Market Commentary and Fund Performance

Tad Fujimura of Tokyo-based SPARX Asset Management Co., Ltd., sub-advisor to the Hennessy Japan Small Cap Fund, shares his insights on the Japanese market and Fund performance.

December 2021
  • Tadahiro Fujimura
    Tadahiro Fujimura, CFA, CMA
    Portfolio Manager

Fund Performance Review

This month, the Japanese stock market began on an upward tick for a couple of reasons. First, the ruling party won more seats than initially forecasted in the Japanese House of Representatives election. Second, U.S. Federal Reserve Chairman Jerome Powell took a cautious stance on raising interest rates. Mid-month, robust performance throughout corporate earnings presentations was also a leading factor underpinning share prices. However, concerns about inflation in Japan and abroad placed a ceiling on this upward trend. At month-end, authorities confirmed the emergence of the highly infectious Omicron variant of COVID-19, lowering expectations for economic normalcy. With the subsequent plummet of share prices, the market ended the month lower than where it began. As a result, the Tokyo Stock Price Index (TOPIX) fell 3.20% in November, while the Russell/Nomura Small Cap Index dropped 5.95% over the same period, with small caps relatively struggling in a harsh environment. The Fund’s performance declined by 6.41% (HJSIX), underperforming its benchmark.

The most significant contributor to the Fund’s performance this month was Yamaichi Electronics Co., Ltd. A manufacturer of semiconductor test sockets and connectors, the firm’s test sockets have performed well, leading to an upward revision to its earnings and likely fueling its share price rise. Towa Corporation, a back-end semiconductor manufacturing equipment producer, also saw its share price climb on the back of an upward earnings revision, driven by robust orders and sales in China and other areas with significant investment demand in semiconductor plants.

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Meanwhile, the stock with the greatest negative impact on the Fund’s performance was Nishimoto Co., Ltd., a trading firm specializing in exporting Asian food overseas. Its share price fell, likely in a backlash to its considerable growth the previous month and due to declining profits quarter-over-quarter. While there was no specific news concerning used condominium trader Star Mica Holdings Co., Ltd., its share price dropped, likely in response to previous gains and due to concerns about declining transactions amid reports of climbing condominium prices.

Outlook for December 2021

The emergence of a new COVID-19 variant has put a damper on the Japanese economy, which was expected to normalize after the rapid decline in infections. I believe that policymakers may also temporarily reconsider the shift from monetary easing policies due to global inflation. However, with the development of therapeutic drugs underway, governments should not be overly concerned with short-term adverse effects, preferring responses to achieve long-term normalization. On the other hand, we should be cautious about inflation due to growing environmental awareness and worsening friction between the U.S. and China. Regarding our management strategy, we will continue to increase the Fund’s investment in stocks in industries falling behind in the economic normalization process, including the domestic consumption-related, service, and construction sectors. We will also uncover new stocks by focusing on companies’ ability to resist inflation and improve productivity.

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To view the Morningstar ratings for the Japan Fund, please click here. (Media - TD Ameritrade)

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1 USD = 105.36 Yen as of 07/27/2020 (Media - Ticker - M. Takeda)

Tom White is a TD Ameritrade Network contributor and is not affiliated with the Hennessy Funds. Content is not investment advice, or a recommendation of any security, strategy, or account type. Options involve risks and are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses.(Media - TD Ameritrade-Rothberg)

To view the Morningstar ratings, please click here.

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