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.

August 2020
  • Tadahiro Fujimura
    Tadahiro Fujimura, CFA, CMA
    Portfolio Manager

Fund Performance Review

In July, the Japanese stock market saw a temporary upswing in anticipation of economic recovery. However, amid concerns of a worldwide resurgence in the novel coronavirus and of a worsening in US–China relations due to the Hong Kong national security law, the market finished the month in a decline. Another negative at the end of the month was a rise in the yen relative to the U.S. dollar. 

As a result, The Tokyo Stock Price Index (TOPIX) deteriorated by 2.07% month-over-month, and the Russell/Nomura Small Cap Index fell by 2.03%. The Fund’s performance declined 1.52% (HJSIX), outperforming the benchmark.

The greatest contributor to the Fund’s performance was a call center operator BELLSYSTEM24 Holdings, Inc. We believe the share price increase was due to solid Q1 earnings backed by an increase in spot transactions, and to management finally releasing full-year projections that call for growth in both revenue and profits. Earnings at wholesale supermarket franchise chain operator Kobe Bussan Co, Ltd. continued to be strong, likely due to consumer sentiment remaining focused on low prices and cost savings, thereby boosting its share price.

Meanwhile, the stock that had the greatest negative impact on the Fund was comprehensive real estate company Tosei Corporation. The share price was down sharply, with investor sentiment apparently souring as the company postponed the planned sales of certain properties due to the impact of COVID-19, as well as the posting of valuation losses on inventory assets, primarily hotel facilities. Financial service consolidator and bank and credit card operator Aeon Financial Service Co., Ltd. posted an operating loss in its Q1 quarterly earnings report, and its full-year earnings projections are lackluster, likely the cause of the stock’s decline.  The share price for Kito Corporation, a manufacturer of transportation devices for factories, was also down, which we believe was caused by profit taking following its substantial rise. The financial risk presented by these stocks is limited, and because we see a high likelihood of a rebound, we intend to maintain my positions.

Outlook for August 2020

The stock market had been making a steady recovery, but a reactionary slump after rapid growth and concerns of a resurgence in COVID-19 have led to ebbs and flows. The continuation of lopsided growth driven by certain stocks casts some doubt on the sustainability of a rising market. Earnings releases show substantial variations among companies even in the same sector, leading us to anticipate instability with even starker share price fluctuations. Our investment strategy is to stay the course and not be spooked by such short-term ups and downs in share prices. Amid major changes in the shape of industries spared by the impact of the novel coronavirus, we intend to pursue companies with growth opportunities. We are also considering investments in stocks that appear increasingly undervalued in terms of performance gaps.

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To view the Morningstar ratings for the Japan Fund, please click here. (Media - TD Ameritrade)

To view the Morningstar ratings for the Focus Fund, please click here. (Media - CNBC-B. Macualey).

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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