MIDAS SHARE TIPS: Aim high as fund seeks best of Japan

The salaryman has been a pillar of Japanese society for decades. Solid, dependable, conscientious, he works hard and expects to stay in the same company until retirement. Some barely progress through the ranks. The lucky few make it to the top, where they promote a culture centred on diligence, conservatism and an aversion to change.

Japan’s stock market is littered with such businesses. Meticulous in their approach to work but significantly undervalued compared with their Western equivalents.

NIPPON ACTIVE VALUE FUND (NAVF) aims to seek out these companies, engage with their boards and persuade them to do things a little differently. The company listed on the stock market at £1 in February 2020. They have already risen to £1.42, but should move considerably higher as manager Paul ffolkes Davis agitates for change in his chosen pockets of the market.

Ffolkes Davis started his career as a banker before a 16-year stint as the bursar at Trinity Hall, Cambridge. There, he was tasked with bolstering the college coffers and funds rose sevenfold under his stewardship. Two investment managers who helped him achieve it were Gifford Combs and Jamie Rosenwald, whose grandfather was the first foreign employee at Japanese broker Nikko Securities. Rosenwald junior learnt at his grandpa’s knee and has spent more than two decades investing in Japan.

Having worked together successfully at Cambridge, ffolkes Davis, Combs and Rosenwald decided to set up NAVF, using their combined experience and expertise to deliver healthy returns to UK investors.

Asian appeal: The Nippon fund invests in firms with uniquely Japanese virtues

Backed by a team of Japanese analysts, NAVF finds and invests in companies that are below the radar of most Western brokers. These firms share certain characteristics – a disappointing share price, solid business growth, plenty of cash and no borrowings.

NAVF buys shares in these firms and swiftly contacts the management, praising what they do well but pointing out that the stock price could be far higher if they pursued policies such as paying more attractive dividends or awarding shares to top executives so they think more like owners than salarymen.

Initial overtures are often rebuffed, but several companies have gone on to take up NAVF’s suggestions and their shares have soared in consequence. Mitsuboshi Belting exemplifies the breed. The firm makes specialised products for cars, industrial machinery and conveyor belts, and its principal customer is Toyota.

NAVF invested in Mitsuboshi Belting early on, suggesting it increase dividends and incentivise management with stock. The company followed this advice and the shares have rocketed, rising almost 80 per cent in the past year alone.

Ffolkes Davis even tells some firms that they would be better off in private ownership and this, too, can reap considerable rewards. Dye specialist Sakai Ovex, for example, went private after NAVF recommended that path and the firm doubled its original investment as a result. At valve producer Ihara Science, the chairman said earlier this month that he would like to buy the business, just weeks after NAVF made this suggestion. The shares have risen more than 30 per cent in the past ten days.

Ffolkes Davis and his crew have been busy elsewhere, too. NAVF is valued on the stock market at £153 million, but Rosenwald runs a much bigger outfit in the US – Dalton Investments, a $2.7 billion (£2.25 billion) investment firm focused on Asian shares. NAVF and Dalton have some shares in common and this gives the UK firm considerably more firepower than it would have alone. Along with a similarly minded investment firm, the duo have launched an offer to buy a controlling stake in ink and resin maker T&K Toka, a move that has sent the shares higher and could well flush out alternative bidders.

Overall, NAVF has 18 companies in its portfolio, most of which have risen materially since it bought into them. This performance is reflected in NAVF’s own share price but, even though the stock has done well, the company’s assets are independently valued at £1.45, so the shares are trading at a discount to the value of its underlying investments. This should change as the business grows and shows its mettle.

NAVF is also likely to benefit from wider political and economic shifts in Japan under Prime Minister Fumio Kishida and newly appointed central bank governor Kazuo Ueda.

Midas verdict: NAVF celebrates three years as a listed business tomorrow. Ffolkes Davis and his team have kept their promises, the stock has responded and the company is valued at £153 million. But the group has a £500 million valuation in their sights and a good idea of how to reach that goal. At £1.42 the shares are a buy.

Traded on: Main market Ticker: NAVF Contact: nipponactivevaluefund.com or 0370 707 1346

This post first appeared on Dailymail.co.uk