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 August 2025, the TOPIX rose by 7.13% month over month. In the first half of the month, U.S. non-farm payroll data came in below market expectations, highlighting signs of a softening labor market. This triggered a sharp drop in U.S. equities, which spilled over into the Japanese market, with the Nikkei briefly falling below the 40,000 mark. However, the weak employment data fueled expectations of U.S. interest rate cuts, prompting a global equity rebound.

Domestically, strong corporate earnings reaffirmed the resilience of Japan’s corporate sector, providing further support to the market. Mid-month, investor sentiment improved after U.S. President Trump announced a 90-day extension of certain reciprocal tariffs with China, which contributed to a continued rally and pushed the Nikkei to successive all-time highs.

Later in the month, market sentiment turned more cautious ahead of the Jackson Hole Economic Policy Symposium, and profit-taking contributed to a corrective phase. At the Symposium, remarks by Federal Reserve Board (FRB) Chair Jerome Powell further reinforced expectations of a rate cut in September. Furthermore, despite some concerns about its China-related exports, NVIDIA delivered solid earnings, supporting overall investor sentiment.

As a result, U.S. stocks remained firm, and the Japanese stock market also showed resilience, ending the month with significant gains over the previous month.

The Fund’s Performance

As a result, the Fund returned 6.42% (HJSIX), underperforming its benchmark, the Russell/Nomura Small Cap™ Index, which returned 6.48%.

This month, stocks that positively contributed to the Fund’s performance included Tsukishima Holdings Co., Ltd. and Penta-Ocean Construction Co., Ltd. Tsukishima Holdings announced its first-quarter earnings and simultaneously decided to transfer fixed assets, with an expected gain of 12bn yen ($81.3mn). The company revised its full-year guidance upward, and the stock price rose on positive sentiment regarding improved capital efficiency. Penta-Ocean Construction gained after reporting first-quarter results showing steady progress on existing projects, improved margins, and an increase in orders both in Japan and overseas.

Meanwhile, stocks that negatively impacted the Fund’s performance included Maeda Kosen Co., Ltd. and PeptiDream Inc. Maeda Kosen announced its full-year results and projected a decrease in ordinary income for the current fiscal year, leading to a decline in its share price. PeptiDream announced its second-quarter earnings, with shares declining as uncertainty increased over achieving the full-year plan due to delays in the development process for its proprietary oral myostatin inhibitor relative to initial company projections.

In terms of investment activities, we continued to increase holdings in existing positions while selling stocks where valuations had become less attractive following share price appreciation, or where the original investment thesis no longer applied. In addition, new investments were made in companies such as an automotive parts supplier, where management changes appear to have initiated efforts to enhance corporate value.

The Japanese stock market rose this month, supported by heightened expectations for U.S. interest rate cuts and reduced uncertainty surrounding reciprocal tariffs with the U.S. While some investors are concerned about a narrowing universe of investable opportunities as valuations rise, we continue to observe a wide range of attractively priced companies. In particular, companies subject to strong negative market bias—such as those experiencing short- to medium-term earnings setbacks or belonging to industries perceived as structurally challenging—can offer compelling potential given their heightened sensitivity to positive developments. We will continue to focus on bottom-up research to identify such opportunities capable of generating strong medium- to long-term results.

Based on our view that domestic capital investment is entering a recovery phase, we have built exposure to several construction-related stocks. We especially focus on companies with strong underlying earnings power and growth potential whose share prices trade at deep discounts due to temporary earnings weakness. We believe such market dislocations represent highly attractive entry points for long-term investors.

We have invested in Penta-Ocean Construction since 2022. This company operates a wide range of businesses centered on civil engineering and construction, with particular strengths in technically demanding areas such as ports, airports, and tunnels. Overseas, it has participated for many years in large-scale public works projects in Singapore, Hong Kong, and elsewhere, securing a solid reputation both domestically and internationally.

At the start of the investment, Penta-Ocean Construction was facing challenges, including multiple unprofitable projects due in part to the COVID-19 pandemic. The company recorded project losses totaling approximately 16bn yen ($108.4mn), particularly in large-scale contracts, which led to a rare period of earnings decline. Near-term profit recovery appeared difficult. However, through direct meetings with the company, we confirmed that its technical capabilities and customer base remained intact, and that profitability of new orders was gradually improving. Taking a medium-to-long-term perspective, we determined there was a high likelihood of earnings recovery once unprofitable projects were completed and therefore initiated investments.

In particular, the company’s track record in major civil engineering projects worth several hundred billion yen enhances its ability to secure future large-scale contracts. In construction, experience with projects worth tens of billions of yen has enabled Penta-Ocean Construction to strengthen its position, as reflected in the growing number of invitations to participate in competitive bids. Overseas, while projects are subject to the policy priorities of host governments, several large-scale public works projects—notably airport expansions and port redevelopment—are upcoming, and we believe the company’s longstanding track record and credibility will continue to be recognized.

Since early 2025, the completion of unprofitable projects and steady margin improvement have positively contributed to earnings, driving a recovery in its stock’s valuation. Although unprofitable projects remain this fiscal year, we see room for further improvement in its performance from next fiscal year onward. We continue to hold Penta-Ocean Construction with confidence in its potential, underpinned by advanced expertise in marine civil engineering and extensive overseas experience, and expect ongoing creation of shareholder value over the medium- to long-term.

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