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 December 2023

As the month got underway, the Japanese stock market dipped as the yen appreciated due to various factors, including increased expectation of monetary policy corrections following statements by both Bank of Japan Governor Ueda and Deputy Governor Himino. However, Japanese equities began to rally on the back of rising expectations of monetary easing for next year and robust performance in U.S. stocks. Still, the market ultimately ended the month slightly below where it began. As a result, the Tokyo Stock Price Index rose by 4.62% month over month, and the benchmark for the Fund, the Russell/Nomura Small CapTM Index, rose by 5% over the same period. The Fund’s performance this month also rose by 5.81% (HJSIX), outperforming its benchmark.

Positive contributors to the Fund’s performance this month included mid-sized consumer electronics retailer Nojima Corporation, the parent company to Nifty Corporation; biomonitor and other medical equipment manufacturer Nihon Kohden Corporation, whose expansion is also reaching abroad; and manufacturer Daihen Corporation, whose products include transformers, welding machines, and power supplies for semiconductor production equipment. While no significant news related to Nojima, the shares that were bought were considered comparatively cheap with expectations of a dividend increase. Nihon Kohden saw rising expectations for a share price jump after a U.S. investment fund announcement of over 5% ownership stakes in the company. Daihen’s corporate financial result briefing was well-received, and expectations of a recovery in semiconductor production equipment also provided a tailwind for the firm’s share price.

Conversely, stocks with an adverse impact included Italian restaurant chain operator Saizeriya Co., Ltd., plastic container molding machinery manufacturer Nissei ASB Machine Co., Ltd., and industrial and household gases-specialized trading firm Iwatani Corporation. Despite the lack of news specifically about Saizeriya, its share price dropped, likely due to profit-taking and concerns about the Chinese economy. Nissei ASB Machine saw its share price fall as a backlash to the previous rise fueled by robust incoming orders in November’s earnings call. Iwatani Corporation’s share price dipped due to concerns over its acquiring shares in Cosmo Energy Holdings Company, Ltd., from a former Murakami Fund affiliate which is Japan’s well-known activist fund.

Fund Activity

This month, we fully divested four companies, including a company that announced a management buyout. Meanwhile, we made four new investments, including three related to domestic demand.

Outlook for January 2024

In 2024, in addition to the ongoing conflicts in Ukraine and Palestine, we have the U.S. presidential election coming up and also critical elections are scheduled in Taiwan, Indonesia, and India. Moreover, Japan’s Liberal Democratic Party (LDP) is scheduled to hold an election for its presidency, which could lead to a volatile situation depending on the outcome. On the economic front, the upward pressure on interest rates in the U.S. and Europe has subsided. However, 2024 is a crucial year for Japan, as the anticipated monetary policy changes are likely to affect the foreign exchange market. As a result, there are concerns about negative effects on the Japanese economy, including higher interest rates and a stronger yen. However, we believe the actual change in monetary policy will represent a normalization of the Japanese economy, increasing the possibility of capital inflows into the Japanese stock market from domestic and foreign investors. Furthermore, improved governance and increased management buyouts are attracting more attention to Japan’s small cap stocks, potentially enhancing their lagging performance. While we will not make significant changes to our investment strategy, we will continue to focus on discovering stocks that may promise medium- to long-term earnings growth potential based on the performance in the coming years, from among those that remain undervalued and the emerging stocks that price have fallen sharply.

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