then it does have, what I find quite rare these days with investment trusts, it has a performance fee. And it also, it charges based on how many transactions it will make. are fairly opaque costs because we don't know obviously how busy the fund will feel it has to be going forward so there is that kind of opacity opacity into its charging structure um where you might end up
paying a lot more than 0.49% when it gets really, really busy. So that's certainly something that investors should be aware of. And it might be something they need to talk to their broker about to see what average. performance fees of being etc etc yeah that's a very good point yeah so that 0.49 which you see on the label could be could be a lot higher um if they have a busy year if they uh um yeah
And if they perform. Yeah, you presume, I mean, when you get particularly volatile markets, lots of uncertainty, you know, the market in general tends to be quite... capricious. So it's gung-ho one minute, then it's all very depressed the next minute. And we seem to be going into a spell of increased uncertainty and volatility, especially with Donald Trump in the White House.
Who really knows what the next six months or 12 months will look like? So it might be in the near term, it might be that we start seeing a bit more volatility, those active fund managers being that bit more active. Yep, that's a good point, Steve, from one to watch. So all around, it's got a really good reputation. It's got a good long-term track record. It's been around for donkey years, as we mentioned. But there are...
There are little things that people need to be aware of in terms of the charging structure, for example, but also to make sure that investors are happy with the kind of structure of the portfolio. And also there's the twist that Ian mentioned about the professional services business, which has generally generated some very strong cash flows, I think at the half year stage. It represented 20% of assets, I think, and 34% of the dividend. So that underpins...
the dividends, even though it's not really a dividend, an income-driven investment trust, the yield is pretty minimal, about 2% or something like that. But it does trade at a premium to its... NAV, net asset value, which sets it aside from most investment trusts. It's quite a small number that trade at premiums to their assets, isn't there, Ian?
Yeah, absolutely. Yeah. Sorry, Steve, should have mentioned that. Yeah, it is very unusual in the investment trust world to see something trade. It's not huge. It's a couple of percent, but it does stand out. Yeah, absolutely. So, I mean, there's something to bear in mind for investors is if that... that premium was to disappear and and become a discount obviously that would weigh
on on the share price performance so there are all these kind of moving parts there's nothing outside of the box of of a fairly experienced investment trust investor but if you're fairly new to the game um it's definitely something to consider and balance against your own risk appetite. Yeah, good shout.
So that was Steve Fraser and Ian Conway from Shares Magazine talking about law debenture. And don't forget, if you'd like us to do a deep dive on a particular investment trust, drop us an email with your request. The address is podcast. at ajbell.co.uk. Right, it's time for our final guest. Nicholas Windling is a portfolio manager for the JP Morgan Japanese Trust and recently came to the UK to talk about what he's seeing in his part of Asia.
Dan was lucky enough to take some time with Nicholas to discuss Donald Trump, interest rates, and a lot more. Let's hear what he had to say. Nicholas, thank you ever so much for sparing the time to have a chat with us. Should we sort of start by talking about... japan in general what i mean why should someone consider having exposure to japan in their investment portfolio yeah there's a couple of things that i point to here the first one is
i think people find this very surprising is that although the japanese economy is very mature there's not much gtp growth actually if you look over the last 10 to 15 years traffic growth in japan has been the same as it has for the S&P 500 in the US. So companies in Japan are really delivered on earnings per share growth. And that is what is most important for the stock market overall.
Secondly, Japan is a very undercover market. So there are 4,000 listed companies roughly in Japan, but about two-thirds of them have two, one, or even zero. um analysts from an investment bank writing about them so um it's a really great market for finding exciting companies and it's fantastic that me and the whole team are based in tokyo and thirdly
There are huge changes going on in the Japanese corporate governance landscape. This is an absolute revolution in terms of what is happening, things we never expect to see. I think is still people are a bit skeptical about, but as far as we're concerned, it's a very exciting time for the market. I mean, a lot of people have been talking about...
Japanese companies becoming much more shareholder friendly in sort of recent years. Things like paying more generous dividends. You mentioned about governance changes. Is this now widespread? trend? Or is it actually, it's only a select number of stocks, but it's more of a trend that will play out over the years to come?
Not all companies, but it is increasingly many companies. So that doesn't matter about the sector or the size. This is something we see across the whole market. Very importantly, compared to the past. This is domestic pressure on companies, whether that is from the government, the stock exchange, domestic asset managers. That's why we are so confident that this is really going to play out over a long time. And I think...
Very important for the listeners to be aware that we're still in very early stage. So, yes, dividend growth in Japan has been excellent over the last 20 years, but still... 50% of Japanese companies are listed have a net cash position. Very inefficient balance sheets compared to what you see in the US and Europe.
They have started to sell shareholdings that they own in each other, which is not a practice that we've ever liked to see. And that is picking up pace. But there's a lot more to go for. And then most excitingly. And this is something we've really just seen in the last year or so, is that we start to see a battle for corporate control in Japanese companies. We've had companies within the portfolio that have been subject to hostile takeover.
We have currently a bidding war for one of the major companies that we own. We've had companies taken out by private equity. These are things that we just never, ever, ever talked about in Japan. And this is the reason why. the discount for Japanese companies trade on, there's now a mechanism by which it can close. And this is, I think, a game changer for the market. And the most important thing by far, this happened.
I think most countries in the world seem to be cutting their interest rates at the moment, but Japan seems to be the outlier. It's actually raising interest rates. I mean, do you actually see that as a good sign or is it a negative factor? I think it's undoubtedly a positive thing. Japan has been mired in deflation for, I mean, I've been investing in Japan for close to 25 years now and I've lived in Japan for roughly 20.
And for most of that time, when I received my bank statement, I've never had a line in it that says interest because there is no interest rate. It's always a good decision to keep money in the bank earning zero because the price of everything is getting cheaper all the time in a deflation environment. It's a very difficult for people's mindsets. This is a very big change. I think the prices go up.
It is a normal thing. I think it is absolutely positive that interest rates in Japan got. It will lead people to make different decisions, companies to make different decisions than they have in the past. And this is a very healthy dynamic. Okay. I mean, just looking at the stock market, it had a really good run in 2023 and sort of start 2024, but kind of looks like it's not really gone anywhere since April 24. Is there an obvious...
explanation as why the market has stalled? Well, I think that Japan is a very attractive investment destination. We are certainly very positive on. corporate governance change which we think is still underappreciated just the longevity of that and that this time it really is different in japan it's good that interest rates are rising it's good that there's some inflation it's good that
People's wages have started to go up for the first time in 25 years. And we actually think profit growth in Japan has been excellent. I think probably the only thing we could say here is that when investors look at other markets, probably particularly the United States.
That is in such a strong market that people are finding hard to look elsewhere. But I think that the fundamentals of Japan are very strong right now. I mean, you mentioned about... companies changing their governance companies paying more dividends this takeover activity um you know you're quite bullish about the market but what you know obviously
against that backdrop, what type of companies are you actually looking to invest in? Because you must still be looking for a particular type rather than simply anything that's got a good narrative, for example. Yeah, what we've been looking for is companies that will compound their earnings over the next three, five, ten years. It would generally be in industries with good long-term outlooks.
strong competitive advantages you would generally be investing in companies that are global number one or japanese number one i'm going to keep the companies with very strong balance sheets they're very good free cash flow um and very um yeah really strong balance sheets. But I think one thing that we are very aware of is that we also want to find those companies which are changing. So maybe companies in the past which have many divisions, that's a peculiarly Japanese feature.
you know, really quite low profitability across the board. And as they focus on their core business, alternatively, maybe they have an awful, a very inefficient balance sheet. You know, we have a company in the portfolio which has got $10 billion of net cash. Now, I like a strong balance sheet, but this is very extreme. And as companies start to improve their portfolio of businesses, as they start to make those balance sheets more efficient, this means that you can...
As well as having earnings, bro, you can also get the stock to re-rate, that is to trade on a higher valuation. And when those two things come together, it's a very powerful combination. I mean, in terms of sort of takeover activity then, so if you've got a company with a gigantic amount of cash like that, perhaps... trading cheaply, doesn't that automatically make it an obvious takeover target? Isn't that what companies like to do? Access another business's cash flow? Yes.
There is no reason why these companies shouldn't be, whether it's a corporate taking over or whether it's private equity or even a management buyer. That's another thing that we see in Japan. But I think when it comes to corporate buyers... It's also important that it's an attractive business that potentially often trades on a discount if they were to buy that business elsewhere in the world. So if you look at the...
For example, the convenience store market in the world, the Japanese company, 7-Eleven, which is the world's biggest convenience store chain. Actually, a lot of people think it's American, but it's actually Japanese. It trades on something of a premium to the Japanese market, but it trades on a major discount to similar companies overseas. And that's something you see in areas like computer games.
or robotics. It's not that the companies are trading on a dirt cheap valuation absolute, but they are very much cheaper than if you were to buy that same kind of exposure elsewhere. Well, is there a cultural thing, though? Like if you have a Japanese company, isn't there a history where they don't want to be? taken over by a foreign entity. Is that situation sort of changed or is that still a big pushback by Japanese boards trying to fight off any sort of takeover interest?
Well, you're absolutely right that that was a big issue in Japan. Historically, there was some famous cases around 2005 to 2008 where foreigners tried to come in and the door was unceremoniously slammed in their faces. But I think that that is why we feel that this time is so different, because the pressure to change is not coming from foreigners. It is from the government, the Tokyo Stock Exchange.
Domestic asset managers who are now voting against entrenched management who are unreceptive to changing. There's a takeover code in Japan. So any bid that is made has to be properly considered by an independent committee. So it is very, very different. from the past there is a strong focus in japan by the authorities that japanese companies and the market trades are too low a valuation and that something needs to be done about it
And so it's a completely different playing field from 15, 20 years ago. I just want to ask you about... Japan and its relationship with China. So obviously the two countries got close ties. You typically see a lot of inbound tourism for Japan is coming from individuals in China. The fact that China seems to be struggling to maintain high levels of economic growth, does that obviously have negative implications for Japan at all?
The Chinese market overall is an interesting one. I think that the speed of the economy grows at, that's not something that we have a particularly strong view on. do have a strong view on is the competitive landscape in china and that is very tough and there is a clear policy where the famous chinese companies were by china policy on the government. Local Chinese companies are very competitive. Now, that is not just an issue for Japan. That is an issue for American companies in China.
That is an issue for European companies in China. You can see it in the results, for example, from European car companies at the moment. It's a very clear issue. So we're absolutely aware of that. If you look over time over the last few years, one of the big...
trends you see within the trust and the fund is that we have reduced our exposure because of competition in Chimaida. Something like cosmetics, which five, six years ago, we had a lot of companies with exposure and now we don't have anything. But on the flip side, Japan is a major ally of the United States. The biggest military bases for the US, outside the US, they're in Japan. The US is concerned about China.
The flip side of that is that it's a good environment for Japan when it comes to its relationship with the US, Western Europe, and so on. And actually, I'm much more interested in the opportunities that that creates. rather than any issues in China itself. I was going to ask you actually about Donald Trump coming back to the White House. What does that really mean now for your...
Well, I guess, but for Japan as a whole and perhaps the portfolios decisions that you're making. Well, if you can tell me exactly what Donald Trump's policy is going to be, then that would definitely make life a lot easier. i think we can make some kind of broad generalizations and we can say that last time trump was in power
I would say Japan had the closest relationship with him or of any major country. In fact, the Prime Minister was the first person to meet Donald Trump after his electoral win, and they had an extremely close relationship. We also know that the US is concerned about China and Japan is in a very strategically important area in the world, in Northeast Asia. And we also know that many Japanese companies...
already have significant production in the United States. They're not especially, not to the degree that they were exporting from Japan. or from Mexico as well, they do already have substantial production. So it's not something that we are especially concerned about in this area. I think that US, Japan...
I thought it is a very strong and important one. That was Nicholas Weinling from the JP Morgan Japanese Trust. And that's everything from us for the moment. We'll be back with the usual AJ Bell Money and Markets podcast later this week. Until then, thanks for listening.
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