Market Commentary and Fund Performance

Market Commentary and Fund Performance for May 2023

This month, despite early fluctuations in the Japanese stock market, both the TOPIX and the Nikkei Stock Average reached new 33-year highs mid-month due to continued capital inflows from foreign investors. Underpinning these records were expectations for the Tokyo Stock Exchange’s market reform and the Bank of Japan’s stance on monetary easing. Meanwhile, the market weakened at month-end due to concerns over a weak Chinese manufacturing purchasing managers index (PMI) and lower-than-expected domestic industrial production volume in April. Nevertheless, the market ultimately ended the month higher than where it began. As a result, the Tokyo Stock Price Index rose 0.98% month over month, while the benchmark for the Fund, the Russell/Nomura Small CapTM Index fell by 2.75% over the same period. The Fund’s performance this month decreased by 2.86% (HJSIX), underperforming its benchmark.

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

This month, the primary positive contributors to the Fund’s performance were a manufacturer of semiconductor production equipment for use in back-end processes, Towa Corporation, and a semiconductor wholesaler and network service provider, Macnica Holdings, Inc. Towa’s share price rose sharply amid marketwide growth in semiconductor-related stocks. Macnica rose as its position as an authorized distributor for the U.S. semiconductor company Nvidia fueled expectations for the company’s future.

Conversely, the stocks with the most significant negative impact on the Fund’s performance were a manufacture and installation of construction support piles company, Asia Pile Holdings Corporation, and a contract sewing services, with primary clients that include Uniqlo, Matsuoka Corporation. Asia Pile Holdings Corporation’s share price declined due to the announcement of more than a 20% loss this fiscal year despite posting significant profit growth in the previous fiscal year. Matsuoka Corporation’s share price declined as it projected losses in anticipation of falling order numbers this fiscal year despite having significant profit growth in the previous fiscal year. We partially sold some stocks that made gains and increased the portfolio’s weight in stocks that felt undervalued.

Outlook for June 2023

In May, the Japanese stock market, especially large-cap stocks, rose significantly and performed better than overseas stock markets, which is anticipated to attract more attention from overseas investors. In terms of fundamentals, the Japanese economy continues on the road to recovery, with room for growth just to return to pre-COVID levels, leaving the potential for corporate earnings growth via pass-through pricing and production recovery. At the same time, we think that stock prices are rising too rapidly, especially in the indexes, and the market energy could peak as small-cap stocks with low liquidity are left behind, fueling a temporary correction to the market upward trend. The U.S. economy performing better than expected is a positive factor, but the growing concerns about rising interest rates are also worrying. While there are no significant changes to our investment policy, we remain cautious about stocks that have rallied sharply. However, we believe that there is substantial room for growth in lagging small-cap stocks, and we intend to expand the Fund’s investments mainly in domestic demand-related stocks that have the potential for significant earnings recovery.

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