Market Commentary and Fund Performance
The Portfolio Managers of Tokyo-based SPARX Asset Management Co., Ltd., sub-advisor to the Hennessy Japan Small Cap Fund, share their insights on the Japanese market and Fund performance.
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Tadahiro Fujimura, CFA, CMAPortfolio Manager
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Takenari Okumura, CMAPortfolio Manager
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 February 2025
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.
As a result, the Fund returned 0.30% (HJSIX), outperforming its benchmark, the Russell/Nomura Small Cap™ Index, which returned -0.22%.
The stocks that positively contributed to the performance of the Fund this month included SBS Holdings, Inc., Ariake Japan Co., Ltd., and Tsukishima Holdings Co., Ltd. SBS Holdings announced its full-year earnings results for the fiscal year ending December 2024, exceeding market expectations, while the announcement of a dividend increase was also well received. Ariake Japan announced its financial results for the third quarter of the fiscal year ending March 2025. The company’s strong performance, which was due to robust sales in Japan and improved profitability in Europe, was well received by the market, resulting in a rise in the share price. Tsukishima Holdings also announced its third quarter results for the fiscal year ending March 2025. In addition to the benefits of the integration of its water engineering business, the company’s solid performance was due to the acquisition of large-scale projects in both its water environment and industrial businesses, as well as the smooth progress of these projects. The upward revision of its full-year earnings forecast was also well received by the market.
Meanwhile, stocks that negatively contributed to the performance included Musashi Seimitsu Industry Co., Ltd., J. Front Retailing Co., Ltd., and Nabtesco Corporation. In addition to the fact that expectations for artificial intelligence (AI) server-related stocks in the market as a whole have fallen, it is thought that Musashi Seimitsu Industry’s share price fell due to speculation that the company’s products would not be adopted for AI servers as initially anticipated. Although there was no particular news from J. Front Retailing, the yen’s appreciation is thought to have lowered expectations for inbound consumption which caused the share price to fall. Nabtesco announced its full-year results for the fiscal year ending December 2024. The share price is thought to have fallen because the guidance did not reach the market consensus, and the medium-term management plan announced at the same time was lacking in impact.
From the perspective of investment activities, we made new investments including a company that is expected to improve their corporate value through structural reforms, including a review of financial discipline, despite concerns about the reactionary decline in temporary special demand and the ongoing stagnation of business segments.
The Japanese stock market this month has been on a downward trend due to factors such as strengthening of the yen in response to fears over President Trump’s tariff policy, a slowdown in the U.S. economy, and Japan’s rising long-term interest rates. Towards the end of the month, the decline in tech stocks, which was triggered by factors such as the fall in U.S. NVIDIA shares, also contributed to further worsen investor sentiment. However, we believe that as the tariff policy is actually implemented, excessive concerns will gradually subside. We will continue to seek investment opportunities that have been overlooked by the market through a bottom-up approach.
We invest in multiple semiconductor-related companies, including those involved in semiconductor manufacturing equipment and semiconductor materials. The semiconductor industry is subject to severe fluctuations in economic conditions and rapid technological advancements, making it difficult to accurately grasp the latest business and competitive environment. However, we believe that this is a market that is structurally expected to expand in scale due to technological innovation and the expansion of applications, and it is a market that is worth paying attention to, even considering the large fluctuations. Although the small- and mid-cap market does not have the largest manufacturers like Tokyo Electron, there are many companies that have a high global market share in specific processes, and there are also many companies that have achieved growth that greatly exceeds market growth due to technological progress and other factors.
In the past, the semiconductor industry was difficult to enter due to extremely high barriers to entry, but we believe that changes are occurring from multiple perspectives. From a technical perspective, in recent years, the miniaturization of semiconductors has approached its physical limits, and different technologies are starting to come in demand to improve performance. Another factor is the rise in geopolitical risk. From the perspective that it is necessary to avoid excessive dependence on specific manufacturers, it appears that incentives are being created for semiconductor manufacturers to develop second vendors. Many Japanese small- and medium-sized market have unique elemental technologies, and it can be said that the opportunities for new entrants into the semiconductor market, which was previously limited to existing players, are increasing.
Since the latter half of last year, there has been a significant correction in semiconductor-related stocks. Although investment in semiconductors for AI is continuing to expand, there is a growing sense of uncertainty about the sustainability of demand from China, which has been strong until now, and there are concerns about a decline in the market wide growth rate due to factors such as weakness in final demand, including smartphones. Notably, the emergence of a low-cost, high-performance generative AI model by the Chinese startup DeepSeek in 2025 shocked the stock market, raising skepticism about large-scale investment in generative AI, and has spurred a decline in semiconductor-related stocks as a whole through the fall in NVIDIA stock, the primary driver of the AI market.
However, the general pessimism among market participants represents an attractive investment opportunity for medium- to long-term investors such as the Fund. We have begun to purchase shares, seeing this sudden downturn as an opportunity. Even with uncertainty about short-term earnings trends, companies with the high structural growth potential and high profitability of over 10% return on equity (ROE) mentioned above are rare investment targets. Additionally, the share prices of some stocks have fallen to nearly a price to book ratio (P/B) of 1.0, and we believe that the downside is limited when considering the total shareholder yield, including the dividend yield. We would like to discuss insights of individual companies in the upcoming installments, and we will continue investing while closely monitoring trends in technological change and focusing on changes unique to each company.
Click here for Fund Holdings.
- In this article:
- Japan
- Japan Small Cap Fund
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