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.

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

Fund Performance Review

In November, reports of progress in developing a COVID-19 vaccine fueled bullish sentiment, significantly boosting stock markets globally. The Japanese stock market also benefited. Cyclicals, which had been slumping, rebounded sharply on expectations of an economic normalization. As a result, the Tokyo Stock Price Index (TOPIX) skyrocketed by 11.42% month-over-month, while the Russell/Nomura Small CapTM Index gained 5.87% over the same period, experiencing a lower rate of growth than large-cap stocks. The share price rise was partly due to purchases by foreign investors, but we believe that their influence had limited the growth in small-cap stocks because their investments were mainly in indices and large-cap stocks. The Fund’s performance this month increased by 10.27% (HJSIX), significantly outperforming its benchmark.

Click here for full, standardized Fund Performance.
 

This month’s largest contributor was biomass power plant developer and operator EF-ON Inc. We believe its performance is thanks to quarterly profit growth in the firm’s earnings report and to the Suga administration’s focus on renewable energy-related policies. Automotive parts manufacturer Musashi Seimitsu Industry Co., Ltd. boosted investor sentiment by forecasting profitable year-end earnings, the result of a turnaround in automotive demand primarily in China. Leading employee benefits outsourcing contractor Benefit One Inc. performed well, apparently due to robust earnings and the positive reception of its new human resources (HR) services.

Meanwhile, the Fund’s worst performing stock was personal computer and smartphone accessory vendor Elecom Co. Ltd. Given the growing trends in telecommuting and digitalization, the firm’s products have been selling well, but its share price likely fell because of profit taking and concerns that its sales momentum would wane. Automotive seat manufacturer Seiren Co., Ltd. also announced an upward revision to its earnings resulting from a recovery in automotive demand, but its share price fell in reaction to its prior run-up. Home electronics big-box retailer Nojima Corporation is performing well due to demand from stay-at-home consumers, but its share price appears to have suffered from profit taking. 

This month, we invested in a new undervalued apparel stock and divested from a stock whose share price rose on the back of robust antiseptic product sales.

Outlook for December 2020

In November, the Japanese stock market made significant gains, with the Nikkei Stock Average at its highest level since 1991. The TOPIX Index also posted its highest figures since last year. While this situation may result from a glut of liquidity due to monetary easing and other factors, experts have said that it will take several years for the economy to return to its pre-COVID state. Therefore, investors should be cautious in these circumstances, which have deviated from economic reality. Still, the investment environment is favorable, with most companies reporting results that are beating projections, due in part to conservative initial expectations for interim results. 

Turning to individual stocks, it is true that the earnings momentum is declining among firms that had performed well as a result of demand from people staying at home, and that there is a growing risk of their share prices plummeting due to missed market expectations. However, we think there is plenty of room for growth in previously neglected stocks as the economy normalizes. We believe that the upside is greater than the downside, given that many small-cap stocks were also undervalued as late as November. Our management strategy is to keep divesting from stocks that have seen continued share price increases since last quarter. At the same time, we would like to invest in increasingly undervalued stocks with rising growth potential in neglected industries. Undervalued stocks are more frequently surging under pressure from takeover bids and funds, and we intend to reconsider undervalued stocks that have been overlooked.

 

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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