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

The Japanese equity market fell in June 2026, with the TOPIX returning -1.02% in the month.

In the first half of the month, the market started on a positive footing. However, sentiment weakened after a major U.S. semiconductor company reported earnings that fell short of market expectations, triggering a correction in related stocks. At the same time, stronger-than-expected U.S. employment data led to a rapid increase in expectations for an additional Federal Reserve rate hike within the year. As a result, semiconductor and AI-related stocks came under significant selling pressure.

In the middle of the month, an agreement between the United States and Iran to end hostilities became a turning point for the market. Supported by a sharp decline in oil prices and easing inflation concerns, buying interest broadened across a wide range of sectors. The Bank of Japan’s (BOJ) policy rate hike was absorbed smoothly by the market, as it had already been largely priced in. Against this backdrop, both major indices reached historic milestones: the TOPIX closed above 4,000 points for the first time.

During the latter part of the month, market volatility rose considerably amid a series of negative developments in the semiconductor and artificial intelligence (AI)-related sectors, including a sharp decline in South Korea’s KOSPI index and the postponement of a major U.S. AI company’s initial public offering. Nevertheless, investor interest broadened beyond technology-related names, with domestic demand-oriented stocks attracting increased attention. Despite these headwinds, the TOPIX remained near their record highs at month-end.

The Fund’s Performance

During the month, the Fund (HJPIX) returned 0.86%, outperforming its benchmark, the Russell/Nomura Total Market™ Index, which returned 0.04%. The month’s positive performer among the Global Industry Classification Standard (GICS) sectors included shares of Information Technology and Financials while Communication Services and Industrials detracted from the Fund’s performance.

Among the best performers were our investments in Tokyo Electron Ltd., one of the world’s leading manufacturers of semiconductor production equipment, Mitsubishi UFJ Financial Group, Inc., one of the three largest Japan’s banking groups, and Recruit Holdings Co., Ltd., Japan’s unique print & online media giant specializing in classified ads as well as providing human resources (HR) services.

As for the laggards, SoftBank Group Corp., the telecom and Internet conglomerate, Hitachi, Ltd., one of Japan’s oldest electric equipment & heavy industrial machinery manufacturers, and Shin-Etsu Chemical Co., Ltd., a chemical materials manufacturer with world-leading market shares in a wide range of products, detracted the Fund’s performance.

June Commentary

It has been one year since the Fund initiated positions in three Japanese homebuilders during the first half of 2025. Regrettably, these investments have yet to yield positive results. The primary headwind has been the protracted slump in the U.S. housing market. This stagnation stems from persistent inflationary concerns—triggered by the U.S.-Iran conflict in the Middle East—which have driven up long-term interest rates and kept mortgage rates elevated. While developments have diverged from our original expectations, our conviction in these holdings remains intact.

Investment Rationale and Hypothesis

Revisiting the Original Thesis

We would first like to revisit the rationale behind our positions in this sector. Japan’s three leading homebuilders—Sekisui House, Sumitomo Forestry, and Daiwa House have established a growing presence in the U.S. market. Sekisui House and Sumitomo Forestry both rank among the top 10 builders in the U.S., while Daiwa House is among the top 20. Notably, these companies are the only international players making a meaningful push into the U.S. housing industry. In our view, this unique positioning remains under-appreciated by the equity market.

Although we anticipate a cyclical recovery in the U.S. housing sector in the short term, our focus extends well beyond a simple recovery in housing demand. The core hypothesis rests on these companies’ ability to expand their market share by leveraging their proprietary manufacturing expertise. This includes advanced factory-based prefabrication and the use of pre-cutting materials to shorten construction lead times. Furthermore, the long-term adoption of the “Japan-style” post-and-beam construction method could become a key differentiator.

Japanese homebuilders are known for their focus on high-quality housing—characterized by superior precision, innovative layouts, high levels of insulation, and earthquake/fire-resistant structures. We believe these strengths will resonate with U.S. home buyers.

Another often overlooked advantage of these Japanese players in the fragmented U.S. market is their financial strength. Unlike many pure-play U.S. homebuilders, firms like Sekisui House and Daiwa House operate diversified businesses, including domestic multi-family housing, rentals, commercial facilities, and logistics. Their overall corporate scale surpasses that of the average U.S. builder.

Our research suggests that their U.S. subsidiaries can secure low-interest bank loans backed by parent-company guarantees, enabling them to accelerate expansion. Additionally, the persistent interest-rate differential between the Japanese yen and the U.S. dollar creates opportunities for attractive intra-group lending from Japanese parent-companies to their overseas units.

As we noted in our June commentary last year, the U.S. market remains highly attractive due to steady population growth and a chronic structural shortage of housing. Although the recovery in demand has taken longer than expected, we do not view the delay negatively. Rather, we see it as deferred upside, where the timing of the expected market recovery and subsequent share price appreciation has simply shifted further into the future.

Reasons for Maintaining the Positions Despite the Challenging Operating Environment

1. Sustained Underlying Industry Trends and Future Operational Leverage

Despite the challenging environment, we remain invested because these companies continue to expand their footprint as the only major foreign entrants with meaningful scale in the U.S. market.

Over the past two decades, they have quietly yet steadily built their presence through strategic acquisitions of local builders. Recently, the scale of these deals has grown significantly, as illustrated by Sekisui House’s purchase of M.D.C. Holdings in 2024 and Sumitomo Forestry’s full acquisition of Tri Pointe Homes in February this year.

This aggressive expansion has attracted the attention of major media outlets, with the Wall Street Journal noting that “Japan Is Placing a Multibillion-Dollar Bet on the U.S. Housing Market.”¹ Even Warren Buffett’s Berkshire Hathaway² has shown increased interest in the sector, validating the industry trend that we identified early on.

Importantly, these acquisitions have been funded primarily through debt rather than new equity issuance. As the acquired businesses are integrated and procurement streamlined, these companies are well positioned to generate significant earnings leverage once the market bottoms out and the housing cycle recovers.

2. Support from Domestic Operations

The strength of their domestic businesses provides a vital cushion against volatility in the U.S. housing market. While the mature nature of the Japanese market may lead to a valuation discount in the long term, the stability of domestic earnings helps limit downside risk today.

For instance, Sekisui House reported growth in both revenue and profit in its latest first-quarter results. Solid performance in its domestic rental housing management and development businesses successfully offset the headwinds faced by its U.S. homebuilding business.

3. Attractive Valuations and Margin of Safety

Current valuations allow us to maintain these positions with limited concern about further downside.

Due to short-term earnings uncertainty, these companies trade at undemanding valuations, with forward price to earnings (P/E) multiples of only 8–9 times despite delivering average return on equity (ROE) of 11–14% over the past 10 years and offering dividend yields of 3–4.5%.

While AI-related stocks dominate market attention, homebuilders remain overlooked and, in our view, undervalued. In addition, all three trade below book value, with price to book (P/B) ratios below 1.0 times. This provides a significant “margin of safety” even if our investment hypothesis takes longer than anticipated to materialize.

Potential Catalysts for a Better Operating Environment

Turning to industry sentiment, a positive development can be seen in the Housing Affordability Index. This leading indicator for single-family housing demand has recovered to 116,& up from around 97 in 2023.³ (A level below 100 indicates that a median-income household struggles to afford a median-priced home.)

Unlike Japan’s relatively stagnant wage environment, this improvement is being driven by steady growth in real wages among American workers.

Even so, the “affordability crisis” remains acute. Soaring home prices, a sharp spike in mortgage rates, and a structural shortage of supply mean that home ownership remains a significant hurdle for many middle-income households. We had initially expected that cooling inflation and subsequent rate cuts to improve affordability. However, renewed geopolitical risks have once again clouded the outlook. In this environment, attention is increasingly likely to focus on whether the U.S. administration introduces housing support measures ahead of the midterm elections.

Addressing the affordability crisis is not straightforward. Simply flooding the market with supply is not a viable solution and is politically unpalatable. While greater supply would cool overheated prices, it would also erode the home equity of existing homeowners, potentially weakening consumer demand through a negative wealth effect.

Furthermore, the structural housing shortage is exacerbated by administrative bottlenecks, such as restrictive zoning laws and cumbersome permitting processes. Since many of these issues are controlled at the state and local level, the federal government faces structural difficulties in implementing nationwide changes.

Equally, direct intervention to force lower new-home prices is unrealistic, as it would materially undermine the profitability of homebuilders.

Demand-side measures also carry risks. Proposals such as 50-year mortgages or intervention in mortgage-backed securities markets to suppress borrowing costs could prove counterproductive. Without a corresponding increase in supply, such measures would likely drive home prices even higher, rather than addressing the root cause of the problem.

To achieve affordability for first-time buyers without destabilizing the market, a more nuanced approach is required. For instance, rather than providing direct subsidies to buyers, the government could offer incentives—such as tax credits—to homebuilders that build “starter homes” aimed specifically for first-time buyers. This approach could stimulate supply while minimizing unintended side effects elsewhere in the market.

While various policy scenarios are possible, we believe that the implementation of a truly effective housing policy could act as a powerful catalyst for a meaningful reassessment of the sector.

Outlook and Portfolio Strategy

The environment surrounding homebuilders is arguably as challenging as it has been at any point in recent years. In that respect, our investment reflects a deliberately contrarian position and forms a key part of our “differentiated portfolio.”

However, once the business environment normalizes and the competitive advantage of Japanese homebuilders in the U.S. market becomes more widely recognized, we believe the sector has the potential to evolve into a long-term investment theme. Such a trajectory would mirror the success of Japanese automakers in gaining market share from the U.S. “Big Three” during the 1970s and 1980s.

From a portfolio-construction perspective, homebuilders also offer valuable risk diversification benefits. A substantial decline in mortgage rates would be a powerful tailwind for these companies. Conversely, if interest rates remain elevated contrary to expectations, the portfolio retains balance through holdings that benefit from high rates—such as property and casualty insurance and banks.

While patience may still be required, we believe the current environment provides an attractive opportunity to own high-quality businesses at compelling valuations, positioning the portfolio to benefit when conditions in the U.S. housing market ultimately improve.

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