Update Letter from the Investment Adviser

Nippon Active Value Fund                                               

Things change. With the current enormity of dislocation in the international securities and resources markets, they must. Indeed, expectations already have and this has led inevitably to some questioning whether the accepted rationale for activist-led investing in Japan still obtains. In other words, do the principles guiding NAVF still make sense in a post Covid-19 world? For those who can't wait, the answer is 'yes', but, as they say, it's complicated.

I will have a go at explaining the answer above a little further on, only noting here that, although my crystal ball is now operating with diminished capacity, there are continuing overriding truths that should mean we will not need to rely on it for ultimate success. Firstly, let's examine the facts about how the first couple of months have gone. The news is all good!

The Fund raised £103 million and was admitted to the London Stock Exchange on 21^st February. This turned out to be perfect timing. A month later and global paralysis would have prevented it happening at all. We have set about the task of putting the funds to work and today we are about 51% invested and the NAV per share is roughly 101, or slightly above par. I don't have any other collective investments that have actually gone up since the pandemic struck. I doubt many do.

Every new venture needs some luck, now we must make the most of it. We aimed to have the Fund fully invested inside six months and we are still on track to achieve this. By definition, our target list of around 20 smaller cap counters does not include the most liquid stocks. Some have been easier to accumulate than others and so we have made some slight adjustments to our limits both as to quantity and price while adding an additional name to the mix. The build-out period has also been useful for the testing and perfecting of our management and dealing systems and these are now mostly bedded-down satisfactorily.

So, now let me return to the Fund's raison d'être. Anjani Trivedi recently published a Bloomberg article entitled 'Hedge Funds Will Be Collateral Damage in Japan'. The crux of her argument is that in a new world where cash is king, Japan's asset-rich companies suddenly look prescient and well-managed. Resilience rather than efficiency will be the order of the day, with Western activists' obsession with squeezing dividends out of their prey looking more short sighted and irrelevant by the moment. As the first line of her article says: 'So long, activists. No one's giving you any cash back, at least not anytime soon.'

These points are well made. I accept the global pandemic has supplied some timely ammunition to defensive strategies seeking to justify large chunks of cash on company balance sheets. However, there is still a difference between comfortable operational buffers and holding vastly excess capital. NAVF's charter has never depended on smash and grab tactics, we are investors focused on the long-term and interested in growing value together with the managements of our portfolio companies. The intrinsic worth of our holdings may be protected by their asset backing (as has been shown since we launched) but it will be augmented by unlocking their untapped earning power or demonstrating the lack of it. This will be achieved over time by aligning managements' interests in what are, after all, exclusively 'salaryman' controlled entities with our own.

Our portfolio is diverse and offers a variety of levers to pull to reveal value. We have no initial need to be confrontational or to demand to be 'shown the money'. Our key strategy is premised on getting restricted stock into the hands of managers; in helping executives to think like us, rather than trying to repel us. This was always the plan and, in this respect, Covid-19 has actually changed nothing, except, perhaps, to provide us with a better platform from which to launch our campaign.

All in good time. Let's get the money invested first.

Paul ffolkes Davis

Chairman

Rising Sun Management Ltd