Market Commentary and Fund Performance

Market Commentary and Fund Performance for April 2022

This month, the Japanese stock market declined mainly in emerging stocks and the manufacturing sector, including high-tech stocks with high growth expectations. This decline was due to uncertainty over the Ukrainian situation and a sharp rise in long-term U.S. interest rates as the Federal Reserve’s aggressive monetary tightening stance became clear. Mid-month, the yen weakened against the U.S. dollar, fueling a phase of solid performance mainly in export-related stocks. However, the prolonged lockdown in Chinese cities and other factors caused concern, limiting the upward momentum. As a result, the Tokyo Stock Price Index (TOPIX) fell 9.58% in April, while the benchmark for the Fund, the Russell/Nomura Small Cap™ Index, dropped 8.10% over the same period. The Fund’s performance declined by 7.61% (HJSIX).

The most significant contributor to the Fund’s performance this month was used condominium refurbisher and seller Star Mica Holdings Co., Ltd. It announced an upward revision to its earnings forecast, benefitting from rising condominium prices compared to conservative projections. General hospital-related business operator Ship Healthcare Holdings, Inc. also saw its share price climb. The rise was likely a reaction to its sharp decline following the announcement of a downward revision to earnings last month. Biomass power station operator and waste recycler TRE Holdings Corporation, a favorable performer last month, continued its rise, fueled by a bright performance outlook.

The most significant contributor to the Fund’s performance this month was used condominium refurbisher and seller Star Mica Holdings Co., Ltd. It announced an upward revision to its earnings forecast, benefitting from rising condominium prices compared to conservative projections. General hospital-related business operator Ship Healthcare Holdings, Inc. also saw its share price climb. The rise was likely a reaction to its sharp decline following the announcement of a downward revision to earnings last month. Biomass power station operator and waste recycler TRE Holdings Corporation, a favorable performer last month, continued its rise, fueled by a bright performance outlook.

Meanwhile, the stock that had the greatest negative impact on the Fund’s performance was semiconductor production equipment manufacturer Towa Corporation. Its incoming orders remain robust. However, it announced a medium-term plan for the next three years with lower-than-expected profit margins. That, combined with a rebound from last month’s share price increase, has likely fueled the stock’s dip. Employee benefits outsourcing contractor Benefit One Inc. also saw its share price decline. It seems to have suffered from concerns that COVID-19-related sales would decline after the boon they received last year. Connector and semiconductor test socket manufacturer Yamaichi Electronics Co., Ltd. suffered from a couple of factors. The first was a backlash against its high share price, which performed well through the end of last year. The second was concerns that the semiconductor market’s growth rate would slow, a situation that similarly impacted Towa.

This month, we made two new investments in the service industry. Both firms should see their growth rates rise again after COVID-19’s negative impact declines. Meanwhile, we partially divested stocks whose performance has been relatively steady. There were no names that we have wholly divested

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Outlook

Alongside rising energy prices, the yen has continued to weaken, further increasing concerns about inflation in Japan and future trends in consumer spending and corporate earnings. Furthermore, Russia’s invasion of Ukraine does not look on track for a quick resolution, with the severe situation expected to continue. As monetary tightening in the U.S. moves into full swing, there are also concerns about the negative impact on overseas stock markets, which have remained overvalued. However, we believe that it will have a limited impact on the Japanese stock market due to its minimal overvaluation and the Bank of Japan’s continued accommodations. Japan also has relatively few political and economic risks, so the Japanese stock market should remain reasonably steady even if overseas markets decline. While corporate earnings will remain uncertain for the time being, the Japanese economy should turn upward in the second half of 2022. At that time, the sense of accelerating inflation is likely to decline, as there is significant room for recovery from COVID-19. Our investment strategy is to invest in stocks with high growth potential and low overvaluation among those that have fallen sharply. We also intend to continue selectively investing in companies that can remain highly inflation-responsive and keep up with medium-term social changes.

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