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 September 2025, Japan’s equity market posted solid gains. The TOPIX Index rose 2.38% month-over-month.

During the first half of the month, sentiment was weighed down by the announcement of a new to artificial intelligence (AI) chip by Alibaba Group Holding, which heightened concerns over the intensifying U.S.-China tech rivalry. This led to weakness in U.S. AI-related equities and a corresponding decline in Japanese high-tech stocks. However, market sentiment improved following the signing of a U.S. presidential executive order by President Trump, which included provisions for reducing auto tariffs between Japan and the U.S., providing a tailwind for Japanese equities.

Mid-month, weaker-than-expected U.S. employment data raised expectations for further monetary easing by the Federal Reserve (Fed). Domestically, Prime Minister Shigeru Ishiba’s resignation announcement sparked optimism around potential new policy initiatives under the next administration. These developments supported a broad-based rally in Japanese equities, with semiconductor and AI-related stocks leading the gains in U.S. equity market. Investor appetite extended to other sectors, driving both the Nikkei and TOPIX to new highs and sustaining upward momentum.

In the latter half of the month, the Federal Open Market Committee (FOMC) resumed rate cuts and signaled continued easing through year-end. Meanwhile, the Bank of Japan (BOJ) held rates steady, but two Policy Board members proposed a rate hike, increasing market expectations for a potential hike in October. Additionally, the BOJ’s decision to begin unwinding its ETF holdings triggered a temporary market correction. However, the sell-off was short-lived, and the market quickly regained composure, demonstrating underlying resilience.

Toward month-end, strong U.S. economic data tempered expectations for aggressive rate cuts, leading to a pullback in U.S. equities. This, combined with caution ahead of the Liberal Democratic Party (LDP) leadership election, contributed to a softer tone in Japanese equities. Nonetheless, the market closed the month significantly higher compared to the previous month-end.

The Fund’s Performance

This month, the Fund returned 4.35% (HJPIX), outperforming its benchmark, the Russell/Nomura Total Market™ Index, which returned 2.44%.

The month’s positive performer among the Global Industry Classification Standard (GICS) sectors included shares of Communication Services, Consumer Discretionary, and Information Technology while Industrials 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 Sony Group Corporation, a diversified consumer and professional electronics, gaming, entertainment and financial services conglomerate.

As for the laggards, 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 Hitachi, Ltd. (6501), one of Japan’s oldest electric equipment & heavy industrial machinery manufacturers.

September Commentary

In our June commentary, we introduced three Japanese homebuilders as our new investments. We will delve into the investment appeal of these three companies, examine their respective financial challenges, and discuss the strategic financial measures they should adopt moving forward.

Overview of the Three Companies

The three companies—Sekisui House, Sumitomo Forestry, and Daiwa House—have varying degrees of exposure to the U.S. market, ranging from 10% to 80% of their business portfolios. By diversifying investments across these firms, we believe the portfolio achieves a well-balanced exposure to the U.S. housing market, who also have meaningful exposure to the Japanese property market, as well other global markets like Australia.

Since mid-last year, the U.S. new housing market has entered a correction phase. This downturn is largely attributed to persistently high mortgage rates and rising construction costs due to inflation, leading to decades-low housing affordability. These factors have driven new home prices beyond the reach of average consumers.

As previously stated, we view such challenging market conditions as an opportune time to invest. Consequently, we have been actively increasing our position in these companies.

Investment Highlights of the Three Companies

Our decision to invest in all three homebuilders stems from their varying investment merits. Below, we provide a concise summary of the key attributes of each company:

Sekisui House

Market leader in scale: Acquired MDC Holdings, a U.S.-listed homebuilder, last year. This transaction significantly expanded its U.S. operations, making it the fifth-largest player and the largest among the three Japanese companies.

Efficient acquisition structure: The acquisition was completed entirely in cash without issuing new shares, avoiding earnings dilution. Synergies among U.S. group companies are expected to materialize once the housing market recovers.

Overseas profit contribution: Approximately 21% of its operating profit (FY2024) comes from overseas, a figure expected to rise above 30% as the U.S. housing market normalizes. This positions Sekisui House as a mid-tier player among the three in terms of international exposure (all three are in the midst of a multi-year global expansion phase).

Focus on mid-to high-end homes: Actively applying its domestic expertise in designing and manufacturing single-family homes to the U.S. market, particularly in the mid- to high-price range (“SHAWOOD” brand).

Diversified business portfolio: Domestically, the company engages in single-family and multi-family home development, renovations, property management, and real estate brokerage, which diversifies its risk exposure.

REIT expertise: With experience in structuring REITs in Japan, Sekisui House may leverage this expertise to improve capital efficiency in its U.S. housing business.

Valuation metrics: Forecasted FY2026 price to earnings ratio (P/E) of 9.6x, price to book ratio (P/B) of 1.1x, a dividend yield exceeding 4.3%, an average return on equity (ROE) of 11% over the past decade, and a 10-year operating profit compounded annual growth rate (CAGR) of 8%.¹

Sumitomo Forestry

Early entry into the U.S. Market: Among the three companies, Sumitomo Forestry was the earliest to expand into the U.S. and has extensive operational experience in the region.

Acquisition expertise: The company has a strong track record of acquisitions, focusing on small, privately-owned U.S. homebuilders. This strategy has enabled the group to grow into a top-10 player in the U.S. market.

Presence in Australia: Achieved market leadership in Australia with a 50% acquisition of a local homebuilder, Metricon, completed in 2024.

Global scale: The group projects over the mid-term to deliver over 8,000 homes in Japan, 10,000 in the U.S., and 7,000 in Australia, highlighting its strong presence in high-growth international markets. Overseas operations contribute 76% of its operating profit (FY2024).

Strategic integration: Gradual integration with acquired companies in areas such as procurement, logistics, and production to enhance efficiency.

Future growth potential: While acquired companies are not 100% owned, the potential for full ownership (as the founding members of the acquired companies eventually retire) could enhance shareholder value by reducing minority interests.

Valuation metrics: Forecasted FY2026 P/E ratio of 11.3x, P/B ratio of 1.1x, a dividend yield of 2.8%, an average ROE of 12% over the past decade, and a 10-year operating profit CAGR of 19%.¹

Daiwa House

Overseas profit contribution: Overseas operations account for 13% of operating profit (current fiscal year guidance).

Diversified business portfolio: Beyond single-family homes, Daiwa House engages in commercial facilities, logistics centres, rental properties, and other developments. This diversified portfolio provides unique risk mitigation on a global scale.

Synergy development: Although its U.S. housing market exposure is the smallest among the three, the company has been effectively realizing synergies through centralized procurement and shorter construction timelines among its acquired firms. Performance growth in these acquisitions has been notable.

Mid-term goals: The company aims to achieve overseas sales of 1tn yen ($6.6bn) and operating profit of 100bn yen ($663mn) during the ongoing mid-term plan, with U.S. operations playing a key role.

Resilient performance: Despite a downturn in the U.S. housing market that has impacted its peers this year, Daiwa House has maintained steady sales, profits, and order volumes.

Valuation metrics: Forecasted FY2026 P/E ratio of 12.9x, P/B ratio of 1.3x, a dividend yield of 3.2%, an average ROE of 13% over the past decade, and a 10-year operating profit CAGR of 12%.¹

By investing in these three companies, we aim to capitalize on their individual strengths while achieving a balanced exposure to the U.S. housing market. Each company offers unique opportunities, and we remain optimistic about their long-term growth potential as market conditions stabilize.

Perspective on Financial Strategy

One common theme across all three companies is their focus on capitalizing on growth opportunities by enhancing their presence in the U.S. housing market. However, we believe that Japanese homebuilders must concurrently shift toward financial strategies that prioritize capital efficiency.

In the U.S. housing business, builders typically acquire land, construct homes, and carry these assets as inventory on their balance sheets until they are sold. Many companies adopt a model where they purchase undeveloped land in anticipation of future price increases, holding it until they can benefit from appreciation (aka “spec” business).

While this approach can generate capital gains, it also ties up significant amounts of cash as working capital, making the business capital-intensive. As a result, while these companies often report strong ROEs, their ability to generate free cash flow is limited. Metrics such as the cash conversion cycle and free cash flow as a percentage of net income remain low.

This dynamic implies that as Japanese homebuilders, whose business model in Japan is based on a build-to-order model, increase their U.S. revenue contributions, their financial burdens will grow, potentially weighing on capital efficiency.

One exemplary model to consider is NVR Inc., a leading U.S. homebuilder renowned for its highly efficient financial structure. Unlike traditional homebuilders, NVR operates with a unique business model. Instead of holding land on its balance sheet, it relies on developers to retain ownership of the land. NVR purchases the lots only after the construction of homes is complete, paying a slight premium above market prices. This approach allows NVR to avoid tying up capital in land and rapidly transfer inventory to end buyers.

As a result, NVR maintains one of the shortest working capital cycles in the industry, significantly boosting its capital efficiency. The company consistently leads the sector in terms of return on invested capital (ROIC) and free cash generation. These improvements strengthen investor confidence, leading to P/E ratio expansion. Indeed, NVR’s P/E multiple, consistently around 19x, significantly outpaces its peers’ averages of 10-12x, underscoring the market’s recognition of its superior capital efficiency.

More recently, other major U.S. homebuilders, such as DR Horton and Lennar, have adopted similar asset-light strategies. These include leveraging REIT structures or spinning off subsidiaries to hold land.

Given their increasing reliance on U.S. operations for growth, we believe that Japanese homebuilders must address capital efficiency challenges sooner rather than later. If Japanese firms can replicate NVR’s asset-light and efficient working capital management, they could unlock similar valuation premiums.

To this end, we plan to discuss capital efficiency strategies with the management teams in future meetings.

Potential Policy Tailwinds in the U.S. Housing Market

As discussed in our June commentary, the U.S. housing market,² unlike Japan’s, represents a long-term growth market,  characterized by chronic undersupply and insufficient housing stock. This makes the sector particularly attractive for homebuilders.

Supply-side policy actions

On July 29, the U.S. Senate Banking, Housing, and Urban Affairs Committee marked up the ROAD to Housing Act, which passed unanimously (24-0). This is the first major housing-related legislation in roughly 17 years and is seen as a critical step toward addressing housing shortages. The bill could include measures such as relaxation of zoning restrictions and the sale of federally owned land for residential development, etc.

Additionally, ahead of next year’s midterm elections, the Trump administration is eager to revive the anaemic U.S. housing market. Earlier this month, U.S. Treasury Secretary Scott Bessent indicated that President Trump might declare a National Housing Emergency this fall. Such a declaration, under the National Emergencies Act, would grant the president broad authority to reallocate budgets and expedite regulatory changes without congressional approval. If enacted, it would mark the first housing-related emergency declaration since the 2008 financial crisis.

The fact that housing is receiving bipartisan attention through legislative efforts and executive initiatives underscores its urgency as a national priority.

Demand-side policy actions

While these measures aim to tackle the housing supply shortage, the demand side hinges heavily on interest rate movements, which directly influence mortgage rates that remain prohibitively high for many prospective buyers.

On this front, several levers could be pulled to lower borrowing costs. For instance, the Federal Reserve has allowed its mortgage-backed securities (MBS) portfolio to run off since 2022, when it began aggressively hiking rates. The Fed could reverse this decision by holding its MBS holdings steady, thereby increasing reinvestments of principal payments. Consequently, the market will respond to a stronger MBS demand from the Fed, putting downward pressure on mortgage rates.

Similarly, the government-sponsored enterprises (GSEs)—Fannie Mae and Freddie Mac—have reduced their MBS exposure since the 2008 Global Financial Crisis, but they could reenter the market.

Moreover, the Fed could resume yield-curve control through purchases of long-term bonds while simultaneously cutting short-term rates. These tools could prove particularly effective in stimulating the demand side of the equation.

Analysts suggest that once mortgage rates drop to around 5% from the current 6%+, housing affordability would begin to improve. This decline would also alleviate the so-called “lock-in effect” from elevated rates, encouraging more homeowners to sell and boosting supply in the existing-home market—which, in turn, could help temper home price growth.

This runs counter to the common narrative that lower rates would reignite housing inflation but provides an interesting perspective on the industry.

We will also be keeping an eye on whether ongoing AI-driven productivity gains can serve as a deflationary force, paving the way for sustained rate reductions ahead.

The Adage

In Japan, there is a well-known investment adage: “Don’t bet against national policy.” The phrase captures the idea that industries aligned with government priorities often benefit from concentrated funding and support, leading to improved corporate performance and potentially higher stock prices. While we prioritize businesses capable of sustaining growth independently of external factors, we also recognize the compelling opportunities in sectors strongly supported by government policy.

Basket Investment Approach

From time to time, we have employed a strategy of investing in multiple companies within the same sector based on a single investment thesis.

In the early 2010s, we took positions in four Japanese general trading houses (“sogo shosha”), anticipating long-term value—much like Warren Buffett did more recently. Over time, we consolidated these holdings into a single name: Mitsubishi Corporation. The company has delivered strong performance, bolstered in part by Mr. Buffett’s public endorsement of these firms.

In 2022, we identified Japan’s property and casualty (P&C) insurance industry as an attractive investment opportunity. What stood out was its oligopolistic structure—dominated by just three major players, a rarity in insurance markets outside Japan—and its exceptionally asset-rich balance sheets, underpinned by substantial holdings of investment securities known as “policy shareholdings.” These holdings carry $10–20 billion in unrealized gains, offering a valuable source of liquidity for strategic reinvestment, including disciplined acquisitions and shareholder capital returns. we acquired stakes in all three major insurance groups.

They remain in our portfolio today, benefiting from robust domestic pricing power that could  offset inflation, disciplined international expansion for long-term secular growth, and compelling shareholder returns. Such an approach allows me to capture broader opportunities across the sector while diversifying risk.

This strategy is particularly effective when the companies share similar factors driving their performance and stock prices, and no single company offers a clear advantage in terms of risk-adjusted returns.

This time, we have applied this approach to our investments in Japanese homebuilders. While we may eventually narrow the holdings as research progresses, we currently view all three companies as equally compelling investments. This allows us to take a significant position across the sector and benefit from the collective upside potential.

In summary, these investments are guided by a combination of long-term growth prospects, alignment with favourable policy trends, and a disciplined strategy to balance risk and return. By maintaining exposure to multiple companies in the U.S.-focused homebuilding sector, which already has stable revenue bases in Japan with strong earnings, we aim to capitalize on its structural growth opportunities through Japan’s unique homebuilding expertise while navigating the challenges of capital efficiency and market dynamics.

Parallels with Berkshire Hathaway

Interestingly, our recent investments in Japanese homebuilders coincided with Berkshire Hathaway’s new positions in U.S. homebuilders Lennar and DR Horton, both industry leaders.

This is not the first time that our investment actions have aligned with Warren Buffett’s firm, widely regarded as a symbol of long-term investment.

In 2020, Buffett surprised the global investment community by disclosing substantial stakes in Japanese trading companies, a sector that had previously been overlooked by the market. This marked a significant shift for Buffett, who had historically been reluctant to invest in Japanese equities.

Similarly, we began investing in Mitsubishi Corporation in the late 2000s, well before Buffett’s entry, and we continue to hold it today. We believe that this alignment underscores a shared recognition of undervalued opportunities in Japan.

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