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 December 2025, the TOPIX, a representative index of the Japanese stock market, rose 0.58% compared to the previous month.

In the first half of the month, long-term interest rates rose sharply after comments by Bank of Japan (BOJ) Governor Ueda heightened expectations of a rate hike at the December policy meeting. This led to broad-based selling across a wide range of stocks, excluding bank shares, and major indices declined significantly. Subsequently, sentiment improved on growing expectations of U.S. interest rate cuts and the U.S. government’s announcement of plans to support the robotics industry. Shares related to physical artificial intelligence (AI), including factory automation and robotics, rallied strongly, lifting the overall market and pushing the TOPIX to a new all-time high.

Around mid-month, after a temporary pullback after the U.S. interest rate cut decision, Japanese equities regained momentum as U.S. stocks remained firm and major indices hit new highs. The TOPIX again reached a record high. However, market sentiment weakened as concerns emerged over the profitability of AI-related investments, highlighted by reports of delays in AI data center projects by U.S. information technology (IT) giant Oracle and by weaker-than-expected earnings by semiconductor giant Broadcom. This led to a widespread sell-off, particularly semiconductor-related stocks, and the market entered a corrective phase.

In the latter half of December, the BOJ decided to raise interest rates, but the yen weakened as the governor’s press conference was perceived as relatively dovish. This supported buying in export-related stocks and semiconductor stocks. Toward month-end, however, trading volumes declined and the market direction became less clear. As a result, the TOPIX maintained a relatively resilient upward trajectory, while the Nikkei Stock Average finished the month modestly higher. Looking at the year as a whole, although both indices experienced significant declines in the first half, they rebounded in the second half and repeatedly reached new highs, ending the year at elevated levels.

The Fund’s Performance

This month, the Fund (HJPIX) returned 1.85%, outperforming its benchmark, the Russell/Nomura Total Market™ Index, which returned 1.22%.

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

Among the best performers were our investments in ORIX Corp., Japan’s largest non-bank comprehensive financial services company, and 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.”

As for the laggards, Sony Group Corporation, a leading global entertainment, technology, and electronics conglomerate, Hitachi, Ltd., one of Japan’s oldest electric equipment & heavy industrial machinery manufacturers, and Mitsubishi Corporation, the largest trading company in Japan.

January Commentary

The year 2025 came to a close, the Japanese stock market reached an all-time high and finished the year hovering near that peak. In tandem with this market strength, the Fund’s net asset value (NAV) also achieved a record high. The Fund (HJPIX) posted an annual return of 14.88%, marking its third consecutive year of double-digit gains. However, the Fund underperformed its reference index, the TOPIX.

While the Fund maintains a substantial long-term lead over the index and has outperformed over the past three years, its performance remains behind the market when measured from the end of 2020 (all figures are net of fees). We will continue to strive for performance that exceeds the index for all investors.

That said, we believe the underlying quality of the Fund’s portfolio management remains sound, especially when compared to 2022. That year, the Fund’s performance suffered significantly as we were slow to adapt to the structural shift brought about by the arrival of inflation and the end of negative interest rates. This led to a major portfolio repositioning over the course of 2022, which ultimately contributed to the sharp rebound in 2023 and 2024.

Reasons for Underperformance in 2025

In 2025, the Fund’s performance benefited from the share price gains of companies such as SoftBank Group, ORIX, and Sony Group. Conversely, other global companies at the core of the Fund faced what we believe was undue selling pressure, likely driven by concerns over potential “Trump tariffs.”

However, as detailed in our November 2025 commentary, we believe such concerns are unwarranted. Our portfolio is carefully constructed with global players largely insulated from direct tariff impacts. This includes non-manufacturing holdings like ORIX and the three non-life insurers, as well as manufacturers like Hitachi, which produce differentiated, high value-added products with strong pricing power.

While some portfolio companies such as Recruit have faced concerns over potential earnings deterioration amid uncertainties surrounding the U.S. economy and the expansion of generative AI, their fundamentals remain robust. We are confident that these market anxieties will ultimately prove unfounded.

We firmly believe that companies expanding their businesses beyond the mature domestic market and growing globally are best positioned to stand the test of time in long-term investing. Therefore, we remain steadfast in our strategy and will continue managing the Fund without altering our investment approach.

Overview of Major Individual Holdings

As we continue to focus on constructing a portfolio that is distinct from the index, the following overview presents the Fund’s holdings, ordered by core (key) positions.

Please note that for the non-life insurance groups, home builders, mega banks and semiconductor-related sectors, we employ a “basket buying” strategy, investing in multiple stocks within the same industry. For the sake of clarity, these stocks will be discussed collectively as single investments.

ORIX Corporation

•    Active weight 9.5%, Fund weighting 10.0%¹

•    2025 share price return 33.6%

•    Performance contribution 3.16%

ORIX, alongside Seven & i Holdings, has been one of the most aggressively added positions in our portfolio in the last several years. Encouragingly, ORIX’s share price performed strongly toward the end of 2025, reflecting early signs of success.

Its stock price rallied following the company’s decision to sell its stake in Greenko Energy Holdings, a company that develops and operates large-scale renewable energy projects in India. This led to an upward revision of current-year earnings and a subsequent enhancement of shareholder returns at its half-year results announcement in November.

As Japan’s largest non-bank financial services/investment company, ORIX has evolved from its origins as a leasing firm in 1964 into a diversified global company spanning aircraft leasing, property development, asset management, banking, life insurance, private equity, venture capital, renewable energy investment, airport concession, and so on. It operates extensively across the Americas, Europe, and Asia.

ORIX has posted profits every fiscal year for nearly 60 years since its establishment, despite various crises including Japan’s bubble economy collapse (FY1992), the Asian currency crisis (FY1997), the IT bubble burst (FY2001), the global financial crisis (FY2008), and the COVID pandemic (FY2020).

The investment appeal lies in its position as a beneficiary of both inbound tourism and rising domestic interest rates. Regarding the former, businesses such as Kansai International Airport (a regional monopoly), aircraft leasing (third largest in the world), and domestic hotels and inns have rebounded strongly post-COVID. Meanwhile, higher rates serve as a tailwind for its subsidiaries, ORIX Bank and ORIX Life Insurance, and will eventually expand interest spreads for its leasing business.

The company’s medium-term “shift to asset management,” representing a transition to an asset-light investment business model leveraging third-party capital from the current principal investment model, is expected to lead to a significant expansion in valuation multiples (please also refer to the November 2025 commentary).

In September, we met with new CEO Hidetake Takahashi to discuss long-term growth strategies, capital market communication, and his view on intrinsic value, following similar discussions with former CEO Makoto Inoue in November 2024.

In 2025, the stock finally surpassed its all-time high dating back to 2006. Nevertheless, valuations remain highly attractive, and we hold strong confidence in the new CEO’s management capabilities.

Seven & i Holdings Co., Ltd.

•    Active weight 9.1%, Fund weighting 9.7%¹

•    2025 share price return -9.5%

•    Performance contribution -0.73%

Though this stock was a major negative contributor in 2025, we continue to hold a large position because it meets our two key criteria: limited downside risk and meaningful upside potential.

Following the withdrawal of Alimentation Couche-Tard’s takeover proposal in July, acquisition speculation has returned to square one for the moment. While the stock initially sold off, its share price stayed above pre-announcement levels, with declines limited—evidence of our margin of safety at work.

From the outset, we have believed that allowing the company to remain independent and improve its management approach could potentially generate far greater long-term returns than crystallizing short-term gains through an acquisition. This view is grounded in the strength of the convenience store business, a capital-efficient retail model that generates robust cash flows.

Meetings with Management

To this end, we held meetings with the new President, Steve Dacus in September 2024 and May 2025. The first meeting took place while he chaired the special committee reviewing the acquisition proposal, during which we expressed our belief that management change was necessary to achieve a standalone survival strategy. The second meeting occurred after the announcement of his planned appointment as President, where we sought to understand his resolve as the incoming leader.

While other institutional shareholders may have shared similar views, we consider it an important achievement that our discreet request contributed to this outcome.

With no acquisition/buyout deal materializing, the market will closely scrutinize the actions new management’s next steps. It is not difficult to imagine there is huge pressure to speed up the ongoing strategic initiatives to grow the intrinsic value of the business fast. Encouragingly, domestic same-store sales have shown improvement since around October.

Furthermore, in December, the U.S. convenience store subsidiary, 7-Eleven Inc. (SEI) announced the resignation of CEO Joseph DePinto after more than 20 years. In our August 2024 commentary, we had raised concerns about his excessive compensation and the company’s disclosure practices. While the best outcome remains to be seen, we believe shareholder pressure, including ours, may have played a role. We now look forward to the leadership of SEI’s new management team.

Share Buyback Commitment

Management’s sense of urgency is also reflected in its shareholder return policies. The company is conducting share buybacks worth 600 bn yen ($3.8 bn) this fiscal year and plans to repurchase an additional 1.4 tn yen ($8.8 bn) by fiscal year 2030, or the equivalent to 34% of its current market cap.

It is worth noting that in its April 9, 2025 press release, “Notice of the Establishment of a Facility for the Repurchase of Own Shares,”—while this may appear to be a minor detail—the company announced its plan to fully cancel treasury shares.

While this may seem minor, it is unusual in Japan, where firms use vague language regarding the purpose of buybacks and often defer decisions to cancel treasury stock. By contrast, Seven & i’s explicit statement, similar to Mitsubishi Corporation within our portfolio, signals a genuine focus on enhancing shareholder value.

Investor Relations’ Disclosure Practices

However, we see room for improvement in the company’s disclosure policy regarding its medium-term earnings forecasts. For example, in the August 6 presentation titled “Transformation of 7-Eleven,” page 26 outlines the EBITDA differences between IFRS standards (scheduled for adoption in three years) and Japanese GAAP (“JGAAP”). FY25 EBITDA was 0.9 tn yen ($5.7 bn)  under JGAAP, but would have been 1.3 tn yen ($8.2 bn) under IFRS, primarily due to the different treatment of rent in the profit and loss (P/L) statement: under IFRS, operating lease fees are capitalized and expensed as depreciation and interest, whereas under JGAAP they are fully expensed as “rent.” However, the document does not mention the corresponding increase in interest-bearing debt. This omission is misleading, or even somewhat disingenuous, as it presents only information favorable to the company.

The good news is that transitioning to IFRS will enable better comparisons with U.S. competitors such as Couche-Tard and Casey’s General Stores. If Seven & i resumes its global growth trajectory as we expect, the company’s relative undervaluation will likely become clearer.

Non-Life Insurance Groups (Tokio Marine Holdings, MS&AD, Sompo Holdings)

Tokio Marine Holdings, Inc.

•    Active weight 3.6%, Fund weighting 4.9%¹

•    2025 share price return 1.6%

•    Performance contribution 0.41%

MS&AD Insurance Group Holdings, Inc.

•    Active weight 3.5%, Fund weighting 4.1%¹

•    2025 share price return 6.8%

•    Performance contribution 0.41%

Sompo Holdings, Inc.

•    Active weight 4.1%, Fund weighting 4.6%¹

•    2025 share price return 29.5%

•    Performance contribution 1.40%

The Fund has owned all three listed non-life insurance groups since 2022, with portfolio weightings actively adjusted as relative attractiveness shifts. Initially, we weighted the three equally on an active-weight basis. Tokio Marine was the most attractive in terms of profitability, track record, and growth potential, but its valuation was not cheap.

Subsequently, when concerns over U.S. commercial real estate and credit risks emerged, we judged that Tokio Marine’s stock was oversold relative to its quality and increased our position.

In the second half of 2025, we increased our allocation to Sompo Holdings following its announcement of the acquisition of U.S.-based Aspen. We view the prospect of the company’s overseas business expanding over the medium- to long-term positively. With its overseas business now accounting for approximately half of gross written premiums, the company’s dependence on the mature domestic market is expected to decline.

The company also holds U.S.-based Palantir Technologies as a prized strategic asset. Monetizing this significantly appreciated stake (up eleven-fold in two years) to reinvest in its core overseas is a rational strategy. Despite expected return on equity (ROE) improvement following Aspen’s acquisition, Sompo’s price to equity ratio (P/E) remains the lowest among the three groups.

While near-term shareholder returns may be muted, continued Palantir share sales could restore capacity for dividends and share buybacks. Beyond capital returns, we believe that the stock is in a phase where a P/E re-rating is likely if it earns recognition as a high-quality global non-life insurance player, like Tokio Marine.

Dividends and Share Buybacks are often an Underappreciated Source of Investment Returns

When investing in non-life insurance stocks, we should not underestimate the impact of long-term sustainable dividend growth and share buybacks. For example, from 2015 to 2025, the stock price appreciation of Sompo Holdings and Fast Retailing (a representative growth stock also held in the Fund) was almost identical, at approximately 3x.

However, when factoring in dividends, Sompo delivered a total return of 463%, significantly outperforming Fast Retailing’s 339%. Over this period, Sompo’s average dividend yield was approximately 3.97% and its total capital return yield averaged about 6.68%, compared to just 0.97% for both metrics at Fast Retailing).² Clearly, Sompo shareholders achieved the higher return.

The Beauty of Low P/E, Low Price to Book (P/B) Stocks as “Growth Stocks in Disguise”

The appeal of low P/E, low P/B stocks lies in the ease of finding a “margin of safety”, which cushions downside risk. In contrast, high P/E, high P/B stocks, which are priced on lofty future growth expectations, offer little valuation support if the outlook fails because it is difficult to find valuation support such as BPS (often viewed as a proxy for liquidation value), a high dividend yield, or a P/E significantly below the market average. A slight earnings miss can trigger a sharp P/E multiple contraction, causing price declines far greater than the drop in profits. Unless one has extremely high conviction in the long-term outlook, such stocks warrant lower investment priority. Conversely, low P/E, low P/B stocks have low initial expectations. Provided there are no serious business issues, the risk of valuation compressing extremely relative to the market average is low. This makes them attractive candidates for long-term, risk-conscious growth investing.

SoftBank Group Corp.

•    Active weight 3.1%, Fund weighting 4.6%¹

•    2025 share price return 91.6%

•    Performance contribution 4.36%

We discussed the SBG investment in our August and October commentaries, and our view remains unchanged as of the end of this month.

A primary driver of the company’s stock price has been the appreciation of its stake in OpenAI as an AI-related stock. However, an often-overlooked factor is he significant reduction in SBG’s number of shares outstanding through massive buybacks over the past five years.

Between June 2020 and September 2025, SBG’s total NAV—which can be regarded as its intrinsic value— rose by 47%, from 22.67 tn yen (143.0 bn) to 33.31 tn yen ($210.1 bn). Over the same period, NAV per share doubled from 11,647 yen ($73.46) to 23,379 yen ($147.46).³ This was largely due to an approximately 30% reductions in shares outstanding, as buybacks were promptly cancelled, effectively increased the “slice of the pie” for each remaining share.

This buyback effect was one of the reasons we decided to aggressively increase our position last summer.

Homebuilders (Sekisui House, Sumitomo Forestry, Daiwa House)

Sekisui House, Ltd.

•    Active weight 2.5%, Fund weighting 2.7%¹

•    2025 share price return -7.5%

•    Performance contribution -0.10%

Sumitomo Forestry Co., Ltd.

•    Active weight 2.2%, Fund weighting 2.3%¹

•    2025 share price return -9.1%

•    Performance contribution -0.06%

Daiwa House Industry Co., Ltd.

•    Active weight 1.7%, Fund weighting 2.1%¹

•    2025 share price return 7.0%

•    Performance contribution 0.19%

These three homebuilders are new investments, with most purchases made in the first half of 2025. The rationale behind these investments and our latest views were explained in the June and September commentaries, and our outlook remains unchanged.

The U.S. single-family housing market is vast yet fragmented, with even the largest players holding only about 10% of market share. Historically, Japanese companies had little to no presence in this space, which has long been dominated by local firms.

Recent selective acquisitions and investments have changed this dynamic. In 2024, Sekisui House’s U.S. subsidiaries collectively ranked 5th nationwide in homes sold, while Sumitomo Forestry’s subsidiaries entered the top 10. Daiwa House has also positioned itself within the top 20.

Interestingly, Japanese homebuilders are the only foreign players actively competing in this market, highlighting their bold expansion strategies. Looking ahead, we anticipate a recovery in the U.S. single family housing market, which has likely been pushed out to next year and beyond.

More importantly, we are not only expecting these companies to benefit from the long-term growth of the U.S. housing market; we are also excited about their ability to leverage Japanese-style manufacturing excellence and cost efficient homebuilding techniques — such as factory-based prefabrication, the use of pre-cut materials, and a long-term emphasis on the Japanese post- and beam-method over the 2x4 approach. This combination positions them to deliver high quality housing for quality-focused homebuyers and expand market share. This is the long-term investment hypothesis, and a view that is not yet widely recognized by the stock market.

Meanwhile, in the domestic market, these industry leaders are likely to keep reaping the benefits from industry consolidation within Japan’s mature housing sector.

Hitachi, Ltd

•    Active weight 5.1%, Fund weighting 7.6%¹

•    2025 share price return 24.5%

•    Performance contribution 2.00%

Our investment in Hitachi, first introduced in detail in the July 2021 commentary, has played out well for the Fund.

The company’s “Lumada” business is the key growth driver and is not dependent on any specific technology or software. Rather, it represents a “business brand” representing Hitachi’s strategic shift away from traditional hardware (or system) sales toward a solutions-based model that integrates consulting, systems, and after-sales services. This concept credited to former Chairman Hiroaki Nakanishi, who regrettably passed away in 2021, has been central to Hitachi’s transformation.

Over the past decade, Hitachi has strengthened its capabilities through group restructuring and acquisitions, including GlobalLogic, Hitachi Energy (formerly ABB’s power grid business), and Thales’s rail signalling business (France). The company is also targeting DX (Digital Transformation) and GX (Green Transformation), two sectors where demand is expected to grow.

Japan’s Large-Scale Foreign Direct Investment into the U.S.

When we initiated our investment, power-infrastructure spending linked to today’s AI data centres boom hadn’t started yet. Today, it appears poised to become one of the multi-year growth drivers for Hitachi.

On November 28, Japan and the U.S. released a “Joint Fact Sheet for Japan–U.S. Investment” signalling deeper bilateral cooperation. While details remain limited, media reports suggest Japanese companies will play a significant role across multiple industries. Hitachi is expected to contribute to long-distance power transmission networks—critical for meeting rising electricity demand and modernizing the U.S. grid to support large-scale AI infrastructure projects.

This announcement highlights a broader trend where after decades of industrial hollowing out, the U.S. faces challenges in revitalizing domestic infrastructure and defence industries alone. Japan having preserved much of its manufacturing base despite prolonged deflation, is now well-positioned to play a more central role. What was once seen as a slow restructuring may prove advantageous in today’s geopolitical environment shaped by U.S.–China rivalry.

We believe this shift will benefit many Japanese companies, including Hitachi.

Potential Risk: GlobalLogic

One key area we have been monitoring this fiscal year is GlobalLogic, Hitachi’s subsidiary specializing in digital product engineering and software development.

GlobalLogic’s traditional strength has been its labor-intensive model built around a large base of highly skilled engineers. However, the rapid adoption of generative AI and its growing ability to write code has unsettled the software industry, raising concerns that demand for human engineers could face structural pressure.

This backdrop fuelled the “software is dead” narrative, creating market unease. We worried this might weigh on sentiment toward Hitachi, which acquired GlobalLogic in 2021 for approximately 1 tn yen ($6.3 bn) during a period of abundant liquidity and active mergers and acquistions (M&A). As global software-related equities sold off sharply this year—including Globant, a close listed peer—our concerns deepened.

That said, while the longer-term trajectory of software services remains uncertain as AI proliferates, Hitachi’s latest earnings release helped ease those concerns. The company continues to show solid momentum, and GlobalLogic appears increasingly integrated within Lumada, Hitachi’s digital solutions platform, supporting the group’s shift toward higher-value services and recurring revenue opportunities.

We will remain attentive to further developments—particularly around pricing, utilization, client demand patterns, and how AI reshapes the economics of software engineering.

Sony Group Corporation

•    Active weight 4.2%, Fund weighting 7.3%¹

•    2025 share price return 23.65%

•    Performance contribution 1.88%

In September, Sony Group spun off its financial division as Sony Financial Group (SFG). As part of this process, the Fund received SFG shares as a dividend in kind.

We sold all distributed SFG shares and reinvested part of the proceeds to increase our position in Sony Group. This decision reflects our view that the potential upside in Sony Group’s market valuation—now more clearly defined as an entertainment enterprise post spin off—outweighs the benefits of SFG being re-evaluated as an independent listed company.

Sony Group’s Growing Presence as an Entertainment Company

Throughout the 2010s, Sony Group successfully transformed itself from a hardware-focused electronics manufacturer into a diversified entertainment conglomerate powerhouse. Its key strengths lie in the platform effects of its PlayStation franchise and its extensive IP portfolio (intellectual property of characters, music rights, etc), which spans gaming, music, and movie businesses. Because the company operates such a diverse range of entertainment businesses, it is uniquely positioned to leverage its IP portfolio across various business segments.

In 2025, Sony Group further solidified its position as a pure entertainment company.

In the Game & Network Services segment, PlayStation 5 continues to drive user engagement through network services, boosting profitability. The PlayStation 6 announcement is expected within a few years.

The music segment, as one of the world’s three major record labels, is growing steadily, supported by the tailwind of streaming service growth. It is also aggressively expanding its music catalogue. Music remains enduring content. Unlike video content or video games, many classic songs and Christmas songs are listened to repeatedly for years. For younger generations, even old music can be a fresh discovery. While AI-generated music is seen as a threat, we believe human-created works will gain value, benefiting Sony’s music catalog.

The movie segment faced stagnation during the COVID-19 pandemic, but the company has pursued various initiatives, including adapting its own game titles into films and releasing new Spider Man installments.

Sony Group’s anime business has emerged as a fourth pillar of entertainment in recent years. Crunchyroll, one of the world’s largest anime distribution platforms, was acquired from AT&T in 2021 and is generating synergies. Hits like Demon Slayer and the 2025 successes of the Demon Slayer sequel and the K POP themed animated film K-Pop Demon Hunters highlights Sony’s creative momentum. Although Netflix secured exclusive rights to K-Pop Demon Hunters for $100 million, future licensing deals should be more favorable as the franchise expands.

Recent successes highlight Sony’ Groups ability to produce globally appealing content across group companies from Japan’s Aniplex, which produced Demon Slayer and is one of Japan’s largest anime production and planning companies, to U.S.-based Sony Pictures Animation, which developed K-Pop Demon Hunters. The company has also drawn attention by introducing distinctive Japanese film content such as Kokuhou, a kabuki-themed drama.

Walt Disney, long the industry heavyweight, has lacked momentum in recent years. It strengthened its leadership position by acquiring Pixar, Marvel, and Lucasfilm. However, the company has relied on serializing proven franchises to stabilize growth and recent works have drawn criticism for lacking originality, which appears to hurt its reputation.*

In contrast, Sony Group’s approach empowers creators to take risks, with headquarters providing strong support. This challenger stance appears to be paying off, positioning the company as a dynamic force in global entertainment.

Expectations for further evolution of Sony Group

Regarding the group-wide business portfolio, there is speculation that management may spin off or deconsolidate the CMOS image sensor business 
to further transition away from a “non-synergistic conglomerate” structure toward a pure entertainment company. While this segment currently holds a dominant global market share, growing competition from Chinese enterprises poses a significant challenge. We will continue to watch closely for any management action on this matter.

Semiconductor-related Stocks (Tokyo Electron, Shin-Etsu Chemical, Renesas Electronics, Socionext)

Tokyo Electron Limited

•    Active weight 2.6%, Fund weighting 3.9%¹

•    2025 share price return 41.9%

•    Performance contribution 1.65%

Shin-Etsu Chemical Co., Ltd.

•    Active weight 2.3%, Fund weighting 3.3%¹

•    2025 share price return -8.0%

•    Performance contribution -0.33%

Renesas Electronics Corporation

•    Active weight 2.0%, Fund weighting 2.3%1

•    2025 share price return 4.6%

•    Performance contribution 0.00%

Socionext Inc.

•    Active weight 0.9%, Fund weighting 1.0%¹

•    2025 share price return -13.5%

•    Performance contribution -0.16%

We began contrarian purchases of chip-related stocks in the fall of 2022, when global semiconductor shares plunged amid U.S.–China trade friction. This decision proved successful in 2023, contributing to the Fund’s performance.

However, U.S. export controls intended to weaken China have ironically accelerated the development of its domestic semiconductor industry. Chinese players, now more self-sufficient and competitive, are emerging as a growing threat to global chip makers. We highlighted this concern in the December 2024 commentary, and our view remains unchanged.

Since then, we have gradually reduced our semiconductor exposure, specifically in Renesas, Socionext, and Shin Etsu Chemical.

The speed of China’s catch up—achieved within just two years—was unforeseen at the time of purchase. Recent advances in electric vehicles (EVs), along with breakthroughs in AI and humanoid robotics that gained attention in 2025, underscore both the seriousness of China’s industrial policy and the resilience of its corporate sector. This represents 
a structural investment risk that Japanese equity investors must continue to monitor.

Tokyo Electron

Meanwhile, Tokyo Electron’s semiconductor production equipment continues to maintain a technological edge over Chinese competitors—though vigilance remains necessary, particularly compared with analogue semiconductors and silicon wafers.

The company has also built deep, long-term partnerships with leading global manufacturers like TSMC and Samsung Electronics, anchored by shared technology roadmaps. This creates high switching costs and serves as a high entry barrier, which is why we are maintaining the current weighting.

Furthermore, the rapid growth in memory chip demand, fueled by large scale AI data center investments that became more evident in the latter half of 2025, is expected to provide a near-term tailwind for the company.

Mega Banks (Mitsubishi UFJ Financial Group, Mizuho Financial Group)

Mitsubishi UFJ Financial Group, Inc.

•    Active weight 1.6%, Fund weighting 4.8%¹

•    2025 share price return 35.0%

•    Performance contribution 1.61%

Mizuho Financial Group, Inc.

•    Active weight 2.0%, Fund weighting 3.4%¹

•    2025 share price return 47.2%

•    Performance contribution 1.45%

First introduced as a new holding in the October 2023 commentary, the appeal of the banking sector is closely tied to the outlook for rising interest rates. As explained at that time, the Fund continues to hold mega-banks MUFG, and more recently Mizuho, based on the view that their profits will rise significantly as interest rates increase.

While it is impossible to pinpoint the appropriate neutral interest rate for Japan’s economy, one fact is clear, Japan’s real interest rate remains extremely low, leaving room for further increases. Japan is the only advanced economy where real interest rates (nominal minus inflation) are still deeply negative. With core Consumer Price Index (CPI) around 3% and a labor shortage due to a shrinking workforce exerts inflationary pressure, a return to deflation appears highly unlikely.

Indeed, 10-year Japanese Government Bond (JGB) yields have exceeded 2% as of the end of 2025, a striking contrast to the era of zero rates. In the financial markets, some voices suggest that there is limited room for further rate increases, yet Japanese households and investors, long accustomed to zero rates, may not yet fully appreciate the significant gap between real and nominal rates. From a real-rate perspective, a 2% nominal rate is by no means high.

We continue to view the BOJ as being on a path of gradual rate hikes. For the economy, real rates matter the most, but for bank earnings, nominal rates are key. The current environment remains highly favorable for the financial industry as a whole, and particularly for banks, which benefit from deposits as a stable, low-cost funding source.

Recruit Holdings Co., Ltd.

•    Active weight 4.1%, Fund weighting 5.7%¹

•    2025 share price return -20.6%

•    Performance contribution -1.50%

Recruit owns Indeed, the world’s largest online recruitment platform. In our January 2025 commentary, we reiterated a bullish view on the stock and considered concerns over an economic slowdown following the Trump tariffs announced in April as temporary, gradually adding to our position.

However, the news of large-scale layoffs by Microsoft in July triggered us to reassess the risk landscape and a new risk emerged: the potential for a long-term decline in job demand as AI adoption accelerates. While there are no clear signs yet of widespread workforce reductions across the broader economy, hiring managers appear unlikely to approve aggressive recruitment budgets under current conditions. As a result, we adopted a more cautious stance and trimmed our position during the July–September period.

Since reducing the position, the stock price has continued to remain soft. While we acknowledge in hindsight that we should trimmed the allocation more aggressively, we have decided to maintain the current level for the following reasons.

Indeed remains the strongest player in the HR Technology sector, with unmatched market share and competitiveness. Its ability to leverage vast datasets from both employers and job seekers improves matching accuracy, driving user satisfaction and creating opportunities to increase pricing.

At the company’s Investor Day held in March 2024, management disclosed that its current take rate from corporate clients per hire is currently less than 1%.^4,5 This is significantly lower than the industry average of around 20% for general recruiting agents and up to 40% for executive search firms.

Management sees significant upside potential, noting that the take rate could double or triple while remaining far more cost-effective than rival services.

We believe the company can achieve organic growth even in the current environment. Recent FY25 interim results showed steady performance, and full-year profit forecasts were revised upward. Once the labor market normalizes, stronger growth momentum should return.

Additionally, we highly value the management team’s swift decision-making, their ability to cut costs, and execute “offensive investments” precisely when the business environment is deteriorating, thereby positioning the company to widen its competitive lead when demand recovers.

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