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 Commentary and Fund Performance for March 2025

In March 2025, Japan’s representative stock index, the TOPIX, rose by 0.99% compared to the previous month’s end. Throughout the month, Japan’s stock market saw significant fluctuations as investor sentiment was unsettled by concerns over U.S. tariff policies and geopolitical tensions.

In early March, concerns about a global economic slowdown emerged as U.S. President Donald Trump implemented successive tariff measures, leading to a sharp decline in Japan’s stock market, particularly among cyclical stocks.

In mid-March, several factors contributed to a shift in Japan’s stock market dynamics. Bank of Japan’s (BOJ) Governor Kazuo Ueda suggested the continuation of rate hikes, the Philadelphia Semiconductor Index (SOX) saw a significant surge, and geopolitical risks surrounding Ukraine eased. Additionally, Warren Buffett’s Berkshire Hathaway increased its stakes in major Japanese trading companies, which was well-received by the market. These developments led to strong buying interest in value stocks. While the Nikkei 225 remained weak, the TOPIX showed resilience, and the NT Ratio (Nikkei/TOPIX) fell to its lowest level in five years.

In late March, U.S. President Donald Trump announced a 25% tariff on imported automobiles, leading to significant sell-offs in auto and semiconductor stocks. This announcement heightened risk-averse sentiment in the market. Additionally, growing concerns over “stagflation” in the U.S.—a combination of rising prices and economic stagnation—further fueled fears, causing major stock indices to decline sharply. As a result, Japan’s stock market experienced widespread losses, with the Nikkei 225 ending the month at its lowest level in approximately seven and a half months.

As a result, this month, the Fund returned 2.60% (HJSIX), underperforming its benchmark, the Russell/Nomura Small Cap™ Index, which returned 3.01%.

The stocks that positively contributed to the performance of the Fund this month included Tanseisha Co., Ltd., Treasure Factory Co., Ltd., and Penta-Ocean Construction Co., Ltd. Tanseisha, a company that engages with the interior design of commercial facilities and one of the two major companies in Japan’s display industry, announced its full-year results for the period ended January 2025. The company expected to achieve record-high operating income on the back of booming demand related to the Osaka World Expo and hotels, and also announced a dividend increase, which led to a rise in the share price. Treasure Factory, an operator of second house shops, had no news, but existing store sales continued to be favorable. Although the share price fell immediately after the announcement of the financial results, it rebounded due to expectations of earnings growth. Penta-Ocean Construction, a mid-sized general construction company, had no particular news either, other than the fact that a joint venture with TOA Corporation had received a large-scale order in Bangladesh. The company had announced a downward revision to its earnings forecast for the fiscal year ending March 2025 in February, but it seems that there was buying in due to the view that all the bad news had played out.

Meanwhile, stocks that negatively contributed to the performance included Gakujo Co., Ltd. and Nihon Kohden Corporation. Gakujo, a company which provides job information service for new graduates, announced its first quarter results for the fiscal year ending October 2025. As more and more companies are adapting flexible hiring schedule for new graduates, a portion of sales were carried over to the second half of the fiscal year, and this led to a slowdown in earnings compared to projections, which resulted in a decline in share price. Nihon Kohden, a comprehensive manufacturer of medical electronic equipment and the only manufacturer of automated external defibrillator (AEDs) in Japan, had no particular news this month. However, there was a concern among investors on the possibility that the high level of inflation and interest rates in the U.S. could slow down demand for capital investment in hospitals.

As for the investment activities, we continued to accumulate more shares of existing holdings, while also selling stocks whose share prices had risen and were no longer considered undervalued, as well as stocks for which the initial investment hypothesis had expired. We also made new investments, such as in stocks for which we expected to see an improvement in capital profitability because of structural reforms to their business portfolios.

There are growing concerns about the downward pressure on the global economy caused by the Trump administration’s tariff policy and geopolitical risks are also continuing to draw attention. Due to the uncertainty about the future, Japanese stocks are also fluctuating, but we believe that the fundamentals of the Japanese economy are steadily improving supported by wage increases. We are also paying attention to the fact that corporate reform, which had lagged in large-cap stocks, is also progressing in small- and mid-cap stocks. We will continue to seek investment opportunities that have been overlooked by the market through a bottom-up approach.

At the beginning of this year, we made a comment that corporate governance reforms at Japanese companies were spreading not only to large-cap stocks but also to small- and mid-cap stocks. During this first quarter, we have been conducting company research focusing on the corporate governance reforms, and we are increasingly seeing signs of changes in the course of dialogue in companies that have not made any notable efforts so far. Specifically, this includes the reorganization and downsizing of unprofitable businesses, the sale of idle assets, and the clarification of investment criteria, all of which are essential for increasing capital profitability. We view that the improvement of corporate value will increase the attractiveness of the Japanese equity.

We believe that these efforts to increase capital profitability are largely the result of the companies’ own intentions, and that they are more probable than investment ideas relying on changes in the external environment amid a growing uncertainty, especially with regard to the policies of the Trump administration in the U.S. In the small and mid-cap stocks, where the domestic sales ratio tends to be high and the factors specific to each company are significant, a bottom-up approach would be effective, in our view.

We see it as a reflection of the progress in the corporate reform that many companies are re-examining industry practices. In business-to-business transactions, priorities had been placed on customer relationships and business continuity over profitability, leading to a decline in capital profitability. However, due to factors such as inflation and the serious shortage of labor, profitability has declined even further, and companies are taking this opportunity to raise prices and withdraw from unprofitable businesses. While these actions are welcome, what is more important is to create a cycle where an improvement in profitability via a price increase leads to expansion in capital expenditure and an investment in human capital. This will bolster the confidence of companies, and through a self-reinforcing process in which they proactively work to improve profitability, we believe that the spread of an inflationary mindset in Japanese society will progress.

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