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 market and Fund performance.

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

In March, U.S. equities performed well on expectations for a sizeable economic stimulus package, fueling solid performance in Japanese stocks. Rising U.S. interest rates and a weak yen sparked solid performance in cyclicals and automotive stocks. On the other hand, the hedge fund blowups and rising interest rates have kept the NASDAQ’s growth flat and caused poor performance among emerging Japanese equities. As a result, the Tokyo Stock Price Index (TOPIX) rose 1.92% month-over-month, while the Russell/Nomura Small Cap Index gained 3.08%. The Fund’s performance (HJSIX) this month increased by 4.73%, outperforming its benchmark by more than two percentage points. Contributors included construction, cyclicals, and the service industry, which had become undervalued following last month’s dip.

The most significant contributor to the Fund’s performance this month was Kito Corporation. The company, which produces chains and pulleys for lifting heavy objects used in factories and construction sites, attracted favorable attention after its upward earnings revision due to a recovery in capital investment. Hanwa Co., Ltd., which deals mainly in steel and other non-ferrous metals, saw its share price rise due to market expectations for significant future earnings after the company increased the prices of its steel products and battery materials.

Meanwhile, internet-based life insurance provider LIFENET Insurance Company had the greatest negative impact on the Fund’s performance. It apparently suffered a backlash to its significant share price growth last year and a decline in its client acquisition momentum. The share price of Siix Corporation, an assembler of parts primarily for automobiles, likely fell in a backlash to its considerable growth the previous month.

Click here for full, standardized Fund Performance.

Outlook for April 2021

While the stock market has performed well so far in 2021, it has retained a sense of overall balance as overvalued stocks undergo corrections and undervalued equities rise. Japan remains committed to monetary easing, with a weak upward pressure on interest rates. As a result, we believe the negative impact of interest rates on the stock market will be smaller than in other countries. In the first half of 2021, the weakening yen could also be a significant factor in booming profit growth, mainly in manufacturing and underpinning the market. The change in the Bank of Japan’s Exchange Traded Fund (ETF) purchase policy is a risk for large-cap stocks, but we believe it will have little impact on small-caps, the Fund’s universe for investments.

In terms of our management policy, we intend to raise the Fund’s weight in stocks that should see significant profit recovery as the economy returns to normalcy while selling stocks that made big gains last year on the back of the COVID-19 pandemic. Further waves of COVID-19 infections are a risk, but we will continue to focus on companies that could see massive earnings improvements based on our assumption that the economy will normalize by the end of this year. We will also focus on the stocks very likely to benefit from improved governance, exchange restructuring policies on the Tokyo Stock Exchange, and the accelerating industrial reorganization that COVID-19 triggered.

Click here for Fund Holdings.

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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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