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 2024

In October 2024, the TOPIX, which is a representative index of the Japanese stock market, declined 4.33% from the end of the previous month.

Early in the month, the prospect of a rate cut receded due to factors such as the fact that U.S. Federal Reserve Chairman Jerome Powell, who spoke at the annual meeting of the National Association for Business Economics, emphasized that there was “no need to rush” when it came to future rate cuts. This, combined with U.S. employment statistics greatly exceeding market expectations and cautious views expressed by Prime Minister Shigeru Ishiba regarding the Bank of Japan’s (BOJ) another raising interest rate at early timing, led to a stronger dollar against the yen. Although stock prices temporarily fell due to the worsening situation in the Middle East, as mentioned above, the stock market rose due to factors such as the continuing depreciation of the yen, the resilience of the U.S. economy, and confirmation that the Ishiba administration would continue the economic policies of the previous Kishida administration.

In the latter half of the month, there was a broad sell-off in semiconductor-related stocks after the earnings forecast for the fiscal year ending December 2025 was lowered in the earnings announcement by ASML Holding, a major Dutch semiconductor equipment manufacturer. In addition, the long-term interest rates in Japan and the U.S. continued to rise, and it was reported that the ruling Liberal Democratic Party and Komeito Party were in a delicate situation in terms of securing a majority of seats in the House of Representatives election, which was held on the 27th. These factors and more led to a weak market.

Following the House of Representatives election, the ruling coalition party lost its majority for the first time in 15 years since 2009, and there was a growing view that the future framework of the government would be a “partial coalition” in which the minority ruling party would seek cooperation from the opposition on a policy or bill-by-bill basis. The stock market changed completely after the House of Representatives election and closed the month up from the end of the previous month, due to factors such as the awareness of the possibility of the implementation of economic stimulus policies through cooperation with the opposition party, which advocates expansionary fiscal policies, and the repurchase of futures after the risk events were passed.

As a result, the Fund’s performance returned -7.02% (HJSIX), underperforming its benchmark, the Russell/Nomura Small Cap™ Index, which returned -5.81%.

The month’s negative performers among the Global Industry Classification Standard (GICS) sectors included shares of Industrials, Consumer Discretionary, and Materials while there were no sectors that increased the Fund’s performance.

The stocks that contributed positively to the performance this month were Koshidaka Holdings Co., Ltd., Aeon Fantasy Co., Ltd., and TRE Holdings. Koshidaka Holdings reported its full-year results for the fiscal year ending August 2024 that surpassed company expectations, while forecasts for the current period also exceeded market expectations, which was well received. Aeon Fantasy announced its second quarter financial results, and the market bought into the company’s shares in anticipation of the end of negative news from the company’s operations in China. TRE Holdings raised its full-year earnings forecast, and its share price rose due to strong performance in large-scale waste treatment and recycling projects.

Meanwhile, stocks that negatively contributed to the performance included Treasure Factory Co., Ltd., Kyudenko Corporation, and Mitsubishi Logisnext Co., Ltd. Treasure Factory announced its second quarter results. Due to increased costs associated with the expansion of the area of its purchasing bases and rising personnel costs, the company fell slightly short of its forecasts for the June-August period on account of a small decrease in profits. In addition, the pace of store openings for this quarter has been revised downward. Kyudenko also announced its second quarter financial results. Operating income did not reach market expectations due to lower-than-expected sales and additional costs incurred in some construction projects.

In addition, although market expectations have fallen due to factors such as the sluggish demand for capital investment in China, we initiated a new investment in an electrical equipment manufacturer that we judged to have a high potential for business expansion thanks to the introduction of strategic products and other factors.

The Japanese stock market has been performing well, supported by the strength of the U.S. economy and continued yen depreciation. However, the ruling coalition party losing its majority in the lower house election and the uncertainty surrounding the U.S. presidential election could weigh on the market in the short term. However, both the ruling and opposition parties have shown a positive attitude towards economic policy, and we do not think it is necessary to change our view on the recovery of the Japanese economy through a virtuous cycle of wages and prices. The yen’s depreciation is once again making large-cap stocks more attractive, but the attractiveness of investing in small- and mid-cap stocks is increasing, and we believe that the investment appeal of this strategy remains high. While during events such as the U.S. presidential election, the market continues to remain on edge. While the yen is weakening again, the return of funds to stocks that benefit from a weak yen has been slow, and the sense of undervaluation of some stocks, particularly in the small- and mid-cap markets, is increasing. In this installment, we would like to introduce one of these companies.

The company is a chemical manufacturer with a wide range of products, from the production of acetic acid to key components for airbags, with its origins in the celluloid business, a pioneer in the plastics industry, and boasts high profit margins and capital efficiency.

One of the reasons for the company’s high profit margin is the high efficiency of its factory operations. The company’s production process has been so well known that even large companies have asked to learn from it. We recently had the opportunity to visit the company’s factory and were able to reconfirm what we believe to be its superiority, and we would like to talk about it briefly. In preparation for the “2007 Problem,” a concern that productivity would decline due to the mass retirement of the baby boomer generation, the company worked to improve its production processes starting from the 1990s. Specifically, in the 2000s, they created a system that automatically displays the cause and solution when a problem occurs in a certain process by having skilled operators in the control room to identify patterns of how they judged specific problems that occurred in the factory and input them into the system. At the time, the level of computers was not that high, so it was only possible to identify patterns for dealing with problems that affected quality, but in the second half of the 2010s, they developed a system that succeeded in analyzing and inputting 8.4 million patterns for dealing with problems, including even minor malfunctions, that they had accumulated in the past. As a result, the company has been able to operate its factories without relying on the skill level of the operators, and by eliminating the need for on-site patrols, it has been able to significantly improve production efficiency. The company has several factories in Japan, and it plans to expand the above initiatives to other factories in the future and further improve costs.

The company also has a wide range of products and, by taking advantage of its access to a diverse range of industries, it is actively allocating capital to areas where growth is expected as well as strengthening its research and development activities. While having a diverse range of businesses can be a factor that discounts share value, if capital can be rationally allocated to businesses with significant growth opportunities, it can lead to high capital profitability. More specifically, this includes photoresist solvents used in the photolithography process of semiconductor manufacturing, and epoxy resins used as protective agents for power modules that integrate the insulators and power semiconductors of electric vehicle motors. Although none of these products are making a significant contribution to the company’s performance at this stage, they should be a potential driver for the company’s future growth as they are in a growth market in the long term.

The company is highly sensitive to foreign exchange rates, and recently its share price has been fluctuating more in response to short-term foreign exchange rate movements than to medium- to long-term business performance trends. However, we have confirmed changes within the company, such as the optimization of capital allocation mentioned above and progress in the development of new products that will drive the next stage of growth, and we believe that the company’s shares remain undervalued. As capital profitability continues to improve, we expect the market valuation to recover and will continue to invest.

Click here for Fund Holdings.