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 September 2024

In September 2024, the TOPIX increased 0.23% from the end of the previous month. In early September, concerns over a slowdown in the U.S. economy affected market sentiment due to the ISM manufacturing index and U.S. jobs data falling below expectations. Furthermore, the Japanese yen continued to strengthen due to expectations of a rate cut by the U.S. Federal Open Market Committee (FOMC) and rising expectations of a rate hike by the Bank of Japan (BOJ). Amid such circumstances, the stock market temporarily declined, despite showing signs of recovery. Nevertheless, investors remained cautious, as stock prices seemed to be stagnant. Later in the month, after the FOMC decided to cut interest rates by 0.5%, Federal Reserve Chairman Jerome Powell indicated that he would not rush to ease monetary policy, and the BOJ maintained its current monetary policy, which helped to halt the appreciation of the yen and led to a rebound in export-related and semiconductor-related stocks. On the 26th and 27th, the situation looked like Sanae Takaichi seemed to win as leader of the Liberal Democratic Party (LDP), and the prospect of monetary easing being resumed increased, so the stock market rose sharply over these two days. However, Shigeru Ishiba ended up winning the leadership election, and due to an increasing sense of caution on economic policy and the uncertainty over the short term, the Japanese stock market was nearly flat for the month.

As a result, the Fund’s performance returned 1.88% (HJPSX), underperforming its benchmark, the Russell/Nomura Small Cap™ Index, which returned 2.36%.

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

The stocks that positively contributed to the performance of the Fund this month included Maedakosen Co., Ltd. and Nihon Kohden Corporation. Analysts have factored the increase in the target share price for Maeda Kosen into the market and it is also attracting positive attention as a disaster management-related stock. Nihon Kohden also had no news during the month, but its stock rose due to a rebound following a sharp decline after its first-quarter earnings for FY3/2025 in August.

Meanwhile, stocks that negatively contributed to the performance included The Musashino Bank, Ltd. and Tanseisha Co., Ltd. Musashino Bank continued to be sold due to exhaustion following the BOJ’s interest rate hike in August. At the time of the announcement of Tanseisha’s second quarter financial results for FY1/2025, the gross profit margin seemed to have worsened, and the share price had fallen before the announcement of the financial results. It is thought that this was due to selling caused by concerns about the financial results.

Furthermore, although share prices continue to be sluggish due to factors such as the worsening of short-term earnings, we made a new investment in a service industry, where we predict the probability of a strong recovery.

The yen has strengthened due to factors such as concerns about a slowdown in the U.S. economy and differences in the monetary policies of central banks around the world, and the Japanese stock market has been lackluster. The shift in the exchange rate, which has been one of the factors driving Japanese stocks in the past, may have been seen as negative, particularly in the short-term. However, we believe that the Japanese economy is steadily recovering, due to factors such as the normalization of wage increases, including a positive turnaround in real income, and the improvement in the consumption environment caused by the pause in the depreciation of the yen.

As the scope of the search for investment targets widens, we expect that more attention will be paid to small-cap stocks that are undervalued, and we believe that the investment appeal of this strategy remains strong. Against a backdrop of factors such as the continued high level of U.S. interest rates and the cost increases associated with the depreciation of the yen, the environment for domestic demand-related stocks has continued to be challenging. However, the Federal Reserve Board has started to lower interest rates and the accompanying correction of the excessively weak yen is beginning to take place, so we think that attention will be focused on domestically oriented stocks, which have continued to face challenges.

In this report, we would like to highlight our investment in a company that is providing services to those with disabilities. The company mainly offers employment support services for people with disabilities, but it also operates in a wide range of other areas, including providing developmental support services for children with developmental disabilities as well as platform services for welfare facilities for people with disabilities. The employment support services for people with disabilities and the developmental support services for children are publicly funded projects, and the structure of the company is such that the revision of compensation every three years has a significant impact on its business performance. This year is the year of the revision of compensation, and while the revision had a positive impact on the employment support services business, it would negatively affect the developmental support services business, leading to a decline in profitability.

Due to the revision of compensation, it has become necessary to change the services provided by the developmental support services business, and it is expected that the utilization rate of facilities will decline with a negative impact on short-term business performance. However, the company is already taking measures in response to the revision of compensation, and we believe that it can expect to see an improvement in the utilization rate in the future. In addition, the quality of the company’s employment support services business, which have placed many workers in employment, has been highly regarded and we believe that this reputation will be further enhanced by the current revision. Moreover, the pace of increase in the number of locations is also projected to pick up, and even stronger growth in business performance is expected for this business than before.

Furthermore, we also believe that the platform business, which started a few years ago, is worth paying attention. This business is not a publicly funded service, but rather a business that provides a platform centered on SaaS-type products aimed at welfare facilities for people with disabilities as well as schools and nursing care facilities. The company is expanding its business by selling the systems it uses in-house to other companies. We believe that this is very enticing for companies in the same industry. In terms of expanding the business without relying on public funds, we believe that the growth of this business will have a significant impact on the company’s corporate value. The company’s share price has been stagnant for several years, which could be a result of, 1) concerns about a decline in earnings due to revisions in compensation, 2) concerns about a decline in profitability due to rising personnel costs, and 3) a correction of excessively high valuations. It is necessary to note that the company’s main business is a publicly funded service, and so it is a business model where it is difficult to pass on cost increases in the form of higher prices. However, as the government is leading the way in raising wages, we believe that the risk of the profitability of this business deteriorating structurally due to revisions to compensation is limited. The probability of business expansion due to an increase in the number of locations is high, and we believe that the recovery of the share price level will progress along with business performance growth.

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