After raising £103m in its initial public offer, Nippon Active Value Fund (NAVF) will become the first investment trust flotation of 2020.
Managed by Rising Sun Capital's James Rosenwald, the trust will aim for high levels of growth through a concentrated portfolio of Japanese small-cap equities.
The unique selling point of this investment trust, however, is that it deems itself to be an "activist" vehicle.
According to NAVF's website, the management team will pursue "multiple activist strategies" including communication with management teams and boards, putting company representatives on the board of investee companies, making shareholder proposals and tender offer bids.
NAVF is now the second Japanese small-cap investment trust to exercise activism as part of its investment process, with AVI Japan Opportunity (AJOT) having launched in October 2018.
Activist investment trusts typically hold a significant proportion of each company's shares within their portfolio, with the view to engage with their management teams to improve the firms' governance or streamline their operations.
The stocks chosen tend to be value plays whose share prices have lagged, and the trust manager aims to work closely with the company to boost the value of their shares again.
Typically, these managers will invest in companies that are further down the market-cap spectrum so that they can hold a more significant percentage of the business.
"Activist funds make their own luck," James Carthew, head of investment company research at QuotedData, said.
"If they spot a value opportunity, a typical value manager would sit and wait for investors to work out it is cheap, whereas the manager [of an activist trust] crystallises the value of their holdings by going out and doing something.
"This means they do have the opportunity to offer returns above and beyond what the market is doing".
Sarah Godfrey, director and investment trust analyst at Edison Investment Research, said this style of investing requires "a lot of due diligence" from the investment trust manager before they buy into the stocks, who will often spend in excess of six months building their investment cases.
In addition, she pointed out that investment trust activists buying into publically-listed companies will be less forthright in their approach than private equity trusts.
"The management teams will do things like help the companies find new sales people, suggest board changes, or edit or overhaul remuneration policies," she said.
"Because these are listed companies, the investment trust manager will not want to do anything that destroys value. If you are a private equity investor, it does not matter what you do until you have to sell your shares. If you can sort things out in between reporting dates, nobody will notice."
Godfrey explained this as the "J curve" effect: the manager buys "a chunk" of shares in the company and "shakes things up", which leads to a further dip in share prices. Then, improvements begin to feed through and bolster share valuations well beyond their starting point over the longer term.
Activist investing in Japan
According to research from Kepler Trust Intelligence, there are nine "traditional" activist investment trusts in the AIC universe, four of which invest in UK small caps; Crystal Amber, Downing Strategic Micro-Cap, Odyssean and Strategic Equity Capital.
Godfrey added that Richard Staveley's Gresham House Strategic investment trust falls loosely into the activist category, although it takes a softer approach to dealing with its holdings.
"Gresham House Strategic is looking to buy between 5% and 25% of its companies. It is still enough to have a voice and, in some cases, 25% of a company can allow for quite a big voice.
"I would say this is perhaps more of an ‘active value' fund than it is an activist fund, and it seems as though the new Nippon Active Value fund also falls into this camp somewhat."
While a majority of activist or activist-leaning trusts seemingly invest in the UK, Kepler Trust Intelligence's Thomas McMahon said it is "unsurprising" to see a second activist investment trust launch focusing on Japanese equities.
"Historically, Japanese companies have been suspicious of foreign investors playing the activism card, but the new regime is seeing a thawing of this attitude. With the small-cap space in particular containing numerous companies with huge amounts of cash and marketable securities on their balance sheets, this looks like it will be a fruitful trend for investors in the country."
McMahon added that Joe Bauernfreund's AVI Japan Opportunity trust has returned 12.5% to shareholders since its launch in 2018, compared to a 4.8% return from the MSCI Japan Small Cap index.
He added: "Since AJOT's launch the thesis that Japanese companies would become more receptive to activist investors has been thoroughly proven, with share buybacks, raised dividends and the unwinding of unwieldy parent/child subsidiary structures all boosting its shareholder returns."
Emma Bird, research analyst at Winterflood Securities, agreed that launching a Japanese activist investment trust makes sense, given the country is in the process of reforming its "relatively poor corporate governance and attitudes to minority shareholders in Japan".
However, Charlotte Cuthbertson - who co-manages the Miton Global Opportunities trust-of-trusts alongside Nick Greenwood - warned that investors "need to be cautious about how quickly the reforms, and therefore the successes, will come".
"Some ideologies in Japan are quite entrenched, and companies do not like investors coming in and telling them what to do," she reasoned.
"Activism can be a great thing. Governance is becoming increasingly important to investors. However, it can be confrontational and both parties can be staunch in both views. It is about treading the balance and implementing constructive activism."