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 March 2026, the Japanese equity market declined sharply. The TOPIX, a representative index of Japan’s stock market, fell 12.00% month-on-month, erasing much of the gains accumulated in the previous month.

From early to mid-March, markets came under significant pressure as oil prices surged amid supply concerns following U.S. and Israeli strikes on Iran and the closure of the Strait of Hormuz. The spike in energy prices intensified risk aversion, triggering broad-based equity sell-offs. While markets subsequently recovered driven by a technical correction after the sharp declines, renewed concerns over a prolonged conflict, including the election of a hardline leader in Iran, led to another downturn. Persistent worries about the economic impact of elevated oil prices and stubborn inflation contributed to continued market volatility.

In the latter part of the month, sentiment deteriorated further after U.S. President Trump issued a strong warning to Iran, threatening attacks on power plants and infrastructure unless the Strait of Hormuz was reopened. Iran responded with a defiant stance pushing oil prices even higher, prompting another wave of equity declines. Although markets temporarily rebounded following reports of a postponement of military action and a U.S.-proposed peace initiative, concerns over stalled negotiations remained. Toward month-end, fears surrounding preparations for ground operations and a broader regional escalation weighed heavily on investor sentiment.

As a result, the Japanese equity market finished March at levels that effectively offset the gains recorded in the prior month, reflecting heightened geopolitical risk and ongoing concerns over inflation and global economic stability.

The Fund’s Performance

Within the environment, the Fund (HJSIX) returned -12.09%, underperforming its benchmark, the Russell/Nomura Small Cap™ Index, which returned -11.92%.

The Japanese equity market declined sharply during the month amid a deterioration in conditions in the Middle East. This move appears to reflect rising energy prices after the de facto blockade of the Strait of Hormuz, which has heightened concerns about a global economic slowdown. While recent reports of ceasefire negotiations have raised hopes for a market rebound, the situation remains highly fluid, and we believe caution is warranted. In this environment, we remain focused on bottom-up company analysis and seek investment opportunities where current valuations are at a discount to intrinsic value.

During the month, key positive contributors to the Fund’s performance included Kakaku.com, Inc. and Fukuda Corporation. The shares of Kakaku.com increased, due to a broad rebound in the information and communications sector, which had previously declined due to unfavorable news related to Anthropic, as well as on the disclosure of increased share purchases by an activist investor. In contrast to the overall market decline, Fukuda’s share price rose slightly, buoyed by its attractive valuation and positive factors such as the announcement of its mid-term management plan, with no particular news during the month.

Meanwhile, key detractors from the Fund’s performance included Nishi-Nippon Financial Holdings, Inc., CKD Corporation, and Daihen Corporation. Nishi-Nippon Financial Holdings’ share price fell amid concerns over an increase in allowances for doubtful accounts, driven by higher crude oil prices and the possibility of delayed interest rate hikes. Shares of both CKD and Daihen also fell as risk-off sentiment spread following the U.S. attacks on Iran, leading to a correction in semiconductor-related stocks that had previously risen sharply.

Last month, global stock markets experienced a sharp correction, with declines particularly pronounced among information and communications technology stocks. The sell-off was triggered by a sudden surge in concerns that existing information technology (IT) services and software businesses could be replaced by the rapid development and widespread adoption of artificial intelligence (AI) agents, such as Claude Cowork.

SaaS (Software-as-a-Service) companies were among the most heavily affected. These businesses had long been expected to deliver steady growth, primarily through seat-based pricing models. As concerns grew that AI could directly replace tasks, doubts were cast on the very sustainability of the SaaS model itself. Market sentiment deteriorated rapidly, as symbolized by phrases such as “SaaS is dead” and the “SaaSpocalypse” (SaaS + Apocalypse), leading to especially sharp corrections in stocks that had previously been valued on high growth expectations.

In the past, we had avoided investing in certain companies within the sector, as their valuations appeared too expensive relative to their growth potential. However, the recent market correction has created an opportunity to reassess these businesses from a fresh and objective perspective. Following the decline in share prices, we conducted company visits and analyses, which led us to initiate new investments in select companies where we believe the fundamentals and medium- to long-term competitive positioning justify a reevaluation.

In our research, we placed particular emphasis on whether companies have an economic moat (a competitive advantage) not dependent solely on technology or functionality. Considering the pace of AI advancement, we believe that advantages based purely on technological superiority are likely to rapidly diminish within the information and communications industry. As demonstrated by the growing adoption of OpenClaw, an AI agent that can autonomously operate PCs using natural language, we are entering an era in which capabilities that once required advanced expertise are becoming rapidly commoditized.

In this environment, we believe that a company’s true economic moat lies in how deeply it is embedded in the workflows of its customers and users, as well as in the strength and quality of the relationships it builds with its customers, particularly through its sales organization. These intangible assets cannot be easily replicated overnight and are built up over time, and we believe they are highly likely to remain a source of relative competitive advantage even in the age of AI.

For companies that possess such a moat, AI represents not a threat but a growth driver, with the potential to improve service quality, enhance customer satisfaction, and dramatically increase internal productivity. We believe that a company’s ability to effectively integrate AI into its business model and customer value proposition will be a key determinant of future corporate value.

History has repeatedly shown that periods of widespread market pessimism often create attractive investment opportunities over the medium to long term. While short-term downside risk cannot be ruled out, we will continue to pursue disciplined company analysis and selectively increase investments in companies with structural competitive advantages and the potential for sustainable growth. Through this approach, we aim to generate excess returns in the Japanese small- and mid-cap market by assessing the evolving AI landscape from both risk and opportunity perspectives.

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