Improving Capital Efficiency, Governance Reform, and Global Competitiveness

Key Takeaways

» Japan’s quarterly outperformance has been driven by selective leadership and improving market quality, rather than a simple risk-on rally.

» Geopolitical tensions have contributed to short-term volatility, but they have not materially changed our longer-term outlook.

» Many companies are improving profitability without relying on valuation expansion, which suggests governance reform is strengthening underlying fundamentals.

» Many Japanese companies have captured value in the enabling and infrastructure layers of the AI ecosystem where demand is supported by sustained capital expenditure.

» Our conviction in homebuilders is driven more by portfolio construction and valuation discipline.

» We remain constructive on Japanese equities. Improving capital efficiency, governance reform, and global competitiveness continue to support the long-term investment case.

Japanese equities are outperforming U.S. equities year-to-date. What has been driving leadership within the market so far this year?

Japan’s outperformance has been driven by selective leadership and improving market quality, rather than a simple risk-on rally. Greater political clarity and confidence in policy continuity have helped stabilize investor sentiment, but the more important factor has been where capital is flowing within the market. Leadership has been concentrated in areas where earnings visibility remains strong and valuations are still reasonable, particularly in semiconductors, automation, and AI-related infrastructure. At the same time, stocks driven primarily by narrative or long-duration expectations have been more volatile. Overall, we believe investors are increasingly rewarding return on capital, balance-sheet strength, and fundamental durability, which has shaped market leadership so far this year.

How are current geopolitical tensions influencing your outlook for Japanese companies?

Geopolitical tensions have clearly contributed to short-term volatility, but they have not materially changed our medium- to long-term outlook. We tend to view these developments as episodic shocks rather than structural turning points, and markets usually adjust through rotation rather than broad de-risking. From our perspective, the key question is whether geopolitical events impair a company’s long-term earnings power or competitive position. In most cases, they do not. As a result, our focus remains on business fundamentals rather than headline-driven sentiment.

How have recent tensions between Japan and China affecting globally oriented Japanese companies?

We believe the direct impact on many globally oriented Japanese companies is more limited than the headlines imply. A large proportion of the businesses the Fund invests in are either non-manufacturing companies or have localized production and established value chains in their end markets, particularly in the U.S. That means their earnings are driven far more by global demand, technology leadership, and pricing power than by bilateral political tensions. While Japan–China relations remain an important background consideration, they have not been a primary driver of fundamentals for most globally diversified companies.

How have recent market moves influenced your conviction in existing holdings, and where have they created opportunities to add or reassess positions?

Recent market moves have largely reinforced our conviction rather than weakened it. We have seen sharp price declines driven by broad narratives— especially around AI disruption—rather than by deterioration in underlying earnings or business quality. In several cases, companies under pressure continue to report solid results and are actively investing in technology to enhance productivity and competitiveness. This kind of environment often creates opportunities where price temporarily diverges from intrinsic value, allowing us to reassess relative value and allocate capital more efficiently in line with our long-term discipline.

How have recent currency movements affected the global competitiveness and earnings outlook of the Fund’s holdings?

We do not make investment decisions based on short-term currency movements. Currency can influence reported earnings, but over a full cycle, business quality and competitive positioning matter far more than foreign exchange volatility. For the Fund, we focus on companies with pricing power, diversified global revenue streams, and cost structures that allow them to remain competitive across currency environments. Viewed through that lens, recent currency movements have not fundamentally changed our long-term earnings outlook for internationally oriented holdings.

What meaningful changes have you observed in how companies are approaching ROE targets, shareholder returns, or capital allocation?

In our view, corporate governance reform in Japan has clearly moved from intent to execution. Management teams are increasingly conscious of capital efficiency, return on equity (ROE) targets, and shareholder expectations, and this is showing up in more disciplined capital allocation decisions, including share buybacks and reductions in excess balance-sheet cash. What is particularly encouraging is that many companies are improving profitability without relying on valuation expansion. That suggests governance reform is strengthening underlying fundamentals rather than simply driving multiples higher.

Global demand tied to AI infrastructure and semiconductors has accelerated. Where are you seeing Japanese companies capture value within this ecosystem?

We see Japanese companies have captured value primarily in the enabling and infrastructure layers of the AI ecosystem—areas such as semiconductor equipment, factory automation, and industrial technology—where demand is supported by real and sustained capital expenditure. At the same time, we believe fears that AI will simply replace existing business models are overstated. Many established companies are already integrating AI to improve efficiency, decision-making, and product quality, which in many cases strengthens their competitive position rather than undermines it.

What developments in the U.S. housing market have reaffirmed your conviction in the Fund’s homebuilder holdings?

Our conviction in homebuilders is driven more by portfolio construction and valuation discipline than by short-term macro signals. These businesses add meaningful diversification, as they tend to behave differently from financials and industrials across interest-rate environments. They also provide exposure across multiple geographies and trade at valuations that offer a margin of safety, which aligns well with our broader focus on balancing return potential with downside mitigation.

How are the structural drivers supporting Japanese equities evolving as we move further into 2026?

Stepping back from near-term market moves, we remain constructive on Japanese equities. Improving capital efficiency, governance reform, and global competitiveness continue to support the long-term investment case. While valuations have risen in certain areas, many high-quality companies still trade below intrinsic value despite stronger profitability. we believe the Japanese market is becoming more rational, more selective, and more fundamentals-driven, which should be a supportive environment for disciplined investors over time.