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

Japanese equities advanced in August 2026, with the TOPIX rising 3.54% month-over-month.

The equity market moved higher during the first half of the month. Although export-related stocks initially came under pressure due to yen appreciation following a coordinated foreign exchange intervention by the Japanese and U.S. authorities, falling crude oil prices and solid quarterly earnings supported investor sentiment. In addition, softer-than-expected U.S. employment data and moderating inflation indicators reduced expectations for further U.S. interest rate hikes, supporting market performance in artificial intelligence (AI) and semiconductor-related stocks. As a result, the Nikkei 225 briefly approached the 70,000 level, while TOPIX continued to reach new record highs.

During the latter part of the month, Japanese equities declined as geopolitical tensions in the Middle East resurfaced and long-term interest rates in Japan, the U.S., and Europe moved higher, reinforcing expectations for further increases in global interest rates. Selling pressure was particularly evident in AI- and semiconductor-related names, which had led the market earlier in the month. Subsequently, while the Nikkei 225 traded without a clear direction, investor interest rotated toward cyclical, domestic demand-oriented, and financial stocks, which had lagged the broader market, helping the TOPIX hold up relatively well.

Toward month-end, the equity market temporarily weakened following hawkish remarks from the U.S. Federal Reserve Chair. However, losses were largely recovered, and the TOPIX finished the month higher compared to the end of July.

The Fund’s Performance

In this environment, the Fund (HJSIX) returned 3.96%, underperforming its benchmark, the Russell/Nomura Small Cap™ Index, which returned 4.75% for the one month ended August 31, 2026.

This month, key positive contributors to the Fund’s performance included Nishi-Nippon Financial Holdings, Inc., LITALICO Inc., and The Ogaki Kyoritsu Bank, Ltd. 

The banking sector, including Nishi-Nippon Financial Holdings and Ogaki Kyoritsu Bank, performed well amid growing expectations that the Bank of Japan (BOJ) would raise interest rates. LITALICO announced first-quarter results that were well received by the market. Profit in its employment support business, which helps people with disabilities prepare for work and find jobs, increased significantly, supported in part by higher utilization rates at existing facilities.

Meanwhile, key detractors from the Fund’s performance included Towa Corporation and Ulvac, Inc. Towa announced its first-quarter results. Although orders exceeded the company’s initial forecast, operating profit fell short of market expectations, leading to selling pressure. Ulvac announced its full-year results. However, its forecast for the fiscal year ending June 2027 did not meet market expectations.

August Commentary

During the month, we made a new investment in a wholesale company. We believe the structural transformation of supply chains is creating greater opportunities for the company to grow its business. Despite this, limited investor attention has kept the share price at a low level. As a result, the gap between its intrinsic value and market price has widened.

We also increased the Fund’s weighting in CyberAgent, Inc., as the decline in its share price improved its medium- to long-term investment appeal. Since the company launched ABEMA, a Japanese streaming video service in 2016, we have held regular meetings with its investor relations team and assessed its progress in reducing dependence on the highly volatile smartphone game business and shifting toward a more diversified, intellectual property (IP)-driven media and entertainment platform.

We have invested in CyberAgent in the past. At that time, however, the improvement in earnings was driven more by a major hit in the game business than by a transformation of its business structure centered on ABEMA. Following the success of that title, earnings rose sharply, as did the share price. Although this was not the outcome we had originally anticipated, we believed that the gap between the company’s intrinsic value and its share price had narrowed, and we therefore exited the position.

After the contribution from the major hit had run its course, the share price corrected. At the same time, ABEMA continued to strengthen its position as a media platform and moved closer to profitability on a stand-alone basis. The company also strengthened its IP-related capabilities in areas such as animation production, event and theatrical operations, and merchandising. We concluded that CyberAgent was building a stronger foundation for medium- to long-term business growth and began investing in the company again around 2023.

We believe the recent share price decline reflected two factors. First, performance in the game business was weaker than expected. Second, the company’s upward revision to its earnings forecast for the current fiscal year fell short of market expectations. However, these factors mainly affect short-term earnings expectations and do not undermine the medium- to long-term transformation that we value. The correction reduced the extent to which future growth expectations were reflected in the share price and improved the balance between risk and expected return. We therefore increased the Fund’s weighting in the company.

That conclusion is based largely on two developments that we focus on when assessing the company’s intrinsic value. First, the business foundation needed to maximize the economic value of IP content is taking shape. As a result, the company is moving closer to fully monetizing high-profile titles. Second, the accumulation of game development and operating expertise, together with the expansion of its media channels, is gradually improving the stability of earnings in the game business. In the past, earnings in this business were highly dependent on the success or failure of individual titles.

In the IP business, the key is not simply to produce animation. It is to secure access to multiple revenue streams across streaming, merchandising, games, advertising, events, and theatrical releases, thereby capturing more of the economic value created by each title. If a company only undertakes production work for a fee, it may not fully benefit when a title becomes a hit. By contrast, a company may be able to generate multiple revenue streams over the medium to long term if it plays a meaningful role in managing and commercializing those rights. This may occur as the lead production company or a major investor in a production committee, a common structure used to finance and commercialize anime and other content in Japan. However, the investment share in each title, the scope of the rights held, and the terms of revenue distribution are generally not disclosed. External investors therefore have limited ability to determine precisely how the final profits will be allocated.

Against this backdrop, Kagurabachi, a popular manga (Japanese comic book) series on which CyberAgent is focusing across the group, is an important project for assessing the effectiveness of its IP strategy. CyberAgent and Shochiku are jointly leading the production project, while Cypic, a CyberAgent group company, is responsible for animation production. CyberAgent has therefore secured a role not only in producing the animation but also in the wider commercial development of the title, creating revenue opportunities beyond those available through contract production alone.

More importantly, the CyberAgent group possesses capabilities that extend well beyond animation production, including advertising, media such as ABEMA, game development, merchandising, and event and theatrical operations. If the company has secured sufficient rights to Kagurabachi, it should be able to leverage the group’s capabilities across multiple channels, including streaming and broadcasting, advertising and promotion, games, merchandise, and events. This could allow the group not only to generate revenue through multiple business channels, but also to increase recognition of the title and build continuing relationships with fans through multiple points of contact, thereby potentially increasing the overall value of the IP.

According to the Association of Japanese Animations’ Anime Industry Report 2025, the anime market reached approximately JPY 3.8tn ($24.6bn) in 2024. The overseas market accounted for more than half of this total, at approximately JPY 2.2tn ($14.2bn). Growth in the overseas market has been supported not only by increasing global awareness of Japanese anime, but also by streaming services such as Netflix, Disney+, and Crunchyroll, which have made Japanese content more accessible to viewers around the world.

Kagurabachi has cumulative manga sales of four million copies and has already gained recognition in overseas markets. As the title has established a meaningful base of existing readers, we believe an anime adaptation could significantly broaden its audience in both Japan and overseas. We view this title as an important test of whether CyberAgent’s IP business can develop multiple revenue opportunities through manga sales, video streaming, merchandising, games, and events.

Beyond the IP business, the game business remains an important area of focus because the success or failure of new titles continues to have a significant impact on short-term earnings. At the same time, we believe the quality of the title portfolio is improving as the company accumulates development and operating expertise and works with strong external IP. We view two developments as particularly important. The first is the higher success rate of recently released titles. The second is the decline in extraordinary losses, including impairment losses related to cancelled development projects and underperforming titles. In the past, CyberAgent recorded extraordinary losses on a continuing basis, including impairment losses on game titles. As a result, growth in operating profit did not always translate fully into net profit. Looking ahead, if improved project selection and operating capabilities lead to a structural decline in extraordinary losses, we believe the conversion of operating profit into net profit will improve, supporting growth in shareholder value.

Cygames, a major subsidiary, has minority shareholders, including DeNA and Nintendo. Therefore, not all profits generated by Cygames are attributable to CyberAgent’s shareholders. By contrast, if titles developed and operated by group companies other than Cygames, as well as titles based on external IP, account for a larger share of profits, this could improve net profit attributable to owners of the parent. The actual contribution, however, will depend on the contractual terms of each project.

Taken together, if these changes become visible in the company’s financial results, the equity market may come to view CyberAgent differently: not simply as a game developer whose profits fluctuate sharply depending on the presence or absence of hit titles, but as an integrated IP company with a media platform and multiple ways to monetize IP. If ABEMA’s profitability improves, the success rate of the game business rises, extraordinary losses decline, and IP such as Kagurabachi is developed across multiple channels, earnings growth should become more consistent and predictable. We believe this improvement in the quality of earnings could also support a higher market valuation.

The main risk to our investment in CyberAgent is that the anime works and game titles on which the company is focusing may fail to gain sufficient audience support. If that occurs, earnings could fall below our expectations. In the content business, indicators such as the popularity of the original work and the number of advance registrations may suggest a certain level of demand, but they cannot reliably predict whether a title will become a hit. For anime, profitability is affected by factors including production quality, distribution terms, promotional effectiveness, and merchandising. For games, it depends not only on the initial number of users but also on retention rates, monetization rates, and operating capabilities.

That said, we do not specialize in content-related investments and do not have the same level of knowledge as industry specialists regarding individual game titles or user trends. Accordingly, we do not base the investment decision on predicting individual hits with a high degree of confidence. Instead, we focus on the company’s organizational ability to release multiple titles on a continuing basis, its business platform for monetizing IP through multiple channels, and the downside risk implied by the current valuation if the expected earnings growth does not materialize.

Viewed through this lens, the company’s current valuation remains attractive. At its current share price, the company is trading at around 15 times its earnings forecast for the current fiscal year. We do not believe this valuation fully reflects its potential growth opportunities, including expansion of the IP business, greater earnings stability in the game business, and improved profitability at ABEMA. The recent share price decline driven by short-term earnings concerns also suggests that a degree of earnings downside has already been priced in. We therefore believe that the additional downside to the share price would be relatively limited even if the company’s growth initiatives do not progress as expected.

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