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.

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

Fund Performance Review

In May, the Japanese stock market had a difficult month in terms of earnings and economic indicators, but the market surged in the end driven by expectations that the state of emergency declaration would be lifted as the number of people infected with COVID-19 declined, and by expectations that economic activity would recover around the world. As in the previous month, small-cap stocks continued to perform relatively well. The promise of vaccines and effective medicines buoyed stock prices for biotechnology and pharmaceutical-related companies, while emerging companies, such as information technology (IT) and artificial intelligence (AI) related companies, also performed well on expectations of continued digitalization. As a result, the Tokyo Stock Price Index (TOPIX) dividends rose 6.03% in May, while the Fund’s benchmark Russell/Nomura Small Cap™ Index gained 8.08% over the same period. The Fund (HJSIX) increased by 11.95%.

The greatest contributor this month was internet-based life insurance provider Lifenet Insurance Company. We believe that the rapid growth in the number of new subscribers due to COVID-19 has been a positive factor in boosting the stock price. SBS Holdings, Inc., a major third party logistics 3PL company, has seen its share price rise on the back of stronger demand for electronic commerce (EC) and expectations of benefits from lower fuel costs, as well as the firm’s announcement that it will make Toshiba Logistics, a Toshiba subsidiary, a consolidated subsidiary.

On the other hand, the stock with the largest negative contribution was Ship Healthcare Holdings, Inc, which sells medical equipment and facilities in bulk. We believe its share price fell in part due to concerns that hospitals are facing a tougher profit environment as they are forced to deal with COVID-19. The share price of Suncorporation, an IT equipment maker dealing in ICT and entertainment-related products, is believed to have fallen as a result of profit-taking following a sharp rise in its share price.

Outlook for June 2020

The Japanese stock market rallied sharply in April and May, returning about two-thirds of the decline that occurred in February and March. Although we believe that stock prices have recovered from the extremely pessimistic price levels of the past two months, it may be difficult to make sure that the market continues rising without slowing down its current hiking pace unless we see a commensurate improvement in the real economy. Other risk factors are the worsening of U.S.-China relations in the wake of the developments in Hong Kong, the spread of COVID-19, and escalating protests from racial discrimination issues in the U.S. On the other hand, there are still a number of stocks that have been left undervalued as the market has rallied led by biotechnology, AI, and other high growth stocks. Our investment strategy is to invest in companies with strong finances who would be able to expand market share, and those companies who can respond to new demand under the circumstances new social and economic activities emerge in the wake of COVID-19.