Market Commentary and Fund Performance

Tad Fujimura of Tokyo-based SPARX Asset Management Co., Ltd., sub-advisor to the Hennessy Japan Small Cap Fund, shares his insights on the Japanese market and Fund performance.

October 2023
  • Tadahiro Fujimura
    Tadahiro Fujimura, CFA, CMA
    Portfolio 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 September 2023

Early in the month, the Japanese stock market was on an upward trend due to the temporary decline in recessionary anxiety in China caused by an improved Chinese Manufacturing Purchasing Managers’ Index (PMI), as well as expectations of an early dissolution of the House of Representatives and a general election in Japan. However, as the month came to an end, market sentiment deteriorated, and prices returned to their previous levels due to indications of prolonged monetary tightening at the U.S. Federal Open Market Committee (FOMC) meeting and heightened fears of government agency closures as budget talks in the U.S. Congress came to a standstill. Ultimately, the month ended slightly above where it began. As a result, the Tokyo Stock Price Index fell 1.94% month over month, while the benchmark for the Fund, the Russell/Nomura Small CapTM Index, lost 1.93% over the same period. The Fund’s performance this month decreased by 1.78% (HJSIX), slightly outperforming its benchmark.

Click here for full, standardized Fund Performance.

Positive contributors to the Fund’s performance this month included semiconductor production equipment manufacturer Towa Corporation; leading commercial interior contractor Tanseisha Co., Ltd.; and contract sewn product manufacturer Matsuoka Corporation. Towa’s share price climbed in response to a sense that its incoming orders have continued to turn the corner since the previous month. Tanseisha benefited from the bullish sentiment after it announced an upward revision to its midterm earnings forecast. Matsuoka Corporation’s share price rose on the positive operating profit of Q1 financial results announced in the previous month.

Meanwhile, stocks with a negative contribution included leading semiconductor-oriented chemical manufacturer Tokyo Ohka Kogyo Co., Ltd.; peptide-based drug discovery support service provider PeptiDream, Inc.; and employee benefits outsourcing contractor Benefit One Inc. Tokyo Ohka Kogyo attracted market concern likely because sell-side analysts lowered its target share price. PeptiDream suffered amid a sell-off of stocks with high growth expectations. Benefit One also saw its share price drop due to the trend of selling growth stocks.

This month, we made a new investment in a manufacturer which is heavily undervalued in their price to book (P/B) ratios and other metrics. We fully divested one stock during the same period.

Outlook for October 2023

Despite the high uncertainty regarding interest rate trends, the Chinese economy, geopolitical risks, and other factors, Japanese equities have performed well in relative and absolute returns. We believe that it stems from how absolute valuations of Japanese equities are still low, providing significant room for earnings recovery. Thus, we expect this robust performance to continue through year-end. Looking at corporate earnings, the manufacturing sector continues to benefit from the weak yen and the production recovery since last year, making solid gains despite the slowdown in the Chinese economy. Domestic non-manufacturing industries, which warrant concern about the disadvantages of a weaker yen, have maintained robust performance due to strong inbound demand and price transfer progress. Further rise in crude oil prices and excessive yen depreciation are risks, but we believe that progress in wage raises and price pass-throughs should allow the market to maintain a solid foundation. We expect that small- and mid-cap stocks continue to undergo reevaluations with upcoming earnings announcements while they remain relatively undervalued. We will focus on stocks with earnings growth starting in the next year rather than how undervalued they are, as we believe that this category is starting to garner attention.

Click here for Fund Holdings.

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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 and can be found here. Performance data current to the most recent month end may be obtained from HennessyFunds.com Hennessy Funds Standardized Performance

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1 USD = 105.36 Yen as of 07/27/2020 (Media - Ticker - M. Takeda)

Tom White is a TD Ameritrade Network contributor and is not affiliated with the Hennessy Funds. Content is not investment advice, or a recommendation of any security, strategy, or account type. Options involve risks and are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses.(Media - TD Ameritrade-Rothberg)

To view the Morningstar ratings, please click here.

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