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.

Market Commentary and Fund Performance for November 2024

In November 2024, the TOPIX increased 0.90%.

The first half of the month saw fluctuations. Following the U.S. presidential election on November 5, the reports that former President Donald Trump took the lead in the election led to a significant rise in the Nikkei 225, nearing JPY40,000 ($259.66) on November 7.

However, when U.S. President-elect Trump’s plan to appoint a hardliner against China to his administration was reported, increased caution towards the incoming administration’s policy for tougher tariffs put pressure on semiconductor-related stocks, and the stock market began to decline. Nevertheless, on November 14, following the Federal Reserve Chairman Jerome Powell’s comments that the central bank of the U.S. does not need to be “in a hurry” to lower interest rates, export-related stocks were bought as the yen weakened, and semiconductor-related stocks rebounded, halting the stock market’s daily declines.

In the second half of the month, the Japanese stock market fluctuated within a narrow range, with investors continuing to be affected by uncertainty over the future of U.S. monetary policy and trends in U.S. semiconductor stocks. In addition, the market continued to soften in response to the announcement by U.S. President-elect Trump of tariff measures against China, Mexico, and Canada, resulting in an overall decline by the end of the previous month.

As a result, in November, the Fund’s performance returned 6.82% (HJSIX), outperforming its benchmark, the Russell/Nomura Small Cap™ Index, which returned 1.97%.

The stocks that contributed positively to the Fund’s performance this month included Musashi Seimitsu Industry Co., Ltd., Macromill, Inc., and Nishi-Nippon Financial Holdings, Inc. Musashi Seimitsu Industry appears to have been positively received for its announcement of the construction of a new hybrid supercapacitor plant to meet strong demand from data centers. Macromill rose after it was announced that TJ1, a company under the umbrella of the European investment fund CVC Capital Partners, would be conducting a takeover bid with the aim of making Macromill a wholly owned subsidiary. Nishi-Nippon Financial Holdings also performed well, due to the robust price movement caused by rising interest rates, as well as the announcement of a share buyback and an increase in the year-end dividend for the second quarter of 2025.

Meanwhile, stocks that negatively contributed to the Fund’s performance included TRE Holdings Corporation and LITALICO Inc. TRE Holdings announced its second quarter results for the fiscal year ending March 2025. Although the waste treatment and recycling business was performing well due to revisions to unit prices and the Noto Peninsula earthquake, the market had already factored in the upward revision announced last month leading to a sell-off as this was already reflected in the stock price. LITALICO also announced its second quarter financial results for the fiscal year ending March 2025 at the end of October. The company revised down its full-year earnings forecast due to a decline in the utilization rate in the child welfare segment, and this was not well received by the market, and led to a sell-off.

In addition, although share prices have fallen due to concerns about short-term business performance stagnation caused by factors such as the weak yen, we have made new investments in companies such as food manufacturer, which is expected to increase their market share in the medium to long term due to their high price competitiveness.

Concerns are growing over protectionist policies by the United States, such as the strengthening of semiconductor regulations against China and the policy of strengthening tariffs. In Japan, the yen has strengthened due to expectations of an interest rate hike in response to economic indicators that exceeded market expectations, and the manufacturing industry has seen a sluggish stock price development. The decision was also made to set a 2025 wage increase target of at least 5% across the board and at least 6% for small and medium-sized enterprises. It seems likely that appropriate price increases will become easier to implement in order to secure the funds for wage increases, and the recovery of the Japanese economy through a virtuous cycle of wages and prices is steadily progressing.

Furthermore, we have started investing in a drugstore chain this month. Although there is a growing momentum for wage increases in Japanese society, in the short term, consumer purchasing power is declining due to high prices, and domestic consumption is trending towards sluggish growth. From the perspective of the business environment for retailers, it is undeniable that the situation is severe, with demand stagnating while store operating costs such as labor and utility costs are rising. However, the harsh environment can also be a catalyst for industry consolidation, and for companies with a high level of competitiveness, it can be an opportunity to expand their market share. We have already invested in another drugstore chain that focuses on low-cost operations, and after conducting research, we have also started investing in this drugstore chain that has a solid store format and high expectations for future growth in the number of stores opened.

The company is expanding its business in rural areas. It has grown by offering more attractive prices than surrounding supermarkets, taking advantage of the increasing thriftiness of consumers, and is characterized by its EDLP (Everyday Low Price) strategy. Like the drugstore chain in which we have already invested, low-cost operations are the source of their competitive advantage. By standardizing store formats based on chain store theory, they have been able to introduce work plans that are common to all stores. This is like a timetable that shows the tasks that store staff should complete in a day, down to the minute, and it has led to a significant increase in efficiency. As a result, the sales floor area per employee at this company is higher than we see at typical drugstores. Another point that gives them a cost advantage is that they handle their own logistics and food processing in-house. In-house logistics and food processing directly contribute to price competitiveness in stores. Although this will increase fixed costs in the short term, as the number of stores increases, marginal profits could increase, and in the future, improvements in business efficiency may be expected.

In addition to these low-cost operations, it is also worth noting that the company has become more precise in its ability to increase the number of new stores. The company has continued to search for the optimal store format, and there were twists and turns before it was unified into its current main business format. In addition, in the past, the pace of store development had slowed down in recent years as the company shifted from working with developers to developing stores on its own. However, with the establishment of store formats and an in-house development system this fiscal year, it is thought that the company has entered a phase where it can expect an increase in the number of new stores. The company’s low-cost operations are highly competitive, and if this business model can be established even in small commercial areas in the countryside, the potential for further expansion of the number of stores can be expected to increase.

However, the company’s stock is in a slump due to concerns about the industry. As mentioned above, the main reasons for this are concerns about a deterioration in profit margins in the medium to long term due to the continuous rise in store operating costs caused by wage increases, and the slump in domestic consumption caused by high prices. However, the company’s products are highly competitive in terms of price, and the growing awareness of the need to conserve spending is leading to changes in consumer behavior, which in turn should be increasing the company’s market share. The restructuring of the domestic retail market has only just begun, and we believe that the expansion of market share by competitive companies will continue for the time being.

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