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 October 2023

This month, rising U.S. long-term interest rates in response to robust U.S. employment data and concerns about higher future interest rates negatively impacted the Japanese equity market. Also weighing on the market were rising crude oil prices due to the tense Middle East situation. Later in the month, China’s economic stimulus measures were well received. However, the month ultimately ended below where it began due to expectation about the Bank of Japan to revise its monetary policy again and disappointment over weak financial results from U.S. technology companies. As a result, the Tokyo Stock Price Index fell 4.41% month-over-month, while the benchmark for the Fund, the Russell/Nomura Small Cap™ Index, lost 3.65% over the same period. The Fund’s performance this month decreased by 2.48% (HJSIX), outperforming its benchmark.

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Positive contributors to the Fund’s performance this month included semiconductor production equipment manufacturer Towa Corporation; leading Italian restaurant operator Saizeriya Co., Ltd.; and leading Japanese food exporter Nishimoto Co., Ltd. Towa’s share price rose on expectations of increased demand due to the semiconductor market expansion driven by generated artificial intelligence (AI). Saizeriya’s share price climbed after it announced significant revenue and profit growth in its year-end forecast. Nishimoto saw its share price grow after it announced its medium-term management plan with a high profit growth rate.

Conversely, stocks with an adverse impact included peptide-based drug discovery support provider PeptiDream Inc.; children’s amusement facility operator Aeon Fantasy Co., Ltd.; and leading construction crane manufacturer Tadano Ltd. PeptiDream’s share price fell on the widespread market’s view that the firm lost a business opportunity after completing the development of a drug candidate with a partner company. Aeon Fantasy lost value due to bearishness about the weak monthly sales from existing stores in its China operations. There was no news about Tadano, but its share price fell likely due to bearishness about deteriorating economic conditions. This month, we made a new investment in a retailer whose share price has undergone corrections.

Outlook for November 2023

Geopolitical risks are rising as the Palestinian conflict expands and issues in Ukraine and elsewhere linger. Optimism toward the global economy is also challenging as U.S. long-term interest rates remain high. However, the Japanese economy remains strong, with companies benefiting from the weak yen amid an increasing number of domestic market-oriented companies bolstering profits by passing higher costs on to their customers. Furthermore, the Chinese economy, semiconductor producers, and other industries have begun to show signs of recovery, making it likely that the economy will show clear signs of improvement toward year-end and into 2024. Foreign investors also continue to focus on Japanese equities, driving continued favorable market conditions. We will not make significant changes to our investment strategy, but we would like to expand the Fund’s holdings in stocks undervalued based on performance expectations for the next fiscal year and beyond. Moreover, as the share prices of emerging growth stocks continue to decline, we will also seek to identify stocks with earnings growth potential for the following year.

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