Market Commentary and Fund Performance

Fund Performance Review

In December, the Japanese stock market continued to experience ups and downs—the result of selling pressures in response to massive gains in November and concerns about the continuing pandemic. However, as the month closed, progress in vaccine administration overseas and expectations for U.S. economic stimulus helped boost global market performance, leading to rising share prices for Japanese equities. The Tokyo Stock Price Index (TOPIX) closed out December by surpassing 1,800 points for the first time in two years. As a result, TOPIX surged by 3.99% month-over-month, while the Russell/Nomura Small Cap™ Index gained 3.42% over the same period, again lagging large-cap stocks. The Fund’s performance this month increased by 4.40% (HJSIX), outperforming its benchmark.

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Among the positive contributors to the Fund’s performance this month was metal coating service provider Tocalo Co., Ltd. As semiconductor-related stocks continue to perform well, the firm’s shares found buyers, due likely to the company’s relatively undervalued status and its stable results in processing semiconductor manufacturing equipment. We believe the primary factor in the share price rise for industrial gas seller Iwatani Corporation was the Suga administration’s announcement of a policy to increase hydrogen-based energy use. The share price of Towa Corporation, who manufactures production equipment for semiconductor post-processing steps including sealing and cutting, likely rose with the expectation of increase in semiconductor-related capital expenditures (CAPEX).

Meanwhile, the Fund’s worst-performing stock was apparel subcontracting manufacturer Matsuoka Corporation. We believe its share performance was the result of a backlash against its rising share price over the last month, and of concerns about sluggish garment sales and manufacturing bases in Southeast Asia amid the second COVID-19 wave. Leading employee benefits outsourcing contractor Benefit One, Inc. lost ground, apparently in response to its share price growth in November.

Market Outlook

Regarding the stock market and its significant growth in 2020, there are concerns about high price volatility and its disconnect with the sluggish real economy. Nevertheless, with no changes to various nations’ outlooks on monetary easing, we believe there is little cause for concern that the market will plummet. 

Furthermore, we think that Japanese equities are highly undervalued compared to those in the U.S. and other developed nations, and they seem less risky than bonds and other assets, so investors inside and outside Japan are likely to increase their investment in the Japanese market. As a result, we believe that 2021 could be another solid year. Simultaneously, the performance gap between growth stocks and other equities was too high in 2020, and we think there could be corrections coming in this regard. 

Therefore, our investment strategy is to keep divesting stocks that have seen continued significant share price increases. At the same time, despite our concerns about the pandemic, we intend to increase the Fund’s investment in undervalued cyclicals that should benefit from industry restructuring and economic recovery. We will also increase our efforts in uncovering overlooked growth stocks. 

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