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 January 2026, Japan’s equity market posted solid gains. The TOPIX, a representative index of Japan’s stock market, rose 6.31% month-over-month.

During the first half of the month, strong rallies in U.S. semiconductor-related stocks boosted demand for Japanese semiconductor and artificial intelligence (AI) related names, sending the Nikkei sharply higher from the first trading day of the year. Although there was a temporary sharp pullback following reports that the Chinese government might tighten export restrictions to Japan on products including rare earth materials, major Japanese indices continued to set new highs through mid-month. This was supported by expectations that Prime Minister Takaichi’s growth strategy would advance more easily amid speculation of a dissolution of the Lower House and early general elections.

In the latter half of the month, market sentiment shifted markedly. Rising uncertainty around domestic politics—driven by the Prime Minister’s call for an ultra-short snap election and the formation of a new opposition party—combined with geopolitical concerns, including fears of increasing U.S.-EU trade frictions, weighed on investor confidence. Additionally, long-term Japanese government bond yields rose more quickly than expected due to concerns about fiscal deterioration from expansionary policies, adding to the downward pressure on equities.

Toward the end of the month, the yen experienced sharp volatility following reports of “rate checks” by Japanese and U.S. authorities. The yen briefly strengthened to the JPY 153 per dollar range, creating turbulence particularly for export-related stocks. Despite this late-month weakness, Japan’s equity market finished January at a significantly higher level compared with the previous month-end.

The Fund’s Performance

This month, the Fund returned 3.55% (HJPIX), underperforming its benchmark, the Russell/Nomura Total Market™ Index, which returned 6.54%.

The month's positive performer among the Global Industry Classification Standard (GICS) sectors included shares of Financials, Information Technology, and Industrials while Consumer Discretionary, Communication Services, and Consumer Staples detracted from the Fund’s performance.

Among the best performers were our investments in Tokyo Electron Limited, one of the world's largest manufacturer of semiconductor production equipment, Mizuho Financial Group, Inc., one of the three largest banking groups in Japan, and Hitachi, Ltd., one of Japan’s oldest electric equipment & heavy industrial machinery manufacturers.

As for the laggards, Sony Group Corporation, a leading global entertainment, technology, and electronics conglomerate, Recruit Holdings Co., Ltd., Japan’s unique human resources (HR) and media company and the owner of U.S.-based online job advertisement subsidiary "Indeed," and SoftBank Group Corp., the telecom and Internet conglomerate.

January Commentary

Our Fund invests in companies where underlying business value, or intrinsic value, is either unrecognized or undervalued by the markets. Consequently, there is often a certain amount of time for our assessment of a company’s value to be properly reflected in the share price.

While it is generally said that stock markets are "efficient in the long term," the challenge for many investors is that this "long term" often exceeds the timeframe many market participants can tolerate. We believe that by deliberately selecting stocks with a long-term perspective, the Fund can outperform the index over time. The cost of this discipline is that performance may lag for a period of time. We view this not as a flaw in our process, but as a necessary trade-off for generating attractive returns over time.

New Investment Criteria

We primarily consider three points when evaluating a new investment. These factors also determine position size.

1. Potential Upside

At the time of purchase, we seek investments with an expected upside of at least 40% to 50% based on our assessment of intrinsic value.

2. Level of Conviction

Conviction matters as much as upside. If faced with a choice between a stock that might double but carries significant uncertainty, and one with only 40% potential upside but much higher certainty, we will choose the latter. Higher conviction also translates into larger position sizes.

3. Time Horizon for Value Realization

Ideally, we assume that an investment’s intrinsic value will be reflected in the share price within three to five years. This horizon is long enough for its fundamentals to be appreciated by the market, but not so long that returns become overly diluted.

Importantly, our investment decisions are not swayed by quarterly earnings forecasts. Short-term oriented investing is highly competitive and dominated by investors with very different timeframes. That is not where we believe the Fund has a sustainable edge. Instead, we focus on areas where we believe we can sustain a long-term advantage.

At the same time, we are mindful of clients’ time horizons. Investments that appear likely to require more than 10 years to reach their potential are generally avoided, as they tend to dilute annualized returns and test investor patience. We consider the three-to-five-year horizon to be the most manageable period for considering a company's future.¹

In this way, the Fund targets an annual return in the high single digits to around 10%. This is not a promise of smooth returns each year, but rather a baseline return we aim to deliver over a full market cycle.

Viewing Expected Returns Through the Fund's Average Return on Equity (ROE)

The same return expectations can be explained from the perspective of the Fund as a whole.

Historically, the portfolio’s average ROE has ranged around 12–13%, exceeding the average for Japanese companies. This reflects our deliberate bias toward high-quality businesses and exemplifies our investment philosophy: "Invest in a great business with exceptional management at an attractive price."

In theory, if portfolio companies consistently retain earnings while generating 12-13% ROEs, both earnings and intrinsic value should compound at roughly the same rate. Assuming valuation multiples remain constant, we believe stock prices should increase at a comparable pace over the medium- to long-term. In other words, sustaining the current ROE² requires earnings growth that matches the ROE itself.

In practice, the average earnings growth rate of companies in our Fund has been slightly lower, generally in the high single digits to around 10%. ROE has nevertheless remained at 12–13% because the portfolio companies distribute a portion of net income, such as through dividends. When the earnings retention rate is below 100%, the level of earnings growth required to sustain the current ROE is correspondingly lower. For example, with the dividend payout ratio of around 20–30% and a stable ROE of 12–13%, the implied underlying earnings growth rate is approximately 8-10% per year.

Seen this way, our expected returns of high single digits to around 10% are consistent whether viewed bottom-up (individual stock selection) or top-down 
(portfolio ROE).

Why Our Fund’s Historical Annualized Returns Have Exceeded the Baseline

While our baseline expectation is high single digits to around 10%, the Fund’s historical results have exceeded this level. A meaningful contributor has been our ability to take decisive action during periods of share price stagnation as well as sharp market declines when stock prices temporarily but significantly deviate from their intrinsic value.

Examples include sharp market sell-offs driven by macro or technical factors rather than company-specific deterioration.³ The August 2024 unwind of the yen carry trade is a case in point, producing a decline that was more severe than those seen on Black Monday in 1987. During such episodes, we increased exposure to the highest-conviction holdings at materially better prices. Temporary price dislocations also occur for company-specific reasons, particularly when markets overreact to company-specific news.

These opportunities are difficult to predict and emotionally challenging to act upon. Some elements of timing and luck is always involved. Nevertheless, long-term results are significantly influenced by how “cheaply” great businesses are acquired, and disciplined buying during periods of stress has historically enhanced the Fund returns.

Our Perspective on Investment Time Horizon

In an ideal world, a Fund’s performance would compound smoothly upward. In reality, returns are uneven. Some investments work quickly; others may remain dormant for years before delivering value in the fifth year—sometimes appearing as “dead money” along the way.

Several of our most successful investments have followed this latter path. The willingness to endure periods of stagnation and then allow winners to run once value is recognized, has been a key driver of long-term outcomes.

Of course, if the initial investment judgment was incorrect—or if a more compelling opportunity emerges with higher conviction and a shorter time horizon—we may choose to reduce or exit a position. The major portfolio adjustments made during the 2022 growth-to-value market rotation are an example.

In closing, we continue to refine our analytical tools and decision-making as markets evolve, but our conviction in a disciplined, valuation-driven investment framework remains firm. This approach is intentionally long term and can require patience. Our goal is not to maximize returns in any single year, but to compound capital responsibly over time through a process that is clear, repeatable, and aligned with the long-term interests of the Fund’s investors.

Click here for a full listing of Holdings.