Market Commentary and Fund Performance

Tad Fujimura of Tokyo-based SPARX Asset Management Co., Ltd., sub-advisor to the Hennessy Japan Small Cap Fund, shares his insights on the Japanese market and Fund performance.

August 2023
  • Tadahiro Fujimura
    Tadahiro Fujimura, CFA, CMA
    Portfolio Manager

Market Commentary and Fund Performance for July 2023

The Japanese stock market started the month on a downward tick due to a backlash against the previous month’s spike and raising concerns about the rising interest rates in response to U.S. employment statistics. Mid-month, the U.S. Consumer Price Index (CPI) came in below market expectations, and the market anticipated a halt in interest rate hikes, leading to solid stock performance. Near month-end, the Bank of Japan (BOJ) announced a more flexible yield curve control (YCC), leading to temporary price volatility. However, the market was reassured by the perception that the BOJ would maintain its current moderate stance. Ultimately, the month ended up. As a result, the Tokyo Stock Price Index rose by 3.25% month over month, while the benchmark for the Fund, the Russell Nomura Small CapTM Index, gained 4.58% over the same period. The Fund’s performance this month increased by 1.79% (HJSIX), underperforming its benchmark.

Click here for full, standardized Fund Performance.

This month, the stocks that positively impacted the Fund’s performance included Italian restaurant chain operator Saizeriya Co., Ltd., leading apparel firm with multiple brands Onward Holdings Co., Ltd., and regional bank based in Saitama prefecture Musashino Bank, Ltd. Saizeriya was buoyed by an increase in operating profit in its Q3 earnings. Onward saw its share price rise on robust in-store sales and an upward revision to its performance forecast in its Q1 earnings presentation. Musashino Bank benefited from expectations of a BOJ monetary policy change, boosting prospects for future earnings.

Conversely, stocks with an adverse impact to the Fund’s performance included children’s amusement facility operator Aeon Fantasy Co., Ltd.; drug discovery platform provider and pharmaceutical developer PeptiDream Inc.; and Internet-based real estate broker and retail support service provider Kufu Company, Inc.

Aeon Fantasy’s share price suffered from a slow recovery in domestic sales and the market’s disappointment with its Q1 earnings falling short of expectations. PeptiDream was not the subject of any specific news, but its share price fell, likely as a response to its previous gains. While Kufu Company’s performance continued to struggle, its share price fell as a reaction to its rally over the past several months.

This month, we fully divested two domestic demand stocks whose share prices had climbed and we made a few new investments in the service industry. We have also been increasing the existing portfolio’s weight in increasingly undervalued stocks.

Outlook for August 2023

The Japanese stock market continues its upward trajectory. However, we expect signs of a change in the BOJ’s monetary policy to influence market trends. The market’s heavily weighted focus on large-cap stocks, primarily from overseas investors, may turn around. Meanwhile, looking at corporate earnings trends, many companies have been able to absorb wage hikes and other cost increases and maintain profit growth trends, so we assume that there is no need for significant concern. Therefore, while the market may become uncertain in the short term due to the summer holidays, we intend to remain optimistic and invest in companies that seek improved performance. While we do not plan any significant changes to the Fund’s investment policy, we will consider actively selling stocks that have rallied sharply and expanding the Fund’s holding in new undervalued stocks, especially those related to domestic demand. Small-cap stocks are notably lagging, however, we will focus on investing in companies that can increase future profits through price pass-through and aggressive investment, even if their performance has been sluggish.

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