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 June 2025, the Japanese stock market saw gains, with the TOPIX rising 1.86% compared to the previous month.

While geopolitical risks and developments in U.S. trade policy influenced market sentiment at times, improving external conditions and expectations for potential monetary easing in the U.S. fueled a stronger risk-on appetite among investors throughout the month.

In the first half of June, Japanese stocks were initially weighed down by concerns over U.S. tariffs and a potential economic slowdown. However, the market rebounded on the back of strong U.S. employment data and gains in U.S. semiconductor-related stocks. Reports of Israeli attacks on Iran then heightened tensions in the Middle East, triggering a temporary risk-off mood and pushing the market lower.

However, the Bank of Japan (BOJ) kept its policy rates unchanged and signaled a slower pace of government bond purchase reductions. Similarly, the U.S. Federal Reserve (FOMC) held interest rates steady, which supported investor sentiment and stabilized the market. While Japanese equities traded within a narrow range amid shifting external factors, they gradually trended higher.

In the latter part of the month, although renewed tensions in the Middle East and reports of U.S. airstrikes on Iranian nuclear facilities briefly triggered risk aversion, geopolitical concerns eased quickly. A rebound in U.S. equities subsequently supported the Japanese market. Additionally, comments from President Trump regarding a potential ceasefire, along with dovish comments from Federal Reserve officials hinting at possible rate cuts, further boosted investor confidence and risk appetite.

High-priced semiconductor stocks led the rally, and demand from reinvestment following the ex-dividend date provided an extra tailwind. As a result, the Nikkei 225 reached a new year-to-date high, and the overall Japanese stock market ended the month with substantial gains.

The Fund’s Performance

This month, the Fund returned 2.96% (HJPIX), outperforming its benchmark, the Russell/Nomura Total Market™ Index, which returned 2.22%.

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

Among the best performers were our investments in SoftBank Group Corp., the telecom and Internet conglomerate, Tokyo Electron Limited, one of the world’s largest manufacturer of semiconductor production equipment and Seven & i Holdings Co., a Japanese diversified retail group and operator of Seven-Eleven convenience stores.

As for the laggards, MS&AD Insurance Group Holdings, one of the leading non-life insurance companies in Japan, Sony Group Corporation, a diversified consumer and professional electronics, gaming, entertainment and financial services conglomerate and Mitsubishi UFJ Financial Group, Inc., one of Japan’s largest financial groups.

June Commentary

New Investments

We have initiated investments in three major Japanese homebuilders—Sekisui House, Sumitomo Forestry, and Daiwa House. This decision was driven by these companies’ expansion into the overseas housing markets, particularly in the U.S., where they have the potential to grow significantly over the long term.

The U.S. single-family housing market is vast, yet fragmented. Even the largest players hold only about 10% of market share. Historically, it is dominated by local U.S. firms and Japanese companies had little to no presence in this space. However, selective acquisitions and investments in recent years have changed this dynamic. In 2024, Sekisui House’s U.S. subsidiaries collectively ranked 5th nationwide in the number of homes sold, while Sumitomo Forestry’s subsidiaries have entered the top 10. Daiwa House, too, has positioned itself within the top 20. An interesting observation is that Japanese homebuilders are the only foreign players actively competing in this market, highlighting their bold expansion strategies.

At present, the proportion of operating profit derived from overseas businesses is 76% for Sumitomo Forestry (as FY2024 ended in December), 30% for Sekisui House (based on company FY25 guidance), and 10% for Daiwa House (as FY2024 ended in March 2025). While their domestic operations continue to provide solid earnings in a mature market consolidated by major players, their overseas businesses are poised to become increasingly important within the consolidated earnings of these companies.

The U.S. Single-Family Housing Market

In contrast to Japan, where population decline poses long-term challenges, there is little doubt about the growth potential of the U.S. housing market. The market size, as indicated by the number of households, is approximately 130 million and has been increasing by about 1.2 million annually for many years. This trend is largely driven by natural population growth and immigration. Additionally, the increase in the number of households is supported by factors such as the rise in number of nuclear families and the longevity of the elderly population. In recent years, the trend has also been bolstered by younger generations, who had been hesitant during the COVID-19 pandemic, now taking the step to purchase their first homes.

Despite this trend of market expansion, the supply of new homes in the U.S. has been insufficient for many years since the 2008 subprime mortgage crisis. Several factors contribute to this issue, including strict land zoning regulations, a shortage of construction workers, rising building costs, and the cautious stance of homebuilders who have been limiting supply since suffering severe losses during the financial crisis.

Until around the year 2000, the U.S. housing market was in equilibrium in terms of supply and demand as well as housing stock. However, the introduction of subprime loans and speculative buying led to the formation of a housing bubble, causing a sharp rise in home prices. In response, the supply of new homes surged significantly. From 2002 to 2006, the number of new single-family housing starts ranged between 1.4 million and 1.7 million homes annually (U.S. Census Bureau), far exceeding the average annual household growth rate of 1.2 million. This resulted in a market oversupply.

When the bubble burst in 2008, the housing industry faced a buildup of inventory and a significant decline in single-family home prices. The annual average of new single-family housing started fell sharply to just 700,000 homes between 2008 and 2020. Meanwhile, the number of households has continued to grow. As a result, the recovery in the supply-demand balance for single-family homes after the bubble burst has been surpassed, leading to a cumulative shortage of approximately 3.7 million new single-family homes as of Q3 2024.¹

To close this gap, it is estimated that at least 1.2 million new single-family homes need to be supplied annually. This figure reflects the consistent increase in household numbers and the replacement of aging single-family homes built between the 1950s and 1970s, which are being replaced at an average rate of about 200,000 units per year.² Given these factors, the long-term outlook for the new single-family housing market is highly favorable.

The consolidation of the homebuilding industry is another noteworthy development. In the 1990s, the U.S. single-family housing market was highly fragmented, with a large number of players. However, the 2008 subprime mortgage crisis forced many companies into bankruptcy, leading to mergers and acquisitions within the industry. The number of establishments in the homebuilding business decreased by 30%, from 26,000 in 2002 to 17,000 in 2017.³

Though the local aspect of the homebuilding industry persists, larger players that have grown through mergers and acquisitions (M&A) enjoy competitive advantages in several areas: raw material procurement, access to capital, land acquisition capabilities, and administrative processes such as obtaining building permits. Their market share has gradually increased nationwide. In the early 1990s, the top 10 U.S. homebuilders collectively held less than 10% of the market. By 2023, this figure had risen to 42%, (and 69% by the top 20) reflecting steady industry consolidation.⁴ The U.S. single-family housing market is increasingly becoming an attractive space.

Investment Hypothesis

Against this backdrop, our investment thesis is that Japanese homebuilders will steadily increase their presence in the U.S. housing market over the long term. For this to hold, two key factors must be confirmed:

1. Whether Japanese homebuilders’ strategies, which emphasize competitive advantages in manufacturing, can effectively capture market share.

All the Japanese homebuilders we have interviewed have highlighted inefficiencies in the U.S. home construction industry, citing long construction periods, inconsistent quality, overly standardized designs, and excessive reliance on manual labor. Additionally, many U.S. homes lack flexibility in floor plans and are prone to harsh climates. Japanese firms believe they can address these weaknesses by applying their expertise in efficient, high-quality construction methods.

Based on our findings, the key focus for Japanese builders seems to be in the following areas:

•    Leveraging Manufacturing Excellence
     o     Japanese firms excel in industrialized construction techniques, such as prefabrication and the pre-cut construction method. This approach reduces lead times and costs at the construction site. These approaches could improve efficiency in the U.S., where labor shortages and rising construction costs are major challenges. Their expertise in the streamlining of construction work, improvement in logistics efficiency, and promotion of joint purchasing can potentially lead to an expansion of market share.

     o     Sumitomo Forestry is expanding its FITP project, which integrates structural panel production with framing work, streamlining the construction process. The number of its U.S. manufacturing factories is expected to increase from nine as of 2024 to 15 or more by 2027.

     o     Daiwa House is working on cost reduction through joint purchasing from suppliers and promoting industrialization to shorten construction periods. The company’s major subsidiary, Stanley Martin (ranked 22nd in the U.S. in 2024), has seen its sales more than triple since joining the Daiwa House group in 2017 and has shortened construction lead times by about 30% compared to four years ago.

     o     Sekisui House is leveraging its 2022 acquisition of MDC to improve material and construction cost efficiencies across overlapping markets serviced by its three U.S. subsidiaries.

•    Delivering High-Quality Homes
     o    Many U.S. builders tend to gravitate towards land speculation, whereby they focus primarily on acquiring land with potential for value appreciation, as the dominant business model. In contrast, Japanese manufacturers, operating in a market impacted by population decline, have honed their ability to differentiate their homes through innovative designs and superior construction quality.

     o    Japanese manufacturers excel in building airtight, well-insulated, compact single-family homes with efficient storage solutions. Japanese houses, known for their durability and fire resistance, are also well-suited to areas prone to natural disasters such as hurricanes, tornadoes, and wildfires.

     o    There is potential for the Japanese post-and-beam construction method to gain traction in the U.S. market. The dominant construction style for single-family homes in the U.S. has long been the 2x4 method. This approach, which facilitates the standardization of building materials, involves attaching four wall panels to two ceiling and floor panels, however, the standardization has led to a prevalence of uniform home designs. Moreover, the 2x4 method has certain limitations. Since the structure is supported by wall panels, it is difficult to create large window openings, and the layout flexibility is restricted. In contrast, the Japanese post-and-beam construction method uses pillars and beams to support the structure, allowing for more layout flexibility and the inclusion of large openings such as expansive windows.

     o     The 2x4 process often delays the installation of ceilings and roofs, leaving homes exposed to adverse weather during the building phase. On the contrary, under the Japanese post-and-beam method, ceilings and roofs are typically installed earlier in the process, reducing the risk of weather-related damage during construction.

     o     For example, Sekisui House’s “SHAWOOD” brand, which employs proprietary construction techniques, targets the premium housing market, emphasizing durability and comfort. Aimed at affluent consumers, it features superior housing know-how as well as energy-efficient designs. Their marketing efforts, which position it as ZEH (Net Zero Energy House), highlight reduced utility costs, making the homes also attractive to energy cost-conscious buyers.

     o     Strengthening After-Sales Service and Long-Term Guarantees U.S. builders often fall short in terms of after-sales service and warranty coverage. Japanese firms could differentiate themselves by offering comprehensive aftercare and long-term guarantees, drawing on their extensive experience in Japan.

2. How U.S. consumer preferences for housing evolve—specifically, whether they will come to value the high-quality homes that Japanese builders offer.

One historical example of Japanese manufacturers successfully penetrating the U.S. market is the automotive industry during the 1970s and 1980s. At the time, the oil crisis and stricter emissions regulations led to increased demand for fuel-efficient compact cars. Japanese vehicles gained attention and began taking market share from the “Big Three” (General Motors, Ford, and Chrysler). U.S. consumers also started to value cars not just as a means of transportation but as products offering comfort, reliability, and performance. Japanese cars earned high praise for their superior quality and design, which helped them establish a strong foothold in the market.

Currently, Japanese homebuilders lack a well-established brand image in the U.S. housing market. However, if the quality of Japanese-built homes begins to resonate with U.S. consumers, a similar success story could unfold. The idea remains a hypothesis, as there are significant differences between the housing markets in Japan and the U.S., as outlined below.

In Japan, most people view purchasing a home as a once-in-a-lifetime event, influenced by cultural factors such as a deep emotional attachment to inherited land. Custom-built homes are far more common in Japan compared to the U.S., where ready-built homes dominate. Japanese homes tend to be highly individualized, reflecting the unique preferences of each buyer.

In contrast, homeownership in the U.S. is often seen as something to adjust according to life stages. Americans frequently buy and sell homes to accommodate major life events, such as the birth of children, career relocations, or when children leave home. This is partly due to the larger geographic space in the U.S. and the fact that Americans tend to change jobs more frequently than their Japanese counterparts. As a result, the frequency of home purchases and sales in the U.S. is much higher than in Japan.

This suggests that U.S. consumers may place relatively less importance on newly-built homes when purchasing homes compared to Japanese buyers. In the U.S., where relocation often involves moving to entirely new areas, the decision-making process tends to prioritize location over the quality or brand of the home itself. Furthermore, the widespread use of the 2x4 construction method has also minimized distinctions between homebuilders, making brand differentiation less relevant from a consumer perspective.

This lack of brand awareness means that Japanese-built homes are not yet recognized as premium products in the U.S. However, if the quality of Japanese single-family homes becomes more widely appreciated, it could change how U.S. consumers view Japanese homebuilders.

According to an industry expert we interviewed, there are signs that U.S. consumers’ attitudes toward housing may be evolving. The trend of delayed marriage has pushed the average age of first-time homebuyers into their 30s, leading to a greater emphasis on quality over quantity. Similarly, aging baby boomers—many of whom have benefited from long-term stock market gains—are showing increased demand for high-quality homes. These demographic trends could create opportunities for Japanese homebuilders to market their expertise in high-quality housing.

Additionally, heightened awareness of climate-related risks, such as wildfires and hurricanes, could drive demand for disaster-resistant homes. According to the Financial Times,⁵ 57% of new single-family homes built in 2023 were located in areas with “severe” or “extreme” climate risks, up from 49% in 2014 (think wildfire-prone California or hurricane-prone Florida). This trend highlights a growing need for homes with superior resilience, an area where Japanese builders excel.

While cultural and market differences remain significant, these developments suggest that Japanese homebuilders’ strengths in quality, durability, and innovation could eventually resonate with U.S. buyers. If this happens, it could pave the way for long-term growth in the U.S. housing market for Japanese players.

Margin of Safety

Whether Japanese homebuilders can win significant market share in the U.S. remains to be seen. So why did we decide to invest now?

This decision is based on their below-market-average valuations (8~10x forward earnings, dividend yields 3~5%, approximately 1.0x price to book ratio (P/B), 5-year average return on equity (ROE) 11~16%) and the lack of attention they currently receive in the market. Such conditions provide an opportunity to invest at attractive prices. Furthermore, even if our hypothesis turns out to be incorrect, we believe there is a degree of margin of safety that mitigates the risk of significant stock price declines.

At present, the valuation of these companies remains low due to short-term uncertainties in the U.S. housing sector. The recent stagnation in housing demand has been triggered by rising mortgage rates and construction costs, despite a prolonged low supply of newly built homes. However, the structural shortage of single-family homes across the U.S. remains unchanged. As such, we believe that a significant decline in housing prices, similar to the subprime mortgage crisis, is unlikely. Or there will be a sharp increase in demand should home prices soften, mortgage rates decline, the affordability improve with rising real wages or the near-term Trump-induced economic uncertainty be lifted.

Admittedly, the housing industry is inherently cyclical, making below-market average valuations common. The current valuation may not necessarily mean the stocks are undervalued if short-term earnings decline from the consensus estimates. However, even without meaningful gains in market share. Japanese firms stand to benefit from a cyclical recovery in market conditions at some point. From a long-term perspective, the U.S. housing market is expected to grow with a high degree of certainty.

Additionally, these companies have stable revenue bases in Japan, where growth prospects are limited but earnings remain strong (although, in the long term, this could act as a valuation discount factor due to the maturity of the domestic market in the future). High dividend yields further reduce downside risk for their stock prices.

We consider these factors to be the margin of safety behind this investment. We believe the long-term growth potential outweighs the short-term uncertainties, providing a compelling case for initiating our positions.

Click here for a full listing of Holdings.