Market Commentary and Fund Performance

Fund Performance Review

In February, U.S. equities performed well on expectations for economic recovery, fueling solid performance in Japanese stocks. Nevertheless, as the month ended, interest rates rose as the U.S. economic recovery became more pronounced, and the stock market plummeted due to concerns about future shifts in monetary policy. In the Japanese stock market, large-caps gained prominence due to increased trading, primarily among foreign investors. Simultaneously, cyclicals and financials, which had been undervalued, made gains due to economic recovery and rising interest rates. As a result, the Tokyo Stock Price Index (TOPIX) rose 1.33% month-over-month, while the Russell/Nomura Small Cap™ Index rose 0.77%. The Fund’s performance (HJSIX) declined by 1.38%, falling below its benchmark. This decline is primarily because the Fund’s small exposures to this month’s significant beneficiaries such as cyclicals, securities companies, and banks.

The most significant contributor to the Fund’s performance this month was Musashi Seimitsu Industry Co., Ltd. As electric vehicle (EV) related news garners increasing attention, the market sees promise for growth in the firm’s products. Siix Corporation, an assembler of parts primarily for automobiles, also saw its share price rise. In the previous fiscal year, the firm’s profits fell by 20% due to COVID-19, but the market is bullish on Siix’s forecast profit growth of more than 40%.

Meanwhile, the Fund’s worst-performing stock was Nihon Unisys, Ltd. Pessimism about its short-term performance drove down the share price after the company demonstrated Q3 FY3/2021 earnings progress that fell below market expectations. Despite its better-than-average quarterly performance, METAWATER Co., Ltd., which develops and maintains municipal water and sewage equipment, saw its share price decline due to profit taking from the stock’s recent positive performance.

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Outlook for March 2021

The sharp upturn in U.S. interest rates at the end of February coincided with plummeting share prices, as the market saw rising concerns about future speculation. We anticipate a greater risk that foreign growth stocks, which appear highly overvalued, will fall due to coming interest rate movements. Nevertheless, interest rates are not significantly increasing in Japan, and the economic recovery is slow, so the impact of interest rate fluctuations should be relatively minor. Moreover, the Fund’s target investments of small-cap stocks are mostly not overvalued, so they should perform relatively well going forward. As for our investment strategy, we intend to expand the Fund’s investment in those struggling domestic demand service-related stocks with a high potential for earnings recovery, as we expect the market to finally grow in the post-COVID-19 era when most people will be vaccinated. We will also increase the Fund’s weight in stocks with few adverse effects from the turnaround in market conditions and interest rates.

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