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 February 2024

In February 2024, the Japanese stock market continued to swing back and forth in the early part of the month as expectations for an early U.S. interest rate cut subsided following the U.S. Federal Open Market Committee (FOMC) meeting. However, from the mid to the late part of the month, after the Bank of Japan (BOJ) Deputy Governor Uchida indicated that the BOJ would maintain an accommodative financial environment even after ending negative interest rates, Japanese semiconductor related names rose significantly following their U.S. counterparts, where demand for semiconductors for generative artificial intelligence (AI) is expected to increase. On February 22, the Nikkei Stock Average closed at JPY 39,098.68 ($261.97), its highest level in about 34 years. Although the Japanese stock market subsequently moved slowly, the Nikkei Stock Average remained at the 39,000-yen ($261) level through the end of February. As a result, the Tokyo Stock Price Index rose by 2.48% month over month, while the benchmark for the Fund, the Russell/Nomura Small Cap™ Index returned 1.88% over the same period. The Fund’s performance returned 2.26% (HJSIX), outperforming its benchmark.

Positive contributors to the Fund’s performance this month included semiconductor-oriented chemical producer, Tokyo Ohka Kogyo Co., Ltd.; leading commercial and industrial HVAC contractor, Takasago Thermal Engineering Co., Ltd.; and back-end semiconductor production equipment manufacturer, Towa Corporation. Tokyo Ohka’s share price climbed, buoyed by the rise in semiconductor stocks and expectations of increased profitability in the upcoming fiscal year. Takasago Thermal’s share price surged following an upward revision of its earnings forecasts, attributed to robust incoming order numbers. Towa’s share price advanced on expectations of growth in the semiconductor industry in the next fiscal year and beyond, despite the firm’s earnings decline in Q3 FY3/2024.

Conversely, negative contributors included industrial robot parts and automatic door manufacturer, Nabtesco Corporation; biomonitor and other medical equipment manufacturer, Nihon Kohden Corporation; and mid-sized consumer electronics retailer, Nojima Corporation, which is expanding overseas and is the parent company to Nifty Corporation. Nojima declined due to disappointment over Q3 FY3/2024 earnings and a backlash from the previous month’s bullish stock performance. Nabtesco declined due to disappointment over the significant profit decrease in earnings forecast announced in the Q4 FY12/2023 results. Nihon Kohden’s share price also weakened as the market sentiment soured over its reduced earnings in Q3 FY3/2024, coupled with a correction following the previous month’s stock price surge, leading to a decline in share price.

In terms of the Fund activity this month, we made two new investments in domestic demand stocks and divested entire position of some stocks, including an apparel company, whose share price climbed.

Outlook for March 2024

The Japanese stock market continues to rise, with the Nikkei Stock Average reaching a new all-time high. It offers a favorable environment with an influx of domestic and international capital. However, the market has become more heavily weighted toward large-cap stocks, with only Nikkei 225 constituent stocks rising. Share price volatility has also increased, raising concerns about sustainability.

Meanwhile, small caps are lagging further behind. However, given the expectation that profit growth rates will exceed those of large-cap stocks, we do not think that there is need to be pessimistic about small-cap investments in the medium to long term. Despite increasing uncertainties such as expectations of changes in the Bank of Japan’s monetary policy and the expansion of political funding issues, we believe that with the clarification of wage increases for the new fiscal year, the favorable environment in the Japanese stock market will continue. We have not made any significant changes to our investment strategy. Based on the performance outlook for fiscal year 2024 and beyond, we aim to invest actively in stocks that can absorb rising labor costs and achieve further growth focusing on undervalued stocks in emerging markets. We also intend to pay attention to the domestic consumption and service sectors, given the increasing sense of lag in stocks outside the semiconductor sector.

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