Market Commentary and Fund Performance

Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted. Performance data current to the most recent month end, and standardized performance can be obtained by viewing the fact sheet or by clicking here.

Fund Performance Review

In February 2025, the TOPIX fell 1.13% compared to the end of the previous month. The Japanese stock market this month was heavily influenced by U.S. President Trump’s statements and actions on tariff policy, leading to a significant decline in the latter half of the month.

In the first half of the month, the Japanese stock market fell sharply following U.S. President Trump’s announcement that he was considering imposing additional tariffs on Mexico, Canada and China, but the stock market recovered temporarily when tariffs on Mexico and Canada were postponed. However, amid resurfaced concerns about stagflation (an economic situation in which a recession and rising prices occur simultaneously) due to the results of multiple U.S. economic indicators, investors maintained to be cautious, and the Japanese stock market continued to show no clear direction, remaining sluggish.

In the latter half of the month, speculation about additional interest rate hikes by the Bank of Japan (BOJ) intensified, and long-term interest rates in Japan rose to a level not seen in about 15 years. Furthermore, the U.S. Consumer Confidence Index and Purchasing Managers’ Index (PMI) were lower than expected which heightened concerns about the future of the U.S. economy. In response, the yen strengthened against the dollar, which weighed on the Japanese stock market. The Japanese stock market closed the month with a significant decline due to factors such as the Trump administration’s expected strengthening of semiconductor regulations against China, the fall in U.S. high-tech stocks, and the uncertainty surrounding the U.S. tariff policy.

This month, the Fund returned -1.27% (HJPIX), underperforming its benchmark, the Russell/Nomura Total Market™ Index, which returned -1.11%.

The month’s positive performer among the Global Industry Classification Standard (GICS) sectors included shares of Consumer Discretionary and Financials, while Industrials and Consumer Staples detracted from the Fund’s performance.

Among the best performers were our investments in Renesas Electronics Corporation, Japan’s largest semiconductor maker specializing in MCUs and analog chips, Sony Group Corporation, a diversified consumer and professional electronics, gaming, entertainment and financial services conglomerate, and Tokio Marine Holdings, Inc., Japan’s largest general insurance company with arguably the best underwriting track record and successful overseas expansion.

Among the laggards were the Fund’s investments in Recruit Holdings Co., Ltd., the owner of the global job matching and hiring platform “Indeed,” and Seven & i Holdings Co., Ltd., a Japanese diversified retail group and operator of Seven-Eleven convenience stores.

Seven & i Holdings Co., Ltd.

On February 27, 2025, Seven & i announced that the founding family’s proposed management buyout (MBO) to take the company private has been shelved. The decision was attributed to a lack of viable prospects for securing the necessary funding to formally proceed with the acquisition proposal. Following this announcement, the company’s stock price saw a sharp decline.

However, we maintain a positive outlook on the stock. This is consistent with the optimistic long-term view we expressed in August last year regardless of the eventual outcome from the latest series of acquisition offers. It is supported by several key considerations.

Couche-Tard acquisition offer is still on the table

First, the existing acquisition proposal from Alimentation Couche-Tard (Couche-Tard) remains a very valid option. The offer price from Couche-Tard stands at $18.19 per share (equivalent to approx. 2,730 yen¹ at the current exchange rate), significantly higher than the company’s current market valuation. While challenges such as antitrust regulations and restrictions on foreign investment could complicate the deal, we believe these hurdles can potentially be addressed through adjustments to the acquisition structure. Regarding antitrust concerns, the combined market share of the two companies in the U.S. is estimated at only low teens. When viewed in the broader context of the retail industry, which includes players like Walmart and Amazon, their share is even smaller, suggesting that regulatory risks may be relatively limited.

It is worth noting that the founding family’s MBO proposal would not have arisen in the first place if the acquisition by Couche-Tard had not been perceived as a genuine threat. If regulatory barriers—such as concerns under Japan’s Foreign Exchange and Foreign Trade Act, which had already been discussed as early as August last year—had made it virtually impossible for a foreign entity to successfully acquire the company, there would have been no need to devise a privatization plan as late as November, three months after Couche-Tard’s initial public proposal.

If the founding family (Ito family) believed that the company would be swallowed up by a foreign entity unless a higher buyout price was offered as a safeguard, then now that the MBO plan has fallen through, the most logical conclusion for the Special Committee would be to agree to Couche-Tard’s acquisition proposal. Ironically, such a decision would be consistent with the concerns that originally drove the MBO effort.

Even if the deal falls through, we will be optimistic

All that being said, it is entirely possible that no acquisition proposal will materialize, leaving Seven & i to continue operating independently. In such a scenario, the company’s stock price may face further short-term declines due to selling pressure from disappointed speculators.

Nonetheless, we are confident that the company will be eventually forced to do “the right thing,” and the business’s long-term potential will remain intact. In our August commentary last year, we wrote: “As much as we would like to see quick results from our investment, this one has an extremely long growth runway if Seven & i can run it well globally.”

Since the proxy battle with the U.S. activist firm Value Act two years ago, the current management has come under close public scrutiny. The external pressures have driven changes in Seven & i’s governance structure. In May 2022, the company finally transitioned to a board composition with a majority of independent outside directors. The following year, in March 2023, an independent strategic committee was established “to objectively assess and monitor the group’s key strategic initiatives and optimal group structure.” This was a landmark event in the company’s history, which had been rife with suboptimal capital allocation decisions. Furthermore, in August 2023, the Ministry of Economy, Trade and Industry (METI) announced guidelines for corporate acquisitions. It is due to this that the company swiftly announced the acquisition offer this time to the public and transparently launched an evaluation process by setting up the Special Committee.

Thus, whatever action Seven & i chooses to take in response to the acquisition offer this time, management will be held accountable. It is not difficult to imagine that there is huge pressure on them to “behave well” for the good of the shareholders. If the deal falls through, they have no choice but to speed up the ongoing strategic initiatives to grow the intrinsic value of the business fast. The sense of urgency was virtually non-existent before, but we are convinced that it is now firmly installed in the company, and that will be good enough for the time being.

From the Fund’s perspective, allowing the company to remain independent and improve its management approach could potentially generate far greater long-term returns compared to crystalizing short-term gains through an acquisition. This view is grounded in the inherent strength of the convenience store business, which is a capital-efficient retail model that generates robust cash flows. The sustained long-term earnings growth and stock price performance of competitors such as Couche-Tard, Casey’s General Stores, and Murphy USA in the U.S. further validate this perspective. The company’s growth runway extends far beyond the domestic market. In addition to the vast, still-fragmented U.S. market, there are significant untapped opportunities across Europe, the Middle East, Asia, and Oceania. Needless to say, these opportunities have not been fully reflected in the valuations proposed during the acquisition discussions.

In terms of the margin of safety on Seven & i shares, what is important about last year’s event is that the world has come to know that Seven & i clearly has value for strategic buyers. Even if the proposed deal falls through this time, there will likely be someone else who will be interested. That should put a solid floor under the share price. By all accounts, Couche-Tard alone first approached the Ito family for a merger and acquisition (M&A) in 2005, and again in 2020, before making last year’s overture for a third time. M&A speculation will always linger for the stock.

Same store sales performance is showing signs of bottoming out

To address the ongoing challenges of weak existing store performance, the management is implementing the right strategies to bolster sales in the U.S., in our opinion.

Convenience stores in the U.S. are often attached to gas stations, and many customers shop there while filling up their tanks. These stores often lack cleanliness and even can make customers feel unsafe at times. There is a lack of incentive for customers to willingly shop at these convenience stores. Recognizing these issues, the company is aggressively renovating its existing stores (involving simple face-lifts such as changing the store signage, installing new bathrooms, redrawing lane markings in the parking spaces, etc). It is also expanding its product lineup focusing on fresh food. Here, Seven & i is partnering with Warabeya Nichiyo Holdings, a supplier for Seven-Eleven Japan, rolling out commissaries to make a wide range of food offerings (i.e. sandwiches, burritos, hotdogs, rice balls, ramen, etc.).

While the appearances of Japanese and American convenience stores are vastly different, observing American tourists impressed by the cleanliness and variety of SKUs (Stock Keeping Units) at Japanese stores makes us bullish that if the company successfully apply the Japanese strategies to the U.S., it could significantly open up growth opportunities. The Japanese model should resonate with American consumers.

The company is also transferring its operational know-how such as “Tanpin Kanri (Item-by-Item Management)” from Japan. This system traces the movement of each merchandise item and collects massive demographic data based on who is buying what, at what time of day, under what weather conditions, etc. to improve the accuracy of the next order placement for re-stocking. This also helps each store localize its assortment to the needs of customers. You can find more details in this video: Seven-Eleven Is Reinventing Its $17B Food Business to Be More Japanese.²

Due to these initiatives, the same-store sales trend for the current fiscal year has been bottoming out with smaller year-over-year declines since last July, despite the downward pressure from the ongoing decline in cigarette sales demand. This is an encouraging sign.

We are also keenly watching its Japan operations. The domestic convenience store (CVS) industry is dominated by three players with Seven-Eleven being the long-term market leader. It is already a mature market but a strong cash cow. Though same-store sales performance has been sluggish here as well, we are sanguine about the company’s prospects.

The issue facing the company’s domestic operations is clear. Historically, the company has differentiated itself by offering high-value-for-money products, such as its private brand “Seven Premium.” However, this positioning has left it at a disadvantage compared to competitors when it comes to price competitiveness. This shift likely stems from structural changes in the competitive environment brought about by the transition from deflation to inflation in Japan. The management is aware of this challenge and is working to address it urgently. Since last year, it has launched initiatives such as the “Ureshii Ne!” (Happy Price) campaign, and since October, same-store sales growth has started to turn positive. Although the improvement is gradual, signs of a recovery trend are beginning to emerge.

As a pioneer in the convenience store industry since the 1970s, the company has driven numerous innovations in areas such as store operations, product development, and customer service. The domestic market is an oligopoly, dominated by just three major players, namely Seven-Eleven, Family Mart, and Lawson. Given this landscape, it does not appear overly challenging for Seven-Eleven to regain its competitive edge against its rivals.

Engagement with the Special Committee

Lastly, we would also like to report that during our direct meeting with Mr. Stephen Dacus, the chairman of the company’s Special Committee, in September last year, we demanded that if the acquisition proposal were to be rejected and the company were to continue operating independently, “a management reshuffle should also be considered.” We plan to continue engaging with the company in the same fashion going forward.

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