AVI Japan Opportunity Trust proposes merger with Fidelity Japan Trust to create larger Japanese equity fund

AVI Japan Opportunity Trust plc has formally proposed a merger with Fidelity Japan Trust plc to create a larger, more liquid investment trust targeting undervalued Japanese equities. With structural reforms in Japan accelerating corporate governance improvements, AVI Japan Opportunity Trust sees an opportunity to consolidate investor interest into a single, high-performing vehicle with a proven strategy for unlocking value in small-cap Japanese stocks.

The proposed transaction is structured as a scheme of reconstruction under Section 110 of the Insolvency Act 1986, with Fidelity shareholders offered the choice of rolling over their investments into AVI or redeeming up to 25% of their holdings for cash at a 2% discount to formula asset value. Crucially, the proposal is backed by City of London Investment Management, the largest shareholder in Fidelity Japan Trust with a 23% stake, which has publicly endorsed AVI’s strategy of consolidation and active discount control.

How do AJOT and FJV compare on performance and market valuation?

The divergence in long-term performance and shareholder value protection between AVI Japan Opportunity Trust and Fidelity Japan Trust is a central theme in the merger proposal. Since its IPO in October 2018, AVI Japan Opportunity Trust has consistently delivered outperformance, with NAV total returns of 93.3% over five years, 47.3% over three years, and 20.9% over the past year.

In contrast, Fidelity Japan Trust has struggled in recent periods, posting a NAV total return of just 28.1% over five years, -3.4% over three years, and -9.3% over one year. Against the benchmark MSCI Japan Small Cap Index, which returned 35.2% over five years and just 0.9% in the past year, AJOT’s results stand out as top-decile in its category.

The discount to NAV at which the two trusts trade offers another key comparison. AJOT’s shares have averaged a mere 0.05% discount since inception, compared to Fidelity’s 9.35%. As of April 4, 2025, AJOT’s stock was trading at 144.00p—down 4.48% from the previous day and 13.77% off its 52-week high of 167.00p—representing a 9.13% discount to NAV. Fidelity Japan Trust’s shares were at 159.00p on the same date, down 4.79%, with an 8.44% discount to NAV and roughly 13.58% below its 52-week high.

What investment advantages does the merger offer Fidelity shareholders?

Fidelity Japan Trust shareholders are being presented with an opportunity to move into a vehicle with stronger historical returns, greater liquidity, and more robust discount control. Through the merger, these shareholders would gain access to AVI’s activist investment approach, which focuses on unlocking value in under-capitalised and undervalued Japanese businesses via constructive engagement with company management and boards.

Moreover, AVI Japan Opportunity Trust’s annual uncapped redemption opportunity offers an ongoing liquidity mechanism that Fidelity currently lacks. This structure has proven effective, with only 2.58% of shares tendered in 2024, suggesting high shareholder satisfaction. The manager of AVI Japan Opportunity Trust, Asset Value Investors Limited, also invests 25% of its management fee into AJOT shares on the secondary market, directly aligning management incentives with shareholder outcomes.

City of London Investment Management stated that it supports consolidation in the UK investment trust sector and considers AVI’s proposal an effective means to protect shareholder value through both outperformance and active discount management—areas where Fidelity has lagged.

Why has Fidelity’s board resisted engagement, and what’s next?

AVI Japan Opportunity Trust’s board submitted a written merger proposal to Fidelity in August 2024, followed by a meeting in March 2025. According to AJOT, no substantive engagement or response followed. Fidelity’s board, in its own reporting, has indicated a preference to continue its current strategy without providing liquidity until 2028.

This prompted AJOT to take the unusual step of making the proposal public ahead of Fidelity’s May continuation vote, thereby allowing shareholders to evaluate both the trust’s recent underperformance and the proposed alternative. AVI Japan Opportunity Trust’s board has indicated that it believes shareholders deserve transparency and the opportunity to consider a better-aligned investment strategy that can address persistent discounts and unlock latent value.

The merger, if progressed, would remain subject to due diligence, shareholder approvals, regulatory clearances, and formal agreement on heads of terms. It would be exempt from the UK Takeover Code, given the Section 110 structure.

What does the sentiment analysis and stock performance suggest for investors?

Stock market performance and current sentiment suggest a mixed but insightful picture. AJOT has recently faced some market pressure, closing at 144.00p on April 4, down 4.48% from the previous session. However, this drop must be contextualized against its strong multi-year NAV performance and robust shareholder alignment mechanisms. With a 9.13% discount to NAV, there may be latent value for long-term investors, especially if the merger boosts scale and secondary market liquidity.

Fidelity Japan Trust shares also dipped 4.79% on April 4, to 159.00p, and continue to trade at a significant discount to NAV. Despite recent efforts to reassert its value proposition, the trust remains far behind AJOT in performance, liquidity, and governance structures that protect shareholder value.

Investor sentiment around AJOT is broadly positive, particularly among institutional holders who favour active managers capable of exploiting inefficiencies in the Japanese equity market. In contrast, Fidelity’s higher discount and recent underperformance may be contributing to mounting pressure from shareholders to consider strategic alternatives like the proposed merger.

For investors weighing their positions, AJOT may represent a long-term “Buy” or “Hold,” especially in anticipation of a merger that enhances scale and market access. FJV holders should consider voting in favour of further dialogue or engagement, particularly if the continuation vote proceeds without clear plans to address liquidity and valuation gaps.

The proposed merger is more than a structural reshuffling—it’s a strategic move that reflects wider trends in the UK investment trust sector, including consolidation, shareholder activism, and demand for better discount control. With performance, alignment, and governance on its side, AVI Japan Opportunity Trust is positioning itself not just as a better-performing alternative, but potentially as the blueprint for value-oriented investment in Japanese small caps. Fidelity shareholders now face a critical choice: continue with the status quo, or embrace an active model that promises better alignment and the possibility of unlocking long-term value.