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

The Japanese equity market fell in June 2026, with the TOPIX returning -1.02% in the month.

In the first half of the month, the market started on a positive footing. However, sentiment weakened after a major U.S. semiconductor company reported earnings that fell short of market expectations, triggering a correction in related stocks. At the same time, stronger-than-expected U.S. employment data led to a rapid increase in expectations for an additional Federal Reserve rate hike within the year. As a result, semiconductor and AI-related stocks came under significant selling pressure.

In the middle of the month, an agreement between the United States and Iran to end hostilities became a turning point for the market. Supported by a sharp decline in oil prices and easing inflation concerns, buying interest broadened across a wide range of sectors. The Bank of Japan’s (BOJ) policy rate hike was absorbed smoothly by the market, as it had already been largely priced in. Against this backdrop, both major indices reached historic milestones: the TOPIX closed above 4,000 points for the first time.

During the latter part of the month, market volatility rose considerably amid a series of negative developments in the semiconductor and artificial intelligence (AI)-related sectors, including a sharp decline in South Korea’s KOSPI index and the postponement of a major U.S. AI company’s initial public offering. Nevertheless, investor interest broadened beyond technology-related names, with domestic demand-oriented stocks attracting increased attention. Despite these headwinds, the TOPIX remained near their record highs at month-end.

The Fund’s Performance

Within the environment, the Fund (HJSIX) returned -1.66%, underperforming its benchmark, the Russell/Nomura Small Cap™ Index, which returned -0.77%.

This month, key positive contributors to the Fund’s performance included Daihen Corporation and Towa Corporation. Daihen held its full-year earnings briefing, and buying interest strengthened as growth expectations increased for both its power supply business for semiconductor manufacturing equipment and its grid-scale battery storage business. Shares of Towa traded firmly amid growing expectations for higher demand for semiconductor manufacturing investment, fueled by expanding AI-related investments.

Meanwhile, key detractors from the Fund’s performance included Musashi Seimitsu Industry Co., Ltd., Fukuyama Transporting Co., Ltd., and SBS Holdings, Inc. Musashi Seimitsu Industry’s shares surged last month amid rapidly mounting expectations for new components used in AI servers, and the share price subsequently corrected as signs of overheating emerged. Although neither Fukuyama Transporting nor SBS Holdings reported any company-specific news, both stocks saw significant gains following the release of their May financial results, and their subsequent declines appear to have been driven by profit-taking.

June Commentary

More broadly, the market’s continued focus on AI-related themes has remained a dominant driver of equity performance. Against the backdrop of expanding AI-related investment, semiconductor-related stocks continue to lead the equity market higher. Investor interest is not limited to semiconductors themselves but is spreading to related fields, including electronic components used in AI servers. As a result, the current market environment is increasingly being defined by what can only be described as an “AI-driven market.”

At the same time, while capital has concentrated in stocks that directly benefit from AI, share prices of information and communications-related stocks, as symbolized by the “SaaS (Software as a Service) is Dead” narrative, as well as human resources and systems development stocks, which are particularly vulnerable to concerns about AI-driven labor substitution, have remained lackluster. The market is increasingly distinguishing between companies that benefit from AI and those perceived to be vulnerable to it, resulting in continued valuation compression among the latter group.

It was within this environment of widening valuation disparities that we made a new investment during the month. We invested in a human resources company whose market expectations have deteriorated amid concerns over AI-driven labor substitution and other factors. We believe the company offers limited downside risk and meaningful potential for earnings improvement through self-help initiatives.

We have long recognized the structural growth potential of the human resources sector. Nevertheless, we have remained cautious toward the sector because valuations did not appear sufficiently attractive relative to that growth potential. However, the simultaneous sharp rally in semiconductor-related stocks and weakness in information and communications and service-related stocks have materially improved the sector’s relative investment appeal.

In light of these changes in the market environment, we conducted additional company meetings and research. Based on this work, we initiated a new investment in a human resources-related company that we believe is trading at a meaningful discount to intrinsic value and offers an attractive medium- to long-term risk-return profile. Importantly, this investment decision is not simply a reaction to a decline in the share price. Rather, it is based on our assessment that there is a disconnect between the market’s expectations of slowing growth and the company’s underlying business fundamentals.

Japan’s human resources industry has continued to grow, supported by multiple structural factors, including increased hiring demand resulting from a declining working-age population, greater labor market flexibility, and rising wage pressures. Against this backdrop, demand for services such as recruitment, temporary staffing, employment support, and business process outsourcing has expanded. As a result, the market has historically viewed the industry as one with stable growth prospects.

However, in recent years, hiring demand has slowed, particularly within the information technology (IT) industry, reflecting a normalization following the sharp increase in hiring during the COVID-19 pandemic. In addition, concerns have emerged that advances in AI could lead to a structural decline in labor demand as certain tasks become increasingly automated. As a result, market expectations for human resources-related companies have deteriorated significantly. Share prices across the industry have been sluggish, and the market has shifted its view on the sector from a growth industry to focusing on the potential risks posed by AI-driven labor substitution.

That said, based on discussions with companies’ management, we believe the market concerns about slowing growth are somewhat oversimplified. In particular, two considerations stand out. First, labor demand varies significantly by company size, and second, staffing firms themselves have opportunities to use AI to improve productivity, reducing their reliance on labor-intensive business models. We believe these factors represent primary gaps between current market expectations and the underlying business reality, contributing to an attractive investment opportunity.

First, it is important to recognize that labor shortages differ meaningfully by company size. At large companies, hiring appetite has weakened in some cases, reflecting both a normalization following the recruitment expansion seen during the COVID-19 pandemic and a shift in investment priorities toward AI-related initiatives. In contrast, small and medium-sized enterprises continue to face challenges such as aging business owners and employees, limited recruitment capabilities, and chronic labor shortages. As a result, demand for hiring and temporary staffing remains resilient and, in some segments, is continuing to grow as companies seek to maintain business continuity.

More broadly, approximately 70% of salaried workers in Japan are employed by small and medium-sized enterprises. While the number of small and medium-sized enterprises is declining due to an aging population, business closures, and consolidation through mergers and acquisitions, we believe that Japan’s severe labor shortage is unlikely to change significantly over the medium term. Therefore, it is important to analyze human resource companies on an individual basis rather than as a single group. Performance prospects could differ significantly depending on factors such as the size of a company’s customer base, as well as the industries and geographic regions in which it has competitive strengths.

Second, the potential for self-help initiatives through AI adoption is an equally important consideration. The staffing industry remains highly fragmented, with numerous operators of varying sizes. Historically, competitive advantage was driven largely by human resources, including sales staff, career advisors, and candidate-matching specialists. Going forward, however, differences in profitability are likely to be driven by how effectively companies apply AI to improve job and candidate matching, streamline applicant communication, automate business processes, and enhance sales efficiency.

In this regard, developments at Recruit, one of the industry’s largest players, warrant close attention, as they may offer an indication of the industry’s future direction. The company is seeking to shift its human resources business from a traditional labor-intensive model to a more technology-driven one. This change in business structure could have a significant impact on the competitive landscape of the staffing industry. Over the medium to long term, we believe that the industry is likely to undergo consolidation, with larger companies that possess the financial capacity to invest in technology strengthening their competitive positions, while small and medium-sized operators that are slower to adopt AI risk gradually losing competitiveness.

Accordingly, when evaluating human resources-related companies, it is important to avoid taking a one-dimensional view that the industry is vulnerable to AI-driven disruption. Rather, the key distinction lies between companies that can use AI to improve operational efficiency and matching accuracy, and strengthen their competitive positions, and those that remain reliant on traditional labor-intensive business models. During periods when market sentiment toward the industry deteriorates broadly, these differences among companies are not always fully reflected in share prices, and fundamentally attractive companies can be sold off indiscriminately. It is precisely this divergence between intrinsic value and market price that has attracted our attention.

Going forward, we will continue to focus on the gap between corporate value and market price rather than chasing short-term themes or areas of heightened market attention. Within the human resources sector, we will carefully assess both concerns about slowing growth and the potential impact of AI-driven labor substitution, while conducting detailed company-level analysis of customer exposure, target company size, AI adoption capabilities, opportunities for profitability improvement, and positioning within an industry that is likely to experience consolidation. Through this approach, we will continue to seek investment opportunities that offer attractive medium- to long-term risk-return profiles.

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