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 May 2025, Japan’s major stock indices showed strong gains, with the TOPIX rising 3.90% compared to the end of the previous month. The Japanese stock market surged in the first half of the month, then corrected mid-month before recovering in the latter half, ultimately maintaining an overall upward trend within a defined range.

At the start of the month, optimism about progress in U.S. tariff negotiations continued to support the market. Additionally, the Bank of Japan’s (BOJ) downward revision of its forecasts for real gross domestic product (GDP) growth and inflation in its Outlook Report, signaling caution toward further interest rate hikes, combined with a weakening yen, helped sustain the market’s strength. The market surged further after the announcement of a U.S.-U.K. trade agreement and unexpected tariff reductions by both the U.S. and China.

However, by mid-May, positive news had largely been priced in, and the market faced pressure from a stronger yen and weaker dollar, as well as growing concerns over U.S. fiscal deterioration triggered by a downgrade of U.S. government bonds. These factors weighed on investor sentiment, causing a temporary pullback.

In the latter half of the month, the market rebounded as the U.S. postponed additional tariffs on the European Union and speculation arose about a revision to Japan’s ultra-long-term government bond issuance plan, which contributed to yen depreciation and buying interest in major stocks. On May 28, the U.S. Court of International Trade ruled that the Trump administration’s tariff policies were illegal and ordered a halt to the tariffs, accelerating yen depreciation and pushing the stock market sharply higher. However, the market retreated again after The Court of Appeals for the Federal Circuit temporarily suspended enforcement of the tariff injunction, resulting in a stronger yen, a weaker dollar, and a pullback in stock prices.

In summary, despite fluctuations caused by uncertainty surrounding U.S. tariff policies, the Japanese stock market closed May with solid gains compared to the previous month.

The Fund’s Performance

As a result, the Fund returned 4.18% (HJSIX) for the month, outperforming its benchmark, the Russell/Nomura Small Cap™ Index, which returned 3.90%.

This month, the stocks that contributed positively to the Fund’s performance included Nissei ASB Machine Co., Ltd. and Gunze Limited. Nissei ASB Machine announced its second quarter results of the fiscal year ending September 2025, showing sales and profit growth driven by the shipment of large orders and steady demand for its mainstay small and medium-sized machines. Gunze announced its full-year results ending March 2025, with its business restructuring plans and significant dividend increase being well received.

Meanwhile, the stocks that contributed negatively to the Fund’s performance included Relo Group, Inc. and PeptiDream Inc. Relo Group announced its full-year results ending March 2025, and its forecast fell significantly below market consensus, causing a negative market reaction. PeptiDream released its first quarter results, and the lack of major updates led to a decline in its stock price as prior expectations were not met.

As for the investment activities, we continued to accumulate shares of existing holdings while selling stocks whose share prices had risen and were no longer considered undervalued, as well as those for which the initial investment hypothesis had expired. We also made a new investment in a company whose shares had been sluggish due to concerns over short-term growth slowdown, but which we believe has strong potential for profit growth driven by unit price increases.

Japanese stocks rose significantly this month, driven by growing optimism over the outlook for U.S. tariffs under the Trump administration. In selecting stocks, we will continue to focus on individual companies’ unique growth factors and developments rather than macroeconomic changes. Against the backdrop of a Japanese economy normalizing through healthy inflation, we expect that more companies will improve their capital profitability, and we believe that there is significant room for revaluation of undervalued stocks.

The global economy continues to be shrouded in uncertainty amid tariff policies, and investors remain cautious about investing in export-dependent companies. In this environment, we believe it is important to select companies that can continue to grow by leveraging their unique strengths that are less susceptible to external factors. Nissei ASB Machine Co., Ltd. (hereinafter referred to as “Nissei ASB Machine”), in which we have been investing for many years, is one such company that continues to grow thanks to its unique strengths.

Nissei ASB Machine is a manufacturer headquartered in Komoro, Nagano Prefecture, specializing in planning and development to manufacturing and sales of stretch blow molding machines, related molds, accessories, and parts used to produce plastic containers such as PET bottles. Established in 1978, the company is a global enterprise with world-class technology in biaxial orientation stretch blow molding machines, with over 90% of its sales generated overseas.

A key reason why we focus on Nissei ASB Machine is that it is steadily developing new markets through the introduction of innovative new products. The stretch blow molding machines that the company specializes in have a relatively short history among various machine tools. They are still undergoing technological innovation in this developing field. This technology offers significant environmental and cost advantages compared to injection molding and extrusion molding—traditional methods for container production—primarily due to reduced resin usage.

Despite the structural growth potential in this market, Nissei ASB Machine’s stock price remains at the same level as other cyclical machinery stocks. We believe it is undervalued relative to its growth prospects, which is why we continue to invest in the company.

Through recent meetings with the company’s management, we have become even more confident in the stability of the company’s business. In addition to selling molding machines, the company’s business consists of providing molds and parts that are essential for its customers’ container production, along with ancillary services such as technical support. To enhance business stability, we believe it is crucial to expand revenue streams linked to the operating status of customer factories, including the supply of molds and parts.

However, ancillary service sales did not increase smoothly, as inexpensive counterfeit products became widespread, particularly in emerging markets, and it was difficult to provide prompt service in areas where the company’s support bases was insufficiently developed.

What brought about a major change in the company was the introduction of a new technology called “ZC (Zero Cooling)” in 2018. This breakthrough technology significantly reduces the cooling time during the molding cycle, thereby improving container quality and greatly shortening production process time. This has contributed substantially to enhance customers’ productivity, further strengthening the company’s technological superiority and industry presence.

Notably, Nissei ASB Machine has secured patents for the ZC technology and its molds. As a result, customers adopting molding machines equipped with ZC technology are required to purchase specialized molds and related parts from the company, directly driving increased sales of ancillary services, particularly molds. In fact, sales of molds and parts reached a record high in the most recent financial results, demonstrating the strength of this business model. As sales of ZC technology-equipped machines continue to grow, sales of these high-margin ancillary services are expected to rise steadily, contributing to a more stable earnings structure for the company.

For several years now, Nissei ASB Machine has been making a full-scale entry into the beverage polyethylene terephthalate (PET) bottle molding market, which was not previously its main focus. Large-scale production have traditionally dominated the market, and the company, which specializes in small-lot production of a wide variety of products, realized that penetrating this market using its existing strengths would be challenging. However, its newly developed molding machines for beverage containers have received high praise from Japanese beverage manufacturers, where product diversification is advancing, for features such as the machines’s relatively conpact size, allowing efficient use of factory space, and its flexible control production volume. As a result, more and more companies have begun adopting the machines.  Although its full-scale expansion into overseas markets for beverage PET bottles is still at an early stage, the potential market size is estimated to reach between 100bn and 200bn yen ($695mn - $1.4bn) and future developments are being watched with great interest.

Regarding the impact of the anticipated U.S. tariff increases, the company’s management has indicated that it plans to cover the increased costs by appropriately passing them on to product prices, backed by the high competitiveness of its products.

Based on the above, we believe that Nissei ASB Machine is well-positioned to achieve sustainable growth and stabilize its earnings structure through its unique technological capabilities and strategic market development, even amid growing external uncertainties. We therefore intend to continue investing in this company as a core holding of the Fund.

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