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 May 2026, Japanese equities delivered a strong performance, with the TOPIX, a representative index  of Japan’s stock market, rising 4.58% over the month.

Early in May, market sentiment was buoyed by a sharp rally in U.S. semiconductor stocks and easing geopolitical concerns in the Middle East. Against this backdrop, Japanese equities moved higher, led by robust gains in artificial intelligence (AI)- and semiconductor-related names.

By mid-month, however, market dynamics shifted. Escalating tensions in the Middle East pushed energy prices higher, driving a rise in global interest rates. In Japan, long-term yields climbed to their highest levels in nearly three decades, prompting profit-taking, particularly in technology stocks. As earnings season progressed, stock selection became increasingly important. The Nikkei 225 temporarily retraced below the 60,000 level, while the TOPIX proved relatively resilient, supported in part by a rotation into value-oriented stocks.

In the latter part of May, sentiment improved once again. A decline in oil prices helped alleviate inflation concerns, while renewed optimism surrounding AI and semiconductor stocks—supported by expectations of a large-scale AI-related U.S. IPO—triggered a rebound. Japanese equities rallied strongly into month-end, with gains broadening across sectors. Both the TOPIX and the Nikkei 225 closed the period at record highs, capping a volatile but ultimately positive month for the market.

The Fund’s Performance

During the month, the Fund (HJPIX) returned 8.37%, outperforming its benchmark, the Russell/Nomura Total Market™ Index, which returned 7.87%. The month's positive performer among the Global Industry Classification Standard (GICS) sectors included shares of Information Technology and Industrials, while Real Estate and Consumer Staples detracted from the Fund’s performance.

Among the best performers were our investments in SoftBank Group Corp., the telecommunications and Internet conglomerate, ORIX Corporation, Japan’s largest non-bank comprehensive financial services company, 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, Daiwa House Industry Co., Ltd., a top Japanese developer of homes and commercial properties, Sumitomo Forestry Co., Ltd., a globally integrated Japanese homebuilder and timber company, specializing in wooden construction and Tokio Marine Holdings, Inc., Japan’s largest general insurance company with arguably the best underwriting track record and successful overseas expansion detracted the Fund’s performance.

May Commentary

At a time when market sentiment remains narrowly focused on the most visible AI beneficiaries, a number of our core holdings—SoftBank and ORIX—illustrate 
a more nuanced set of opportunities. In different ways, these positions reflect either underappreciated exposure to the same structural tailwinds or, in Tokio Marine’s case, a strategic development that may be misunderstood by investors. The commentary below sets out why we believe these dynamics remain mispriced, and how they align with our broader investment approach.

The Evolving AI Race: SoftBank Group’s Strategic Position via OpenAI

In our previous commentary, we noted that while the outcome of the AI development race remains uncertain, SoftBank Group’s position as a major shareholder in OpenAI underpins a key part of our investment thesis. Below, we examine the shifting competitive dynamics surrounding OpenAI.

1. Concentration of Excess Profits: Defying "Commoditization" Fears

Until recently, the prevailing view was that frontier AI models, such as ChatGPT and Claude, would inevitably become "commoditized." Critics argued that a lack of differentiation and low switching costs would erode the profitability of AI labs. This mirrored the history of the telecommunications industry, where infrastructure providers became "dumb pipes" while players like the "Magnificent Seven" and software as a service (SaaS) companies captured a disproportionate share of profits.

Recent trends challenge this narrative. For example, reports that Anthropic has achieved operating profitability for the current quarter caught many industry watchers by surprise.¹ Furthermore, by launching specialized features like "Claude Code" and "Claude Cowork," it signals a move up the value chain into the application layer, encroaching on traditional software providers. OpenAI appears to be following a similar path. As these AI labs build business models with higher switching costs, it appears that excess profits are beginning to accrue to these players themselves, rather than enterprise users.

2. The Widening Gap Between Proprietary and Open-Source Models

Another widely held belief was that open-source models would eventually overtake proprietary systems, in both performance and cost-efficiency. Current research now suggests the opposite.

Analysis by the National Institute of Standards and Technology (NIST) indicates that the performance gap between frontier and open-source models is actually widening. While "DeepSeek R1" (released in January 2025) trailed state-of-the-art models by only three to four months, "DeepSeek V4" (released in April 2026) trails by approximately eight months. The reality is that the leading edge of AI continues to be driven by closed-model companies.²

3. OpenAI’s Next Move: A Full-Scale Entry into Advertising

Capitalizing on more than 900+ million weekly active users, OpenAI announced on May 5 a move to dramatically scale its advertising business through the launch of a self-serve platform.

The shift from limited pilot programs to a CPC (cost-per-click) self-serve model will allow advertisers to test campaigns flexibly and measure returns on investment with greater precision. This could transform ChatGPT from a productivity tool into a robust advertising marketplace.

Compared with incumbents such as Google and Meta, OpenAI has potential advantages in targeting through direct insight into "user intent" through conversational context. For a challenger like OpenAI, even capturing a modest share of the massive existing ad market would boost its financial performance.

4. Competitive Landscape and Future Outlook

In contrast, Anthropic earlier this year ran a high-profile Super Bowl campaign declaring: "Ads are coming to AI. But not to Claude." This campaign implicitly criticized OpenAI’s strategy and emphasised that Anthropic had no intention to enter the ad business. For now, the AI advertising space appears to be an opportunity OpenAI is uniquely positioned to pursue.

While Google retains a formidable grip on consumer touchpoints through Search, Gmail, and YouTube, OpenAI is increasingly focused on the enterprise sector. This is a rational strategic shift, as corporate customers are better positioned to convert advances  in frontier model performance into revenue.

Although it remains unclear which player will capture the greatest economic value, OpenAI undoubtedly remains front and center. For SoftBank Group, as a significant shareholder, this acceleration in monetization could act as a catalyst for a substantial revaluation of its underlying assets.

*Side Note: A Potential Shift in Japan’s Most Valuable Company for the First Time in a Quarter Century

Separately, SoftBank Group’s market capitalization stood at 42.7tn yen ($266.4bn) at the end of May, closing in on Toyota Motor’s 48tn yen ($299.5bn). After 25 years at the top, Toyota may be overtaken as Japan’s most valuable listed company. (As of June 1, 2026, SoftBank Group’s market capitalization has now surpassed Toyota Motor’s.)

Strategic Partnership Between Tokio Marine and Berkshire Hathaway: Follow-up Analysis

We would like to provide an update on the strategic partnership between Tokio Marine Holdings and Berkshire Hathaway.

As previously noted, a key component of the collaboration commenced in April, under which Berkshire assumed a portion of Tokio Marine's insurance portfolio through a Whole Account Quota Share (WAQS) reinsurance scheme. This arrangement allows Tokio Marine to mitigate exposure to catastrophic risk and reduce its solvency capital requirements, while providing Berkshire access to high-quality float.

Float remains the lifeblood of the investment income in property and casualty (P&C) insurance. Over the past six decades, Berkshire has created immense value by skillfully deploying such float into investments generating superior returns.

In economic terms, the P&C business has a unique feature: underwriting results determine the cost of capital. In other words, where claims exceed premiums, the difference represents the cost of funding. Even so, insurance can remain an attractive financing mechanism if that cost is lower than prevailing interest rates. Where underwriting business is profitable, insurers are essentially being "paid" to raise capital, creating a formidable competitive advantage.

A few years ago, when Berkshire first invested in the five Japanese general trading houses, it funded those positions through yen-denominated "Samurai bonds." Since then, Japan’s long-term interest rates have risen significantly, with 10-year yields currently hovering near multi-decade highs. In this environment, Berkshire’s decision to strengthen its low-cost float through insurance operations—rather than debt issuance—appears to be a rational strategic move.

Given that this float is likely to be yen-denominated, investment is likely to be concentrated in Japanese equities to eliminate currency risk. As the scale of float increases, Berkshire may further increase its holdings in Japan, potentially including a larger stake in its partner, Tokio Marine, depending on valuation.

As a side note, in an earlier commentary in 2023, we suggested that Japanese P&C insurers could be a potential next focus for Warren Buffet following the trading houses. Three years have passed since then, and while Mr. Buffett has stepped down as CEO, subsequent developments broadly support our "prediction," albeit with a narrower focus on Tokio Marine.

Update on ORIX: Strategic Transformation and the Kioxia Windfall

On May 21, ORIX announced it expects to recognize 179.8bn yen ($1.1bn) in equity-method investment gains for the April–June 2026 quarter. These reflect gains from divestments and on Kioxia Holdings shares recorded by Toshiba Corporation, in which ORIX is an investor. ORIX indicated that this could boost full-year net income by approximately 70bn yen ($436.8mn) above its initial 530bn yen ($3.3bn) target.³

Kioxia, a leading NAND memory manufacturer, has seen its share price soar since its December 2024 initial public offering (IPO), rapidly ascending to the ranks of Japan’s mega-cap stocks⁴ due to strong demand linked to AI data centers. ORIX holds approximately 14% stake of Toshiba’s common stock,⁵  which in turn owns a 16.1% stake in Kioxia as of May 18, implying an indirect stake of about 2.25%.

The gains disclosed reflect positions as of the end of March. Since April, Toshiba has continued to trim its Kioxia holdings further amidst a continuing rally in its share price, suggesting potential for additional upside, depending on future market conditions.

While the "Kioxia factor" has partially contributed to ORIX’s recent share price performance, our investment thesis remains focused on its medium- to long-term structural transformation.

This rests on three pillars: the significant undervaluation of its shares relative to its asset base (at the time of purchase); the expected benefits of Japan’s transition to a stable inflationary environment and normalizing of interest rates; and the shift from a balance-sheet-heavy investment model to an asset-light approach leveraging third-party capital. The latter in particular could serve as the key catalyst for a further re-rating of ORIX’s valuation, alongside sustained earnings growth.

This re-rating will depend on communication with investors. Changes in business model can fundamentally reshape the perceived intrinsic value. In our view, the management team has yet to fully articulate this transition. We therefore engaged with both former CEO Inoue and his successor Takahashi on the matter.

Click here for a full listing of Holdings.