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 April 2025

In April 2025, the TOPIX rose by 5.19% compared to the end of the previous month. The Japanese stock market experienced significant volatility during the month, driven by uncertainty surrounding U.S. trade and monetary policies.

In the first half of the month, concerns about stagflation in the U.S. intensified. The Trump administration announced reciprocal tariffs of up to 50% globally, prompting immediate retaliatory measures from China and the European Union (EU). This created a widespread risk-averse sentiment globally. As a result, the Japanese stock market plunged sharply, with the futures market triggering a circuit breaker, amplifying the turmoil. However, on the 9th, when the U.S. government announced a 90-day suspension of some tariffs, the overly pessimistic mood began to ease, and the market rebounded strongly. On the 10th, nevertheless, the U.S. clarified its intention to raise total tariffs on China to 145%, reigniting market caution.

Additionally, U.S. President Trump called for interest rate cuts from the Federal Reserve, and concerns about the possible dismissal of Chairman Jerome Powell fueled growing distrust in the Fed’s independence. As a result, U.S. markets experienced a triple whammy with declines in stocks, bonds, and the dollar, and Japan’s stock market also faced a challenging environment with limited upward movement.

On the other hand, on the 22nd, U.S. Treasury Secretary Janet Yellen stated that “tariffs are unsustainable,” and on the 23rd, reports emerged that President Trump had denied plans to dismiss Chairman Powell, which reassured the market. Additionally, reports suggesting that the U.S. might review its tariffs on China were positively received, and expectations of a de-escalation in U.S.-China tensions helped boost risk appetite. As a result, the Japanese stock market closed the month with a gain compared to the end of the previous month.

Within the environment, this month, the Fund returned 4.90% (HJSIX), underperforming its benchmark, the Russell/Nomura Small Cap™ Index, which returned 5.03%.

This month, the stocks that contributed positively to the Fund’s performance included Penta-Ocean Construction Co., Ltd., Cosmos Pharmaceutical Corporation, and Genky stores, Inc. Although Penta-Ocean Construction had no particular news to report for the second consecutive month, it appears that all negative factors have been priced in, leading to the purchase of its stocks. Cosmos Pharmaceutical Corporation announced its third quarter results, and not only the continuous improvement in profit margins but also the fact that the company is once again attracting attention as a domestic demand growth stock amid rising tariff risks were well received. Genky also announced its third quarter results, and its steady profit growth, driven by store openings, was well received. On the same day, it also reported solid sales figures for existing stores in April. The same as Cosmos Pharmaceutical Corporation, Genky appears to attract attention as a domestic demand growth stock.

Meanwhile, the stocks that contributed negatively to the performance included Nihon Kohden Corporation, PeptiDream Inc., and Nissei ASB Machine Co., Ltd. Nihon Kohden was affected by reports on tariffs, prompting fears of a decline in demand for capital investment in hospitals in the U.S. Additionally, concerns were raised about a potential decline in profits due to the stronger yen. PeptiDream had no particular news to report. However, although the direct impact of U.S. tariffs is limited, there may have been concerns about a decline in demand for the whole pharmaceutical industry, especially research and development (R&D). Nissei ASB Machine had no particular news either, but there may have been concerns about a decline in profits due to the yen appreciation.

As for the investment activities, we continued to accumulate more shares of existing holdings, while also selling stocks whose share prices had risen and were no longer considered undervalued, as well as stocks for which the initial investment hypothesis had expired. We also made new investments in stocks of an information and communications company which is expected to expand its business areas and business models.

In response to the growing uncertainty caused by President Trump’s reciprocal tariff policy, stock markets not only in Japan but also the rest of the world experienced significant price fluctuations. However, towards the end of the month, the markets were recovering led by some factors such as relief measures for additional tariffs and expectations for progress in tariff negotiations.

We will focus on individual companies’ unique growth factors and changes rather than macroeconomic changes in selecting stocks. Against the backdrop of the normalization of the Japanese economy 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.

As stated in the above, we have begun investing in a company in the information and communications field, with the expectation that it will expand its business areas and business models. The company started out selling hardware such as PCs and network equipment, and has steadily increased its corporate value by expanding its business to system integration and maintenance as well as operation services. In recent years, looking ahead to further growth, the company has been focusing on providing cloud-related services, thereby increasing the added value of its business portfolio.

The company’s major strength lies in its strong customer base of over 20,000 companies, built over many years through its long-standing presence in the wholesale sector, which represents its founding business. Long-term, stable relationships with customers enhance the company’s competitiveness in various ways. Specifically, these include the ability to easily pass the increase in labor costs and other costs on to its prices, limited business risks due to not being dependent on specific customers, and the ability to easily create opportunities for cross-selling and upselling high-value-added products.

The management team’s enthusiasm and execution capabilities are also key strengths of the company. They consistently focus on enhancing corporate value from a long-term perspective and have a proven track record of having steadily increased the shareholder value. In the past, they have made crucial management decisions from an investor perspective, such as selling assets with no prospect of improving capital efficiency, which demonstrates that they are a trustworthy management team. In addition, since the company fully understands the importance of its employees who are the core of its corporate value, they put their effort into creating a workplace environment that prioritizes employee comfort. As a result, the company’s turnover rate is stable and below the industry average. Especially in the current environment of labor shortages and high mobility of human resources, we believe that the high level of employee engagement can differentiate the company from its competitors.

Although the company’s stock price has risen steadily so far, we believe that it remains undervalued compared to its current earnings level and net asset value. We think that this is because the company’s stock is a small-cap one and is not yet well known in the market. In addition to stable earnings supported by a solid customer base, we believe that the company has significant potential for future profit growth, considering the leeway for reinvestment of funds obtained from high value-added business initiatives and the sale of non-core assets. Furthermore, the management team is highly capable and operates with an investor-focused approach. The company is proactive in returning profits to shareholders. As valuation revisions progress in line with earnings growth, we expect significant upside potential for share prices from both earnings and valuation perspectives. Taking these factors into overall consideration, we believe that the current share price level is extremely attractive for investment.

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