Atlantis Japan Growth Fund (AJG) is a closed end investment company (i.e. like an investment trust) focussed on small Japanese companies. It has had disappointing performance in recent years, is trading on a significant discount to asset value, has low liquidity, and is now relatively small in size. Indeed the current market capitalisation is only £54 million which many people would consider unviable, as a result it has relatively high costs (2.47% On-Going Charge according to the AIC). The fund has underperformed the MSCI Japan SMC Index in the last 1,3 and 10 years in terms of share price total return so you can see this situation has persisted for some time.
One of their major investors, LIM Advisors, has requisitioned an EGM to consider a special resolution to force the board to produce proposals to either liquidate the company or do a restructuring of the company – more specifically to possibly convert it to an open-ended fund run by the same manager. Coincidentally the fund management company already runs a similar open ended fund called the Atlantis Japan Opportunities Fund which shows much better performance and is managed by a different person (Taeko Setaishi), although she has already been nominated by Atlantis to become the lead fund advisor to AJG.
Now ShareSoc has been involved in several cases of investment funds which have become stuck in similar situations. Unattractive performance tends to lead to high discounts, low liquidity and a shrinking in size as investors depart (AJG has run a “redemption” programme to buy back shares). Few new investors acquire the shares because it looks moribund – Alliance Trust and Rensburg AIM VCT were two recent cases in which we were involved. This problem can persist for a very long time unless vigorous action is taken. Why has not the board tackled this issue before?
Another concern in this company is the length of service of some of the directors. ShareSoc has consistently opposed investment trust companies who flout the UK corporate governance code that indicates that 9 years is the maximum non-executive directors should serve. After that point they can no longer be considered independent. The AIC (a trade body for investment companies), unfortunately has encouraged this ignorance. The problem with long serving directors of investment companies is they often end up becoming too sympathetic to the interests of the fund managers, as this writer has said several times in the past. The 9 year rule was considered sensible by those who devised the UK Corporate Governance code for the number of reasons, and ShareSoc believes it should be followed unless there are very good reasons not to do so, which there do not appear to be in this case. Two of the directors, Eric Boyle and Andrew Martin Smith have now served for 15 and 13 years respectively despite them receiving substantial votes against their re-election at the last AGM. A third Director, Takeshi Murakami reaches his 9 year limit this November and the Board only consists of 5 people.
In response to the requisition from LIM Advisors, the board have issued a circular recommending voting against the requisition resolution and reiterating its commitment to pursue its existing investment objective. They talk about the performance of the Atlantis Japan Opportunities Fund, but as they say “past performance is no guide to future results”. They do not appear to deal with the problems of the small size of the fund or the high costs that this implies.
Although there may be some advantages to being a closed-end versus open-ended fund, the board has not really made proposals that would ensure the long-term viability of this investment company. Therefore ShareSoc recommends that shareholders in the company give careful consideration to this matter and consider supporting the requisition unless the board makes alternative and substantial proposals to tackle the problems explained above before the EGM.