Market Commentary and Fund Performance

Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted. Performance data current to the most recent month end, and standardized performance can be obtained by viewing the fact sheet or by clicking here.

Market Highlights

In March 2026, the Japanese equity market declined sharply. The TOPIX, a representative index of Japan’s stock market, fell 12.00% month-on-month, erasing much of the gains accumulated in the previous month.

From early to mid-March, markets came under significant pressure as oil prices surged amid supply concerns following U.S. and Israeli strikes on Iran and the closure of the Strait of Hormuz. The spike in energy prices intensified risk aversion, triggering broad-based equity sell-offs. While markets subsequently recovered driven by a technical correction after the sharp declines, renewed concerns over a prolonged conflict, including the election of a hardline leader in Iran, led to another downturn. Persistent worries about the economic impact of elevated oil prices and stubborn inflation contributed to continued market volatility.

In the latter part of the month, sentiment deteriorated further after U.S. President Trump issued a strong warning to Iran, threatening attacks on power plants and infrastructure unless the Strait of Hormuz was reopened. Iran responded with a defiant stance pushing oil prices even higher, prompting another wave of equity declines. Although markets temporarily rebounded following reports of a postponement of military action and a U.S.-proposed peace initiative, concerns over stalled negotiations remained. Toward month-end, fears surrounding preparations for ground operations and a broader regional escalation weighed heavily on investor sentiment.

As a result, the Japanese equity market finished March at levels that effectively offset the gains recorded in the prior month, reflecting heightened geopolitical risk and ongoing concerns over inflation and global economic stability.

The Fund’s Performance

In March, the Fund (HJPIX) returned -6.84%, outperforming its benchmark, the Russell/Nomura Total Market™ Index, which returned -12.33%. Financials, Information Technology (IT), and Industrials were the primary sectors detractors during the month.

Among the best performers were our investments in Tokio Marine Holdings, Inc., Japan’s largest general insurance company with arguably the best underwriting track record and successful overseas expansion, and Shin-Etsu Chemical Co., Ltd., Japan’s largest chemical company.

As for the laggards, ORIX Corporation, Japan’s largest non-bank comprehensive financial services company, Hitachi, Ltd., one of Japan’s oldest electric equipment & heavy industrial machinery manufacturers, and Tokyo Electron Limited, one of the world’s largest manufacturers of semiconductor production equipment.

March Commentary

This month, shares of Tokio Marine Holdings surged following the announcement of a strategic partnership with Berkshire Hathaway. Among the companies long held in our portfolio, this marks Berkshire Hathaway’s second investment, following Mitsubishi Corporation.

While the details of the partnership are expected to emerge over time, we have consistently highlighted two distinctive and globally attractive features of Japan’s non-life insurance industry (see also our April 2023 and August 2023 commentaries):

•     Since the so-called Japan’s ‘Big Bang’ financial system reforms in the 1990s, industry consolidation has resulted in three major insurance groups controlling roughly 90% of the market. There is no non-life insurance market elsewhere in the world exhibiting such a high degree of oligopoly.

•     Legacy cross-shareholdings dating back to the 1960s have generated substantial unrealized gains. The major insurance groups strategically deploy these assets to finance overseas acquisitions and provide generous shareholder returns. Japan is globally unique in having a non-life insurance industry underpinned by such abundant financial assets.

Since 2022, the Fund has owned all three of Japan’s major non-life insurance groups, including Tokio Marine Holdings. At the time of our investment, the Japanese accounting standards (J-GAAP) applied by these companies differed materially from the International Financial Reporting Standards (IFRS) standards used by overseas insurers, resulting in profits being understated relative to their underlying earnings power. Valuations were, as a result, highly attractive.

In light of the recent announcement, we intend to maintain our holdings across all three insurers.

Investing the Warren Buffett Way

The Fund’s investment style centres on the intrinsic value of businesses and, in many respects—including the emphasis placed on ‘moats’ as an investment criterion—has been strongly influenced by the investment philosophy of Warren Buffett.

It is fair to observe that even Mr. Buffett has at times struggled in his later years to deliver outstanding returns in today’s rapidly evolving investment landscape. There is, however, little doubt that the philosophy he has championed over many decades remains robust and enduring.

Adapting Buffett’s Ideas to Japan

While our investment strategy is built on Mr. Buffett’s principles, we believe those principles must be adapted to Japan to function effectively within the country’s distinct investment environment.

Japan, for example, lacks the globally dominant consumer staples and household brands—such as Coca-Cola and P&G—that Mr. Buffett has favored. These companies typically benefit from strong pricing power in inflationary periods, provide low- cost everyday essentials with resilience across economic cycles, and possess brands with global consumer appeal.

Similarly, Japan does not have the kind of massive, fast-growing technology companies with formidable barriers to entry seen in the U.S. ‘Magnificent Seven.’

Japan does, however, possess strengths of its own. Its manufacturing heritage—the spirit of craftsmanship, or monozukuri—is very much alive. The country’s capabilities in content creation, including anime and video games, also represent competitive advantages of which it can be genuinely proud on the global stage.

Given these structural differences, our stock selection criteria naturally diverge from those typically applied in the U.S.

From a corporate culture perspective, Japanese companies are frequently criticised for outdated mindsets and slow decision-making. Viewed differently, however, these characteristics can also represent strengths: a quiet persistence and determination to see things through to completion.

Consider the tendency to continue operating businesses that are initially losing money. For  many years, Japanese companies were known for retaining unprofitable divisions long after their overseas peers would have pulled the plug. In fields such as cutting-edge electronic components, rooted in materials science and requiring lengthy research & development (R&D) investment, this kind of ‘staying power’ can ultimately evolve into a real competitive edge.

By the time such a business becomes profitable—often after years of struggle—overseas competitors operating under stricter exit disciplines have typically already withdrawn. Re-entering the market thereafter would require closing a multi-year technology gap, an exceptionally difficult task. The result is a formidable barrier to entry that accrues to the benefit of incumbent Japanese companies.

Not A Blind Follower: Where We Interpret Differently

While the Fund draws extensively on Mr. Buffett’s thinking, we do not blindly adopt his views. Just as his principles must be adapted to Japan’s investment environment, there are areas where we apply our own interpretation.

One such example appears in Berkshire Hathaway’s 1997 annual report:

“If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? [… ] If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?

Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

— Warren Buffett, Berkshire Hathaway Annual Report, 1997

Mr. Buffett argues that when a stock you intend to buy falls in price, you should welcome price declines—the lower the price, the better the opportunity. Stocks, however, are not quite like ordinary consumer goods. In equities, risks may exist beneath the surface that lie beyond an investor’s capacity to observe.

Consumer goods, of course, carry risks of their own—safety issues or harmful ingredients—but the nature of what is being purchased is clearer. A share price, by contrast, reflects a complex interplay of factors: supply and demand, regulation, litigation, governance, and accounting issues, among others. The broader stock market is itself shaped by intricate economic and financial forces.

A falling share price does not necessarily imply cheapness. It may reflect a substantive change in fundamentals. Where a sharp decline defies easy explanation, caution and reassessment may be more appropriate than automatic accumulation.

Moreover, equities as an asset class can take decades to recover from structural downturns. Japan’s equity market has only recently surpassed its 1989 pre-bubble peak. Even U.S. equities—often perceived as a straightforward success story—provide sobering reminders: following the Great Depression, the Dow Jones Industrial Average took 25 years to regain its previous high; or recently, the S&P 500 did not surpass its 2000 IT-bubble peak until 2013.

Against this backdrop, it is understandable that ordinary investors, mindful of their own lifespans, remain wary of equity risk. Even if markets prove efficient ‘in the long run,’ the duration implied by  the phrase may exceed what many individuals can realistically endure.

This should not be read as a simplistic critique of Mr. Buffett’s view; his long record of thoughtful investment speaks for itself. Rather, from a  Japanese perspective—shaped by decades of market stagnation—we hope that our view may resonate with our readers.

Stocks Are A Little Different From Ordinary Shopping

Whether investing via index funds, individual equities or investment trusts, outcomes ultimately rest on personal judgement. That said, buying equities is, in certain respects, different from ordinary shopping—and the difference lies in the difficulty of assessing ‘quality.’

With everyday purchases, you generally know what you are getting. With stocks, that clarity is harder to achieve. Even when buying an index, investors must judge whether the moment is appropriate, in light of their own outlook for the stock market itself.

It is also worth remembering that the market’s ability to process information and look ahead can frequently surpass what any single individual is capable of. For example, a book published in 2005, The Wisdom of Crowds, recounts the following real episode.

On January 28, 1986, the space shuttle Challenger exploded 74 seconds after launch. With no official statement on the cause and no evidence of insider trading, the stock market nonetheless moved swiftly and decisively. Of the four contractors involved, Morton Thiokol’s shares were singled out and hammered—down nearly 12% by the end of the day—while the other three fell only about 3%. Six months later, a presidential commission confirmed what the market had seemingly known all along: Thiokol’s O-ring seals on the booster rockets were responsible for the disaster. Within 30 minutes of the explosion, thousands of buyers and sellers—most of them relatively uninformed—had collectively identified the correct answer. No single participant knew the full picture, yet the aggregation of their fragmented judgements pointed unmistakably to the truth.

This story vividly illustrates the power of the market’s collective intelligence. When the scattered pieces of information held by individual participants are aggregated through prices, the result can sometimes be surprisingly accurate judgements.

That cuts both ways: When a stock in which you  believe begins to fall, it is entirely rational to wonder whether someone else in the market may know something of which you are unaware. ‘If the price goes down, just buy more’ may sound logical in theory, but maintaining conviction against the signal that the entire market is sending is, in practice, far from easy.

To succeed in equity investing—that is, to outperform the index—you have to be willing to think differently from the crowd. At times, that means being a contrarian. But it is also true that the market is right much of the time, and there are even moments when it can seem almost omnipotent, as The Wisdom of Crowds suggests.

We think of active management as a continual effort to navigate the tension between these two realities: you need to be different to win, yet the market is often right.

Accordingly, rather than being contrarian for its own sake or simply following whatever the market says, we try to maintain a disciplined approach: first, understanding the concerns being priced in by the market; second, judging whether those concerns are temporary or permanent; and third, only when we conclude that the underlying investment thesis remains intact do we seek to use price volatility to our advantage.

Put differently, the conviction required to say ‘I welcome falling prices’ is not something that can be sustained easily at all times. That is why humility in the face of market signals—and healthy skepticism about overconfidence in our own views—must remain a cornerstone of our investment process.

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