Market Commentary and Fund Performance

Market Commentary and Fund Performance for February 2023

Early in the month, as rising long-term U.S. interest rates drove down share prices in the U.S. stock market, the weak yen underpinned Japanese equities. They took a downturn into mid-month as concerns over prolonged interest rate hikes reignited due to the higher-than-expected U.S. Consumer Price Index (CPI) and Purchasing Manager’s Index (PMI). However, toward the end of the month, the next Bank of Japan (BOJ) Governor nominee, Kazuo Ueda, clearly stated his intention to continue monetary easing at a policy hearing, and the yen’s depreciation continued to underpin the Japanese stock market, which ultimately ended the month higher than where it began. As a result, the Tokyo Stock Price Index fell 3.63% month over month, while the benchmark for the Fund, the Russell/Nomura Small Cap™ Index, lost 3.46% over the same period. The Fund’s performance this month decreased by 2.95% (HJSIX), slightly outperforming its benchmark.

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The month’s positive performers among the Global Industry Classification Standard (GICS) sectors included shares of Materials and Utilities while the Information Technology, Consumer Discretionary, and Communication Services sectors detracted from the Fund’s performance.

This month, the primary positive contributor to the Fund’s performance was Glory Ltd., a seller of money-handling and payment equipment to banks and retailers, which revised its performance upward due to a lower-than-expected impact from parts shortages and cost increases. Concrete pile manufacturer and installer Asia Pile Holdings Corporation continued to see the impact of the upward revision to performance it announced in January amid the recovery in construction demand. Conversely, the stocks with the most significant negative impact on the Fund’s performance were Internet-based life insurance provider LIFENET Insurance Company and children’s amusement facility operator AEON Fantasy Co., Ltd. No news specifically mentioned LIFENET Insurance, but its share price fell, likely as a backlash to its strong performance last year. AEON Fantasy’s sales continued its year over year (YoY) growth, but its share price declined, likely as a backlash to its gains in January. This month, we wholly divested two stocks, one in Financials and one Materials firm.

Outlook for March 2023

Overseas stock markets are in a tug-of-war between concerns about the European and U.S. economies and expectations of a recovery in the Chinese economy, causing investor sentiment to fluctuate. Meanwhile, the Japanese stock market has been relatively steady due to expectations for various favorable factors, including a recovery in consumption thanks to coming wage hikes, a recovery in inbound demand, the end to parts shortages, and progress in price pass-through. Moreover, the Tokyo Stock Exchange has indicated that it will require companies with price to book (P/B) ratios below 1x to improve them, which should underpin the market by raising expectations of higher share prices for undervalued stocks due to future improvements in asset efficiency and other factors. Therefore, we believe that Japanese equities, especially undervalued small-caps, will perform well due to expectations of improvement in both performance and supply-demand balance. We have not made any significant changes to our investment strategy. With sales likely to recover in a wide range of stocks, we will increasingly invest in stocks that may promise substantial earnings growth even under inflation. We will also seek out undervalued companies that aggressively improve profitability.

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