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 April 2026, the Japanese equity market staged a strong rebound, with the TOPIX, a representative index of Japan’s stock market, rising 8.19% month-on-month.

Market conditions were volatile at the beginning of the month, reflecting persistent concerns surrounding geopolitical tensions in the Middle East. However, sentiment improved as expectations for progress in ceasefire negotiations increased, allowing the market to stabilize and shift into an upward trend.

From mid-month onward, investor focus rotated away from geopolitical risks toward corporate earnings and structural growth themes, particularly in artificial intelligence (AI) related demand. Supported by strength in U.S. technology stocks and the Philadelphia Semiconductor Index (SOX), capital flows within Japan increasingly concentrated in semiconductor and AI-related names. As a result, the Nikkei 225—driven by high-priced, large-cap constituents—continued to trend higher and, notably, surpassed the 60,000 level at the close for the first time in its history.

In contrast, the broader TOPIX index lagged from mid-April onward, reflecting more subdued performance outside of select large-cap growth sectors. This divergence led to a further expansion in the performance gap between indices, with the “NT ratio” (Nikkei 225 divided by the TOPIX) reaching historically elevated levels.

Toward month-end, the market faced renewed headwinds. Rising interest rates—both domestically, amid a more hawkish outlook from the Bank of Japan (BOJ), and globally, as the Federal Reserve maintained a cautious stance on rate cuts—combined with a rebound in crude oil prices to weigh on equity markets. Profit-taking became evident, particularly in semiconductor-related stocks that had led the rally. Although there were intermittent rotations into domestic demand-oriented sectors, these were insufficient to meaningfully narrow the elevated performance gap between the Nikkei 225 and TOPIX. Nonetheless, Japanese equities closed the period with substantial gains.

The Fund’s Performance

Within the environment, the Fund (HJSIX) returned 5.87%, outperforming its benchmark, the Russell/Nomura Small Cap™ Index, which returned 4.52%.

During the month, key positive contributors to the Fund’s performance included Musashi Seimitsu Industry Co., Ltd., CKD Corporation, and Daihen Corporation. Musashi Seimitsu Industry benefited from heightened investors’ focus on its hybrid supercapacitors, which are used to stabilize power supplies in AI servers in data centers. Following Oracle’s announcement of an expanded partnership with Google Cloud, among other developments, market attention turned to the expansion of AI data centers. This, in turn, fueled increased expectations for demand for hybrid supercapacitors and boosted the company’s share price. Shares of both CKD and Daihen also advanced during the period, as strong momentum in the semiconductor manufacturing equipment and factory automation sectors increased expectations for their earnings growth.

Meanwhile, key detractors from the Fund’s performance included Saizeriya Co., Ltd., Maeda Kosen Co., Ltd., and Eternal Hospitality Group Co., Ltd. Saizeriya announced its second-quarter earnings and revised its full-year forecast downward due to a decline in its gross margin resulting from higher costs. The market reacted negatively to this news, causing the stock price to fall. While there was no specific news related to Maeda Kosen, concerns over the potential impact of crude oil shortages on materials production likely weighed on its share price. Similarly, shares of Eternal Hospitality Group fell, reflecting concerns over both rising costs, which could further weigh on its gross margin, and challenging year-over-year comparisons for same-store sales in the fourth quarter, despite the absence of any specific company news.

April Commentary

In April, the Japanese equity market rebounded sharply, supported mainly by easing concerns over tensions in the Middle East. Although concerns remain that rising oil prices could impact corporate earnings, investor focus rotated away from geopolitical risks toward corporate earnings and structural growth themes, particularly in AI-related demand. Supported by strength in U.S. technology stocks and the SOX, capital flows within Japan increasingly concentrated in semiconductor and AI-related names. On the other hand, domestic demand-related stocks continued to trend downward, contributing to increasing market polarization. While higher crude oil prices are expected to weigh on corporate earnings going forward, we believe that recent stock price declines appear to have already begun to reflect these risks. Through our discussions with companies, we have observed a steady improvement in management’s focus on profitability, including the implementation of more timely pricing adjustments. Against this backdrop, we view the heightened short-term uncertainty as a source of investment opportunity and remain focused on generating medium- to long-term performance.

At the same time, the effects of inflation—a theme that has been developing over the past several months—are becoming increasingly evident at the sector level, particularly in the construction industry, where both challenges and opportunities are emerging.

The construction industry continues to operate under generally favorable conditions, supported by an improving supply-demand environment amid strong development activity and structural labor shortages. However, concerns are beginning to emerge regarding project profitability due to rising crude oil prices and supply chain disruptions, as well as delays in revenue recognition resulting from extended construction timelines. In this environment, we believe it is important to carefully assess these issues while identifying medium- to long-term investment opportunities.

While extreme supply-side disruptions, such as the temporary suspension of modular bathroom unit orders, are beginning to subside, cost increases remain unavoidable and must be absorbed somewhere along the value chain. That said, many recent construction projects include contractual terms that allow cost increases during the construction period to be passed on to project owners. As a result, we believe the risk of individual projects turning unprofitable for construction companies remains limited.

Extended construction timelines do not necessarily imply a loss of revenue, as they may also create opportunities for additional orders. Accordingly, we do not see a need for excessive concern over short-term earnings deterioration. However, higher costs will need to be factored into future projects from the outset, making project cost increases unavoidable. We view this as a potential medium- to long-term demand risk, as it could discourage project owners’ willingness to undertake new projects, leading to design changes or delays in placing orders.

Today, rising construction costs are increasingly leading to project cancellations and revisions. In this environment, we are focusing on the display industry, which could benefit from these changing market conditions. This industry, which specializes in the planning, design, and construction of commercial facilities and hotels, remains relatively small and has attracted limited attention. Furthermore, business has tended to fluctuate depending on major events such as the World Expo or the Olympics, which has complicated investment decisions.

However, rising construction costs have led to a shift from new builds toward the renovation and refurbishment of existing facilities. As these projects require strong planning and design expertise to reconfigure spaces, they play to the core strengths of display companies. In addition, renovation projects tend to involve a lower proportion of foundation and structural work and a higher proportion of interior work compared with new construction, allowing for a broader involvement and greater opportunities. We view this as a positive factor for expanding earnings potential.

As noted earlier, the continued rise in inflation is influencing not only the construction industry but also decision-making across a wide range of industries. We regard these changes not as temporary, but as structural shifts in the business environment. Through bottom-up research, we remain focused on identifying companies that can consistently adapt to and benefit from these changes, and will continue to pursue, what we believe to be, attractive investment opportunities within Japan’s small- and mid-cap equity market, while carefully distinguishing between short-term concerns and medium- to long-term growth prospects.

Click here for Fund Holdings.