LONDON (Alliance News) - In the wake of an attack on its performance and size by Hong Kong-based investor LIM Advisors, Atlantis Japan Growth Fund Ltd said Thursday it plans to give shareholders a vote in 2019 to determine whether the London-listed investment trust should continue or close down.
LIM, which controls a 14.9% stake in Atlantis Japan Growth Fund, later on Thursday said the planned continuation vote fails to address the discount at which the trust trades to book value; "extremely high" running costs; and an "unviable" size.
LIM would rather an opportunity for shareholders to exit their investment in the trust at close to its net asset value with a possible roll-over opportunity into an open-ended vehicle.
"This fund now has a market capitalisation of GBP56 million due to under-performance, a persistently wide discount and a share buy-back programme that has only managed to reduce the size of the fund to render its existence meaningless," LIM said in a statement Thursday. "The simple fundamental facts are that this fund is far too small, far too expensive and should not exist in a closed-end structure."
Atlantis Japan Growth Fund is the smallest in its peer group, according to LIM, which said the trust has total assets of GBP69 million versus a sector average of GBP146 million. LIM claimed that Atlantis Japan Growth Fund's expense ratio is "the highest" of all closed-ended funds focused on smaller companies in Japan.
"Sadly the fund's total expense ratio will climb further this year as the board is running up costs to defend the fund from one of its own long-term shareholders," LIM, which has been invested in the fund since December 2010, said.
With a vote on LIM's restructuring proposal scheduled for May 3, Atlantis Japan Growth Fund currently boasts the backing of three shareholder advisory bodies: Pensions & Investment Research Consultants Ltd, Glass, Lewis & Co LLC, and Institutional Shareholder Services Inc. LIM's restructuring proposal requires the backing of at least 75% of votes cast at the meeting to pass.
One of LIM's main criticisms of the trust is that its performance has lagged that of its open-ended sister, the Atlantis Japan Opportunities Fund, which is managed by Taeko Setaishi. She is set to become lead fund adviser to Atlantis Japan Growth Fund on May 1.
That remedy marked a change of heart at Atlantis Japan Growth Fund, which had originally planned to improve its performance by including Setaishi's top 10 stock picks in its portfolio of investments, with Ed Merner to remain lead portfolio manager.
The growth fund's total return in sterling was 23.8% over three years and 74.6% over five to March 31, while the opportunities fund had a total return of 77.9% over three years and 169.9% over five.
It's not just performance that rankles with LIM. Valued at about GBP55 million by market capitalisation, the London-listed trust is "too small" to attract new investors, according to the shareholder. Without appetite for its shares, the discount at which the trust trades to its net asset value - the difference between its assets and liabilities - could persist, LIM fears. Atlantis Japan Growth Fund wants a chance to improve.
"The change of lead fund manager to Taeko reflects the board's acknowledgement that there is room for improvement in the company's performance, although we note that the company's performance has been in line with its peers for the most part and also that its discount has been narrower," Noel Lamb, chairman of Atlantis Japan Growth Fund, said in a statement Thursday.
"We have already been pro-active in managing the company's discount. In 2013, we introduced the discount control mechanism and this has helped limit the company's discount to an average of 8.0%, narrower than the average discount for its peer group of 9.5%," Lamb said.
Atlantis Japan Growth believes its closed-end structure will help it to generate "superior investment returns" relative to Atlantis Japan Opportunities over the longer term.
LIM has called that view into question. The open-ended fund's performance shows the closed-ended structure is unnecessary, according to the shareholder.
The debate about structure is at the heart of the nature of investment companies. Supporters of closed-end structures like that they have a fixed number of shares in issue at any given time.
This, supporters say, provides stability because the trust's investments are unaffected by the trading of its own shares on an exchange. As a result, closed-ended investment trusts are able to invest in illiquid assets, for example private equity or venture capital.
In an open-ended structure, a fund expands and contracts in size depending on whether investors are adding money or withdrawing. This tends to mean that such structures are better suited to investing in liquid assets. If an investor wants to leave the fund, the open-ended fund needs to sell the underlying asset to return the cash. Unlike closed-ended funds, they're unable to make use of borrowing money to boost returns.
Atlantis Japan Growth Fund thinks LIM's proposed roll-over opportunity "fundamentally undervalues the benefits" of a closed-end structure.
"The company has, and will continue to have, a bias towards investing in small to mid-cap assets and the closed-end structure provides a stable pool of capital which allows the fund manager to do this without having to manage significant inflows and outflows of cash, and therefore target some less liquid stocks that Ms Setaishi may find attractive but is not able to hold in her open-ended fund for liquidity reasons," Atlantis Japan Growth Fund said Thursday.
"In addition, the ability to use gearing (borrowing for investment purposes) gives Ms Setaishi additional flexibility to seek superior investment returns; for example to take advantage of new investment opportunities without being forced to realise existing investments that she considers still hold value," the trust said.
Shares in Atlantis Japan Growth Fund were down 1.0% at 139.00 pence on Thursday afternoon.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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