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.

September 2021
  • Tadahiro Fujimura
    Tadahiro Fujimura, CFA, CMA
    Portfolio Manager

Fund Performance Review

In August, the Japanese stock market started on an upward trajectory, partially in response to the dip at the end of July. Amid growing COVID-19 variant infections in Japan in the mid-month, the market took a downward turn after the August 19 report that Toyota Motor cut its global production volume forecast by 40% for September. As the month-end approached, share prices rebounded as expectations for an early U.S. interest rate hike were lowered. As a result, the Tokyo Stock Price Index gained 3.07% in August, while the Russell/Nomura Small Cap Index rose 2.40% over the same period. This month was marked by individual stock trends reversing those seen in the previous month. The Fund’s performance this month slightly declined 0.67% (HJSIX), underperforming its benchmark. This result is likely due to a backlash to rising prices the previous month and to the notably poor performance of undervalued stocks.

The greatest contributor to the Fund’s performance this month was Nishimoto Co., Ltd., a trading firm specializing in Asian foods for Western markets. Its gains were likely due to its upward performance revision fueled by widespread price hikes and a significant recovery in restaurant demand in the West compared to last year. Employee benefits outsourcing contractor Benefit One Inc. also made gains. Its performance was likely due to the market’s bullishness about the firm’s solid performance, which it announced at the end of July. 

This month’s most significant negative impact came from biomass power plant developer and operator EF-ON INC. Its share price fell likely due to pessimism about reports of scandal at the company from some media outlets. The firm has denied the reports, and there seems to be little motive for the scandal for the company, so we think that the authenticity of the information is uncertain. That said, the sudden drop in the firm’s share price was likely in response to its growth the previous month. Biomass power plant operator and industrial waste recycler Takeei Corp. also saw its share price decline. As with EF-ON, Takeei’s decline was likely a reaction to the sharp rise in the previous month amid the noticeable drop of stocks in the carbon-neutral sector. 

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Outlook for September 2021

As we approach summer’s end, the Tokyo Olympics and Paralympics have concluded, the U.S. withdrew from Afghanistan, vaccinations have progressed, and the U.S. shifted away from its monetary easing policy. We feel as though there is a significant shift in social trends. This shift is also happening in the stock market, which should be particularly evident in the anticipated U.S. shift from the GAFA (Google, Apple, Facebook, and Amazon)-driven market. On the other hand, Japanese corporate short-term performance is struggling due to rising costs, slowdowns in the U.S. and Chinese economies, and another wave of COVID-19 infections. Nevertheless, there are signs that the end of these concerns is in sight and we think that the Japanese economy is primed for recovery, with significant earnings growth potential and an increasing sense of undervalued stocks. In terms of our investment strategy, we will continue to respond to ongoing market corrections by increasing the Fund’s holdings of highly undervalued stocks not only within the Portfolio but also in a wide range of industries. We will also continue to uncover companies that promise significant profit gains by responding to new lifestyles and changes oriented toward realizing carbon neutrality.

Click here for Fund Holdings.

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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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